Are Purchase orders real orders or just a holding technique?
How many times have you received a purchase order only to have it cancelled just as you have it ready to ship?
How many times have you had a Purchase Order sitting in your file for months before the buyer finally decides they want delivery?
How many of you have ever read the normally onerous Conditions of Purchase that sometimes accompany a Purchase Order?
These problems seem to be more and more common these days.
Back in the dark ages before the Internet when I started in business, a purchase order was regarded as money in the bank, and could be used to get a Bank loan.
Alas, that is no longer the case.
It appears that business attitudes have changed to the point where Purchase Orders are being used as a means of providing the buyer with a price that they can then use as a lever with another supplier. Another use seems to be that buyers issue a Purchase Order well in advance of their requirements in order to secure their place in the order chain.
This is especially true if there is significant lead time to supply the goods.
In a previous article entitled "Why do some large companies expect vendors to fund their cash flow?" I went through the reasons why companies want credit, and this is another means by which they try the same thing.
The reason for giving a Purchase Order without paying is that they want you to put your money and resources at risk by getting their order ready for shipment, and then waiting for them to make the decision to pay you. Should they decide to cancel then you are the loser, not them.
Being in business is a partnership between the buyer and the seller. The seller has something that the buyer wants, a negotiation takes place, an exchange of value takes place and the goods are transferred.
Receiving a Purchase Order is merely the start of a negotiation. An order is not made until the exchange of value takes place. It is from this point onwards that there is a contract to supply the goods paid for, and I believe it is at this point (and not before) that an order enters the sellers system for actioning.
Bottom line:- A Purchase Order is NOT an order until it has been paid in full. It is merely a request for information and should be treated as such.