Delving into the world of purchase orders

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Before we get started, let’s discuss what purchase orders actually are. A purchase order is a contract between a buyer and vendor or seller that includes the details of what is being purchased. The effectiveness of the purchase order depends upon how much information is included about the purchase with a very detailed purchase order considered robust. The buyer submits the purchase order and once the vendor accepts it, the contract between the two parties becomes active.

There is merit for the buyer in including as much information as possible about their request as they are then protected should the vendor accept it and try to change things or worse yet, cannot deliver on the product or service. Likewise, the purchase order protects the seller due to it being a legally binding agreement, if the buyer decides to withhold payment.

Now, we will consider four different types of purchase orders:

Standard Purchase Orders

These are the documents used when the item or service, the cost of the item or service, the payment terms and the anticipated delivery date are known. In essence, these are the most basic and popular purchase orders and are suitable for simple, one-time purchases or repeat purchases that are not made very often.

Planned Purchase Orders

A planned purchase order is provided when the item required and its cost are known as well as the payment terms and an approximate date of when the item is required. However, the actual date of when the item can be delivered is uncertain. Therefore, as only the date the item is needed by is known, this is entered onto the purchase order in the ‘PPO’ field. By entering this date, the seller will treat it as a tentative timeline to aim for, however they should update the buyer on the actual delivery date (when they have acquired it from the supplier) by way of a ‘Schedule Release’.

Blanket Purchase Orders

These purchase orders exist when the item needed is known, but the buyer is uncertain of the quantity of the item needed or the date(s) when the item is needed. Therefore, these orders are essentially generalized orders that are highly flexible in nature and allow the details about quantity, delivery date and price to be entered later, as and when needed. A bonus of these orders is that if these details are unknown to the buyer at the time of submitting the order, then they do not have to go to the effort of completing a new purchase order every time they need the item.

Contract Purchase Orders

A contract purchase order is essentially an acknowledgement of preference where a buyer has a legal agreement with the seller that they will purchase their product from the seller. Although at the time of the contract taking effect, the quantities and therefore exact prices and delivery dates are unknown. Due to this uncertainty, the contract purchase order does not exist in solitude but rather in conjunction with a standard purchase order which is then raised when the specific items are actually wanted.

Let’s Summarize

Basically, a purchase order is always required for good transparency and protection of the buyer and seller but choosing the right one for the right situation can be difficult. If all information about the desired product is known and the buyer intends on only making this one purchase, then a standard purchase order would be a simple and suitable choice. If the buyer knows what they want, what it is going to cost them and therefore the payment terms of the transaction, however they do not know when they will require the item with several deliveries at varied times, then a planned purchase order is the way to go. This will allow for flexibility with delivery dates. If the buyer knows what they need from the seller, however they are unsure of the amount or when they will need the items, then they can use a blanket purchase order.

This simplifies things later when they come to make multiple orders of the same item at later dates – essentially the one, ‘blanket’ order can be used for all future orders. And finally, if the buyer does not know anything other than what item they need from the seller, then they can draw up a contract purchase order which essentially means the buyer is selecting the seller as their preferred vendor for that product and are forming a legal agreement to that effect. When the buyer actually needs to order the product, they must raise a standard purchase order.

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Melanie - Unleashed Software
Melanie

Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.

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