The risks to foregoing a formal PO process
Material management is all about saving money and increasing profits. When you take short cuts to ordering and managing your material for a job, it has a direct impact on the bottom line and exposes your company to many risks.
FRAUD
This can be hard to detect and prove with an informal PO process because either buyer or supplier may be manipulating your orders. Without proper documentation, it opens the door to mistakes that lead to cash leakage and to billing schemes.
INVOICING ERRORS
Invoicing errors might happen without a proper PO such as duplicate invoices, use of substitute materials, wrong pricing and wrong quantities. Without proper written PO, your finance team has no way of identifying and rectifying these errors.
OVERPAYING FOR ITEMS
When you include your price for each item on a purchase order, the supplier must adhere to this price or notify of a different price before the order is released. This protects you from surprise price increases when the invoice arrives.
ORDERING MORE THAN ESTIMATED
When you are ordering material ad-hoc or as your guys tell you what is needed, you likely do not have enough time to compare what you ordered previously or to check your estimate to verify that the material is within your budget.
THEFT
Theft occurs when no one is looking, and no one is tracking. Without a process that contains all your orders, it is impossible to control the flow of material on a job site.
DELAYS IN PAYING YOUR INVOICES
Without a copy of what you ordered, your accounts payable team will not be able to reconcile invoices. Instead your project managers will need to find the time to try to review and approve the invoices based on their emails, text messages and memories. This creates delays in payments exposing you to accumulate interest charges and potential holds placed on your accounts.
A formal written purchase order process will help protect you against these risks.
Manual PO
A manual PO process is when the buyer informally, written or verbal, places an order with a supplier where any of the key elements of a formal written purchase order are excluded.
Challenges of an informal or manual PO process
An informal or manual purchase order process tends to be used in 70-80% of small electrical contracting businesses.
- Lacks visibility and tracking
- Leads to higher spending
- Depends on human intervention
- Has process bottlenecks and compliance issues
- Involves an endless loop of emails and people
Is cumbersome, inaccurate, and error-prone
How can you minimize your purchasing risks?
- Define a purchase order policy and procedures.
- Provide training on products and pricing.
- Improve internal department communication.
- Build stronger supplier relationships.
- Use technology and automation to assist.