By: Lacey Hill
Purchase orders (POs) are legally binding contracts between your company, and the company placing the order. If you aren’t treating each PO as a formal contract and reviewing the details of it as such, it’s time to!
When you send the Buyer your order confirmation, you are agreeing to that contract and all the terms therein.
For the past decade, I’ve sat on the customer side of the table (as a Buyer, Purchasing/Planning, and Supply Chain Manager), and I’ve issued and reviewed hundreds of POs and order confirmations. When I say I know a lot of the scenarios you’ll run into during order entry/contract review, know that I’ve experienced them first hand myself. I’ve been on both the advantageous side of a supplier not completing a thorough contract review, and I’ve been burned by missing contract terms myself….and there’s nothing worse than the moment you realize what you missed!
There are numerous aspects of a Customer PO to be reviewed before sending your order confirmation back to a Buyer. I’m going to review 4 scenarios that I’ve commonly run across in contract review and suggestions for how to address them, but know that there are hundreds more. Plus, the more attention & effort you put into contract review the more you reduce your risk of agreeing to terms of an order you shouldn’t.
1. Orders placed within the quoted lead time
You open the email from the buyer that they’ve awarded you the job. ‘YES!!!’
You’re excited. ‘This is just the size order we needed this month!’
Then you look at the delivery date… ‘2 WEEKS?!!! But I quoted them a 4 week lead time!’
Don’t skimp on reviewing all aspects of Customer POs that come into your shop. You may miss that a buyer has just cut your lead time in half. Consequently, you’re required to pay for all the expedited costs out of pocket.
Make sure you’re allocated the time needed to complete the job. After all, you took the time to calculate accurate lead times and include those details in the quote to the buyer. Rushing a job risks high scrap rates, defects, and poor quality. Thus, you negatively impact other jobs, eat into your profits…and so on.
If the delivery date on the Customer PO is under the quoted lead time, this is a great opportunity to contact the Buyer and discuss expedite charges or other options.
- Can they pay to have the parts delivered in the expedited window? This covers overtime labor charges, charges to program/run the job on an alternate machine, or expedited outside processing charges.
- Would they consider taking partials of a delivery? You can run 1-2 parts through a prototype cell and the rest of the order at the standard lead time. If the prototype cell is more expensive, outline that cost to the buyer. Consider breaking out the early delivery quantities to a separate PO line.
- Are you able to schedule other jobs out to make room for this one? Most shops can run an open order report with an effective ERP. Advise potential shifts in schedules that could be made.
2. Orders placed with outdated pricing
You sent the Buyer a Quote three weeks ago, but they quoted last year’s price on the PO. What gives?!
There are several reasons a Buyer might have entered the incorrect pricing. Here are a few to consider:
- Their ERP software can’t tie your Quote # (or a copy of the quote) to the part number. So the quote is saved in a separate file folder. And if the buyer is moving quickly, they may not double-check the accuracy of pricing.
- They are copying a previous PO in their ERP system and did not update pricing.
- In their ERP software, they may have entered your original quoted price as a standard cost, meaning each time they place an order for that part number, that outdated cost is going to default on the PO. On the other hand, they may have neglected to update the standard cost for the part when you re-quoted. Also, if they are required to manually override that standard cost at the time of PO placement, they may forget to.
Should the pricing be incorrect, when you conduct a thorough contract review, you are more likely to catch these mistakes. Seeing these mistakes gives you the opportunity to contact the Buyer and have them revise their PO before you send them an order confirmation.
In ProShop, to ensure you are accepting the PO at the latest quoted price, we developed a best practice workflow of creating a Customer PO (aka Sales Order) directly from the Quote! Simply use pricing, quantities, rev levels of each part, etc, copying from the Quote onto the Customer PO. Likewise, it’s obvious as you look at the PO the Buyer sent. Plus, you can compare the fields in ProShop if there is a disconnect.
3. Customer directs you to use preferred or single-source supplier
A Buyer calls you up, “I’m sending over an order today, and I want the finish to be done solely at this designated finish house. Then go ahead and have the finish house dropship the completed parts to us. They’re expecting your call in the next week to schedule the job.”
This CAN be a great job for you, HOWEVER, ensure that the customer’s preferred supplier arrangement works for you. Factors to consider are:
- Location of the customer preferred supplier — Does this require new or additional shipping/logistics that you don’t currently handle?
- Parts scrapped at the supplier — Who covers the cost to remake parts? How will the supplier communicate scrap situations? Will you require an NCR from the supplier? What’s your lead time for re-making scrapped parts? What’s the customer’s stance on updating delivery dates?
- Incoming receiving procedures at the supplier — What are receiving inspection procedures? How can they contact you about delivery discrepancies? Are pictures required to verify discrepancies?
- Risk evaluation of the preferred supplier — Did the customer complete a supplier risk evaluation? Do you have a copy for your records.
- Dropshipping as an aspect of the scenario — How will you get the packing slips and certs for your records? How will you confirm a customer’s receipt of finished goods? When can you invoice the customer? Is it upon receipt of finished goods or proof of delivery?
- Approved Supplier List (ASL) — How long should you keep this supplier on your ASL? Have you been provided the full scope of work?
Reduce your risk of being liable for aspects handled by your customer or the supplier. Also, don’t wait until parts are scrapped, or shipments are delayed to negotiate a workflow process with the supplier. Be proactive and ensure that the customer’s preferred supplier arrangement works for your shop.
4. Extensive, in-depth, or easy-to-miss Terms and Conditions (T’s & C’s)
T’s & C’s are the fine print of the contract you are reviewing. It’s in your best interest to read fine print thoroughly.
T’s & C’s may be printed on the bottom of the order to review, HOWEVER, they may also be listed on a website, and/or the order portal. Be sure to look for statements on the base of an order. If you haven’t received their T’s & C’s, ask before confirming the order.
T’s & C’s vary from customer-to-customer. I’ve listed some common T’s & C details, but there are many more that can be included:
- Order cancellation and/or amendments
- Buyer reserves the right to cancel/amend POs with ____ days notice.
- Expectations of stop or completion of work upon cancellation.
- Liability for the cost of materials, labor, etc. for canceled or amended orders.
- Payment terms/invoicing
- Payment terms applied to all orders unless specified otherwise on the PO.
- Invoice payment terms apply at receipt of goods or receipt of invoice.
- Delivery
- Delivery of goods must be in full and cannot be changed without prior written consent.
- Charges for packaging, crating, insurance, or other extra charges are not allowed unless agreed upon in writing.
- Packaging and insurance shall conform to commercial standards.
- Responsibility for loss or damaged goods.
- Responsibilities for exportation of goods (payment of customs duties, taxes, tariffs, etc),
- Penalty fees for late deliveries.
- Labeling of packages
- Package or crate must be marked with an order number, weight, part number(s), etc.
- Tooling
- Responsibility for paying and supplying tools, fixtures, gauges, etc.
- Subcontracting
- Subcontracting any part of work/process or transference of orders must have written consent.
- Retention of records
- Retention and issuance of quality documents.
- Retention period.
- Retention of records by subcontractors.
- Supplier performance rating expectations
- Performance rating outlines maintained & actions required if ratings fall below that requirement (ex: root cause analysis and corrective action plan).
How can ProShop help?
In ProShop, contract review at the point of Customer PO order entry is built into the system! You can’t miss it!
We have included checkboxes for the critical fields on the PO that need to be reviewed (ex: Part Rev, Part Number, Delivery Date, Qty, shipping Address, Price, Terms) and added a list of key aspects to be completed as part of Contract Review/Risk Evaluation (ex: Payment terms, T’s & C’s, FAI requirements).
We even leverage the ability to create and review a Task in ProShop dedicated to following a step-by-step process for Contract Review/Risk Evaluation.
With these tools at your fingertips during order entry, you can quickly & efficiently complete the required contract review and get to the best part…..making parts!!!
If you aren’t using ProShop, I can’t stress enough the importance of developing & implementing a standard contract review process now for your business! A small amount of time upfront can save thousands of dollars and a lot of fire fighting in the long run.
Or if you’re interested in knowing more about the solutions ProShop offers for this and many other challenges facing your shop, we’d be happy to talk with you.
By: Lacey Hill, Implementation Specialist