What is a Purchase Order?
(If you are already familiar with Purchase Orders, skip to What is a Self Purchase Order below— either way, it would be useful to read about Purchase Orders first)
Purchase Orders are used by businesses when buying products that the company and its employees need. Stated simply, Purchase Orders are the opposite of bills or invoices. In other words, they are created by the customer (the company looking to make the purchases) for the vendor and they specify the requirements, the negotiated price and relevant details for a product(s) that the customer intends to buy from the vendor. Once the vendor accepts the Purchase Order, he is legally bound to deliver the product to the customer, in accordance with the requirements and the price so mentioned.
Essentially, this is how the process unfolds: an employee needs a particular product; he informs his superior about it, who then conveys the need to the procurement officer or purchasing manager — whosoever is responsible for procuring products on behalf of the company. After being made aware of the need, the procurement officer looks for relevant vendors, and chooses the most viable option. Once a price is negotiated with the vendor, the procurement officer draws up the Purchase Order, and sends it across to the vendor. This is a general outline of the process — in reality, there are several variations and steps involved.
What is a Self Purchase Order?
A Self Purchase Order, as the name suggests, is not generated by the procurement officer or any central authority responsible for the company’s purchasing. No, it is generated by the employee himself. What this means is that the same employee, who needs a product to use in the office, is actually creating a Purchase Order for it. In most organizations using Self Purchase Orders, there is a minimal approval process in place — typically, the employee must get his boss’ or superior’s approval before creating a Purchase Order for the product. However, once such approval is obtained, it is the employee himself, and not the procurement officer, who actually looks for a vendor to source and buy the product from.
On the surface of it, Purchase Orders & Self Purchase Orders may seem only slightly different. But the implications of this difference are profound and can directly affect your company’s Spend Culture.
Why Some Companies Insist On Using Self Purchase Orders
Companies use Self Purchase Orders because they are seen as a quicker way to get the product so needed to the company’s doorstep. They are favored particularly by oil or construction companies, which need products to be instantly delivered in order to keep their day-to-day operations running smoothly. For such companies, waiting for a chain of approvals before procuring the product is not an option.
Why Self Purchase Orders Are A Bad Idea
Like a lot of things that seem attractively quick and simple on the surface, you have to look a little closely to see that although Self Purchase Orders offer short-term gains, they are setting the stage for serious, long-term losses. Here are some of the reasons why Self Purchase Orders are best avoided.
If you let your employees decide which vendor to buy from, you are making your company vulnerable to fraud. Is the employee using a vendor because the vendor has offered him some type of kickback? Is the employee even getting what was listed on the Self Purchase Order — maybe, he’s creating the Self Purchase Order to buy something that he personally needs, and is cleverly covering up his tracks in the process? or maybe he’s cooking up invoices and transferring money meant for buying the product to his offshore account? Just look up procurement fraud on Google and you’ll be overwhelmed with reports about some of the most complex and detailed procurement frauds orchestrated by employees who identified weaknesses in their company’s purchasing process. Fraud is one of the biggest and most wide-spread problems in procurement — it can easily go unchecked, and what’s even more alarming is that you might never even realize that your company has fallen victim to it.
THE SOLUTION: A comprehensive purchasing solution introduces best practices into your company’s purchasing. What this effectively means is that your company’s purchasing would be so transparent that any requests or transactions that seem even slightly suspicious will be red-flagged immediately.
Most employees don’t have a background in purchasing or procurement. Neither can they be expected to maintain diligent accounts of their expenditure — purchasing is not their core job so why should they be expected to give more time to it? Given their time constraints, along with the absence of any up-to-date account of their spending, they are very likely to overshoot their budget without even realizing it. In procurement circles, this pattern of overspending is called Rogue Spending.
THE SOLUTION: Most companies still think that the only way to prevent Rogue Spending is by maintaining an account of the company’s budget and expenditures on spreadsheets that need to be diligently and painstakingly updated. But you do not need to follow such an outdated process to keep an up-to-date account of your company’s spending. A savvy purchaser uses an agile purchasing solution that offers a real-time account of a company’s expenditure vis-a-vis its budget. Real-time spend visibility gives all the key actors in the purchasing process a precise picture of how the company’s expenditure — till date — stacks up against its allocated budget. This means that the chances of overspending are virtually eliminated.
Lack of Accountability
Most employees have little experience finding or negotiating prices with vendors. And since purchasing isn’t their core job function, they don’t consider it their responsibility to ensure that they are buying at the best possible price. A purchasing manager, on the other hand, has a bird’s-eye view of the company’s entire purchasing needs. And with the right purchasing software, a purchasing manager will be equipped with a comprehensive set of data to identify the company’s buying patterns. These buying patterns are telling — they reveal which vendors the company buys from most often and most extensively. The purchaser can utilize these findings to convince these vendors to offer the company better prices. Additionally, he can also limit the bulk of the company’s purchases to these vendors so that he can place bulk or larger orders with them and avail of bigger discounts.
THE SOLUTION: In a data-driven world, purchasing cannot be confined to merely finding a vendor and buying from him. An intelligent purchasing solution conveys the aforementioned patterns in a graphical and coherent fashion so that the purchaser is no longer just a clerk or pen-pusher but someone who has the ability to help the company get better bang for the buck and, in turn, improve its bottom line.
Vendors Go Unchecked
Delayed shipments and incorrect orders can halt a company’s day-to-day operations. Granted, a Self Purchase Order allows an employee to make a purchase quickly; but that’s about the only thing it does. Placing an order and receiving it — in a correct and timely fashion — are two different things. In the absence of a purchasing or procurement manager overseeing company-wide purchasing, there is no way to track vendor performance.
THE SOLUTION: An overarching purchasing solution gives the purchaser centralized visibility and control over the company’s purchasing. It allows him to identify if the company’s purchases are being delivered on time and if the products shipped are, indeed, the products that were ordered.
In fact, Even The Sole Advantage Is Based On A Mistaken Belief
The crucial difference between a purchasing process built around Self Purchase Orders and one that is premised on Purchase Orders essentially boils down to the time factor. A company using Self Purchase Orders will continue using them so long as it labors under the impression that an alternative purchasing process takes more time. This impression, though, is a misguided one.
What most companies do not realize is that a smart and cutting-edge purchasing solution can dramatically speed up a company’s purchasing. Mobile access and real-time notifications can keep everyone on the same page and ensure that every request for a purchase is acted upon immediately, reviewed and, if need be, corrected before it is approved for purchase.