How purchase ordering works, and why you should care

Proper purchasing is critical to your brand’s success.

Understanding what to order when and maintaining visibility into stock at your 3PL or warehouse can make-or-break your brand’s success. Purchase orders help brands solve for inventory discrepancies by having the right information regarding what product is needed at any given time.

So, what is a purchase order?

A purchase order is a brand-generated document which outlines the product needed by the supplier. It consists of the quantity, price, description, shipment information, and any other relevant information included in the purchase of the products. These orders can consist of unfinished or finished goods.

When is a purchase order needed?

A well-structured brand has the proper framework in knowing when to send in purchase orders. Often, brands need to leave leeway time to send in a purchase order and receive product. Understanding that the amount of goods and costs can vary between suppliers will also provide your brand with budgeting information.

Ideally, product from your suppliers will arrive at a timely fashion, and the supplier will be able to respond to the demand of your brand in case of sudden growth or spikes in sales.

Implementing reporting tools such as sales velocity can better predict the need for product at any given time, but a certain amount of flexibility on the supplier’s end within the purchase order is always expected. Meaning, you might not always get exactly what you ordered.

Is a purchase order a contract?

Purchase orders are legally binding contracts which list the variants and prices of the particular product being ordered. Once the purchase order is accepted by the supplier, it is legally binding.

What is a purchase order good for?

Since your brand’s assets are tied up in inventory, ensuring you maintain an appropriate amount of product at all times is key. Whether it’s preparing for a big holiday or scaling back during slower times during the year, proper purchasing can be the deciding factor in your brand’s success.

The purchase ordering process

Your brand depends on a smooth and streamlined purchase order processes. It can be a very challenging task understanding what to order when, and customers often get upset when product is out-of-stock and unavailable for sale.

1. Prevent backorders and overstocks

If items are stocked out, it can be difficult to meet your financial targets, and when items are backordered, it frustrates the customer, deterring them from buying your product in the future.

Overstocking product results in aging inventory, which is detrimental to a brand’s growth. Aged inventory reports represent inventory which is often discounted and sits in a warehouse, taking up the space of product that could otherwise be moving.

2. Properly handle inventory

When your brand is ready to put in a purchase order, automating parts of the process with the help of inventory management software like Stitch certainly helps.

If you have supplier information on record, you’re able to easily rely on the automatic population of your supplier’s information. Additionally, reporting tools that contain low-stock threshold information will give your brand the information it needs to know exactly which products to record for a purchase order.

When placing a purchase order, it’s simple to view a consolidated inventory report across all departments in order to auto-calculate what’s needed. Sales velocity is an important figure in seeing how quickly stock moves, and you’re able to track that based upon 7, 14, 30, 60, or 90 days.

Giving supplier lead time and ensuring your brand has safety stock allows for any issues that may come up.

3. Understand true inventory cost

Your brand’s purchase orders are the life of your business. Inventory equates to assets, and in ordering the correct quantity and type of product is imperative in keeping your business competitive.

More often than not, suppliers change the price, amount, and shipment method of the product you order, and it’s difficult to account for those extra costs.

Stitch is able to hold them accountable in situations like these, and ensure your brand is staying on track in their accounting and financials.

4. Achieve financial accountability

Purchase orders consist of inventory financials, which need to be accounted for as processes change. The costs from suppliers are subject to change at any given time due to shipment method, tariffs, and quantity received.

FIFO (first-in-first-out)

Editing purchase orders after receipt with accurate cost adjustments will allow operation management process and financials teams to audit their expenses accurately. First-in-first-out (FIFO) capabilities will accurately allow your brand to reflect on each purchasing decision made, and how those purchasing decisions affect overall profitability.

Although brands strive for only a small percentage of aging inventory on-hand, FIFO accounts for the diminishing value of aging inventory, so your brand can plan accordingly.

Financials play a significant role in how to use purchase orders. Situations whether or not brands need FIFO vary, but having the option of using FIFO rather than the average-cost (AUC) method is a good option to have.

The reason behind wanting these opposing methods originate from the need for brands to siphon cost data instead of averaging the cost of items in a single shipment. Whether your brand is using FIFO, AUC, advanced functionalities, or simply trying to keep appropriate stock of items.

Saving time through automation

Taking all of this into account is complex. By streamlining this purchase order process, Stitch is able to act dynamically when taking all this information into account, instead of doing double-work in order to accommodate the true cost of inventory.

In addition to automating each point above, Stitch houses your purchase order information and acts as the centralized hub of information. This empowers your team to grow, and save you time and frustration especially when holiday seasons approach.

Purchase orders are inevitable, and the quality, simplicity, and accuracy of them are key factors in the success of your brand.

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