“Number one, cash is king… number two, communicate… number three, buy or bury the competition.”
The first thing everyone looks for when they source from China is price (cash is king) so they can crush their competition. But often overlooked is communication. In my experience this is critical to success when sourcing from China. Not only are you a continent and many time zones away, but there are also the language and cultural barriers. Moreover a “good quality” product is very subjective and it means different things to different people. All of this increases the chances of misunderstandings, poor quality product, and breakdowns in your sourcing process.
So after dozens of emails, Skype messages, calls, and sample review/approval, you found a good supplier with what seems like the right product at a great price. You are ready to place an order. But before you take that leap of faith and transfer your money, read this to learn how to protect yourself against future headaches and reduce the risk of misunderstandings. This article will help you understand what is a purchase order, why should issue a PO, when to issue it, and how to make a purchase order.
What is a purchase order (PO)?
A purchase order is a document issued by the buyer to the seller which indicates the product specifications, pricing, and terms. In other words it is an offer in writing from the buyer to purchase from the seller. If accepted by the seller, then it becomes a contract between the two parties.
A PO includes the following:
- Buyer name and address:
- Seller name and address:
- Purchase order number:
- Product description and specifications – Here you will indicate the product details such as measurements, color, weight, logo, packaging, and whatever else relevant to your product.
- Depending on your product, it is good to include accepted tolerances. For example an auto parts buyer may accept a size tolerance of +/- .03mm beyond specifications from the seller. It would be nice to 100% perfect product but in the real world, no supplier is perfect so it’s good practice to indicate the accepted limits to be realistic and save headaches later. This helps the seller plan production. If the product is beyond this tolerance then it will be considered defective. Also indicate your accepted defect rate.
- Price and Total Value: Unit price and total value normally in USD.
- Incoterms – The accepted price as well as the incoterms. For example commonly used ones are EXW factory, FOB Shanghai, DDP Los Angeles. This is beyond the scope of this article but but you can find out more here: https://en.wikipedia.org/wiki/Incoterms
- Delivery Date – This is important to keep the factory on its toes. Delays happen often.
- Shipping Method – Air freight or Sea freight.
- Payment terms – For example 30% advance payment and 70% payment after inspection before shipment
- Warranty and spare parts – Does the supplier offer any sort of guarantee against defects?
- Signature by authorized party
Why place a purchase order?
- Clarification – Having the purchase terms in writing helps clarify the terms for both the buyer and seller. This is especially true when there are dozens of back and forth emails, calls, text messages, etc. This reference point will decrease the risk of misunderstandings later.
- Protection – In case of any later discrepancies, both parties will have this PO as a reference point. For example, if it says in the PO that we agreed upon a 500mm x 1500mm glass tube while the product is 600mm x 1500mm.
- Proper record keeping – for your accounting purposes.
- It acts as a template for the invoice – After a PO is issued by the buyer and if they seller accepts, then the seller will issue you a invoice.
When do you place a purchase order?
After the buyer feels satisfactory with a seller, their product, pricing, and terms the buyer will issue the PO to the seller for their acceptance. If accepted, the seller will issue a Proforma Invoice that acts as a de facto contract to initiate the production process.
How do you place a purchase order?
Sign up to our 80/20 Sourcing newsletter to get my free PO template
Let me know if you have any questions. You can reach me at gary [at] 8020sourcing.com