To PO or Not to PO . . . that is the Question
They may be a hassle, but purchase orders save countless mistakes and unnecessary costs.
In every business I’ve been involved, it’s been an issue: which transactions with suppliers and customers require a purchase order, and which ones do not?
POs serve a valuable purpose. They ensure proper approvals have been secured before a purchasing decision is made. They establish payment terms, product specs, due dates and ship-to locations.
But, they are also a hassle. When I want to order something, I need to chase down the right approval and request the PO from a buyer who will inevitably ask tough questions about price, who else I should have quote it, how many quotes I procured, whether there are any volume discounts, and so on. Who needs that distraction?
So the question of whether to insist on a PO is a tricky one. Fear not. Let’s answer this question by contemplating scenarios in which it comes up.
Scenario 1: The “Life and Death” Emergency
In my first company, we considered instituting a “PO required” rule and pandemonium soon followed. The counter argument was that often times we have to arrange “emergency service” from a supplier and getting a PO is impractical. “Can I be exempt from the requirement?” pleaded our head of technical services. Response: No.
Logic: I compromised with this individual and we agreed that if he had an emergency so urgent that he could not wait for a buyer to issue a PO, he was to call me and request an exemption. My phone never rang.
Scenario 2: Get the Revenue Now
In this situation, the customer has agreed to take delivery of the order immediately and the sales representative is emphatic that the customer will issue the PO as soon as possible. The rep would love to get the order out yet this month, ensuring the commissions show up on his next check. “Can we at least get the order started?” he asks. Response: No.
Logic: For reasons I don’t understand, saying yes and starting the order almost guarantees the customer will change her mind, or that what we thought she was going to order and what she actually wanted were two different things. If something changes after we start but before we get the PO, who gets stuck with the inventory? We do.
Scenario 3: The “Use My Name”
This technique works well if we are trying to secure a table at a restaurant and a friend knows the maître d’, so why not try it when ordering manufactured product? In this situation, when asked for a PO number the customer responds with “Just use my name.” So the customer service rep asks, “The customer said to use his name as the PO number. Can we ship?”Response: No.
Logic: Fast forward 45 days. Our accounts receivable department calls the accounts payable department of the customer and inquires about collection. The customer asks for a PO number to match up with the invoice. We respond, “The PO number is Jerry.” “Who?”
Scenario 4: The Line Down
The sales person rushes into the office and shares the crisis. Customer X has an emergency and we must fill the order or his line will go down. His purchasing department needs a few days to process the PO, but if we don’t ship today the line-down will be on us. “We can’t have that, can we ship without the PO?”Response: No.
Logic: Trust me, if his line is really going down, the customer will find a way to issue the PO.
There are other scenarios, but by now the point should be clear. Look, I am a customer advocate to a fault. My default answer when it comes to anything the customer wants is an affirmative one. But I have lived first-hand the nightmare that ensues when we don’t insist on POs for what we sell and what we purchase. We risk shipping the wrong product, to the wrong facility, on the wrong date, and charging the wrong price, all of which make the customer’s problem worse. The customer changes his mind (his prerogative) and we end up with obsolete inventory which means we will be that much more expensive to do business with in the future. We end up with receivables that take months and waste work hours to collect. We think we know what we are buying from a supplier, but one of us misunderstands and the wrong part arrives or the wrong work gets done.
Are POs a hassle? Yes. But they sure save a lot of trouble.