The ins and outs of purchase orders

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Purchase orders, or POs as they are commonly known, are a standard way of agreeing the supply and demand of products and inventory between a buyer and seller, akin to a contract between the two. In fact, POs often come with contractual terms of supply/sale so you should treat them as legally binding.

But when you are starting out with your business, concepts likely stock management in general, and purchase orders specifically, may be a complete unknown. You may have heard of them, but you’re probably not clear on the different types of purchase orders or how and when you can use each one. Let’s take a quick look at the four different versions you’ll encounter and when you should use each.

Standard Purchase Orders

A standard purchase order is very much what it says on the tin; it’s standard. It can be used across the board and is probably the most common type of purchase order as a result. The thing with standard purchase orders is that you know all the terms of agreement in advance, in that the items you want, the price, when they will be delivered and the payment terms are all set.

As all the details are known, a standard purchase order is more common when demand from a buyer isn’t as often or it is a one-time occurrence. It may be that you’ve got a specific event or activity happening at your business and you need items for a set time.

Planned Purchase Orders

Unlike standard purchase orders, planned purchase orders are used when you don’t know the delivery dates. You will likely have all the other details penned in and confirmed however, like the price and quantities, but when they are arriving on your doorstep will be unknown to a certain degree. More than likely you will have tentative dates to work to but that will be it.

Planned purchase orders are perfect for companies that know they will need say 1000 of X product across a certain time period, but they don’t want all 1000 upfront. Instead, they will get smaller deliveries as and when they need the product over that agreed timeframe (e.g. for manufacturing companies).

Contract Purchase Orders

A contract purchase order is a lot more variable. Basically, you won’t know a lot of the details like what products you even want to purchase, but you are essentially agreeing with the supplier that over a certain timeframe A) they will supply you with the products you then order, and B) the terms of sale/agreement are agreed upon. When you do know the products you need you will then raise a standard purchase order referencing the contract.

Blanket Purchase Orders

When you know the products you want to purchase but you don’t know when you want them, how many you want or the price, look to use a blanket purchase order. Basically it’s saying ‘yes I want them, but let’s sort out the details as and when we need to’. That way you look to get the quantities you need, as and when you need them, at discounted or negotiated rates across the time you specified. Blanket purchase orders are particularly good for when you’re looking at large quantities as you can sort out different price brackets especially.

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Melanie - Unleashed Software

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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