Daily Archives: January 3, 2011

Will 2011 Be The Year Supply Chains Go Purchase Order Free?

Back in the early days (of Sourcing Innovation), I suggested purchase-order free supply chains — and not just because such a strategy could reduce buyer direct material by 30% and supplier component inventory by 25%, drastically reducing inventory costs in addition to eliminating the thousands of man hours spent by the organization each year processing meaningless purchase orders.

And yes, purchase orders are meaningless if they are for a good or service on contract. If you did your job right during the sourcing event, you know what you need, when you need it, were it has to come from, and where it has to go to. And you can provide this information to the suppliers up front during bidding and then revise it for the winning supplier when the award is made. Suppliers can create appropriate schedules and the inventory will be ready when it is required. Then, when the goods are needed, they can be ordered with a call (or an electronic demand signal).

While purchase orders are a good policy for any goods or services of significant value not on contract, when you have a contract that specifies volumes, delivery schedules, etc, why should you waste time and effort with purchase orders? You’re just doing the work twice! And since you’re not hiring more people to help you clear the increasing workload (as per yesterday’s post), this is only going to create headaches. Either your people will work overtime, tire themselves out, and/or get sick, or they’ll try to work faster. Either way, they’ll make careless errors and more man-hours will be needed to accomplish the m-way reconciliation to try and figure out why the invoice doesn’t match the PO which doesn’t match the contract.

So ditch the purchase orders for contracted goods and services. If you collaborate with your suppliers and implement sales, forecast, and demand-supply synchronization systems, they won’t be needed. Your buyers, accounting personnel, and suppliers will thank you. And so will the company bank account when you’re not wasting up to one or two hundred dollars processing each purchase order you don’t need.

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