Purchase Requisition vs Purchase Order: Key differences

Finance and procurement teams know how important it is to have a streamlined procurement process. Whether you're ordering raw materials, supplies, or services, you need a reliable system in place that ensures timely and cost-effective procurement. 

Two key documents that play a critical role in that process are the purchase requisition and purchase order. In this post, we'll explain the difference between these two documents and how their adoption by stakeholders enables improved automation of purchasing workflows.

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What is a Purchase Requisition?

A purchase requisition is an internal document that an employee or department submits to the finance department or purchasing department to request goods or services. The purchase requisition contains information about the item or service required, the quantity needed, the estimated cost, and any other relevant details. Once the purchase requisition is submitted, it goes through an approval process, usually involving the department head or budget holder, to ensure that the purchase is necessary and within budget.

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What information does a purchase requisition include?

In its simplest form, a purchase requisition summarizes what an employee would like to buy, so an approver in the finance department or procurement function can decide whether or not to proceed with a purchase. To facilitate that decision, an employee must at a minimum provide the:

• Requisition number
• Item or service to be purchased
• Quantity needed
• Delivery date
• Budget code
• Specifications for the item or service
• Supporting documentation or justification for the purchase
• Contact information for the person submitting the requisition
• Approval from one or more individuals within the organization, depending on company policies and procedures

At first glance, a purchase requisition may seem like a simple form. From the perspective of the accounting department, however, it is a critical first step in the purchasing process that creates an audit trail that will later inform the invoice approval process.

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What is a Purchase Order?

A purchase order is a legal document that the purchasing department sends to a supplier to order goods or services. The purchase order contains information about the item or service ordered, the quantity, the agreed-upon price, the delivery date, and the payment terms. Once the supplier receives and acknowledges the purchase order, it becomes a legally binding contract they must fulfill according to the terms specified.

Purchase orders are created by the purchasing department once a purchase requisition has been approved. The purchasing department will gather information about the item or service to be ordered, including quantity, price, delivery date, and payment terms, and will create a purchase order based on this information. The purchase order will include a unique identification number, the name and address of the supplier, the items or services to be ordered, the quantity, price, and other relevant details. Once the purchase order is complete, it will be sent to the supplier, who will then be legally bound to fulfill the order according to the terms specified.

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What information does a purchase order include?

The goal of a purchase order is to outline the terms of a purchase agreement between a company and a supplier. Some of this information is previously gathered from the purchase requisition, while other details must be gathered from the supplier before creating the purchase order in the procurement system.

A typical purchase order must at a minimum include:

• Purchase order number
• Item or service being ordered
• Quantity ordered
• Price per unit or total cost of the order
• Delivery date and location
• Payment terms and method
• Shipping address
• Handling instructions
• Any applicable taxes or fees
• Contact information for both the company and the supplier

By providing this information in a purchase order, both the company and the supplier can ensure that they are on the same page and that the order is fulfilled as expected. Most modern companies track this process in a digital purchasing system such as an e-procurement, procure-to-pay, or ERP solution.

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Purchase Requisition vs Purchase Order: Key Differences

The key difference between a purchase requisition and a purchase order is that a purchase requisition is an internal document used to initiate a purchasing request, while a purchase order is an external document used to formalize and authorize a purchasing order. While both documents are essential for the procurement process, they serve different purposes and have different levels of formality and legal status.

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Purchase requisitions vs purchase orders: common issues

As you can see, however, purchase requisitions and purchase orders are linked steps in your purchasing process. Unfortunately, this link often comes with baggage. The purchase requisition process, in particular, can create significant drags on the efficiency and effectiveness of a company's procurement process. 

One common flaw is the lack of detail or specificity in the purchase requisition, which can lead to confusion or delays in the purchasing process. This can occur when the person submitting the purchase requisition does not provide enough information about the item or service requested, such as the quantity needed or the specifications required. 

Another common flaw is a lack of standardization in the purchase requisition process, which can result in inconsistencies in how purchase requisitions are created, reviewed, and approved. This can lead to delays or errors in the purchasing process and can make it more challenging to track purchases or manage budgets. 

The root causes of these flaws can include inadequate training or resources for employees involved in procurement, a lack of clear policies and procedures, and a failure to utilize procurement software or tools that could automate and streamline the purchase requisition process.

To bridge this gap, businesses are rapidly adopting intake-to-procure solutions. These tools use dynamic request workflows to gather purchase request information with category- and process-specific questions to route users to the appropriate request fields. Users gain a more comprehensive, intuitive purchase request experience, while finance and procurement capture more information up front to expedite the PO creation process. 

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How purchase requisitions and purchase orders streamline the purchasing process

The purchase requisition and purchase order are key documents that work together to create a faster and more error-proof purchasing process. 

By providing detailed and standardized information in the purchase requisition, the purchasing department can quickly and accurately create a purchase order, reducing the risk of errors or delays in the approval process. 

Better upfront data collection improves overall automation of the purchase requisition and purchase order processes, companies can reduce the time and effort required to procure goods and services while minimizing the risk of errors or discrepancies. This can help to create a more efficient and effective procurement process, benefiting the entire organization.

A common barrier to ensuring smooth connection between purchase requisition submission and purchase order creation, however, is a lack of detail and flexibility in how a finance or procurement department manages the request intake process. 

Historically, purchase requisition forms in procure-to-pay systems have been rigid and goods-centric. This means the e-forms work well for simple items captured by catalogs, but they often fall short for increasingly common purchase types, like SaaS software, that are not as easily captured in a P2P catalog. 

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Why the Difference Between PRs and POs Matters to Finance and Procurement Leaders

Understanding the difference between purchase requisitions and purchase orders is critical for CFOs and Chief Procurement Officers for several reasons. Properly managing the processes related to each document:

1. Ensures that the purchasing department follows a standardized workflow that minimizes errors, delays, and unnecessary purchases.
2. Enables better cost control by ensuring that purchases are made only when necessary and within budget in satisfaction of true business needs 
3. Helps to avoid confusion and disputes with suppliers by ensuring that the terms and conditions of the purchase order are clear and legally binding.
4. Create a clear paper trail for accounts payable employees to verify orders have been delivered at the right time and quantity at the expected price before paying an invoice

Purchasing Process Best Practices for Purchase Requisitions and Purchase Orders

To ensure an efficient procurement process, CFOs and Chief Procurement Officers should establish clear policies and procedures for creating, reviewing, approving, and tracking purchase requisitions and purchase orders. As covered above, however, each document type has a unique purpose and requirements, so effectively creating each requires specific practices, too. 

When creating purchase requisitions, best practices include:

• Provide detailed information: Ensure that all purchase requisitions include sufficient detail about the item or service being requested, including the quantity, specifications, delivery date, and budget code.
• Standardize the process: Develop a standard template for purchase requisitions and establish clear guidelines for how they should be completed, reviewed, and approved.
• Use procurement software: Implement procurement software, such as an intake-to-procure solution, that can automate the purchase requisition process, reducing the risk of errors and delays.
• Train employees: Provide training to employees involved in the purchase requisition process, including how to complete the requisition form accurately and how to follow the purchasing policies and procedures.
• Monitor the process: Regularly review the purchase requisition process to identify areas for improvement and to ensure that it is running smoothly.

When creating purchase orders, best practices include:

• Ensure accuracy: Double-check all details on the purchase order, including the item or service ordered, quantity, price, delivery date, and payment terms, to ensure accuracy.
• Maintain communication: Keep in touch with the supplier throughout the purchasing process to confirm receipt of the purchase order, to track the status of the order, and to manage any changes or issues that may arise.
• Centralize the process: Establish a central repository for all purchase orders, ensuring that they are organized, easily accessible, and securely stored.
• Monitor delivery and payment: Track delivery of the ordered items or services and ensure that payment is made according to the payment terms specified on the purchase order.
• Conduct regular reviews: Regularly review the purchasing process, including the creation and handling of purchase orders, to identify areas for improvement and to ensure that the process is efficient, effective, and compliant with company policies and procedures.
  

The key to PR and PO automation? Frictionless intake-to-procure

Purchase requisitions and purchase orders are critical documents in the procurement process, and understanding the difference between them is essential for finance teams and procurement managers. By following best practices and utilizing modern procurement systems, you can establish a streamlined and efficient procurement process that ensures timely and cost-effective purchases.

Simply digitizing this process, however, may not fully produce the intended results. In order to get full adoption and automation of the request intake and purchasing process, you need an intuitive, dynamic user experience that captures all types of spend. For that, you’ll need not an ERP or e-procurement system but an intake-to-procure solution. To learn more, dive into our guide to establishing a frictionless intake-to-procure process, or contact an expert at Zip to learn more.