The purchase order process can often seem like a bureaucratic nightmare, especially when viewed within the public sector, but in fact there is a good rational behind a purchase order process, because it ensures that there is clear rationale for procuring the item, a firm contract between the buyer and the seller and that each party is clear about what is required.

Step 1: Identification Of Need

The very first step in any purchase order process is identifying a need. For the purposes of this example the need is 1000 parts in order to complete a manufacturing process. The need has arisen because the buying company has received a new order from it’s customers and requires some raw material for it’s production process.

Step 2: The Requisition Note

A requisition note has to be raised in order to kickstart the process of an order. The requisition note is a way of ensuring that there is an ‘audit trail’ for orders. Within any company, only a certain number of personnel or staff will be authorised to make a purchase, so requisition notes are a way of identifying need and then passing the note on to someone who is authorised to make the purchase.

Step 3: Identifying Suppliers

Suppliers need to be identified. This will be the role of procurement, who will be the key personnel who will be able to make the final purchase, based on the requisition note.

The procurement section can deal with this in 2 ways; either they can look at their list of approved suppliers to see if any of them can accommodate their requirements, or they may approach specific suppliers who produce the parts required and go through a process of seeking information from the suppliers, to elicit who best can meet their needs.

In this instance it would be reasonable for procurement simply to go to their approved suppliers, because the parts are needed relatively urgently to complete the manufacturing process, so to some extent, time is of the essence.

This flexibility ensures that companies can meet their needs efficiently and effectively.

Step 4: Order Raising

Once the supplier has been identified, a cost agreed etc then an official purchase order can be raised. This enables the supplier to be able to proceed with meeting the order. Most suppliers will not act unless an official purchase order has been received.

The purchase order actually acts as a contract between the supplier and customer. The customer is telling the supplier that they want x units at x price and the supplier, once he or she has received the purchase order can then set about providing the units required.

The purchase order is a way of explicitly stating what is required and so if the order is cancelled, the supplier has some course for redress and recouping any funds they have lost in meeting the order’s requirements. Conversely if the items or service is not received, then the customer can complain that the supplier has not fulfilled their side of the bargain.

All purchase orders will have a number, so that the order can be clearly identified and will be able to be reconciled with the invoice.

Step 5: Goods Received

Once the order has been received, then a goods received note is usually generated, so that the finance department can be aware that the goods ordered were indeed received.

Step 6: The Invoice

When the supplier sends in an invoice, this should list the purchase order number, which along with the goods received note is all that the finance department need to be able to generate payment and once payment is generated, the purchase order procedure has effectively come to a close.

Processessupply chain