Purchase Requisition vs Purchase Order

Purchase Requisition vs. Purchase Order: Understanding the Differences

When managing procurement processes, two key documents often come into play: the purchase requisition and the purchase order. While they might seem interchangeable to some, each serves a distinct purpose and plays a vital role in maintaining smooth operations, financial control, and vendor relationships. In this blog, we’ll explore their differences, dive into their unique purposes, and outline how to use them effectively to enhance your procurement strategy.

What Is a Purchase Requisition?

A purchase requisition is an internal document used by employees to request the purchase of goods or services. Think of it as the starting point of the procurement process—a way for employees to communicate their needs while seeking approval from the appropriate authorities.

The requisition often includes key details such as the item description, quantity, estimated cost, preferred supplier, and any relevant delivery details. Once the requisition is submitted, it moves through a review and approval process, ensuring that the purchase aligns with company policies and budgets.

For instance, an employee in the marketing department might submit a requisition for promotional materials. Before any action is taken, their manager reviews the request to verify its necessity and alignment with the department's budget. Only after this approval can the procurement team proceed to the next step: creating a purchase order.

What Is a Purchase Order?

A purchase order (PO) is a legally binding document sent by a buyer to a supplier to formalize the purchase of goods or services. Once approved, the purchase order acts as a contractual agreement that outlines the specific details of the transaction.

Unlike the purchase requisition, which is purely internal, the PO is shared with the supplier and includes critical details such as the description of goods or services, quantity, price, delivery terms, and payment conditions. For example, a supplier might require a formal purchase order to initiate delivery, making this document essential for fulfilling business needs efficiently and transparently.

The Purpose of These Documents

Why Use a Purchase Requisition?

The primary goal of a purchase requisition is to control spending and ensure all purchases are necessary and within budget. By requiring approval before initiating any procurement, businesses can:

• Control Costs: Managers review requests to determine if they align with business priorities.
• Monitor Budgets: Requisitions provide real-time visibility into departmental spending.
• Ensure Compliance: Every purchase undergoes scrutiny to meet internal policies.

Why Use a Purchase Order?

The purchase order’s primary role is to provide a legally binding agreement between the buyer and the supplier. It serves multiple purposes, including:

• Facilitating Vendor Requirements: Many suppliers require formal POs before fulfilling orders.
• Tracking Commitments: POs allow finance teams to monitor outstanding commitments and avoid surprise invoices.
• Providing an Audit Trail: By documenting every purchase, POs make financial audits seamless and accurate.

How the Processes Work

Creating a Purchase Requisition

The requisition process begins with the employee identifying a need for a product or service. They document their requirements, including the quantity, estimated cost, and preferred supplier. Once complete, the requisition is submitted to the relevant manager for approval.

For instance, let’s say your IT team needs new software licenses. They’d first prepare a requisition detailing the software’s features, expected costs, and the urgency of the purchase. After securing approval, the procurement team can move forward.

Creating a Purchase Order

Once a requisition is approved, the next step is generating a purchase order. This document outlines the agreed terms of the purchase, ensuring the supplier understands what’s expected. Before sending the PO to the supplier, it undergoes a final review to confirm compliance with internal purchasing policies.

For example, after the IT team’s requisition for software licenses is approved, the procurement team creates a PO specifying the software name, cost per license, and delivery terms. This document is then shared with the supplier, who fulfills the order.

Best Practices for Implementation

For Manual Processes

• Use clear, standardized templates for requisitions and orders to avoid confusion.
• Establish well-defined approval workflows to ensure accountability.

For Automated Processes

• Invest in procurement software to streamline the creation, approval, and tracking of documents.
• Enable automated notifications to keep stakeholders informed of approval statuses and deadlines.

Conclusion

The purchase requisition and purchase order are essential tools for effective procurement management. While the requisition ensures that all purchases align with company goals and budgets, the purchase order formalizes the transaction and protects both parties legally. By understanding their unique roles and leveraging best practices, businesses can optimize their procurement processes, reduce errors, and maintain tighter control over their spending.

Integrating automated systems can further enhance efficiency, providing greater visibility into expenditures and ensuring compliance across the board. Whether you're managing a small team or a large organization, these tools are invaluable in building a sustainable and scalable procurement strategy.

If you’re searching for a procurement solution that simplifies managing purchase requisitions and purchase orders, our team is here to help. Contact us today to schedule a demo and see how we can streamline your process!