Purchase Order Definition and Process Flow

You pick your order, the seller delivers it, and your payment is transferred. Typically, that’s how purchases work for individual consumers.

It gets complicated for businesses however, as companies often need to purchase large quantities or complex products. The risks and costs involved are much, much higher.

To mitigate such concerns, many businesses adopt a purchase order process to carry out their purchases with external suppliers. 

  1. What is a Purchase Order?
  2. What is the Purchase Order process?
  3. Why should I use a Purchase Order?
  4. How to automate a Purchase Order process?

What is a Purchase Order?

A purchase order is an official document that companies send to their suppliers or vendors, so as to request for specific products.

Purchase orders act as contracts between companies and their vendors. When a vendor signs and accepts the purchase order form, they are legally obliged to deliver the goods to your company.

In larger organisations, the Purchase Department is usually in charge of creating these Purchase Orders.

What is the Purchase Order process?

Below is a typical example of the purchase order process:

1. Employee submits purchase requisition for approval

A purchase requisition is a document employees submit to their higher-ups, to request for the purchase of products for the company.

The higher-ups will need to approve the request before an official purchase order is created.

This step may or may not be present, depending on organisations.

2. Create a purchase order

Once the company decides to buy a product, a purchase order form is created. It should include these essential information:

  • Your company details – company name and address.
  • Vendor details – vendor company name, address, employee name and contact details.
  • Shipping details – shipping address, shipping method, delivery date, shipping terms, your company recipient’s name and contact details.
  • Order details – Purchase order number, purchase order date, items, item descriptions, item quantities, unit price and subtotal price.
  • Total price – For your subtotal price, factor in taxes and discounts to get the total price.

If you don’t have a purchase requisition as shown in step 1, you’d probably need a supervisor/manager to approve this purchase order form before sending it out to your vendors.

3. Send the purchase order to your vendor

When your vendor receives the purchase order form, they will decide if they’re able to accept the request and deliver the goods to you accordingly.

To play safe, signatures/e-signatures can be used to record the vendor’s acceptance of your request.

4. Vendor sends the goods along with invoice

Your vendor will be in charge of preparing and delivering the goods to you as stated in the purchase order.

They will also send an invoice to your company. The invoice will summarise the type and quantity of goods sent, as well as the final amount that your company needs to pay.

5. Invoice approval by your company

Send the invoice to your manager/supervisor for review. Once they approve the invoice, you can arrange for payments to the vendor.

Why should I use a Purchase Order?

We know. The process outlined above seems long and unnecessary.

But you’ve probably heard or experienced the horror stories involved in purchases – shipment delays, incorrect deliveries, payment disagreement, defected items, need we say more?

Here’re some reasons to consider why you should adopt a purchase order process:

⚖️ It’s legally-binding

As aforementioned, purchase orders serve as a contract between your company and vendors. If anything goes wrong, you know you can be protected by the law, and your vendors won’t be able to get away with it.

📝 It documents your purchases

By listing out all essential details in the purchase order form, you’ll be able to keep track of your purchases and account for budgeting.

The purchase order form also makes it easier for your suppliers to understand your request and deliver the goods more efficiently.

😎 It’s easier than you think

The idea of sending and approving forms may sound troublesome and time-consuming. But it doesn’t have to be.

One of the ways to simplify the purchase order process is via workflow automation. A few benefits that workflow automation can offer include:

  • Generate digital purchase order forms with e-signature functions for remote confirmation
  • Send purchase orders to suppliers automatically
  • Automate approvals

And the list can go on. Forma for instance provides other automation functions like PDF Generation and more.

How to automate a Purchase Order process?

Workflow automation is one way to go about running a purchase order process. Here’s how to get started.

1.  Design a workflow

A workflow is a sequence of steps needed to finish a process. An example of a purchase order workflow is as such:

Common practices of designing a workflow is to think about:

  • What tasks are needed in this purchase order process? How do I arrange the tasks in sequence?
  • Are there any if-this-then-that conditions involved in the purchase order process? If yes, at which step do I split the process up into different paths?
  • Which employees / stakeholders are needed at each step of the purchase order process?
2.  Use a workflow automation software

By itself, a workflow diagram only helps you to visualise your process. 

Which is why we recommend you to use a workflow automation software, where you can design and automate your workflow all in one place. 

If you’re concerned about the technical skills needed to operate a workflow software, know that there’re numerous no-code platforms available, in which you only need to drag and drop to build an automated workflow. 

3.  Let the software do the rest

Once you’ve designed your workflow, the software will automatically run it for you. No other action is required on your part!

If you’re keen to speed up and simplify your purchase order process, try automating it with Forma for free.