The drywall business has been good to me. It has allowed me to personally invest in a few other businesses, all of which have been successful endeavors. However, last week I attended a stockholders meeting for one of these businesses and left that meeting really angry. My partner, who is the majority stockholder in the business, is of the opinion that “our” company does not need a purchase ordering system.
During that meeting, I asked him why he objected to a purchase order system and his key objection was that “neither our employees nor our vendors have the time to deal with purchase orders.”
Subcontractors buy many products from many different suppliers. Some contractors buy all their products from one supplier due to that supplier’s excellent service, pricing, terms or abilities.
Why use a purchase order system? Why waste the time? It doesn’t matter if a company buys $5,000 or $500,000 per month in supplies. What matters is having a system in place for ordering and controlling cost. Call it whatever but a purchase ordering system is a tool no different than a 6-inch knife, a scaffold, straight edge, sponge, trowel, dust mask, mixer or laser. The following are just a few key reasons to use a purchase ordering system.
• Creates a specific list of products ordered.
• Establishes an order date.
• Specifies the cost of the products ordered.
• Allows the bookkeeper to compare purchase orders to invoices.
• Creates a copy for the field staff to compare to the delivery.
• Track backorders, shortages and damage.
• Identifies the person ordering the product.
• May be useful in claim situations when material ordered is different from materials delivered.
• Creates third-party dates, which may be useful in defending a delay claim.
• Offers some embezzlement protection.
• Helps in auditing processes.
• Statement of company polices may be printed on every order.
Unauthorized orderingA supplier is no different than a bank or a credit card. The material has been delivered and then it’s paid for at a later date. Unless purchasing is under close monitoring, a crafty individual can order products from the supplier without anyone elses knowledge.
Construction defect claims
Let’s say an open-cell backer rod has been ordered and the supplier delivered closed cell and the specifications specifically called for the use of the open-cell backer rod. Does the supplier have any liability because he delivered the wrong product? How many times does a supplier deliver something different than what was ordered?
EmbezzlementIf a company or business doesn’t have a purchase order system in place, an insider can easily order materials without anyone ever knowing about it. Having a system does not mean safety from embezzlement however, a purchase order system may help a case in the event the embezzler is prosecuted and may also serve as a deterrent in the eyes of someone who is tempted to steal.
Cost controlSuppliers have the right to raise their prices and it’s important to be aware of costs. A purchase ordering system forces one to stay in touch with flat, rising or decreasing cost. Using a purchase ordering system for equipment rental is also very helpful. Use a purchase order to start rent and stop rent just by faxing it to the vendor. Ever rented a man lift and called the rental company to have it picked up? So a follow-up is placed a week later and they say they have no record of the call.
Company policyIf it’s one’s company policy to require suppliers to name its company as additionally insured, have that requirement printed on the purchase orders. If it’s the company’s policy to not pay an invoice without a purchase order, also put that statement on the purchase order to reinforce the purchasing policies.
The fax machine and the purchase order are two excellent tools. These two tools can save time, money and heartache, no matter how small or large the business is.
My construction suppliers understand and have been notified that no one can order material without a purchase order. When generating a purchase order number, I like using the date in some fashion.
The number I use begins with letters assigned to me followed by the date. That number may be AZ102102, which indicates that “Pete Battisti ordered the material on October 21, 2002.” Someone else in our company may order material using QL and the date. A tip is to also use a job number and date as the purchase order number. The reason I like using a date is because dates are extremely important in construction and are used for scheduling, accident reports, meetings, inspections and so forth. A purchase ordering number that includes the date should be the exact date of the order that can often be different from the date the purchase order was filled out.
A purchase order is simply a record of the quantity in some unit of measure while indicating the type of product or brand name, as well as other specifics relating to the products. A purchase order should be specific in all terms so as not to allow the supplier the flexibility to provide products other than what is ordered. The purchase order should also provide instructions to suppliers: the job name, address, customer name, delivery instructions, special conditions, contact person, phone number and company policies related to supplier. Consider the purchase order to have a statement indicating that the supplier should call the office to verify that the order was received.
A purchase ordering system indicates that the company is organized. If you put yourself in the supplier position, wouldn’t you rather have all your customers use purchase orders in lieu of verbal orders?
The lack of a purchase ordering system is something to get upset about! It’s justifiable, it’s right and it’s a proven, practical business tool that will help in the short and long term. Consider using a purchase order when ordering material, renting equipment or when discontinuing rent on equipment. Just fill it out and fax it. Keep in mind that it is a legal document proving that the company ordered specific items on a specific date by a specific person for a specific job, with specific polices and instructions. This information can go a long way in the event of a claim, as well as cost controlling.
The purchase order system I use is on an Excel spread sheet, which is provided in tear-out form. Contact me at email@example.com if an extra copy is needed.
Remember: Teamwork begins with a fair contract! W&C