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What Your POs Aren’t Telling You

Monday, July 29, 2019

5 minute read

What Your POs Aren’t Telling You

The “No PO, no pay” philosophy has been deemed something of a procurement commandment. But there’s still times when not using purchase orders (POs) makes sense. It just depends on what your company needs.

 

Kierkegaard had his Existentialism. Karl Marx had Marxism. And Derrida had Deconstruction. But as Procurement thinkers, the biggest philosophical debate focuses a little less on existence and politics and a little more on something closer to heart—purchase orders.

Pro-PO” Philosophy

On one hand, there’s no doubt that there’s a lot of information available when you choose the PO-route. Having a PO allows you to have traceability of what price you’ve agreed upon and what product and also provides verification that you’re going to make the payment.

POs are masters of keeping track of information and providing a resource for you to better manage your spend. When one is established, an agreement is made in regard to quantity, price, and quality of the service or good ordered. They also provide us with the approval from the beginning, so that expenses can be processed and approved upfront, allowing for a more accurate, real-time view of your cash flow. Upfront approvals are all about having visibility and control.

For example, perhaps an office regularly purchases office supplies—similar items in consistent amounts each month. In this situation, and under the Pro-PO philosophy, it makes sense to use a PO. You’ll want to make sure this expense is reliably a visible part of your budget reporting. And because POs are designed by nature to capture details upfront, there’s a higher likelihood they’ll be coded properly for quick search and retrieval.

If control and visibility are on the top of your priority list, a PO can give thorough insights into your supply chain as well as be an extra step in your compliance initiatives. With every purchase backed by a PO, your cash flow is constantly updated, and all orders are processed and approved before the money leaves.

There’s also a lot of great information available from a PO regarding supplier performance:

  • Unit price (and ordered price versus invoiced price),

  • Delivery on-time (required delivery time versus actual delivery time), and

  • Quantity Ordered versus Quantity Received

No-PO? No Problem” Philosophy

Just like there are some situations where a PO is the best option for your company, there are times when it isn’t.

For example, if your AC system suddenly stops working in the middle of summer, you aren’t going to want to hassle with the back-and-forth nature of a PO, you’re just going to want to get it fixed. You don’t want to ask for a quote, deal with the approval process, then finally pay the invoice. By that point, half the office will be sweating and upset. You’re going to want your repair people to fix it while they’re there, send you the invoice, and you’ll pay at a later time. Though, you always have the option to raise a PO after the service is completed.

Consider other one-off purchases such as hiring out a voice-over actor for a marketing video or signing up for a conference. A one-time $300 voice-over actor recording, or $250 conference ticket will most likely go on a company credit card as opposed to raising a PO and waiting for the PO process to come full circle. In other words, POs can sometimes slow down operations if you need something done ASAP.

These types of spend can also be controlled through contracts and agreements as well as supported by payment plans.

Sometimes, using “just an invoice” is the better option. This philosophical debate also boils down to how capable both your organization and your suppliers are of handling POs.

Your Organization

It’s important that employees know the different ways and processes behind purchases (whether that be raising a PO, using credit card, etc.) and when these ways are used.

Can they make the distinction between a one-off purchase such as a piece of artwork for the company lobby and the monthly subscription payment?

Do they know what the company policy is for PO versus non-PO purchases in general?

These compliance concerns need to be made clear, a process needs to be established and adhered to, and your organization needs to determine how important it is for your organization to document the committed spend upfront with a PO. It’s also important to note the cultural impact of a “No PO, no pay” philosophy. Though the added control and complete visibility into your spend sounds nothing but positive, it can create roadblocks and bottlenecks in your processes. If users are constantly creating POs for every purchase made, it takes up valuable time best spent elsewhere and (speaking of Marxism) can create a real “big brother” feel a la 1984 for your employees. It ends up requiring supervision over auto-approvals from a control perspective and diligence on approvers to ensure operations get what they need when they need it.

Your Suppliers

It’s also important to consider how capable and willing your suppliers are to process POs. Depending on how a supplier normally submits invoices, they may not be used to using POs or have much experience processing them. Asking suppliers to adhere to your process when they aren’t equipped to handle it might lead to more work on your end as you coach your suppliers through PO 101.

It boils down to what you need

The great part about philosophies is that there’s no pressure to buy into one, single philosophy whole-heartedly. It’s completely fine (and encouraged) to take bits and pieces from multiple philosophies to combine what works best for you and your lifestyle.

In this same thought, it’s not “right” or “wrong” to use a PO. Instead, it’s important to focus on what your organization needs, what it’s capable of, and what your suppliers are capable of.

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