How to Purchase Orders

How to Purchase Orders, Once the buyer and the supplier reach an agreement, the basic terms of that agreement are spelled out in the purchase order

Purchase Orders, there's an old saying that once you reach an agreement with someone, you should get it in writing. And in the business world, that's the purpose of a purchase order. Once the buyer and the supplier reach an agreement, the basic terms of that agreement are spelled out in the purchase order so that there are no misunderstandings. You will define such things as the price, the number of items, and delivery dates. But the purchase order is much more than just a document of the agreement. The purchase order drives the buyer-supplier relationship for each business transaction. The order tells everyone involved in the transaction exactly what is expected of them. Copies of the agreement are sent to the supplier and the company departments like accounting, shipping and receiving, distribution, and transportation. Each department uses the purchase order to coordinate their part of the contract. It's definitely a much easier process if you have a computerized system to connect all these parties.

Purchase Orders : with the purchase order, your company buys many different types of goods and services. Factories requires raw materials, components, and subassemblies to manufacture their final product. They also require routine items to support the production line, like cleaning supplies and repair parts and office supplies. When shipping finished goods to customers, factories also have to buy packing materials and boxes and pallets. Some companies choose to have someone else make the final product for them, which is referred to as outsourcing, but whether the company makes the product itself or buys it from someone else, the purchasing department is involved and purchase orders are the standard procedure.

Capital equipment is a rather special category of purchase because of the high expense and because these purchases are not made as often as the others. Capital equipment can include office machines, production equipment for the factory floor, trucks for the transportation fleet, or automated handling equipment for the distribution center. In most companies, all capital equipment purchases are made by a distinct group of specialized purchasing agents. Many times, these are long-term purchase orders because maintenance service and spare parts are often part of the agreement. Supplier relationships are very important in capital purchases because switching equipment suppliers can be a very expensive decision. For example, Southwest Airlines flies the same type airplane on all flights, which helps to reduce their expenses for both maintenance and pilot training. Changing to another airplane would involve significant costs to make that transition. Lastly, consider the purchase of services. For many companies, buying transportation and delivery services is a big part of their yearly purchasing activity. Because the logistics world is so highly specialized, most companies use a dedicated group of experts to make these purchases also.

But buying services also includes areas like advertising, maintenance, housekeeping, and food services, which are much more general in nature, and sometimes you'll enter long-term agreements for such things as legal or accounting services. For items that are purchased on a regular basis, your company might issue a blanket purchase order. This allows multiple purchases to be made with only one paperwork process. The material is simply released as needed because the price and delivery terms have already been determined. For example, the Hershey Corporation might make one big purchase from corporate headquarters and buy all the sugar they need this year in North America. They issue a blanket purchase order that allows each factory in North America to place orders with the supplier as they need sugar throughout the year. Hershey is able to hold down their administrative cost and they also get a great price for sugar because they are giving the supplier such a large order. When using this approach, you must ensure proper inventory control. It's wise to limit a blanket purchase order to a specific time period or a specific number of items or a specific dollar amount.

Clearly, the purchase order is much more intricate than just getting it in writing. Because of this complexity, the trend today is to automate the purchase order process as much as possible. Today's purchasing departments continue to increase their use of electronic data exchange with suppliers, online ordering, and cloud-based ordering systems. When evaluating your purchase order procedures for effectiveness and efficiency, the degree of automation is the very first place you should look.