Welcome to Chapter 4 of our order management guide. In our previous chapter, Chapter 3, we explained what purchase orders are, and in this chapter, we will focus on how they are created.
Please remember that this chapter discusses the relationship between the buyer (your supplier, vendor, or manufacturer) and the buyer (the e-commerce seller who sells the products online).
Confused? Maybe this is too advanced or too basic for you? Head back to the order management homepage.
Briefly, How Does a PO Work?
To prevent this from becoming a short novel, let’s keep things brief and easy to what we must know. Here’s how a PO works.
You Need to Order Products
It may be that you want to stock up on products you haven’t sold before or must replenish what you already have to keep up with customer orders.
You may have alerts set in your OMS (Order Management Software) for when your inventory reaches a certain level, notifying you that you need to reorder inventory.
Calculate What You Need to Order
Before drafting a PO, you must calculate the needed quantity of products and varieties (your OMS may do this), and you may need to order several different products from one seller in different quantities.
Cost should also be considered, as well as the upcoming season and market trends. If the sales are decreasing, you may want to order fewer quantities and vice versa.
Write Up Your Purchase Order
When you know what you need, you can write up your PO. Ensure it has all the relevant information the seller needs to complete the order.
You may want someone to check it for you, just in case of an error.
Check the Approved Vendor List (AVL)
You should have an approved vendor list (AVL) you can order from—sellers your company has vetted for quality and regularly does business with. The seller that is best suited for the order should be chosen.
When all is approved, and the PO is ready to be sent, send it through the proper channel. If you are using an OMS, you should be able to create and send it to the seller through the system.
Contract Negotiation
At this point, there may be negotiations between the buyer and seller on handling the order. For example, they may have time constraints, meaning they cannot complete the entire order.
Likewise, the buyer may need to change their order after sending a PO.
If you have worked with this seller several times before, you might not have an issue, and they may just accept the PO as is.
Order Accepted Confirmation
The seller confirms that they have accepted the order and begins working on it (though there is likely a bit of a delay before work starts).
Notification That Shipment on the Way
After the products are produced, the seller notifies the buyer that the shipment is in transit. You can then organize accordingly and prepare for its arrival.
Shipment Arrives
When the shipment arrives at the buyer’s warehouse, they perform a quality check and confirm that everything has been received successfully (or unsuccessfully).
If everything is okay, the products go into inventory. If not, a dispute may need to be opened with the seller.
Ensure That the PO and the Invoice Match Up
In the final step, when everything ordered has been correctly received and you receive an invoice, you should compare the invoice to the PO to ensure everything is correctly accounted for.
If not, you will need to dispute it with the seller. If there is trouble with the seller, you may even consider dropping them from your approved vendor list.
We will explain in greater detail how to create a PO in an OMS (Order Management System) like Sellercloud below.
What Are the 3 Types of Purchase Orders?
The three types of purchase orders are ‘standard purchase order’ (PO), ‘credit memo,’ and ‘vendor offer’ (VO). Generally, they are used in the following order: VO → PO → credit memo.
1. Vendor Offer (VO)
A vendor offer is a document sent from the seller to the buyer that shows a breakdown of how much an order could cost.
Vendor offers can be used in negotiations between buyers and sellers and planning. Buyers can sometimes use vendor offers to negotiate discounts from sellers.
2. Standard Purchase Order
A standard purchase order, better known as just a ‘purchase order,’ is what you would use when ordering from a seller and what we have been going over in the previous chapter and this chapter.
3. Credit Memo
Credit memos are used to return purchase orders to sellers. This can happen if items in an order are broken, wrong, or too many were sent.
What Should a Purchase Order Contain?
There are several things a purchase order should always contain to ensure that the seller has all the correct information to complete the order and reduce mistakes (and having them contact you to confirm details).
- PO number—A reference number used to help the buyer and seller refer to the correct order.
- Contact information—The details the seller needs to contact the buyer.
- SKUs—The unique alphanumeric code used to refer to the item.
- Quantity—How many are you ordering for each item?
- Price—How much does the product cost per item?
- Expected delivery date—When the buyer expects the order to arrive.
- Billing information—The details seller needs to charge the buyer.
- Delivery address—Where the seller will ship the order to (most likely, the buyer’s warehouse).
Aside from the above, some POs may have some optional details, such as a product description, which may help the seller differentiate between similar items or orders where customization is needed.
What Does a Purchase Order Usually Not Include?
Several things are usually not included in a purchase order and are not necessary to add when ordering from sellers.
You want to keep purchase order information to what the seller needs to know to get the job done and not confuse them with unnecessary details, which could lead to mistakes.
You will not need to include detailed legal terms and conditions in a purchase order. Typically, these details are part of a separate document that outlines the agreement between the buyer and seller.
Purchase orders usually don’t include highly detailed product descriptions. For example, long product descriptions that you would usually see to sell the product online to customers.
However, you may wish to include some kind of description if the product you are ordering has many variations to clarify what you need and prevent mistakes.
Purchase orders also do not include any post-delivery obligations, such as warranties. This information is usually reserved for other agreements between the buyer and seller.
Lastly, you typically do not need to add information on how the payment should be made. Instead, this information is kept for the invoice.
Who Sends a Purchase Order?
There should be some kind of structure and decision for who sends a purchase order. POs shouldn’t be sent without approval.
In large companies, requests might be raised by different employees. However, POs are sent by a procurement team, a procurement manager, or whoever is in charge of procurement.
Meanwhile, in a smaller business, ordering tasks are likely managed by the owner, CEO, or head of finance.
Buyers should avoid scenarios where multiple people are sending POs to a seller for the same inventory.
How to Create a Purchase Order?
There are many ways to create purchase orders, and different systems will have different steps. Here’s how you would do it in Sellercloud. This will also give you a good idea of how an optimal OMS should work.
With Sellercloud, purchase order creation is very logical. The whole process shouldn’t take too long as the software should make it quick and easy, especially if you already have all the details saved in the system; then, it is just a matter of selecting the right options.
On top of that, a good OMS should have robust documentation to help users learn how to use it and get the most out of it with exact steps.
1. Navigate to the Create New Purchase Orders Tab
In Sellercloud, navigating to where new purchase orders are created is very easy. From the dashboard, click ‘Purchasing’ and then ‘Create New Purchase Order.’
A solid OMS should also have proper documentation to avoid confusion when navigating and setting up a purchase order.
2. Sort the Who, What, and the Where of Your Purchase Order
From here, you only need to input the required information, and your purchase order will be on its way to the seller.
In Sellercloud, you must choose the needed vendor, the receiving warehouse, the type of purchase order (Purchase Order, Vendor Offer, Credit Memo), and the expected delivery.
You may also want to add a description, vendor note, and payment type if necessary
3. Select Your Products
On the next screen, you’ll need to search for the products you need, select them and the quantity. You can search with different filters by name, SKU, or whatever is more convenient.
Sometimes, you may need to create new products in the system to add them to a PO.
In Sellercloud, for example, you can create them at this point, and you won’t lose the PO you were creating and have to start all over again.
This is convenient in scenarios where you have already started creating a PO and forgot that the item wasn’t yet in the system.
4. In Put Billing Information
After you have listed all the items you need to order, you’ll need to input the billing information, such as the billing address.
Again, you likely already have this information saved and ready to input. In this case, you just need to select it from a drop-down.
You may have several different companies under your name and wish to switch between them for different orders sold by different companies. If this is so, you must ensure the correct billing information is selected.
5. View Purchase Order at the End
You may need to follow up with the seller afterward, or they may even contact you to confirm some details if they are unclear or let you know if something is not possible.
Key Points From Chapter 4
You’re not apt at creating purchase orders! Remember these key points.
- There are three different types of purchase orders—vendor offer, standard purchase order, and credit memo.
- Purchase orders should contain only information relevant to the products you are ordering. It should not contain payment information, terms and conditions, or long product descriptions.
- Purchase orders are sent by whoever is in charge of procurement. This could be a team or a manager in large companies, while it could be the owner in smaller companies.
- In Sellercloud, creating a PO can be done in a few steps.
In the next chapter, we will explain dropshipping in order management.