The Influence of Purchase Orders on Supplier Selection and Supplier Management

Nov 20, 2021 | Supplier management

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Nov 20, 20213 min read

Purchase orders (POs) are essential for businesses in selecting and managing suppliers. POs provide a clear, documented agreement outlining the terms of a transaction, including quantities, prices, and delivery dates. They ensure accountability, provide reference for resolving disputes, and help track supplier performance. POs serve as an important tool in supplier selection and management, helping to build trust and successful business partnerships.

The purchase order (PO) is an essential tool for businesses when selecting and managing suppliers. Understanding the necessity of purchase orders, assessing the benefits they offer in managing suppliers, and setting criteria for selecting suppliers using purchase orders are all important components to navigating the supplier selection process. 

Assessing the Benefits of Purchase Orders in Managing Suppliers 

The main benefit of using a purchase order is that it allows buyers to have documented evidence of their transactions with suppliers. This ensures that a buyer cannot be taken advantage of due to misunderstandings in communication or changes in prices and services. A purchase order also serves as a record of payment should any disputes arise in the future. 

Furthermore, purchase orders make it easier for buyers to track changes in pricing, quantities, and delivery timelines. This can help buyers avoid potential budget overruns and delays in receiving goods or services. Additionally, if suppliers provide incorrect or incomplete information when submitting a quote or invoice, buyers can refer back to the original purchase order to resolve any discrepancies. 

In addition, purchase orders can help buyers maintain better relationships with their suppliers. By providing clear and detailed instructions, buyers can ensure that suppliers understand their expectations and can provide the necessary goods or services in a timely manner. This can help to build trust and loyalty between buyers and suppliers, leading to more successful business partnerships. 

Understanding the Necessity of Purchase Orders in Supplier Selection 

Let's take a look at a few detailed examples to illustrate the role of purchase orders (POs) in supplier selection and management. 

Supplier Selection: Let’s say a company needs to purchase 100 laptops for its employees. The procurement department issues a request for quotes (RFQ) to several suppliers. The suppliers respond with their quotes, including the price, delivery time, and any other relevant information. The procurement department uses the quotes and the information provided in the RFQ responses to compare the suppliers and select the best one for the purchase. With FactWise a holistic SaaS solution, teams can automate the RfX creation, negotiations, and allocations processes all the way up until PO creation. 

Once the best supplier is selected, the procurement department creates a PO to formally request the purchase of the laptops from the supplier. The PO includes the agreed-upon price, delivery time, and any other relevant information, such as the specifications of the laptops and any special requirements. This PO serves as a binding agreement between the company and the supplier, and the supplier is obligated to deliver the laptops according to the terms outlined in the PO. POs generated on FactWise include user-defined Terms and Conditions, company information for buyer and seller including addresses, identifications and the person-in-charge, any additional comments and all item information including item details and specifications, payment terms, and delivery timelines. POs can be auto-generated or manually created on FactWise source-to-pay. 

Supplier Management: Let’s say the supplier has delivered the laptops to the company, but there are some issues with the delivery. For example, some of the laptops are damaged or have missing parts. In this case, the PO can serve as a reference for resolving the dispute with the supplier. The PO outlines the agreed-upon terms and conditions of the transaction, so both the company and the supplier have a clear understanding of what was expected. FactWise enables users to track goods through the journey from RfX to PO to delivery, quality checks, all the way up until payments. Rejected or missing quantities can easily be rescheduled via our intuitive, easy PO management module on our Source-to-Pay procurement platform. 

Additionally, the PO can be used to monitor the supplier's performance over time. For example, if the supplier consistently delivers goods or services late or does not meet the agreed-upon quality standards, the company can use the information from the PO to assess the supplier's performance and make informed decisions about whether to continue doing business with them in the future. Current and past PO data is used to generate holistic supplier performance analytics on FactWise, so that procurement teams are empowered to always make data-driven decisions. 

Overall, the PO serves as a formal agreement and a reference for tracking and monitoring the supplier's performance, helping to ensure that the supplier is held accountable for meeting the agreed-upon terms and providing high-quality goods or services. 

In conclusion, purchase orders (POs) play a critical role in both supplier selection and management. They provide a clear and documented agreement between the buyer and the supplier, outlining the terms of the transaction, including the quantities, prices, and delivery dates of the goods or services being purchased. 

About the Author

Stawan is the founder and CEO of FactWise. Before founding FactWise, Stawan was the NA TMT-Procurement Leader at McKinsey. Passionate about procurement, Stawan has 15 years’ experience in enabling clients of all sizes to achieve business impact via procurement.


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