Know Your Four Types of Purchase Orders

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A purchase order is essentially a request made from buyer to seller, specifying the details of what they want in their order: item, quantity, delivery time, and so on. When the order becomes accepted, it is a binding contract on whatever terms are specified in the order. There are four primary types of purchase orders, which essentially differ according to how much information is known at the time the order is made.

Standard Purchase Orders

This type of purchase order, being the one most widely used, is where all of the key details are known at the time the order is made: the specific item(s) to be purchased, the quantity, the price, the delivery schedule, and payment terms. Standard purchase orders are used for sporadically demanded items, one-off purchases, or purchases where there is a great amount of certainty over exactly what and how much is needed.

Planned Purchase Orders (PPO)

For this purchase order, most details are known: items, quantity, price, and payment terms, but the exact delivery schedules are not yet known. By using this purchase order, you are committing to price and quantity etc, but you only make a tentative delivery schedule. Then, as you lock down certain dates that you want your items delivered, you create releases against the PPO with a detailed delivery schedule. When you make a release, you commit to the delivery also.

For example, you need 900 pairs of jeans yearly for your retail business, so you raise a PPO with a quantity 900, and for the shipment details you can have a shipment schedule as per your need (say 9 shipments with 100 quantities each over the course of the year). This will be a tentative schedule: you must generate a release as and when you need the jeans and your supplier will ship them to you.

Blanket Purchase Orders (BPO)

With a BPO, the situation is the same as a PPO, except price and quantity are not known either. You will still specify which item you want on certain delivery terms, but nothing further until you make a release against the BPO. Typically you will agree a maximum quantity for a specified period, and then order any amount beneath this quantity. You may agree price breaks that depend on quantity purchased.

For example, if you run a lawnmower business, you may need to stock chassis for repairs of lawnmowers that have their chassis damaged for whatever reason. As this kind of damage is typically unpredictable, you may place a BPO with a supplier and make a release whenever more are needed.

Contract Purchase Orders (CPO)

For this final type of purchase order, even the specific item needed is not known. In this case, you may agree on terms and conditions with your supplier, but nothing further until the items and quantities that you want are known. SPOs are created by referring to the CPO when something is to be purchased against the CPO from that supplier.

For example, you may run an import business, where you need to import many items but you don’t have an import license for them. In this case you create a CPO with your supplier who does have the requisite import license(s), and whenever you need something to be imported, you generate a SPO referring to the CPO for that item.

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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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