Purchase Order Process: Challenges, Automation & Best Practices

October 17, 2022
13 min read

In this article:

Walk through the key steps in the purchase order management process and familiarize yourself with the solutions to the biggest PO challenges.

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. Here’s how. 

What is the purchase order process?

The purchase order process is part of the larger inventory procurement process. The PO process itself involves everything from identifying your brand’s inventory needs all the way down to negotiating vendor terms and finalizing payments.

Or, more simply, the PO process is essentially a promise the buyer (AKA, your company) will pay the seller (your supplier) in exchange for specific products by a future date. 

Of course, the 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? 

Perfecting your purchase order process can help maintain smooth and streamlined retail operations. When you automate the purchasing process (more on this later), you can define your exact needs and establish clear expectations between you and your supplier.

You can also better ensure the accuracy of your order forms since you’re not relying on manual calculations and guesswork to guide your inventory replenishment process. After all, old-fashioned human error is often the culprit when there are mistakes on a PO.

Improving your PO process also means you’re more inclined to stay within your budget. Not to mention you can avoid losing money because you’ve mistakenly ordered too much or too little of a certain product.

Moreover, an upgraded purchase order process lets you track which vendors provide what SKUs. So, you can keep a closer eye on your order fulfillment workflows (namely, when shipments will arrive and if they will be received on time).

Last (but certainly not least), a better PO process can give your brand a serious confidence boost. Because you have a binding contract that clearly outlines when your order will come in, you can offer improved delivery timelines to your customers.

More accurate delivery estimates are a surefire way to build more trust among your customer base and to create an elevated customer experience.

10 steps in the purchase order creation process

Creating a purchase order includes a series of 10 steps. Each of these steps (outlined below) 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 and 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 an official document you draft and submit to the relevant budget holder at your business. That person on your finance team 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 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 whole approval process reduces the risks of mistakes or redundancies and 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.

⚾️ Heads up: The finance department can also reject or flag your request, likely leading to further discussions before getting approval.

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'd like to work with, it's time to begin vendor negotiations. You'll haggle details of your deal, like unit pricing, lead times, and anticipated delivery date. 

Your vendor is usually the one who'll kick off the 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 (and maybe even look for an alternate vendor to work with). 

📝 Note: You can also negotiate 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 production plan in Cogsy with your suppliers to negotiate better vendor prices for the next year. That way, your vendor will have what's needed to fulfill your POs as you place them (which can reduce your PO lead time).

5. Submit PO for discussion and agree on final terms

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

Still, 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, the date to ship, and any other particulars related to the PO’s fulfillment.

6. Receive, check, and authorize invoice

Once you’ve agreed on the final terms, the next step will be receiving, checking, and authorizing the vendor’s invoice. This means confirming the product descriptions, pricing, and payment terms.

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. 

🔥 Tip: Be sure to track the progress of your PO, as well. Supply chain issues in the last few years have resulted in products sitting idle in ports and arriving late. You can try negotiating a discount for late shipments when this happens.

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

Suppose your three-way match checks out (meaning there aren’t any discrepancies with your purchase order, invoice, or applicable terms). In that case, 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. Most companies are required to pay part of the invoice upfront (as a form of down payment) and then deliver the rest within net 60 days.

While this is common practice, it can cause working capital issues. This is especially true with the costs of goods rising due to inflation and supply chains taking exponentially longer than usual.

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

🔥 Tip: You can alleviate the challenges that come with going cash flow negative by selling on backorder. That way, you’re still generating revenue even during stockouts.

9. Record the purchase order

With payment finalized, your company will record and file the purchase order as you wait for delivery. 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, the system will make an electronic record of your PO you can reference later. 

Cogsy actually records all your purchase order info in the same place, making it easy to find (and reference) past POs as needed.

10. Close the PO

You’re in the home stretch! The final step is to close the purchase order after you receive your products. But that’s only if the products and delivery meet your stipulations and standards.

Assuming everything arrives as expected, you’ll sign a 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.

These high costs mean you’ll shrink your bottom line since you’ll have tons of overhead tied up in your POs. All in all, 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. (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 guides your vendors about the products you need (and in what quantity), as well as the agreed-upon item price and form of payment.

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 implementing an operations platform that supports your PO process.

Thanks to Cogsy's robust functionality and ample automations, you 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 proactive sales predictions that automatically forecast demand (and help you plan accordingly).

From there, Cogsy’s purchase order system helps your brand reorder inventory at the press of a button. You read that right — with a single click, Cogsy can create a PO tailored to your exact inventory needs and then submit that PO to your supplier in seconds.

🔥Tip: You can also create a PO from scratch inside the Cogsy platform if that’s your preferred process.

Additionally, Cogsy’s replenishment alerts are a huge boon to brands. These alerts keep you from babysitting your inventory levels and trying to figure out when you need to place POs. Cogsy simply gives you a nudge at the right time.

Centralize document management

Cogsy’s operations platform 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 recordkeeping 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

Because Cogsy is a one-stop shop for every facet of your retail operations, brands also have increased spend visibility. (That can’t be said about those pesky manual PO practices.)

For instance, DTC retailers get real-time insights into their inventory levels across multiple warehousing locations. And thanks to your historical POs, know how much you spent on each unit. 

With this information, your team can see the impact of your purchase acquisitions before they’re submitted to your suppliers. That way, you can make smarter decisions regarding managing your cash flow. 

Plus, Cogsy’s new actionable dashboard defines how much working capital brands need to replenish to optimize inventory levels and meet consumer demand. 

And if that wasn’t enough, Cogsy also gives you a timeline for roughly when and how much capital you will need to help you budget accordingly.

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. 

  1. 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.

  1. 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). 

👉 If you’re ready to achieve these results for your brand, Cogsy is here to help. Try Cogsy free for 14 days. 

Purchase order process FAQs

Get answers to the most common PO process questions.

What is the difference between a purchase order and an invoice?

Purchase orders and invoices differ in their inherent purpose. A purchase order is issued by a buyer and fulfilled by the supplier. On the other hand, an invoice is administered by a supplier (after fulfilling a purchase order) and must be paid by the buyer at an agreed-upon date.

What is a non-purchase order process?

A non-purchase order process happens when a brand urgently needs merchandise. In this scenario, the purchaser doesn’t have time to seek approval from multiple parties before they place their order. So instead, they expedite the process to suit their needs or schedule — though this rapid pace often comes at a considerable price (think: rush fees).

What is the average cost to process a purchase order?

Processing a purchase order can cost anywhere from $50 all the way up to several hundred dollars (per individual order). According to a 2020 study from the American Productivity & Quality Center (APQC), manual processing costs businesses as much as $506.52 per PO on average. 

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