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 one of the most important part of an effective procurement management process.
Let’s take a look at POs in the supply chain and the four main types of purchase order used by businesses today.
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What are purchase orders?
A purchase order (PO) 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 PO 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 order
The four most common types of purchase order are:
- Standard purchase orders
- Planned purchase orders
- Blanket purchase orders
- Contract purchase orders
Below, we break down each of these PO types in detail and outline their definitions and uses. Keep reading.
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 and requires little demand planning to establish.
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 replenish inventory, the purchaser may refer to the contract purchase order when raising a standard PO.
Purchase orders in the supply chain: Helpful tips
We’ve given you the four types of purchase order, but why stop there?
Managing purchase orders within the supply chain is no small task. Before we wrap up, here are some helpful tips and best practices for supply chain purchase order management.
Why tracking POs in the supply chain is important
Tracking a purchase order is important because it provides assurance to the supplier. It shows that the buyer has measures in place to pay for the order and can track when a payment will be made. Previous purchase orders can be compared to improve demand forecasting.
Tracking a PO can also help supplier check initial orders with what items were actually shipped. It allows a company to have visibility over what they are spending and what they need to be prepared to pay.
Best practices for managing purchase orders in the supply chain
Don’t let your purchase orders get away from you.
Here are some hard-and-fast best practices for managing POs in the supply chain:
- Use dedicated software. It’s much easier to confirm and store purchase orders using a dedicated inventory management software, which will assign a number to your purchase orders.
- Have a purchase order cancellation process. Accept only authorised cancellations in writing or via email. Make sure to have a copy of the cancellation along with the original PO.
- Control purchase and requisition costs. Make sure you know the difference between purchase orders and purchase requisitions. This will allow your team to keep purchase order costs under control.
- Ensure transparency. Ensuring transparency of your purchase orders can help control internal spending and costs, but also comply to external audits. Having easy access to every element of the PO, including the quantity of the purchase, availability, budget, as well as seller contracts and service level agreements made.
- File changes. It is not uncommon for a purchase orders to change. These changes, however, should be properly made and tracked throughout the journey so that everyone has visibility over the changes.
- Keep PO documentation. It’s important to keep PO documentation for accounting purposes and audits in order to verify their accuracy. Put someone in charge of making sure proper purchase order documentation is in place and filed correctly.
- PO quality control. Each PO should be properly entered into the system and filed. This is where a quality control comes in to play to ensure all PO details are accurate.
- Monitor cash flow. Use cash flow management tools to ensure you’re always able to afford the products in your purchase orders.
- Automation. Use a centralised, automation-driven purchase order management system. Automation provides your business often with the complete set of tools you need to take full advantage of the best practices.
What’s the difference between a purchase order and a purchase requisition?
Often confused with purchase orders, a purchase requisition is in fact much different. A purchase requisition is essentially a request from one department to another (usually the finance department) for approval of purchase costs.
A purchase requisition will have information like:
- The buyer’s department
- The vendor’s name and information
- A description and quantity of the goods required and the price
This purchase requisition is sent to the finance department, or whichever department approves the costs, depending on the business or organisation. The recipient department will either approve or reject the purchase requisition.
If approved, the department who sent the purchase requisition then has formal permission to send the vendor purchase order, at which point the process described above will begin.
This article was updated in March 2023 to reflect current industry trends and new information.