What is a Purchase Order and How Does it Work?

What is a purchase order? A purchase order is exactly what it sounds like: a designated form filled out by a buyer and given to a seller that details precisely what the buyer would like to order for purchase. Purchase orders (often abbreviated to POs) are old staples of paper-trail payment methods and have been in use for decades. Like checkbooks or stubs, purchase orders began as tangible paper products, utilized to help businesses keep track of the orders being placed for various buyers. Purchase orders have been most commonly used in industries such as telecoms, IT, manufacturing, and logistics throughout the years.

The primary goal of a purchase order is clear, easily accessible, and entirely transparent communication. By filling out a purchase order, a buyer is simply and efficiently communicating to the seller exactly what they are looking to purchase, how much of it, and when they are expecting to have this order fulfilled.

In this way, a purchase order is a legally binding piece of documentation. A purchase order turns into a contract once a vendor accepts it, meaning that by agreeing to it, the vendor is promising these services will be rendered efficiently as written. To this end, purchase orders are sequentially numbered and provide an audit trail in the system. While purchase orders are stable and reliable fixtures in many industries, new approaches by companies such as Quadient seek to automate or digitize them, making them even more efficient.

The importance of purchase orders in industries like telecoms, IT, professional services, healthcare, retail, and government comes from how POs have historically helped to contribute to seamless operations. In a time before digitalization or easy online ordering, purchase orders were of great use to both buyers and sellers. For buyers, it was an easy way to communicate their needs to the seller comprehensively. For sellers, it was one of the few truly efficient methods to manage and prioritize incoming orders.

Purchase Order Process

Buyer creates and approves the PO

Intent on procuring services from a given vendor, the customer creates, fills out, and approves a purchase order. This accurately filled-out form details the product, quantity, and date at which the customer seeks to procure these services.

Seller confirms acceptance of the received PO

Upon receiving the customer’s PO, the vendor will review the request’s specifics and accept them, turning the purchase order into a legally binding contract between the customer and vendor.

Buyer receives ordered goods or services

The vendor will deliver the goods or services at the specified date in the specified quantity, fulfilling his end of the legally bound deal.

Seller invoices customer for products shipped or services delivered

Utilizing the details as filled out on the product order, the vendor will then invoice the customer to procure proper payment for the goods or services rendered.

The buyer approves and pays the invoice

The customer will then review the invoice, ensuring that it is correctly aligned with the goods or services they were provided, and pay the vendor.

Close PO

Only after all these steps have been completed, the product order is officially closed out, with both the customer and vendor having fulfilled their ends of the contract.

Potential Problems with Product Orders

Numerous industries face issues with inaccurate information, potential miscommunication, and compliance. Fortunately, Quadient’s AP Automation solutions help streamline the process, reduce errors, and improve efficiency.

Automation in Product Orders

Automation and digitization can improve transparency, compliance, and control in the purchase order process, benefiting industries from education and healthcare to manufacturing and legal services.

The automation process that a company like Quadient (a leading brand in PO management) offers eliminates the need for manual paperwork, speeds up the process, and reduces the chances of errors. It also enables greater communication and transparency, turning the paper trail of yesterday into the digital communication of today.