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What is a Purchase Order?
A purchase order (or “PO” in short) is a document that is issued by a company to a supplier requesting goods or services to be rendered to the company. It usually has details such as the items that are to be purchased, the quantity, and the price of such items.
Why Do You Need a Proper Purchase Order? Why Do You Need One in the First Place?
- It helps the company to avoid duplicating orders. This is especially true in situations where there is bulk purchase- it helps the company to keep track of what has been ordered/ what needs to be ordered and from whom. If similar products were ordered / similar services were requested by the company, it also ensures that the company pays the supplier correctly i.e. in accordance with the correct PO and invoice.
- It helps the company to keep track of incoming orders, thus simplifying the inventory and shipping processes of the company.
- It ensures the company has a fallback document to lean in the event a dispute arises. A supplier is considered to have entered into a contractual agreement with the company once they choose to supply goods/ provide services to the company. Therefore, a company is entitled to sue (and vice versa) if there are any breaches of the terms of the PO.
What are Some of the Terms That You Should Have in a Purchase Order?
| Terms | Descriptions |
|---|---|
| Delivery | How, when and where the goods should be delivered. |
| Inspection | Goods supplied/ service provided is subject to inspection during delivery. Goods/ Services can be rejected too if there are defects/ deficiencies in the goods/ services supplied/ provided by the supplier. |
| Warranties | The warranty period for the goods supplied/ services provided by the supplier. |
| Payment | How payment should be made, and when it should be made and the penalties that are incurred in the event of late payment. |
| Damages | How much can be claimed by the company in the event of delay in supplying the goods/ rendering the services agreed upon by parties? |
| Force majeure | Ensuring that neither party is liable for losses that occurred beyond their control. |
| Termination | Under what circumstances can the contract be terminated. |
| Governing law | Which jurisdiction the contract is subjected to. |
What is the Process Flow in a Purchase Order?
| Supplier | Customer (Company) | |
|---|---|---|
| 1 | The supplier receives a request to supply goods/ provide services by a customer via a PO. | The customer creates a PO. |
| 2 | The supplier then decides if he/ she can fill the order according to the PO. | Once the PO is approved by the customer’s internal management team, the PO will be sent to the supplier. |
| 3 | If the above is positive, the supplier then supplies goods/ provide services according to the terms in the PO. An invoice will be issued to the customer as well, asking the customer to pay for the goods supplied/ service provided by them. | The supplier will check if he/ she can fill the order according to the PO. |
| 4 | Customers will check for defects/ discrepancies in the goods supplied/ service provided by the supplier. At this stage. Any defects will be resolved/ rectified at this stage. | If the above is positive, the supplier will then supply the goods/ provide the services according to the terms in the PO. |
| 5 | Once stage 3 is sorted, the supplier will receive payment for the goods supplied/ service provided by them. | Once the customer receives the goods/ obtained the services, he/ she will conduct checks to ensure that there are no defects/ discrepancies in the goods supplied/ service provided by the supplier. Any defects will be resolved/ rectified at this stage. Customers can even return or reject the order. |
| 6 | Document the PO and close it. | Once stage 5 is sorted, the PO alongside the necessary document will be checked before payment is made to the supplier (according to the invoice issued by the supplier). |
| 7 | Document the PO and close it. |
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