Part 5 of a ten-part series that examines key operational aspects of the so-called “Purchase to Pay” value chain
by Independent Contributor, Peter Alkema – Head: Purchase to Pay at ABSA
“Until such time as a Purchase Order (PO) is created by the customer and received by the supplier, no legally binding purchase process has been initiated,” Peter Alkema, Head: Purchase to Pay, ABSA, told SmartProcurement. Although there are generally agreed principles for POs (it could be written by hand or generated by a purchasing system), it must at least display certain header and line item information. In most cases it will have been created at the end of an approval workflow that began with the creation of a shopping cart (see Part 2).
However the PO is generated, it is the most critical document in the Purchase to Pay process (see Part 4). Without a PO, any purchasing and payments that is performed at a later stage is done without reference to an upfront approved order from customer to supplier. World-class operational procurement requires that before a supplier supplies anything, there must be a written order for goods and / or services which has been through an online, auditable approvals process.
“Importantly, there can be multiple POs for any given shopping cart or purchase requisition. This is because multiple suppliers may be required to fulfil a business requirement that spans a number of commodities in one purchase. If the number of POs created in a given time period is growing more rapidly than the number of purchase requisitions or shopping carts, then this is a sign of growing maturity in the organisation as customers become better at planning and combining more requirements from multiple suppliers,” Alkema continued.
As indicated above, typical POs will consist of a number of key elements:
Header Information:
- Supplier Details – This is the name and address of the supplier that receives the PO. This will typically be the supplier who supplies the commodities listed on the PO in the line items. Generally an overall contract will exist with such a supplier, setting out the terms and conditions of how such commodities would be supplied. This could relate to regional considerations, price change schedules, logistics costs, etc.
- Receiver of the Goods – This is the contact person who will need to receive the goods and / or sign-off the completed service. This person can be entered at the shopping cart creation process, or can be default-based on pre-configured settings, such as that the receiver is always the requestor.
- Delivery Point – This is the physical location where the goods will be delivered at and should be as specific as possible to ensure that the delivery is hassle-free.
- Purchase Order Number – This is the most important header information, as suppliers will quote the number on their invoices. If it is not possible to reference a PO number from an invoice, not only is the spend non-compliant, but payments are made which cannot be correctly referenced.
- Reference Field – The requestor may also wish to add certain information in the reference field such as specific delivery instructions Often when the PO is being processed on behalf of someone else, the reference field will be particularly useful if the system only has the details of the requestor available.
- Contact Details – It is essential for the supplier to get in touch with the requestor should there be queries about the purchase. These contact details may be different for the requestor and the delivery address.
- Registration Number & VAT Number – The registration and VAT numbers, if applicable, of the customer are also essential fields that are required on POs.
- Invoice Address – This is the location to which all invoices should be sent, and is generally the accounts department of the customer.
- Terms & Conditions – Often there is a detailed set of terms and conditions that go with the PO. If the PO is printed on pre-printed stationery, this can easily be added as a standard feature to the back of all POs. However, if POs are being created in PDF and then emailed, it can be useful to reference a common internet site showing this information.
Line Item Information:
- Item Number – Each individual commodity will be listed separately and designated with an item number.
- Delivery Date – A precise delivery date can be specified at the line item level which enables the supplier to work within the parameters pre-agreed in the contract with the customer.
- Long Description – A standard field that is automatically pulled through from the catalogues for that supplier. In some instances this can also be user defined.
- Unit – This is the unit of measure for the specific commodity, and is usually predefined when the catalogues are being set up. Examples of unit measure include each, pack, pallet, etc.
- Quantity – This is the number of the above unit that is expected to be delivered.
- Price – At the line item level, the price is quoted per unit with the ordering currency generally being used.
- Value – This is given at both the line item level, as well as at the summary of line items at the bottom right of the PO. It may include VAT as a separately stated item if it is expected for the currency exchange to include VAT.
When looking at the broader spectrum of POs, one can identify a number of different kinds. The following main types will be dealt with in the next part of this article series:
- Electronic Purchase Order;
- Limit Purchase Order; and
- Normal Purchase Order.
In this article we have dealt extensively with the normal PO, and although the other two types (as mentioned above) are very similar, it is the intent and method of transmitting them that varies.
As for the standard PO, as soon as the shopping basket or purchase requisition is approved by the last approver in the workflow, the PO is automatically created by the system. The PO gets either faxed or emailed immediately to the supplier fax number or email address on record. This creates an immediate obvious dependency on the correctness of the supplier information, as incorrect fax numbers and emails will mean that suppliers do not receive POs.
“The biggest problem with POs, is when there is none. Too often, customers are committing to verbal or informal orders with suppliers, which immediately creates a purchasing process that is not consistent with the generally agreed Purchase to Pay value chain,” Alkema concluded.
