A Purchase Order (PO) is used pretty much anywhere where products or services are procured, from your local restaurant or favorite clothes store to major automobile or electronics manufacturers (and everything else in between). Purchase order processing refers to all tasks that need to be performed in order to correctly create, send, receive and evidence POs.
Besides ordering goods, they are useful in two or three-way matching, a process run by the firm’s AP team to avoid double payments, fraud, or any other mishap that can result in a “this-wouldn’t-have-happened-if-you-issued-a-purchase-order” look from your AP team.
But what exactly are POs, should your company use them, and if yes – what’s the best approach to processing them? In this article, we take a closer look at all that stands behind purchase orders.
What is a Purchase Order?
When discussing purchase orders and how best to handle them, let’s first define what they are and then clarify what they are not (but are occasionally confused as).
A purchase order is a document used for procuring goods, tracking and managing spending by accounts payable. It serves as a legally-binding contract between the buyer and supplier as it includes information about the products or services being ordered, product quantity, as well as, buyer and seller details.
The above means that purchase orders are also an important record in case of any possible disputes or inconsistencies between the two parties.
And now, what are purchase orders not?
Purchase order vs. purchase requisition
Purchase requisition sounds somewhat alike right? But don’t let that confuse you.
When it comes to purchase requisition, think of a shopping list from an employee to the purchasing department.
A purchase requisition is a document filled out by employees within your organization any time they want to request the purchase of goods or services. This document is not sent to the supplier but to the appropriate department within your firm, i.e., purchase department, for internal approval.
The requisition document has no legal power in itself. It is, instead, an internal procedure. Once the requisition gets a green light, the official procurement begins.
Note: Some companies have a practice of requiring a purchase requisition with every order that needs to be made. Others will only ask for them if the product or service exceeds a certain cost.
Purchase requisition documents help in establishing a transparent procurement process from the start. It can also be used in the future to forecast expenses and as an additional reference in case of any mishaps during the later stages of procurement.
Once the purchase requisition is authorized (or if it’s not required in the first place), a purchase order is created and sent out to the seller. This document is based on the information provided in the requisition stage but will also include more specifics like buyer and seller details, payment, and delivery method.
Purchase order vs. invoice
Another document often confused with a purchase order is an Invoice. What exactly is the difference between the two? Maybe they’re the same?
Purchase orders and invoices are, again, two documents exchanged as part of the same process but used for two different purposes.
There is a partial resemblance between them, i.e., both are legally binding, include standard information about the product or service being ordered, and contain matching details on the buyer and seller.
However, it’s important not to confuse them or consider them synonymous.
Purchase orders will usually be generated by a buyer, who will send them to the seller with a request for an order. On the other end, the invoice will move in the opposite direction from the seller to the buyer with a payment request.
Purchase orders and the procurement process
To put things into perspective, let’s take a birds-eye view look at where purchase orders fit in the procurement process.
Processing Acquisitions generally involves the following steps:
- Purchase Requisition Form: A document is put together by a department or staff member within the firm, informing of the need to purchase a certain set of products or services.
- Supplier Selection: The Purchasing Department will select a supplier from a list of pre-approved vendors (or request quotes (RFQ) from multiple suppliers to determine the best price and terms).
- Purchase order: A purchase order is generated by the purchasing department, outlining information and details of the goods or services to be purchased, including the supplier, quantities, delivery date, and agreed-upon prices. If the goods are available from the supplier’s side, they will confirm that information.
- The goods are packaged and shipped to the buyer
- Purchase Receipt: After the goods or services have been received, the buyer confirms that the goods delivered match the purchase order and generate a purchase receipt based on a delivery note that accompanies the shipment- verifying what’s inside the delivery.
- Invoice Receipt: The seller sends an invoice to the buyer requesting payment for the goods or services delivered.
- Three-Way Matching: The procurement department will check that the purchase order, purchase receipt, and invoice receipt match one another and confirm the accuracy of the transaction authorizing its payment.
Processing purchase orders
So yes, as you can see, POs play an important role in procurement.
Purchase orders authorize the supplier to proceed with the buyer’s order in a legally binding way and help AP verify the payment for that order at a later time. That’s why how POs are processed is also really important. The goal is an efficient, simple, and scalable process that keeps costs to a minimum.
While the cost of processing a PO varies depending on multiple factors, the simple answer can be boiled down to two factors, time and errors.
In an effort to put a number on it, research from the Centre for Advanced Procurement Strategy (CAPS) suggested that the average cost per purchase order fluctuates “between $50 and $1,000, based on the industry with the average cost being $217.00.”
This brings a question to mind and probably hints at the reason you may be reading this article in the first place… Is it possible to streamline PO processing? And if yes, then how can this be done?
The answers are as follows, “Yes” and “Thanks to automation”.
As with any manual process, data extraction done by hand leaves employees to sift through piles of documents, requiring undivided attention in identifying relevant information, followed by either typing out that information line by line into excel (or other), or engaging in a copy-and-paste marathon.
To summarize, not the most sustainable process.
Later on, such documents left to their own devices in a physical format are at risk of getting lost or damaged. (Do your most important documents always end up with a coffee spill stain on them, too?)
Automated data extraction from purchase orders
Introducing automation means benefitting from the efficiency, proficiency, and accuracy that come with using a cloud-based and AI-driven tool to tackle data extraction. Remember the two factors affecting the cost of processing a PO- time and errors?
The above-mentioned efficiency, proficiency, and accuracy of data extraction do an excellent job of speeding up data extraction and so, streamlining the processing of POs.
Optical Character Recognition (OCR) software, as part of an automated data extraction platform, uses text recognition techniques to transform images into processable text. Such OCR software can be introduced to a business process and help in creating a reliable framework by turning valuable but unstructured data into a workable format.
Benefits of IDP and OCR
Relying on an Intelligent Document Processing (IDP) – more on that here – data extraction platform instead of manually typing out purchase order details means that humans only need to validate the data fields that the OCR recognizes.
This means the entire process happens much, much faster.
Not only does automation cut down data identification, extraction, and exporting time, but it significantly reduces the amount of energy used in the process. Take a look at our article explaining how document automation cuts power consumption by 80% or this one, if you are trying to decide if process automation is in line with your company’s mission.
More costs can follow in case deadlines are breached as a result of unoptimized document processing or error data slipping into POs. Errors can pop up either because of a man-made mistake when reading and re-typing data or when using an automation tool that isn’t suited to handling the various states and scenarios documents show up in (think, crumpled, stained, or blurred documents you come across sometimes).
Such mistakes require additional time and energy to amend and reverse. Meanwhile, the Alphamoon platform has been trained to read and understand documents of challenging quality (We list the 6 Common Challenges Of Image-To-Text Extraction here) and provide a high certainty threshold. If the software is uncertain about certain data, it will ask for your input and learn from it.
Starting PO automation with Alphamoon
We hope that this article was helpful in understanding the role of purchase order processing in the procurement process.
If you want to speed up your purchase order processing, sign up for Alphamoon Workspace and process 50 documents for free.