Efficient procurement and inventory management start with a well-structured purchase order (PO) process. From creation to fulfillment, each phase requires precise coordination and action to ensure smooth operations.
By segmenting this process into clear, actionable steps, businesses can streamline PO management, enhancing supplier relations and inventory oversight. Explore these seven crucial steps to refine your procurement strategy, and discover how Fishbowl can transform your PO and inventory management approach.
What’s a purchase order?
A PO is a formal document purchasers send to suppliers to initiate a purchase. This document, primarily used in business-to-business (B2B) interactions, outlines the buyer’s intent to purchase products and services from another company. By specifying details such as item types, quantities, and agreed-upon prices, POs document commercial transactions to improve procurement.
Why are purchase orders important?
POs are essential for inventory reordering, offering a systematic way to request goods and services. Perfecting PO generation ensures efficient stock reordering and minimizes inventory gap risks.
Effective PO management also:
- Sets clear expectations: POs detail the requested items, prices, and delivery terms, minimizing discrepancies between buyer and supplier expectations. This clarity prevents confusion over product specifications and delivery schedules, aligning both parties on the transaction’s details.
- Improves budgeting: POs improve record-keeping and budgeting through detailed transaction documentation.
- Enhances business protection: By formalizing transaction terms, POs serve as a legally binding contract. This ensures both parties are accountable for their commitments, safeguarding businesses against potential disputes and contractual non-fulfillment.
- Boosts compliance: POs create a formal transaction record essential for audits and compliance checks. This documentation allows businesses to verify they’re following industry regulations and standards, making demonstrating compliance with regulatory standards easier.
Strategically timing and managing PO processes can also boost warehouse efficiency. By optimizing delivery schedules and actively coordinating with suppliers, you can align deliveries with your warehouse team’s capacity to handle them. This approach ensures that goods arrive in a manageable stream, preventing bottlenecks and keeping warehouse logistics running seamlessly.
How to do a purchase order: 7 steps
While specific procedures vary based on unique business needs, PO generation generally follows these seven steps.
1. Initiate the purchase request
The PO journey begins by detailing your procurement needs. This includes identifying the items and services required, estimating costs, and selecting potential suppliers. Conducting this preliminary groundwork lays a solid foundation for the entire purchasing process, setting clear expectations and minimizing oversight risks later on.
2. Secure approval
Advance the request through your organizational hierarchy for validation. But if you’re leading the approval process, scrutinize the order’s specifics: assess the cost, supplier’s reliability, and quantity needed. Consulting with relevant team members, such as finance officers and department heads, provides an additional perspective before finalizing the decision.
During the review process, validate a request’s precision and conformity to your company’s procurement guidelines. This helps you avoid unnecessary expenditures and ensures the purchase contributes to your organization’s goals.
3. Dispatch the order
Once you green-light the PO, send it to your approved vendor, who will then submit a quote in response.
Businesses often send POs to multiple vendors to compare pricing, delivery timeframes, and other variables. If only one vendor can accommodate the request, skip these comparison processes and submit the order for a price quote.
4. Establish a contractual agreement
In this phase, your business and the supplier agree on a formal contract encapsulating all critical purchasing aspects, including pricing and delivery timelines. This agreement, often prepared with legal help for comprehensiveness and clarity, also outlines dispute handling. Upon reaching an agreement, the supplier will issue an invoice.
5. Receive the goods
The supplier will manufacture and deliver your items per the agreed-upon shipping requirements and schedule. The best suppliers might use materials management software to provide live updates on your order’s progress.
Without such software, estimating the delivery timeline may rely on traditional tracking methods. Although less precise, this conventional approach offers a basic timeframe for when to expect your items, providing crucial information to plan your inventory and ensure product integration and sale readiness.
6. Execute the three-way match
The three-way match process validates the received goods against your initial order. Your team compares the PO, the delivery note, and the invoice to verify billing accuracy and that the delivered items meet specifications. If you notice any discrepancies, immediately communicate them to your supplier to rectify the issue.
7. Close the purchase order
After successfully executing the three-way match, formally close the PO. Keep a detailed record of the PO, the invoice, and all related documents for future reference. Maintaining this documentation ensures compliance with financial regulations and provides insights for future purchasing decisions.
Review the supplier’s overall performance and gather feedback from your team regarding the quality of the goods, delivery timelines, and communication throughout the process. This evaluation determines whether to continue partnering with this supplier for future needs or switch to a new one. If they consistently meet or exceed expectations, continuing the relationship is beneficial. If issues persist, exploring new supplier options could improve future procurement efficiency.
What should a purchase order include?
A comprehensive purchase order outlines crucial transaction details, so here are some general details your PO should always include.
Purchase order number
PO numbers are unique identifiers for tracking and referencing. These numbers enable easier matching with invoices, enhancing order management and accuracy.
Payment terms
Outline the agreed-upon payment schedule within your PO, mirroring terms detailed in the invoice and the contractual agreement with your vendor. Common terms include immediate payment upon invoice receipt and structured payments such as net 30, which grants a 30-day window for payment post-invoice.
Shipping method
The vendor typically selects the shipping method, prioritizing cost-effectiveness while aiming to meet your delivery timelines. But if your shipment has unique requirements — such as expedited delivery, special handling, or specific carriers — specify these needs upfront. This ensures the chosen shipping method aligns with your delivery criteria, such as handling care and speed if your products are time-sensitive or fragile.
Expected delivery date
Communicate your delivery timeline clearly to the supplier. The supplier must confirm their capability to meet your delivery date and provide a realistic estimate of when your order will arrive.
Vendor and shipping date
Include the vendor’s name and the anticipated shipping date in the PO. Exact delivery dates may fluctuate, but establishing a preferred shipping timeline helps in planning and inventory management.
Final cost
After settling pricing negotiations, the order should detail the agreed-upon costs. This breakdown ensures transparency and effective financial reporting by itemizing pre-tax totals, net amounts, and applicable taxes.
Types of purchase orders
Understanding the various PO types helps you optimize your procurement strategy and effectively manage inventory. Each type caters to specific procurement needs, offering flexibility and strategic advantages in supplier relationships.
Standard purchase order
A standard PO is the most common, and it details a single transaction’s complete terms, including quantities, prices, and delivery dates. It’s ideal for straightforward, one-time purchases requiring clear transaction details and documentation.
Blanket purchase order
Effective for ongoing supplier relationships, blanket POs cover multiple deliveries over a set timeframe, such as a year, with agreed-upon terms and prices. This approach streamlines repeated purchases, reducing paperwork and providing bulk pricing and discounts, depending on the supplier.
Planned purchase order
Also known as planned release orders, these POs act as a commitment to buy. They enable businesses to communicate future purchasing intentions to suppliers without immediately locking in exact quantities or delivery dates. It’s an effective approach if a business is still fine-tuning demand forecasts or anticipates needing more materials or products but isn’t ready to commit to specific volumes.
Single-source purchase order
Single-source POs are crucial when your procurement strategy relies on a unique supplier offering specialized products and services unavailable elsewhere. This scenario often occurs in industries where custom-made and highly specialized items are essential, making the supplier relationship invaluable.
Unlike other POs that allow sourcing from multiple vendors, single-source POs are specific to only one supplier. This exclusivity leads to a more collaborative buyer-seller relationship, with the order possibly including customized terms that reflect the unique nature of the products and services.
Best practices for managing your purchase order process
Effectively navigating the PO process requires a structured approach and clear communication for those directly involved with procurement and across your entire team. Here are some best practices to proactively prevent issues and keep everyone aligned.
Educate your team on procedures
First and foremost, train your staff on the proper procedure for creating POs. This training should cover learning how to use purchasing software and understanding the approval hierarchy. Providing your team with proper training empowers them to handle POs confidently, reducing errors and speeding up the procurement cycle.
Keep an updated supplier list
The last thing you want is to accidentally forward purchase orders to outdated or non-approved vendors. An updated supplier list helps your team send POs to the correct vendors, preventing delays and mix-ups.
Keep an updated supplier list by maintaining detailed contact information and preferred communication methods for each supplier in your records. Continuously reviewing and updating this list fosters quicker order placement and more reliable supply chain relationships.
Implement a master agreement
If you have trading partners you work with regularly, implement a master agreement with standardized contract and repayment terms. This approach reduces negotiating times and provides consistent terms across orders. And it streamlines transactions by making them more predictable and efficient. Unless otherwise specified in your PO, you can always default to the terms outlined in your master agreement.
Foster strong supplier relationships
Proactively manage supplier relationships and focus on being a good trade partner. A good relationship leads to more favorable terms and priority service during peak times. By offering prompt payment, clear communication, and openness to feedback, you can turn suppliers into partners willing to go the extra mile when you need it most.
Centralize purchasing information
Employees shouldn’t have to go on a scavenger hunt whenever they create a PO. Make it a point to centralize all purchasing information, including supplier contact details, invoices, and master agreements. Having a single source of truth for purchasing information also helps you simplify audits and improve compliance by providing a complete view of your procurement activities.
Streamline purchase order management with Fishbowl
Ready to optimize your PO process for better efficiency and accuracy? Fishbowl Sales offers a complete order management solution that simplifies the entire process. This powerful tool consolidates your order systems into a single platform, helping you effectively manage POs across your business.
Discover how Fishbowl can transform your order management by scheduling a demo today.