If you do nothing else in 2020 to reduce expenses on your dairy, do this one thing: Implement a purchase order (PO) system.
What is a PO system?
Purchase order (PO) systems are a way of creating bulk purchase agreements between a business and its vendors and suppliers. While a newer concept for dairy businesses, PO systems are common practice in many other industries. The process typically involves generating a statement listing the item, quantity and price information prior to submitting an order with the vendor. The parties involved in decision-making then have an opportunity to approve the expenditure or ask questions before the order is placed.
On dairies, this works great for items ordered regularly, like veterinary or breeding supplies. It’s not for unavoidable emergency expenses.
How does it work on a dairy?
Each party can see the expense before the purchase is made and then discuss whether or not that purchase is necessary. For example, if the equipment manager needs to place an order for oil filters, he or she makes the request to the person who pays the farm’s bills. That person creates the statement showing how many filters are needed and the cost. This statement is sent out to all the decision makers across all departments on the dairy.
Each person then has the chance to ask questions about the oil filter purchase and give it approval. Once everyone agrees on the purchase, the order is placed. The bill payer now expects this expense and plans for it accordingly, well in advance of receiving the actual bill.
Who benefits from a PO system?
PO systems are particularly effective when a dairy has multiple owners or family members involved, because it opens up communication among all parties and across all departments on the dairy. It prompts accountability and more discussion before purchases are made, and it yields fewer surprises when bills come in the mail.
These discussions are particularly helpful for the person in charge of paying the farm’s bills, whether that is a family member or an outside accountant. It eliminates the stress and panic of receiving a pile of bills with no money to pay them.
How does it save me money?
I find when dairies put this system in place, they actually reduce monthly expenses for a couple of reasons:
- Reduce inventories – Carrying excess inventory can cost businesses thousands of dollars per year, and right now, that money may be better utilized paying off debt or investing in other purposes instead of sitting around. Medicine cabinets and semen tanks are common places where I see supplies inventoried beyond monthly needs. The PO system encourages keeping a tighter pulse on current inventories and prevents ordering excessive and unnecessary amounts of supplies.
- Controls high-pressure salespeople – We all know a few salespeople who are hard to say no to, but with the PO system, you are empowered to tell them you need to get expenses approved before committing to a purchase. This process removes the uncomfortable situation of saying no, and it takes the pressure off of the person making the purchasing decision.
- Prompts discussion – When people across all departments on the dairy put their heads together, they can often point out opportunities for saving money that others don’t see. Fresh eyes offer a different perspective. However, it’s important that the parties involved don’t criticize each other but rather approach the discussions with curiosity and problem-solving in mind.
How do I set up a PO system on my dairy?
Setting up a PO system can be as simple as setting up a spreadsheet using the example below (Figure 1). An online search for “purchase order templates” will bring up many options that can be downloaded, purchased or replicated.
Work with the person paying bills to establish the best method for communicating the PO, whether that be email, text or during in-person meetings. Make a list of all expenses that will run through the PO system and adhere to that list.
A PO system is a relatively low investment that can make a big difference in your dairy’s bottom line.
