Pros and Cons of Purchase Orders in E-commerce
Purchase orders allow you to quickly create legally binding contracts with suppliers and manufacturers when placing product orders. However, creating them can be a drain on time and resources, even if you typically use purchase order templates for each supplier. Placing an order means manual data entry, which requires time, can result in human error, and requires you to establish a clear and consistent communication with the seller. This may take days to process through regular snail mail.
However, purchase orders offer a lot of value in that they allow you to create legally binding agreements with suppliers, so that once they accept your purchase order, both parties are protected from mistakes, problems, or improper invoicing.
Most states also require that you use them for any order over $500. The Uniform Commercial Code (UCC) of 1942 mandates that you must have a written record of transaction for purchases over $500 for them to be enforceable, and you must document purchases.
Bulk orders are a large part of running an e-commerce store, so purchase orders likely are as well. Whether you already use purchase orders or are considering using them, you can consider the pros and cons and best practices to make the best decision for your e-commerce store
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What are Purchase Orders?
Purchase orders are template documents designed to make it as easy as possible to create legally binding purchase agreements and to document those purchases. In their most basic sense, a purchase order tracks and records physical purchases with information to indicate what you are paying for, how much you are paying, and where it is sent.
This document includes:
- Price per unit
- Delivery date
- Delivery location
- Billing address
- Payment terms
POs then protect the vendor in case you back out of the transaction and it protects you in case the seller delivers the wrong order, no longer has the product, cannot deliver on time, etc. Once you send it to a vendor and receive a confirmation of acceptance, you have a legally documented contract for that purchase.
Unlike with invoices, the buyer drafts purchase orders. So, if you wanted to make a purchase from a supplier, the process would be as follows:
- Draft a purchase order with the quantity, specific requirements, product, cost, delivery location, delivery date, etc and send it to the supplier.
- The supplier receives the order and confirms or denies that they can supply the order.
- They approve the Purchase Order
- The order, along with an invoice, is sent on the specified date
- The buyer pays the invoice
In some cases, you may be asked to pay after the purchase order has been confirmed, and the invoice will arrive to confirm the amount.
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Pros of Purchase Orders
While purchase orders can seem like an 'extra step' in buying and selling, in that you still have to receive and pay invoices, they act as documented order forms, so that you can audit costs, order amounts, and control when you are receiving shipments. There are many reasons you should consider using purchase orders:
Records of Orders and Details
Purchase orders allow you to build and maintain strict records based on what you are ordering, when you ordered it, whether it was accepted, and other details. Unlike invoices and statements, purchase orders include technical details and can be quite specific, allowing you to record exactly what you are ordering.
While some e-commerce stores skip purchase orders for the sake of speed, purchase orders do allow you to improve the accuracy of an order. Rather than submitting a form or making a phone call to place an order, you can send a written record of each item you want and how you want it. This makes it easier for the supplier to fulfill your order, exactly as listed by you. Purchase orders also offer more control in case something goes wrong. For example, if an order is delivered and it is incorrect, a purchase order gives you a standard with which to tell the supplier that they made a mistake. If the mistake has been made without a purchase order and has been recorded onto the invoice (created by the supplier), you have no such control.
Purchase orders are often sent by snail mail but they can greatly speed up processes. You can easily integrate purchase orders into your inventory management so that you create and send purchase orders whenever your stock dips below a certain point. This allows you to let the supplier know that you need a product for delivery before you need it, so that the shipment is ready when you do need it.
Cons of Purchase Orders
Many e-commerce stores attempt to avoid purchase orders because they do have inefficiencies, can be tiresome to fill out, and may not be entirely necessary. For most, the largest concern is time consumption, because purchase orders typically require some time to create, check for accuracy, print, and mail to the supplier.
Most purchase orders are template files and only require that you change order details and the date. This means that you will be filling out repetitive documents every time you place an order.
Unnecessary for Smaller Purchases
Small purchases of less than $500 do not require documentation. It may also be less important to track the accuracy of the shipment for smaller orders. For this reason, purchase orders can be inefficient and expensive for small volume orders.
In some cases, credit card statements can serve the same purpose of documentation for small purchases. However, they do not include the same technical details offered by a purchase order.
Making Purchase Orders Work for Your E-Commerce Business
Purchase orders typically offer more advantages than disadvantages, especially as your business grows and orders become larger and more complex. Rather than avoiding them, you can work to improve your purchase order process so that they become an efficient and cost saving part of your business.
Automation tools allow you to eliminate many of the cons of purchase orders. By automating purchase order creation using your inventory management tool, you can cut costs, save time, and reduce many of the disadvantages of purchase orders.
For example, you can use tools to create automatic reorder points, which you can use to generate purchase orders based on the SKU. When stock drops below par level, your system automatically creates a purchase order by updating standardized forms created for that purpose – so that you can review, approve, and send them to your supplier.
This does require that you have the ability to calculate and set reorder points, based on sales forecasts, so that you can reorder in time to prevent a stock out, without unnecessarily increasing inventory. However, it also ensures that you only place a new order when stock drops to a level where you need to replenish it, so that you don't unknowingly increase stock unnecessarily by ordering on a periodic basis.
Paper-based documentation processes are slow, inefficient, and costly. Most e-commerce companies create 6-7 documents per purchasing cycle, sometimes per product. If you're creating and sending requisitions, purchase orders, quotes, order acknowledgment, goods received, packing slips, and invoices, a purchase cycle can take time and a great deal of documentation to produce. Switching to EDI allows you to cut paper, print, and postage costs, increase speed by transferring electronic documents instantly and avoiding inefficiencies like duplicate paperwork – all while maintaining your records and legal obligations. EDI solutions also allow you to automatically compare purchase order agreements with purchase orders to create automatic alerts in case of a discrepancy and to communicate with your trading partner in real time to speed up orders.
While EDI is focused on automating your paper processes with electronic documents, you can gain the most value by using EDI in combination with manual quality control to ensure best results.
Purchase orders can be time-consuming and can waste paper or be superfluous for small orders, but for large e-commerce stores with large orders, they offer too many advantages to disregard. However, whether you currently use purchase orders or are considering integrating them into your system, your goal should be to optimize and automate processes so that you can benefit from purchase orders without spending the extra time and resources in managing them.