The Right Way To Use A Purchase Requisition And Purchase Order
Having a purchase process in place should help you save time and money and have better visibility over the total spend. However, when purchase requisitions and purchase orders are handled manually, the process becomes inefficient.
The most significant disadvantage of paper-based purchasing is visibility. You will never know where your documents are: on your desk? In a folder? In your Inbox?
As a result, productivity and spend optimization have to suffer. But there’s an easy way to avoid this - using purchasing software.
Purchasing software is a powerful tool that can help you streamline your internal processes. But only if you use it right. And for this, you need to understand how the purchase cycle works.
How the purchase cycle looks like
The purchase cycle is a set of steps you need to follow to ensure you use purchase orders efficiently. It looks something like this:
1. An employee issues a purchase requisition: even if you have a procurement department, it’s best to let your employees have some autonomy as they know best what they need.
2. The purchase requisition is turned into a purchase order: a purchase requisition is basically an unapproved purchase order; once your procurement department approves it, it becomes a purchase order. If the purchase requisition contains multiple items, each item will usually have its own purchase order.
3. You check your budget and send an RFP to suppliers: once a purchase order is created, the Financial Department carries out a budget check. After this, it’s time to send the purchase order to suppliers. Here you have two options: if you already have an approved supplier, you can send the document directly; if not, the procurement department should send RFPs (Request for Proposals) to prospective suppliers. Need help with your RFPs? Check out our 20 Step Guide For Setting Up An RFP Process.
4. You select your preferred supplier: once you receive the proposals, choose the one that’s most beneficial to you. To make sure you make the right decision, all relevant stakeholders should be involved in the decision process.
5. You negotiate with your supplier and send the purchase order: after you select your supplier, it’s time to negotiate the contract terms. Usually, contract negotiations include:
Potential liabilities and risks;
Change in requirements.
Once the negotiation is complete and both parties approve the terms, they become legally bound.
6. Your order is delivered and you verify if all criteria are met: the supplier has delivered your goods/services and you perform a quality check and reject any damaged products (if there are any).
7. If everything matches, the purchase order can be closed: at this point, the purchase requisition, purchase order, and supplier invoice are evaluated to make sure there are no mistakes. Any errors should be addressed immediately. If there are no errors, the payment is made and the purchase order is closed and stored for bookkeeping.
Hopefully, this simplified purchase process has revealed any mistakes you might be doing regarding purchase requisitions and purchase orders. But if not, it’s time to dig even deeper. And we will start with the definitions.
What is a purchase requisition?
Not to be confused with a purchase requisition, a purchase requisition is an internal document used by an employee to request a product or service to the procurement department.
For products, the purchase requisition should include:
A detailed description;
The unit of measurement;
For services, the purchase requisition should include:
A detailed scope of work;
The conditions under which the service must be performed;
The necessary equipment/material involved;
A clear outline of both parties’ responsibilities;
An initial budget.
We’ve previously mentioned that purchase requisitions and purchase requisitions are different. The difference lies in how much information an employee can provide.
For example, if a product/service has been purchased before, there’s a high chance that employees can fill in all the details of the purchase requisition and the procurement department can just approve it.
But for products/services that have never been purchased before, employees only have an idea of what they want and they might not be aware of all the details. In this case, they fill in a purchase requisition, which is then turned into a purchase requisition by filling in all the required information.
Why are purchase requisitions important?
Some organizations skip the purchase requisition and jump directly to issuing the purchase order. But this is not the correct approach.
Here are 3 reasons purchase requisitions are important:
They establish a clear procurement process: the process is easier to manage when everyone knows who can purchase what and when. And the fact that employees can make a request on their own takes some of the burdens off of your procurement department’s shoulders.
They prevent fraud: the more thorough a process is, the harder it is for an employee to commit fraud without being discovered.
They give the Financial Department direct control over purchasing: having all purchases centralized by one department gives you better visibility over your spending.
What is a purchase order?
A purchase order is a formal document issued by the procurement department and sent to suppliers. It has the same legal status as a contract and, besides the data from the purchase requisition it contains:
The issue date;
Supplier and company details;
So how are purchase requisitions and purchase orders different?
The table below will highlight the differences even better:
How Prokuria streamlines the purchase cycle for you
Managing purchase requisitions and purchase orders manually can get overwhelming. But with a procurement platform such as Prokuria, the process becomes much simpler.
Prokuria enables you to launch purchase requisitions and purchase orders in minutes, thus saving your organization a lot of time and money.
By automating your procurement flow, you have better visibility over your spending. And because Prokuria is a cloud-based procurement platform, you also get additional benefits like ease-of-access and actionable insights.
Are you ready to digitize your procurement process? Contact us and get your free demo now.