Purchase Order Process: Challenges, Automation & Best Practices

Walk through the 10 key steps in the purchase order management process.

As you probably already know, creating purchase orders (POs) is a big — and inevitable — part of running a direct-to-consumer (DTC) brand.

When it comes to navigating the purchase order process, your company has 2 choices:

1. Generate POs manually
2. Automate the task

Admittedly, manual POs feel like they offer more control. But they’re a huge time-stuck and prone to silly human mistakes.

Luckily, you can streamline your purchase order process, increase reorder accuracy, and free up more of your precious time with a few adjustments. All without giving up control.

Here’s how.

What is the purchase order process?

The purchase order process is part of the larger inventory procurement process.

In itself, the PO process spans from identifying your brand’s inventory needs to negotiating vendor terms and finalizing payments.

In other words, the PO process is essentially a promise that the buyer (AKA, your company) will pay the seller (your supplier) in exchange for specific products by a future date.

Of course, this deal hinges on whether your supplier has the goods available. Plus, whether both parties agree to the terms and pricing before the order is fulfilled.

Why should you optimize your purchase order process?

Optimizing your purchase order process can help maintain smoother retail operations.

For starters, when you streamline your purchasing process, you can define your exact inventory needs and establish clear expectations between you and your supplier faster.

(That’s because you might use a PO software that, say, builds your entire PO in a single click.)

You can also better ensure the accuracy of your order forms since you’re not relying solely on manual calculations and guesswork to guide your inventory replenishment process.

After all, old-fashioned human error is often the driving force behind PO mistakes. So, having a tool that calculates reorder points and offers data-backed recommendations on what to restock is never a bad thing.

But improving your PO process also means you’re more inclined to stay within your budget. That’s because you’re not losing money on silly inventory forecasting mistakes, like ordering too much or too little of a certain product.

Moreover, an upgraded purchase order process makes tracking which vendors provide what SKUs easy.

That way, you can closely monitor your order fulfillment workflows (namely, when shipments will arrive and if they will be received on time).

You can then integrate this visibility into your customer experience and clearly communicate when customers can really expect their orders.

10 steps in the purchase order creation process

Creating a purchase order includes a series of 10 steps (outlined below).

Each of these steps plays an integral role in ensuring you get the products you need at the right price.

1. Define your replenishment needs

First things first: You have to sort out your replenishment needs before anything else in the purchase order process.

That means you need to sit down and evaluate your demand forecasts. This’ll help you determine the exact products and quantities you need at that time.

If you don’t begin the PO process by establishing your needs, you won’t know what to include in your purchase requisition.

2. Create a purchase requisition

The next step in the PO process is to create a purchase requisition (PR).

A purchase request is a document you draft and submit to the relevant budget holder at your business.

This person is likely part of your finance team. They’ll be whoever controls funds within the purchase order approval process.

Think of purchase requisition as getting the green light to buy the goods you want. You’re not actually ordering anything yet — you’re just getting approval to do so moving forward.

The main difference between a purchase requisition and the actual purchase order is that a PR is about getting internal permission. Meanwhile, a PO is used externally with your vendors and suppliers.

This approval process reduces the risks of mistakes or redundancies. And it guarantees that what you’re trying to order is within the available budget.

Along those same lines, getting this approval ahead of time also speeds up the replenishment process so your company can avoid any stockouts.

3. Send requests for quotation (RFQ)

A request for quotation, or request for quote (RFQ), is a draft form of a purchase order that isn’t confirmed or shared yet with your vendors.

While your PO is still in this draft stage, it’s possible to switch vendors, add or delete products, adjust product quantities, or even change your distribution warehouse.

Typically, retailers will use an RFQ when their needs for a standard product are consistent and ongoing.

In other words, these retailers buy a regular supply of signature products (like Away brand with their bestselling “The Carry-On” luggage).

You can send a request for quotation on its own or before a request for proposal (RFP).

From there, you can adapt the RFQ to the purchase order itself. Receiving confirmation for the RFQ transforms this draft into the PO you’ll send to potential vendors.

4. Choose vendor(s) and negotiate

When you’ve found the vendor(s) you want to work with, it’s time to begin vendor negotiations.

Here, you’ll haggle details of your deal. For instance, unit pricing, lead times, and anticipated delivery date are typically on the table.

Your vendor will usually kick off this whole approval slash negotiation process once they’ve received your PO.

Hopefully, this step is fairly quick and painless for you both. However, say your PO is rejected for any reason.

You might have to go back to the drawing board and repeat Steps 1 and 2. Or, you might have to look for an alternate vendor to work with (this is usually the case when the vendor’s minimum order quantity is too high).

To avoid these hang-ups, try negotiating several POs at once. This helps to lock in prices and gives your brand peace of mind that you’ll have a reliable supplier moving forward.

For instance, you can share your 12-month growth plan in Cogsy with your suppliers to negotiate better vendor prices for the next year.

Then, commit to fulfilling a large portion of these future POs with this vendor in exchange for a better deal.

5. Submit PO for discussion and agree on final terms

After you finish your negotiations, you can submit your PO for discussion. If you use purchase order software, this system will sometimes submit your PO electronically on your company’s behalf.

Either way, before issuing the PO, you’ll need financial authority to sign off on the purchase. This means offering proof of funds and the ability to pay the amount as stated.

During these discussions, you and your vendor will agree on the final terms. This includes the costs you owe (and when), the shipping date, and any other particulars related to the PO’s fulfillment.

6. Receive, check, and authorize invoice

After you’ve agreed on the final terms, you’ll soon receive an invoice from your vendor that you’ll then need to check and authorize.

But what does that mean? Basically, it’s just a fancy way of saying you’ll need to confirm that the product descriptions, pricing, and payment terms on the invoice match your records.

If you find incorrect details, now’s the time to request amendments.

(More than likely, everything will look just fine — especially since you’ve completed multiple rounds of negotiations and discussions to get to this point.)

Once checked, most retailers authorize their invoices via email or an electronic procurement platform.

7. Perform three-way matching

A three-way match is like a quality check where your company compares 3 different types of documentation:

1. Purchase order you submitted to your supplier
2. The goods receipt note your supplier sent
3. Your supplier’s invoice you authorized in the previous step

Retailers examine each of these documents to prove the following:

• Their company actually requested the invoiced goods
• They received those goods

You often complete three-way matching before approving the supplier’s invoice for payment.

By verifying that your business requested and received the goods listed on the invoice, you can determine whether that invoice is legitimate.

Three-way matching also helps you maintain a paper trail in case you run a procurement audit. When this happens, you’ll need this documentation to review all the contracts, processes, and history with your vendors.

8. Make payment

Assuming your three-way match checks out (meaning, there aren’t any discrepancies with your purchase order, invoice, or applicable terms), it’s time to make your payment.

Depending on your arrangement with your supplier, this amount might be payable in multiple installments or in a lump sum.

For instance, most vendors require their customers (that’s you) to pay part of the invoice upfront (as a form of down payment). The remaining balance is then due within net 60 days on average.

While this process is common practice, it can cause working capital issues for your brand. This is especially true with inflation driving up the costs of goods and supply chains taking exponentially longer than usual.

As a result, you might have to pay the invoice in full before your product arrives. This leaves your brand cash flow negative longer (if not totally in the red).

9. Record the purchase order

With payment finalized, your company will record and file the purchase order. In a manual PO process, this step involves filing your purchase orders by hand to prepare for any financial audits down the road.

But if you created your purchase order in an operations platform, then that system will make an electronic record of your PO you can reference later.

For example, Cogsy actually records all your purchase order information in the same place. Shopify merchants can then easily reference their historical POs at any time within the platform.

10. Close the PO

Finally, all that’s left is to close the purchase order once you’ve received your products. But that’s only if the products and delivery meet your stipulations and standards.

Assuming everything arrives as expected, you’ll sign the goods received note (GRN). GRNs are a record you can use to compare the number of items ordered versus the number delivered.

However, if your order doesn’t arrive as expected, you’ll need to get in touch with your vendor to make sure they correct their mistakes.

This could mean issuing a refund for damaged items or shipping additional products if the order volume was off on their dollar.

After that, you’re all set! The entire process is finished and can be repeated again and again.

Purchase order workflow challenges to avoid

If you’re manually working through the purchase order creation process, there are definitely some obstacles you might run into. The most common complaints about manual purchase orders are the high costs, inefficiency, and countless compliance issues.

High costs

Manual purchase orders are often expensive. According to a 2020 American Productivity & Quality Center (APQC) study, manual PO processing can drain businesses’ budgets by as much as $506.52 per purchase order.

Imagine creating dozens of purchase orders at that shocking sticker price every year. That’s definitely going to cost your company a pretty penny.

Plus, these high costs also mean you’re shrinking your bottom line since you’ll have tons of overhead tied up in your POs. Meaning, manual purchase orders are a poor use of funds and hinder your growth.

Ineffective practices

Manual processes will never be as effective as using automation. Period.

When you handle your purchase orders electronically, you can speed up the communication and confirmation process (and complete lots of steps with just 1 or 2 clicks).

On the flip side, manual purchase orders can take several hours to fill out. Not to mention several days of back and forth if you have to amend those orders or related invoices.

In addition to being more time-consuming, manual POs have much longer processing times. When you do this process by hand, you’re almost guaranteed to have human errors in your reporting or calculations. (After all, to err is human, right?)

The only surefire way to bypass these errors and ensure your documentation’s accuracy is to rely on an automated system like Cogsy instead.

Automation improves the accuracy of your ordering and reporting by eliminating manual mistakes and organizing all your data in a centralized place.

Compliance issues

Besides being expensive, inefficient, and error-prone, manual POs also have their fair share of compliance issues.

Purchase order compliance outlines the products you need (and in what quantity), as well as the agreed-upon item price and form of payment. And it ensures those goods get delivered, and you pay as promised.

With manual POs, you may have a harder time confirming incoming order details — like which products are required and by what date.

Because of these potential inaccuracies, brands may not get the goods they intended to order (or receive them at the wrong time).

In turn, retailers are more likely to end up overstocking (which leads to dead stock) or understocking (stockouts).

Both situations are expensive to remedy. And yet, these mistakes are easily avoidable if you use the right tools.

For reference, McKinsey estimates brands will need to spend $39 billion to return to pre-pandemic stock levels after 2+ years of stockouts and overstock.

How to stay on top of your purchase order process

Don’t want to get caught up in endless emails and tedious processing cycles? Your best bet is to implement an end-to-end purchasing tool that streamlines your PO workflow.

Thanks to Cogsy’s robust functionality, Shopify merchants (like yourself) can create purchase orders without any bottlenecks or never-ending email threads.

Increase ordering efficiency

Cogsy’s ability to streamline your operations is pretty remarkable, really. For starters, Cogsy helps you ditch those static spreadsheets. Instead, Cogsy serves up growth plans that automatically forecast demand for the next 12-months (so you can stock up accordingly).

From there, Cogsy’s purchase order feature than references your growth plans. That way, it can serve up handy restock recommendations that calculate what you need restocked (and how much to order).

You can then bulk-add these recommendations (all, some, or none) to build out your next PO in mere minutes. All while radically reducing your risk of error.

Even better? You no longer need to babysit your stock levels to avoid a stockout. When it’s time to place your next PO, you’ll get an automatic replenish alert, nudging you to restock.

Centralize document management

Cogsy’s ctionable dashboard is a centralized location where you can store all your past, present, and future inventory data and PO documentation. That’s because Cogsy is a streamlined hub that offers easy access to all your purchasing documents.

With Cogsy in your corner, gone are the days of endlessly searching for the file or form you need. Instead, everything is stored at your fingertips, ready for you to reference.

This accessibility will not only save you tons of time, but it makes your record keeping a lot more secure, too. You can trust that your most important details and financial information are safe, sound, and easy to find.

Increase spend visibility

As a one-stop shop for every facet of your procurement process, Cogsy ensures Shopify merchants have total inventory visibility from draft to delivery. (The same cannot be said about those pesky manual PO practices.)

For instance, Cogsy gives you real-time insights into your inventory levels across multiple warehousing locations.

This way, you know exactly how long each unit’s just been sitting. But you also know exactly how much you spent on procuring each unit.

On each purchase order, Cogsy allows for adjusted costs (think: adding hidden shipping costs). This way, you can accurately calculate your landed costs and track your costs of goods sold (COGS) per SKU and per vendor basis.

With this info in hand, you’re equipped to budget for your next PO (because you’ll have a comprehensive picture of how much it really costs you to stock up).

But you’ll also be able to increase your contribution margins (because you’ll know exactly how much you can spend on acquisition without compromising your profits).

Improve relationships with vendors

Who doesn’t want a better relationship with their vendors, right? Cogsy understands your desire to improve these relationships so you can enjoy an easy, breezy PO experience.

With Cogsy’s intuitive planning feature, team members can create inventory plans up to 12 months in advance.

This foresight is great for order management and shortening your PO lead times. But it also gives you leverage to negotiate better terms with your vendors.

Vendors are much more likely to cut you a deal when you provide this level of consistency with your ordering since they can count on your business.

After Lalo teamed up with Cogsy, they cut PO down payments by 50% by sharing their production plans with their suppliers. This move freed up tons of working capital while improving vendor relationships.

Reduce chances of procurement fraud

Cogsy monitors your operations 24/7, constantly monitoring your inventory levels, product movement, and more.

This kind of proactive approach will help your brand get ahead of procurement fraud before it ever happens. Procurement fraud is a type of manipulation to gain an unfair advantage during the procurement process (with inflated invoices, for example).

When you have total inventory visibility and end-to-end processes, it’s much harder for this fraud to slip through the cracks. And by avoiding fraud altogether, your company can also bypass profit loss and save yourself the headache of sorting through legal documents to figure out where things went wrong.

But don’t take our word for it – try Cogsy free for 14 days.

Bonus: 3 best practices for creating purchase orders

Looking for extra guidance on PO creation as a whole? We’ve got some great tips you can start implementing immediately.

1. Ensure accuracy at every stage of the process

We’ve merged a few best practices into one piece of advice because they all boil down to the same thing: ensuring the accuracy of your purchase orders.

This includes:

• Checking that the purchase order number corresponds to the invoice number
• Specifying the payment terms and agreed-upon price
• Clearly indicating the shipping method and date
• Accurately describing the expected delivery

When you verify each of these factors, you’ll set yourself up to create POs that don’t require much amending or negotiation.

2. Build and regularly update your list of suppliers

You’re not going very far in the ordering process unless you have reputable, reliable suppliers you can count on repeatedly.

Creating solid vendor ties probably won’t happen overnight. And it might even involve trial and error as you test out the PO system within the context of these relationships.

But once you’ve established healthy, collaborative partnerships, make sure to make a comprehensive list of all your suppliers to reference later.

It’ll be in your best interest to update vendors’ contact information as you find more to work with or break ties with those who no longer serve you.

3. Team up with a cloud-based operations system

Working with a cloud-based operations system like Cogsy puts you on the fast track to success. This type of procurement software makes it easy to create, submit, and adapt your purchase orders as needed — with minimal data entry.

For example, Cogsy automatically drafts optimized POs based on your historical and real-time inventory data. All you need to do is check that everything looks right and then hit submit.

That’s because Cogsy integrates with the ecommerce tools you already use. And as a result, it can help you accomplish goals like streamlining your purchase order flow in Shopify.

Finding an operational partner is the best way to accelerate your PO approval and processing. On top of that, these systems can ramp up your accuracy and enhance your PO efficiency (so nothing is ever lost or delayed along the way).