What is a Purchase Order?
Although the process of procuring fashion garments should be easy, it is often far more time consuming and complicated than it should be.
Purchasing fashion goods from suppliers around the world doesn’t have to be tedious if done correctly. Getting the fundamentals right, in the form of your Purchase Order is the first step to a successful and efficient delivery of an order.
This has been made significantly easier in today’s world for fast-growing fashion brands who use digital production tools that auto-generate and auto check purchase orders but you still need to ensure the procurement information is accurate and complete.
The goal of this article is to give you an overview of what a purchase order is, why it is important, how to effectively draft one, and why you need to use purchase orders in your e-commerce business.
What is a Purchase Order?
A purchase order (also known as an order purchase or a PO), is a legal binding contract a buyer sends to a supplier or seller to authorise a purchase. It’s one of the most important documents in fashion production whether you are a small business or a large enterprise.
It’s the legal contract between a buyer and a seller. It’s the financial agreement between the two parties.
A typical purchase order will include: line items of every product you wish to purchase, total quantity of items, size split, agreed price, payment terms, purchasing party’s legal name and address, supplier legal name & address, Shipping INCOTERMS any additionally agreed terms and conditions. It is also common for purchase orders to have a dedicated number — the PO number. This allows for easy reference by both brand and manufacturer when they are dealing with 100’s if not 1000’s of Purchase Orders, Purchase Invoices and Requests for Quotation every year.
Purchase orders are beneficial to both the buyer and seller. By issuing purchase orders, small businesses can specify the type of goods they need from suppliers, the number of items they require, and the delivery date the parties agreed upon. This helps to promote efficiency and transparency within the business ranks.
Additionally, purchase orders can help both the buyer and seller maintain a detailed and accurate record of business transactions for auditing and financial reporting purposes. It forms a key part of your paper trail, should you ever need it.
How Do Purchase Orders Work?
In this section, we’ll outline the steps required to create a purchase order and how the companies involved can submit, request, and a track the document in the correct manner.
It is the responsibility of the purchaser to create the PO. They should fill out the order and vendor information. The department who is responsible for this will vary depending on the size of the business but generally it will be the lead buyer and their financial counterpart. The key purchasing practice to follow here is to make sure it is checked by multiple parties who are reliant on the outcome of the document, so that there are no surprises for any department later down the line.
The Buyer Sends the PO for Seller Approval
When the buyer has gathered all the information mentioned above, they will draft the PO and send it to the supplier for approval.
When sending the purchase order to the supplier, it is important that you indicate that the PO is in draft and being submitted for approval. You should let the vendor (or vendors) know when the approval of the document is needed to avoid potential delays.
Digital production collaboration platforms for brands and manufacturers now include digital timestamps for every approval to ensure both parties are on the same page. This enables fashion brands (especially online predominantly D2C brands) who may be raising POs on a weekly or even daily basis to meet their schedule of drops.
The Seller Reviews the Purchase Order Information
Once the manufacturer receives the purchase order, they will review the information for accuracy and raise any queries they have.
When reviewing the PO they will be checking it against their production schedule and capacity, as well as looking at the quantities to see what they need to order from their supply chain to see if they can fulfil the order by the date requested by the buyer. They will also be negotiating on price and raising their own purchase orders with their suppliers, much in the same way.
the chain of POs is long and complex, especially for fashion with many companies across the apparel supply chain involved. For some companies, these chains may well span multiple continents – hence the need for the standardisation of the PO so that all parties are speaking a common language.
Purchase Order Approval
If the seller can fulfil the purchase order request, they will approve it. Hence a legal contract will be created between both parties. It is worth noting the base requirements for a contract to be formed. These are Offer, Acceptance and Consideration. With regards to purchasing garments, the Offer is the vendor saying they will supply the garments for a particular price, the Acceptance is the Fashion brand accepting and confirming the order (via approved purchase order), and the Consideration is the cost of the inventory which has been agreed and paid to the vendors.
After the purchase order has been approved by the seller, the supplier is responsible for the provision of the items indicated in the purchase order.
The factory will then go ahead and manufacture the goods ordered. The manufacturer will then generate and send a purchase invoice (PI) to the buyer for the amount agreed in the purchase order. The generated production invoice will include very similar information to that in the PO.
Payment terms will vary massively depending on the relationship between brand and manufacturer and how established the relationship is. These can vary from 100% paid upfront (for high-risk brands that factories have not worked with before), to 50% on PO raise and 50% on Ex-factory, to 100% at 90 post-delivery.
When the payment is front-loaded, such as the 50-50 (one that is widely considered to be the fairest balance of risk between the parties and incentivises good behaviour), there may be a requirement to update the PI when the production is completed. Often the exact quantity of goods produced by the manufacturer will be slightly different from what is ordered. This is usually due to quality control deeming some goods not acceptable. Therefore a level of overproduction is baked into the order, but sometimes all the goods will be correct, leading to an overage. Generally POs allow for a 5% overage or underage without any penalty but each relationship will have its own specific agreements. N.B. These, along with a whole suite of scenarios should be covered in a Manufacturing agreement.
Payment of the Invoice
This is usually the final stage in any purchase order process, where the buyer is responsible for paying as per the payment agreement stated by the seller in the purchase invoice.
Payments should be made based on the agreed payment method and terms. Not compiling to these terms is a breach of contract.
What Makes a Good Purchase Order Template?
Consists of the brands’ information, which should include the name of the fashion business, business address, contact details, company logo, purchase order date and number.
Indicate the specific receiver of the purchase order. Under this part, you must list the name of the suppliers’ company and their business address. A registered company number is also advisable. If working with a company in the UK this can be checked at Companies House. If overseas, ask for their registered company number and check against the government database for accuracy.
Clearly indicate where the product should be shipped to, shipping method and terms (INCOTERMS), and the specific delivery date. Getting these wrong can be extremely costly.
Fashion brands must try as much as possible to describe clearly the various items listed in the purchase order. For each item included in the purchase order, they must add the product code or SKU number, quantity, item description (name, colour or texture), price per unit, and the expected delivery date. Depending on production timelines, some brands may split POs during production.
Additionally, fashion brand owners may decide to include labelling and packaging information to help guide the vendor when handling the order.
Complete the purchase order by providing the vendor with a subtotal, VAT (or applicable taxes), shipping costs, applicable discount, and any contingency or caveat. A good example of a caveat to include in a fashion-related purchase order is, ‘order and payment are subject to the approval of fabric quality and texture.’ This acts as an escape route if the vendor sends a fabric below the required quality.
Purchase Order Versus Payment Invoice
Running a fashion business requires that owners make purchases and payments on several goods and services that may be needed to grow their business. Hence, two important documents they will have to deal with daily, as a business owner, are purchase orders and payment invoices.
While purchase orders and payment invoices carry similar information, such as order details, prices, supplier information, and delivery details, they are two entirely different documents.
Here are the main differences between purchase orders and payment invoices:
- Who Creates It: Buyers handle the creation of the purchase order.
- When to Send It: Purchase orders are sent when a buyer orders goods or services.
- What Information Does It Contain:
- Delivery date
- Delivery location
- Billing address
- Payment terms
- Details of what is being purchased and the required quantities
- Name of Company
- Purchase order number
- Who Creates It: Sellers are responsible for the creation of the payment invoice.
- When to Send It: Payment Invoice is sent when the ordered goods or services are ready.
- What Information Does It Contain:Usually contains the same information as seen on a purchase order plus the following:
- An invoice number
- Vendor contact information
- Credits or discounts
- Payment schedule
- Total amount due to the vendor
While there are several differences between these two documents, they still share some similarities. One of the major similarities between a purchase order and payment invoice is that they are both legally binding contracts.
Benefits of Using Purchase Orders for Fashion Businesses
Let’s look at some of the important benefits associated with using purchase orders for fashion business.
- Using purchase orders even in a fashion business eliminates the risks of misunderstandings. In other words, it protects fashion business owners against negative surprises.
- Purchase orders also serve as a legal document in case of future disputes between a seller and a buyer.
- Helps fashion business keep track of incoming orders and eliminates the occurrence of duplicate orders.
In this article, we’ve covered all the essential information needed to create a purchase order. Fashion brands must remember that a purchase order is a legally binding contract between a buyer and a seller.
Before putting their signature (digital or physical) to any purchase order, they should endeavour to read through the fine print to avoid mistakes or liability.
We highly recommend using digital POs integrated into your production software as a safe way to raise POs without fault