Managing procurement is crucial for any successful business. If your business does not have consistent processes for managing procurement, you risk failing to account for your purchases and risk making costly purchasing mistakes. Purchase orders are perhaps the most important part of an effective procurement management process. Let’s take a look at purchase orders and the four main types used by businesses every day.
What are purchase orders?
A purchase order is where a purchaser creates and sends an order to a vendor for goods or services. In a standard purchase order, the purchaser will, at a minimum, specify what products are being ordered, the quantity, the agreed price and delivery and payment terms.
A purchase order may arise out of a past order, an advertisement or offer by the vendor, or the parties’ negotiation as to the price and quantity. In this respect, a purchase order is a great way to concretely record what the purchaser and the vendor have agreed on. Purchase orders are essentially contractual offers. When a vendor chooses to accept a purchase order, that purchase order becomes the basis for a contract between the purchaser and the vendor.
The four main types of purchase orders
Standard purchase orders
A standard purchase order is typically used for irregular, infrequent or one-off procurement. As mentioned above, it contains a complete specification of the purchase, setting out the price, quantity and timeframes for payment and delivery.
A restaurant might raise a standard purchase order when it purchases new tables and chairs. If all goes well, this should be a one-off purchase for the restaurant, and the contract will be fulfilled once the chairs are delivered in good order.
Planned purchase orders
Like a standard purchase order, a planned purchase order is relatively comprehensive. A planned purchase order requires full details of the goods and services to be purchased and their costs. Dates for payment and delivery are also included in a planned purchase order, but these are treated as tentative dates. Issuing a release against the planned purchase order places individual orders.
For example, a restaurant might require 50,000 disposable placemats in one year – the manager could create a planned purchase order with a commercial printer detailing the price and quantity with a tentative delivery schedule. After using the first 5,000 placemats, the restaurant would create a release against the purchase order to order more.
Blanket purchase orders
A blanket purchase order involves a purchaser agreeing to purchase particular goods or services from a specific vendor, but not at any specific quantity. Pricing may or may not be confirmed in a blanket purchase order. This type of order is typically used for repetitive procurement of a specific set of items from a supplier such as basic materials and supplies.
In the restaurant example above, they could equally choose to use a blanket purchase order to procure the disposable placemats — not having to confirm a specific quantity may make this a preferable option if the quantity required is not clear.
Contract purchase orders
A contract purchase order sets out the vendor’s details and potentially also payment and delivery terms. The products to be purchased are not specified. A contract purchase order is used to create an agreement and terms of supply between a purchaser and vendor as the basis for an ongoing commercial relationship. To order a product, the purchaser may refer to the contract purchase order when raising a standard purchase order.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. When not writing about inventory management, you can find her eating her way through Auckland.