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. 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, you see they’ve awarded you the job. ‘YES!!!’
You open the attachment, look at the total value of the order, 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!’
If you aren’t thoroughly reviewing all aspects of Customer POs that are coming into your shop, you may miss that a buyer has just cut your lead time in half, requiring you to pay for all the expedite costs out of your own pocket.
Make sure you’re being allocated the time needed to complete the job. After all, you took the time in estimating to accurately calculate the lead time and outlined that lead time on the quote to the Buyer. If you rush a job you run the risk of high scrap rates, defects, poor quality, negatively impacting other jobs, eating into your profits...just to name a few.
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.
Would they like to pay to have the parts delivered in the expedited window? This can cover 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 might be able to run 1-2 parts through a prototype cell and the rest of the order at the standard lead time as intended. If the prototype cell is more expensive, outline that cost to the Buyer and consider breaking out the early delivery quantities to a separate PO line and charging them the increased cost.
Are you scheduled to run another job for them at the same time and could that job be scheduled out to make room for this one? Depending on the ERP system your Buyers are using, most can run an open order report that shows all open jobs they have with you and 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 on the PO you just received from them, the pricing they listed is last year’s quoted price. What gives?!
There are several reasons a Buyer might have entered the incorrect pricing.
Here are a few to consider:
If the pricing isn’t current on the PO, 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! The pricing, quantities, rev levels of each part, etc are all copied from the Quote onto the Customer PO. So it’s obvious as you look at the PO the Buyer sent you compared to 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 once complete. Here’s their contact info, they’re expecting your call in the next week to schedule the job with them.”
‘Great’, you think! ‘They did the leg work for me and I can skip final inspection AND shipping!’
This CAN be a great job for you, HOWEVER, it’s worth some effort upfront to ensure that the customer’s preferred supplier arrangement is going to work for you. Factors to consider are:
Without review and answering many of these questions you are putting yourself at risk for being liable for aspects of this job that should be handled by either your customer or the supplier. Also, the moment when parts are scrapped, or shipments are delayed (time is of the essence), that is not the time you want to be developing or negotiating a workflow process to handle this scenario with the supplier. Taking the time upfront to discuss these scenarios ensures that the customers preferred supplier arrangement is going to work for your shop in a smooth manner.
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 is in your best interest to read the fine print thoroughly, ensure you understand each aspect, and ask the Buyer to provide clarification if needed.
T’s & C’s may be printed on the bottom of the order for you to easily review, HOWEVER, they may also be listed on a website, and/or on the order portal. Be sure to look for statements on the base of an order that read something like “Purchase order subject to Terms and Conditions form/document in your possession or available at [URL link]”. If you have not received, or have in your possession, their T’s & C’s document, be sure to ask for it before confirming the order back to the Buyer.
If up till now the customers you’ve worked with have minimal T’s & C’s, then it’s probably good for you to be aware that they can vary quite a bit customer-to-customer. When quoting and taking jobs from new customers it is critical to review their standard T’s & C’s and dialogue with the buyer on questions or concerns you have.
I’ve listed some of the common components you’ll find outlined in T’s & C’s, but know there are many more that can be included:
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