WORKING ON RETROSPECTIVE PO’S

Call it Retrospective PO (purchase order) OR After the fact PO, even if the names are differ, this process of creating PO’s after rendering the goods or services and/or receipt of invoice, is a common practice seen across many organization for various reasons, more under the presence and pressure of adhering to the organization policy of “NO PO, NO PAY”.

Thus, the question arises,

• What are the reasons for presence of retrospective PO?
• Who is responsible for increased % of retrospective PO?
• Why should we worry about retrospective PO?
• Is it important metrics for CXO and business?
• Will reduction of retrospective PO have a positive impact and benefit procurement organization?
• How can we control and reduce these PO’s?

For us to move in right direction and get an answer to these questions the basic requirement is to understand:

• What is PO?
• Why is a PO created?
• Why is a PO send to supplier before rendering of products or services?

Answers are as follows,

• PO is a confirmation note from requestor to supplier to deliver the goods or services. It is a document created by requestor that authorizes the purchasing transaction, when accepted by supplier becomes a binding contract between both parties
• To control the purchasing process at given price, from qualified supplier and at required T&C and comply with organizations policy and govt. rules & regulations
• To adhere with the contract price, delivery terms, goods/ services quality etc. which is negotiated prior to purchasing transaction providing monetary and other benefits to both the parties

Retrospective PO’s will continue to be created for various reasons, such as, requestor is unclear of his exact requirements or requestors does value the procurement process or does not want to switch the supplier due to comfort level with supplier or lack the supplier market knowledge or lack of process knowledge and benefit of PO, thus  Retrospective PO’s will  be most commonly created based on the information given by the supplier in his invoice, (which saves users time and effort that goes while creating a PR (purchase requisition)) or while there is some urgent/emergency requirement  and requestor is unable to wait until the PO created, released to the supplier

Retrospective PO Process Flow: Figure 1

Now you will have question in your mind, why the information from invoice is copied in to PO?

Let us understand the reason behind why PO’s are used,

PO is generated and shared with supplier only after the PR is approved by approving authority as per approval strategy i.e. PR is created by the requestor to purchase certain product/ service. Ones the PR is created and submitted it goes through the process of compliance & approvals from the procurement department for selection of right buying channel, supplier, rate, quantity etc., and to requestor’s reporting manager for availability of budget. Ones this PR is approved by all the approving parties, this purchase requisition get converted into a Purchase Order (PO) which is then transmitted to supplier. PO confirms that the supplier have been approved to provide the goods or services at a given date, time, quantity, price, location etc.

Standard Purchase Requisition to Purchase Order Process Flow: Figure 2

In most of the organizations which does not understand the basic premise of PO, ends up creating retrospective PO’s for two reasons,

• To make up for the audit process and
• To comply with their organization’s “NO PO NO PAY” policy requirement of PO creation i.e.

This is exactly opposite approach to what it should ideally be followed and an industry best practice process should be, i.e. invoice is created by supplier based on the PO received from requestor.

Now, let us understand various reasons for high percentage of retrospective PO’s and why do we see this trend across regions and industries that have well defined procurement policies, processes and technologies,

Some of the reasons & their % that are commonly seen across global organizations are shown below

In the absence of central procurement team, it is difficult to guide the users/ requestors that PO’s are to be created before the purchase transaction and not on receipt of invoice

Some of the negative effects of retrospective PO’s

• Lost savings on negotiated & contracted price , discounted terms and volume aggregation
• These savings are lost unintentionally due to lack of knowledge and guidance from organization about availability of preferred supplier, central contracts, discounted terms, rebates etc., leading to savings leakage at an average of 15-20% across regions, categories and organization
• Lost control & compliance over the purchasing process, increasing chances of fraudulent purchases  again the reason could be lack of knowledge and guidance from organization about centralized process adhering to global best practices, government rules & regulations, SOX compliance leading organization to SOX violations and exposing company to unintended liabilities

Some of those improvement ideas implemented at various client locations are,

• Design right procurement policy, inclusive of processes to support reduction of retrospective PO’s
• Automation of E2E PR to PO process with minimal manual intervention, backed by “No PO No Pay” policy 
• Design and Implementation of PR gatekeeping process to ensure that  the process is followed within the steps laid down in process, procurement policy and control framework
• Design & implementation of multiple buying channels like, Purchase cards or spot buy for local low value purchases, catalogue buying for repetitive purchases, strategic sourcing for strategic high value purchases and free text or Requisition based purchases for regular purchasing per nature of business, need of local units and regional nuances

Business Case: