Unless you are a painter-abstractionist like Jackson Pollock, then the order will always bring you significantly better results than chaos.
Especially when we talk about procurement, if we want the process go smoothly, employees have to make everything – from the identification of needs to payment – correctly and on time. A number of documents are used in the process. And Purchase Order (PO) is one of the most important of them.
Though benefits from the correct documentation are obvious, in many enterprises, there are cases (in some companies the number of “cases” is so significant, it becomes a “common practice”) when orders are made simply by phone or email, without composing formal Purchase order.
Let’s consider the pros and contras of usage of Purchase order in 100 percents of purchases.
Arguments CONTRA usage of a Purchase order for all purchases
- When you order by phone an ordinary product from your regular supplier, it takes “less” time. There is nothing as simple as a call to your old partner. You’ve bought from him not once, so you can ask “to send the same product as last time. Twenty packages”. Alternatively, you can send an email with the same text.
- When you call, you maintain human relations with your supplier. It goes without saying that despite all technologies and gadgets we can use nowadays, the most valuable component in every business is people, their connections and ability to create a long-term mutually beneficial contact.
Arguments PRO usage of a Purchase order for all purchases
- Purchase order reduces the number of mistakes. When an employee orders a product by phone or informal email message, there always is a room for human mistake. The supplier may not hear correctly, not notice the exact order data. Besides, if the agreed price is not formally recorded anywhere, there is a likelihood that in the invoice, the oral discount will be forgotten and the customer’s accounting will pay a higher regular price.
For the customer, for sure, it is important to receive the exact product he needs. In the absence of proper Purchase order, it is possible that the company will receive, for example, an externally identical item of a similar name at a fair price but with other parameters. Such mistakes can cost the company both money and time. Also, in the case of a telephone order, it is practically impossible to find out who is to blame (and accordingly can be obligated to cover the loss).
With all the documents in place, the “three-way matching” (PO-purchase order, GRN-goods receive a note and invoice) check goes smoothly and quickly.
Sometimes companies use “account payable,” “invoice automation” solutions to take more control over their purchasing process. In this case, invoices are entered (scanned or presented) into one system. However, it is only a partial solution to the situation. Because if there is no Purchase order, it is not clear who is responsible for the purchase. Moreover, it is not possible to automatically compare if what was delivered – the product, quantity, price – match with what was ordered. Therefore, the employee has to spend time explaining and manually approving the invoice. (If the Purchase order or internal requisition has already been approved and assigned to the appropriate cost centers, then the invoice can be compared to the order automatically, with virtually no human intervention, and passed on for payment.)
In this case, a manager can only refuse to approve fraud invoice and to punish employees for maverick spends (so hopefully they will be more responsible next time). The control at PO stage is much more effective.
- Purchase orders reduce invoices fraud. Invoice fraud is a type of fraud in which criminals force a company to transfer money to their account by submitting fictitious invoices to the company. If a company practices procurement without a Purchase order, its risk of becoming a victim of fraud and paying for goods or services that have not been provided is genuine.
It is not only multimillion corporations that fall victim to this crime. For them, such financial losses usually are not dramatic. As we know, neither Google, which lost $ 23 million due to invoice fraud nor Facebook, which lost $ 100 million, went bankrupt. Medium and small businesses are also the target of fraudsters. Unfortunately, SME usually does not have the financial and time resources to detect such crimes. Alas, not everyone can recover from a significant scam attack.
- Purchase order lowers maverick spends. As we discussed in the previous post, maverick spends are expensive, time-consuming, and harm employees’ sense of responsibility and work atmosphere. However, if an employee makes a Purchase order in the e-system, they will also select those approved items at fair prices and from the right suppliers.
- If the company creates Purchase orders for all purchases in a systematic, formalized, and automated way, the finance department can forecast cash flows much more accurately. It is important for every business – small and giant – to know how much money will be on their account at a given time. Also, while necessary expenses are likely to be predicted in advance and executed under proper Purchase orders, “minor” and unsystematic invoices that only become known “post factum” can add much strain to the company.
- Using an e-system with Purchase order creation feature saves accountants’ time. In this case, the invoice is automatically compared to the previously created and approved Purchase order, so there is no need to approve or assign to the respective cost centers each invoice received
On the other hand, such a system also saves time for the procurement department. Unlike ordering, for example, by phone, you do not have to wait for the supplier to call back if he could not speak immediately. Alternatively, to have a polite conversation that kills much time. E-systems have Purchase order forms, and product catalogs and all you have to do is enter the quantity. You can make a call to your favorite supplier and maintain human contact when you have a free minute and when it’s convenient for both.
- Having an e-system that captures all the Purchase orders, facilitates collaboration between the company’s employees. All colleagues see what goods are ordered. This reduces tension in the workforce if someone forgets to order the right item and reduces the likelihood of duplication of orders.
- Systematic Purchase orders allow more objective and faster evaluation of the supplier’s performance. With these documents, customers have one more tool for analyzing how punctually the supplier is working, what his error rate is, how fast the goods are being returned or replaced.
In conclusion, we’d like to say that we believe that applying Purchase order for all purchases will help the company to operate more efficiently. In other words, as the ancient Romans used to say, “Keep order, and order will save you.”