A purchase order seems simple enough: you tell a supplier what you want, they send it, you receive it. But between that request and that receipt lies a process that can either run smoothly or cause constant headaches. Missed orders, wrong quantities, pricing disputes, lost shipments—most of these problems trace back to purchase order management gaps.
Here's how to build a purchase order process that keeps inventory flowing without creating extra work or letting things slip through the cracks.
Anatomy of a Purchase Order
A complete purchase order includes:
- PO number: Unique identifier for tracking and reference
- Order date: When the PO was created
- Vendor information: Who you're ordering from, including contact details
- Ship-to address: Where the goods should be delivered
- Line items: Each product with SKU, description, quantity, and unit price
- Requested delivery date: When you need the order
- Payment terms: Net 30, 2% 10 net 30, etc.
- Shipping terms: Who pays freight, FOB point, carrier preferences
- Special instructions: Packaging requirements, labeling, appointment scheduling
Missing any of these creates opportunities for miscommunication. Suppliers ship to wrong addresses, use wrong pricing, or deliver at inconvenient times—all because the PO wasn't complete.
Creating Purchase Orders: Timing and Triggers
Reorder Point-Based Ordering
The most common trigger: inventory drops to a predetermined level, and it's time to order. This works well for steady-demand products where you've calculated appropriate reorder points and order quantities. The system flags when it's time, you create the PO, and the process begins.
Time-Based Ordering
Some suppliers work better on regular schedules. Maybe you order every Tuesday, every two weeks, or monthly on the first. This approach simplifies planning, consolidates shipping costs, and creates predictable workflows. The tradeoff is potentially holding more or less inventory than optimal on any given day.
MRP-Driven Ordering
For complex products with bills of materials, purchase orders might be generated based on production schedules. You know you're making 1,000 units in week 8, so you need raw materials to arrive by week 6. These POs are planned backward from production needs.
Exception-Based Ordering
Sometimes you need to order outside the normal flow—a rush order to prevent stockout, a special customer request, or taking advantage of a supplier promotion. These exceptions need extra scrutiny to ensure they make financial sense.
Purchase Order Approval Workflows
Who needs to approve POs, and at what thresholds? This balance affects how quickly you can order.
Define Clear Approval Levels
Common structures include:
- Under $1,000: Buyer can auto-approve
- $1,000-$10,000: Manager approval required
- $10,000-$50,000: Director approval
- Over $50,000: VP or executive approval
Set thresholds high enough that routine reorders don't need escalation, but low enough that large purchases get appropriate review.
Automate Routine Approvals
Reorders of existing products from existing suppliers at existing prices shouldn't require manual review. Build rules so these flow through automatically. Save human judgment for new suppliers, unusual quantities, or price increases.
Avoid Approval Bottlenecks
If one person's absence stops all purchasing, you have a problem. Set up backup approvers and consider time-based auto-approvals (if not reviewed within 48 hours, auto-approve for routine orders).
PO Tracking and Status Management
Once a PO is sent, you need visibility into where it stands:
- Sent/Pending confirmation: PO transmitted, waiting for supplier acknowledgment
- Confirmed: Supplier has accepted the order and committed to delivery
- In production: Order is being manufactured or prepared
- Shipped: Order has left the supplier's facility
- In transit: Moving toward your location
- Received (partial): Some items delivered, others pending
- Received (complete): All items delivered and checked in
- Closed: Receiving complete, invoice matched, no outstanding issues
The gap between "sent" and "confirmed" matters more than most brands realize. A PO sitting unacknowledged isn't actually an order—it's a request. Follow up on unconfirmed POs within 1-2 business days.
Managing the Receiving Process
Receiving Against the PO
When shipments arrive, receive them against the original purchase order. This creates the match between what you ordered and what you got. Check:
- Quantities: Did you receive what the PO specified?
- Products: Are these the right items?
- Condition: Any damage or quality issues?
- Documentation: Do packing lists match the shipment?
Handling Discrepancies
Discrepancies happen. Have a process for each type:
- Short shipment: Receive what arrived, create a note on the PO, follow up with supplier about the remainder.
- Over shipment: Decide whether to accept the extra or return it. Update the PO accordingly.
- Wrong items: Flag immediately, segregate the items, and coordinate return/replacement with the supplier.
- Damaged goods: Document with photos, file claim per your agreement terms, and adjust received quantities.
Three-Way Matching
Before paying a supplier invoice, match it against both the PO and the receiving record. This three-way match catches:
- Invoices for quantities never received
- Price increases that weren't agreed upon
- Items billed twice
- Receiving errors that slipped through
Discrepancies found here should be resolved with the supplier before payment.
Purchase Order Metrics to Track
- PO cycle time: Days from creation to delivery. Are orders taking longer than expected?
- On-time delivery rate: What percentage of POs arrive by the requested date?
- Order accuracy: What percentage of received shipments match the PO perfectly?
- First-pass match rate: What percentage of invoices match PO and receiving on first review?
- Open PO aging: How many POs have been open for longer than expected?
Review these metrics monthly. Trends tell you whether your process is improving or degrading.
Common Mistakes to Avoid
- Verbal orders without POs. If there's no PO, there's no documentation when disputes arise. Every order needs a paper trail.
- Ignoring unconfirmed orders. A PO the supplier never acknowledged might as well not exist. Follow up immediately.
- Receiving without checking. Signing for deliveries without verifying quantities means you lose leverage to dispute short shipments.
- Paying before receiving. Unless your supplier requires prepayment, don't pay invoices until you've verified receipt.
- Manual tracking in spreadsheets. Beyond a handful of orders per month, spreadsheet tracking breaks down. Use proper PO management tools.
Key Takeaways
- Complete POs with all details prevent miscommunication and disputes
- Establish clear approval workflows that don't bottleneck routine orders
- Track PO status actively—especially between sent and confirmed
- Receive against the PO and document all discrepancies
- Use three-way matching before paying supplier invoices
Frequently Asked Questions
How do I manage purchase orders effectively?
Create complete POs with all necessary details, establish appropriate approval workflows, track order status from confirmation through delivery, receive items against the original PO, and match invoices to both POs and receiving records before payment. Use dedicated PO management tools rather than spreadsheets for anything beyond basic volumes.
What should be included on a purchase order?
Every PO needs: unique PO number, order date, vendor information, ship-to address, detailed line items (SKU, description, quantity, unit price), requested delivery date, payment terms, shipping terms, and any special instructions. Missing information creates opportunities for errors.
How do I track purchase orders?
Maintain status records for each PO through its lifecycle: sent, confirmed, in production, shipped, in transit, received, and closed. Follow up immediately on unconfirmed POs. Use automated tracking where available, and review open PO aging regularly to catch stalled orders.
What is three-way matching?
Three-way matching compares the supplier invoice against both the original purchase order and the receiving record. All three should agree on items, quantities, and prices. Discrepancies are investigated and resolved before payment. This prevents paying for items not ordered or not received.
How do I handle receiving discrepancies?
Document discrepancies immediately—photos for damage, count records for quantity issues. Receive what actually arrived accurately; don't adjust records to match the PO. Notify the supplier same-day for significant issues. Resolve before paying the associated invoice.