Thursday, August 25, 2011

Purchase Order Types and Acceptance

There are many types of purchase orders. There are stand alone orders and there are purchase orders that are issued under an existing agreement. Stand alone purchase orders are an offer by the buyer that requires acceptance by the Supplier to create a binding agreement. Acceptance can be done in writing or by performing. Acceptance with different terms creates a counter offer.

Purchase orders issued under a master agreement can be individual or blanket orders. Individual orders are used to make commitments. Blanket orders traditionally provide funding where ordering and commitments may be performed in another manner such as pulling supplier owned inventory from stock.

Whether a PO issued under an agreement is binding or not on the supplier will depend upon what the agreement says. If the agreement said that the Supplier agrees to accept all Purchase Orders that conform with the terms of the agreement and the PO issued conforms, those PO's would be a binding. If the agreement was silent about acceptance of conforming PO's, the PO would require acceptance by the supplier before becoming binding.

If you go through all the trouble of negotiating a master agreement with a Supplier don’t you want to be assured that they will accept all PO's that fall within those agreed parameters.
I never want to have the Supplier have the unilateral right of deciding when they will perform and when they won't. You can’t manage supply chains or production if you do.

Most of the time suppliers won’t agree to accept all orders that you issue unless the commitment includes specific parameters. The most common parameters are:
1. Limiting the scope of what you can order. This is usually limited to only the product or service contemplated by the agreement.
2. They will want to limit or exclude any potential additional of different terms from being included and want to make those terms either void or require their acceptance.
3. They will want to limit the volume of what you can order. This may be a specific amount or a parameter that is tied to a forecast or past orders. The reality is they may have limited capacity and may need to manage the orders to that available capacity and do not want to be potentially liable for failing to deliver should your order exceed that capacity. Alternatively they may not want to assume the additional costs to increase their capacity such as paying for overtime as that wasn't included in the price they agreed.
4. They will usually want to limit the amount you may order when there are shortages or allocations and may offer to provide pro-rata commitments based on parameters like your percent of the total orders prior to the shortage.

The only time where it isn’t reasonable for a supplier to want to place a limit on the amount you can order and that they must deliver is when the Supplier has notified you of an end of life for a product or service and you need to make a last time buy.

Why would you want to have the supplier be obligated to accept the orders even with all these conditions or parameters? The simple answer is some is always better than none and when you know you will be limited you can plan for it.The second reason is without that obligation suppliers will tend to focus their capacity on either whether they make the most profit or on their most favored customers. If you don’t fall into either one of those categories and you don’t have the commitment that they must accept your orders, you may not get product or you may get it late.

Suppliers don’t have a faucets that they can turn of and on when the need more supply. They have extensive supply chains.If a preferred customer fails to forecast and order their requirements and they go back to the supplier for help, where do you think they Supplier finds product for them? They usually take it from other customers they can take it from without liability and ship to those customers later.

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