What is a Purchase Order? - Definition, Types, Examples - Overview

Are you tired of struggling with the intricacies of purchase orders? Are you overwhelmed by the various kinds of purchase orders and how to handle them? This extensive guide will walk you through every aspect of the purchase order process.

This guide will cover what a purchase order is, how it works, and best practices for handling them. We'll even discuss the significance of purchase orders for your company and how automating the procedure may transform operations.

What is a purchase order?

A purchase order is a legal document prepared by a buyer outlining the items they are looking to purchase from a supplier. It is a list of the products or services an organization wishes to acquire. A PO should have all relevant delivery information as well as a precise description, quantity, price, and payment conditions.

A purchase order is used to make sure that both the buyer and the supplier are aware of the order and to give a detailed record of the transaction. Additionally, it aids in avoiding misunderstandings and disagreements that might result from poor communication or modifications to the order's terms.

Purchase orders are used to authorize and track expenses and are a necessary component of the procurement process. Often, a PO becomes legally binding when the supplier accepts it. They've made a contract with the buyer and are now required to provide the products.

Employees can submit specific requests for internal resources using POs in firms with well-defined purchase or spend management processes. They may outline the new hardware, software, or agency services they need, identify the ideal vendor, and submit a request for their manager's approval with all the necessary details.

How does a purchase order work?

The procurement process is streamlined by using a purchase order, which also ensures that the buyer and the supplier agree on the specifics of the transaction. We'll go through each stage in creating a purchase order.

1. Purchase requisition

Every organization needs goods and services. Once this need is realized, a request to acquire them is generated, generally known as Purchase Requisition. This might come from the department in charge of purchasing, an individual worker, or a department head. The request should contain specifics about the items or services requested, the required quantity, and other pertinent facts, such as delivery dates or special needs.

2. Creation of a purchase order

Purchase requests are then translated into purchase orders. Companies may have their own purchase order format that might vary from others, but almost all POs consist of basic information necessary to procure the right products. This document typically includes the name and address of the supplier, the quantity and description of the items or services being ordered, the agreed-upon price, payment terms, and delivery details.

3. Review and approval

The next step is to review and approve a purchase order. This may involve multiple levels of approval, depending on the organization's procurement policies. The review process ensures that the information on the purchase order is accurate and that the terms and conditions of the purchase are acceptable to both the buyer and supplier.

4. Issuing the purchase order

Once the purchase order is approved, the buyer sends it to the supplier. This can be done electronically or via traditional mail. Upon receiving the purchase order, the supplier assesses their capabilities or stock to ensure they can fulfill the order. At this stage, they have the right to accept or reject the PO.

5. Fulfillment of the order

Based on the purchase order, the supplier processes the order and prepares to fulfill it. The supplier will confirm the order details, including the quantity and description of the items and the agreed-upon price.

6. Shipment of the goods

The supplier ships the goods or provides the services according to the terms specified in the purchase order. This includes delivery dates, special handling instructions, or other requirements.

7. Receipt of the goods

Once the goods have been delivered, the buyer checks them against the details on the purchase order to ensure that everything is correct. If there are any discrepancies or issues with the order, the buyer contacts the supplier to resolve them.

8. Invoicing and payment

Based on the terms of the purchase order, the supplier delivers an invoice to the customer for the products or services provided. The buyer then makes payment according to the agreed-upon payment terms.

What are the different types of purchase orders?

In procurement, there are different types of purchase orders. that companies use depending on their specific needs and requirements. Understanding the different types of POs can help organizations to streamline their purchasing process and improve their overall procurement efficiency. Here are the four key types of purchase orders to keep in mind:

1. Standard purchase orders

The most commonly used type of PO is the standard purchase order. These are created whenever a company needs to buy goods or services on a singular basis. Standard purchase orders contain all the required information, including payment and delivery details, and are the most precise type of PO. They are often used for one-off transactions and typically have set delivery dates and payment terms.

2. Planned purchase orders

Planned purchase orders are similar to standard POs, but they are not generally used for one-off orders. Instead, they set out the full scope of a transaction, with payment and delivery to take place in installments. For example, a company might order 100 new computers over the next six months but will issue specific releases for ten at a time as required. This type of PO is useful for companies that need to plan ahead for their purchases and want to break down their purchases into smaller installments.

3. Blanket purchase orders

Blanket purchase orders are less precise than standard POs. Companies can request an unspecified amount of a particular good or service from a supplier over an unknown period of time. This is an agreement to buy goods or services from the vendor but with the specifics yet to be determined. Blanket purchase orders are often used for recurring purchases of a particular good or service. They can help simplify the purchasing process and reduce administrative costs.

4. Contract purchase orders

Contract purchase orders are essentially just an agreement to create a commercial relationship between the two parties. They set out the vendor’s details and payment or delivery requirements. The company will then raise a standard PO to make any real purchases. Contract purchase orders are commonly used in long-term business relationships with an ongoing need for a specific good or service.