A purchase order request is the first step in placing a purchase order. The request may be generated by manually checking stock or from an automated purchase requisition generated from a management information system. In large manufacturing operations, the purchasing department may not even be located in the same building or geographic location as the facility, so a purchase order request letter is required to get components on order.
For small operations or "one man shows," a visual inventory system is often used instead of the more expensive computerized inventory system. As the inventory of a particular product gets low, the owner simply calls the supplier and puts in a purchase order request. Depending on the type of business, the owner may use a kanban or two-bin system, which means the purchase order request is triggered when the first bin gets empty and the second bin is pulled.
This type of inventory system relies on a visual check of inventory to know when to order additional product. Once the purchase order request is confirmed by the supplier, the owner will often provide a credit card to pay for the product. Alternately, the owner may issue a purchase order, which is a paper form that states the product being purchased and the terms and conditions of payment.
Larger operations typically employ a management information system or enterprise resource planning (ERP) system to keep track of their demand, inventory and purchase orders. These computer-based systems work by having a master scheduler input the marketing forecast. The system will then compare the planned product build schedule against current finished goods, work-in-process, and raw inventory.
The computer systems have a table or file that includes the supplier lead time for each component used in the manufacturing process. During the system's comparison of the product build schedule against inventory, it takes into consideration the supplier lead time and generates a purchase order request for any components that need to be ordered. Most manufacturing facilities operate in a just-in-time (JIT) environment, which means the system will plan for components to arrive just prior to when they are needed for the manufacturing operation. This process reduces the amount of warehouse space needed and reduces the amount of capital tied up in inventory.
The resulting purchase order request is then sent to the component suppliers by the procurement department. As the suppliers confirm component pricing, minimum order quantities, and lead time, the procurement team will issue a firm purchase order. The purchase order is a binding document that guarantees the supplier will be paid upon delivery.