A Closer Look at the Four Types of Purchase Orders

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One of the cornerstones of an efficient purchasing process is a purchase order. A purchase order will track what has been ordered and provide you with a detailed record. Used in business-to-business settings, this is an integral part of keeping track of your inventory and is useful for forecasting and reporting on your business. This commercial document is issued between buyers and sellers and serves as a legally binding contract. It facilitates a smooth transaction of products and services from suppliers and helps streamline the purchasing process. As there are several different types of purchase orders it is important to understand the different kinds and the best time to use each one.

Standard Purchase Order

A standard purchase order is used when you know the specific item, quantity, price, delivery schedule and payment terms of the product or service.  This is the most common and simplistic type of purchase order. It is frequently used when you have one-off purchases with a variety of items.

Planned Purchase Order

A planned purchase order is for when you know the exact quantity you need, but you are unsure on the delivery schedule. The planned purchase order serves as a long-term contractual agreement, committing the buyer to purchase products or services from this seller.

Tentative delivery dates are arranged with the supplier, but are subject to change due to demand.  When there is a demand for the product, a portion of the order is delivered.

For example, a small business knows they need exactly 2,000 reams of paper for their printer each year.  However, they do not have the storage capacity to keep all 2,000 reams at once.  At the beginning of the year, they would place a planned purchase order for 2,000 reams of paper with tentative delivery dates discussed, as the business generally uses 500 reams each quarter.  This allows the supplier to anticipate the delivery, but exact dates are not decided initially.  When the small business sees that their paper stock is running low, they call their supplier to release and deliver more of their paper from their planned purchase order.

Blanket Purchase Order

A blanket order is used when you are not certain on the quantity, price, or the delivery schedule. This means that the delivery dates are not set in stone and can be decided later in the process. Multiple purchases over the course of a year can be made with the goods or services set at an agreed price.

For example, a buyer purchases a specialized helicopter component when there is a demand for this helicopter customization. The buyer raises a blanket release for this component against the blanket purchase order. In this release, the buyer specifies the quantity, price and delivery time of the helicopter components. It then notifies the supplier and allows them to organize delivery.  The delivery is often negotiated and normally spans a long period of time. For instance, this buyer may do nine customizations a year and will use a blanket purchase order when there is a demand for this customization component.

Contract Purchase Order

A contract purchase order is established for a specific period of time, when the item is undetermined. In this situation, the buyer and supplier agree on a contract that outlines the supplier, supplier site, and payment terms alongside the payment control details. However, it is important to note that this contract is formed in advance of establishing which goods are going to be purchased.

Each purchase order has different advantages, so it is important to decide which types of purchase orders best suit your needs.

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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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