Organizations attempting to cut additional costs and establish control over the purchasing process may use purchase orders (PO’s) as a solution. Unfortunately, a false sense of security may develop within organizations that put all purchases on a purchase order solely for the sake of controls.
Unnecessarily forcing a company to use purchase orders may create duplicative work for operations, and those involved could end up going around the process. For example, operations personnel may wait until the invoice arrives to create the purchase order around it. This is a redundant effort that doesn’t add any value to the business since the purchase commitment was already made prior to the invoice.
Conversely, purchase orders become advantageous for businesses when the following six objectives are at play.
PO’s are a useful tool for reporting and inventory management because they include metrics and capabilities that invoices do not. If a company purchases parts and materials for the maintenance of a plant, they could use the details provided on PO’s to analyze what they are spending on various categories of parts. PO’s would provide insight into trends and help the company pinpoint where costs are increasing and where they should be looking for alternative suppliers.
Blanket PO’s are repeatedly used so businesses do not need to get a new quote from their supplier each time a good or service is repurchased. This is important to maintain any special pricing set with the vendor.
Say a company buys paper at $50 per box from a paper supplier. Any time the company needs to repurchase paper, the company could simply reuse the purchase order from the previous time to maintain the predetermined price of $50 per box. The blanket purchase order also makes the process easier for the person buying the paper by eliminating the need for extra approvals.
It is important for businesses to have a way of tracking delivery expectations to be able to coordinate with other vendors, departments within the company, etc. Purchase orders can help facilitate this coordination by keeping track of delivery dates. Businesses can require suppliers to input the delivery status of the order in their ERP system through the purchase order.
For example, if a drilling company is waiting for pumps to arrive on a drilling rig from their supplier, it would be beneficial to know the date of arrival to be able to coordinate with their team or other vendors who are installing the pumps.
PO’s can explicitly state certain quality expectations, quantities, packaging and sizing requirements, delivery terms, etc. for goods or services purchased. For example, a manufacturing company that buys sheets of metal may state on the PO that sheets need to be a certain agreed-upon gauge, width, and packaging.
Purchase orders can serve as a contract between the buyer and supplier, which protects both parties legally. If the supplier doesn’t deliver goods or services to meet the set expectations on the PO, the buyer can dispute the invoice.
Consolidating purchase requisitions into one PO would allow a company to buy products in bulk. Companies may especially want to do this if they make multiple purchases of the same product in different departments or locations. In this case, purchase orders would help the company internally coordinate to save costs with special pricing deals.
For example, a company has two branches that each need to order more protective eyewear. By using one PO for eyewear and buying in bulk instead of two separate smaller orders from each branch, the company could buy eyewear at a lower price per piece. Also, the company would be able to maintain the right quality of eyewear purchased as defined on the PO.
Shipments from vendors can typically be assigned lot numbers based on commonalities, such as vendor plant and date the product was manufactured. Purchase orders help track these lot numbers so if defects are found, the entire batch can be inspected, recalled, or reissued to prevent further issues.
If a pipeline company receives pipe from a supplier and one pipe ends up having a defect, the company can then use PO’s to easily identify which other pipes were in the same batch purchased from the supplier. The company then could inspect this batch of pipes to ensure no further complications from the same type of defect.
Do not try to force purchase orders on your organization unless there is a reason that adds value, such as those listed above. Businesses should not attempt to use PO’s for the sake of controls because there are more efficient ways to control the purchasing process using technology.
Your company can use software that streamlines and automates invoices without the use of purchase orders. These various solutions are typically inexpensive, easy to use, and don’t unnecessarily complicate the purchasing process.
For more on this topic, listen to our podcast episode, "How & When to Use Purchase Orders the Right Way" featuring Peter Purcell and Alex Perry.
