Purchase Order: What Is It and How Does It Work

Purchase order logistics

Following on from our previous article about Purchase Orders, here is an example template of what a purchase order would look like.

What Does a Purchase Order Look Like?

Take note of all of the attributes explained in the previous example: The header, vendor’s information, ship-to information, the order details, a summarised notation of the purchase order, the date, tax information, signatures, and most importantly – the purchase order number. Have a look at our previous article to understand the importance of a purchase order number, and how a purchase order differs from an invoice in features and functions.

Purchase Order Template

Types of Purchase Orders

Interestingly enough, there are multiple versions of a purchase order that one can find. There are generally four main types of purchase orders used throughout the supply chain, logistics, and retail world: Standard, Planned, Blanket, and Contract Purchase Orders.

Standard Purchase Orders (SPO): The aptly named standard purchase order is largely considered to be the most popular and widely-used form of purchase order, due to its straightforward features and logical terms of use. Much like the above template, SPOs indicate all the necessary details and features of a purchase order such as a specific product, quantity, and price. However, the intent of the standard purchase order is that it will be used for a one-time purchase. Additionally, if your business is just starting out and you are trying out different suppliers, a standard purchase order is likely the best option for you, as it allows you the opportunity to find the best supplier for your company!

Planned Purchase Order (PPO): Planned purchase orders are generally more detailed than a standard purchase order, calling for in-depth descriptions of goods and services along with their costs. However, the planned purchase order is not necessarily known for its in-depth features. It is instead more popular for its nature of being created in advance, but not yet being released to the supplier. They are used in situations when the buyer wants to plan and prepare for future purchases but doesn’t want to commit to the order immediately, generally set in place for more semi-regular orders. PPOs help in forecasting demand, managing inventory, and ensuring the availability of goods when needed. Once the need arises, a PPO can be converted into a standard purchase order and released to the supplier, however, it will initially contain a tentative delivery date and delivery location for each item.

Blanket Purchase Order (BPO): Allowing complete visibility into the flow of goods and services, BPOs are long-term purchase agreements established with a supplier for the repeated purchases of specific goods and services over a defined period. This is often completed with the goal of reducing unnecessary labor and smoothing out the procurement and purchase processes. They are used when there is a need for multiple purchases of the same item within a specific timeframe. Features typically included within a BPO are the description of goods, their quantity and pricing, delivery schedules, and terms and conditions. The advantage of blanket purchase orders is that they provide flexibility in terms of quantity and delivery dates while ensuring a predefined pricing structure and continuous supply of goods and services.

Contract Purchase Order (CPO): Contractually based, a CPO is a pre-arranged agreement between the buyer and supplier for specific products to be sold at a specifically stated price. This is most often used when a long-term relationship between vendor and purchaser has been established, allowing for consistency of ordering over the duration of the contract. The terms and conditions of the contract will often be incorporated into the CPO.

Benefits of Using a Purchase Order

Purchase orders provide several advantages in business transactions, particularly in terms of organization, tracking and accountability between buyer and supplier. Here is a list of some of the benefits you will find when using a purchase order:

  1. Organization: Establishing a structured and standardized procurement process, requesting and approving purchases, POs ensure that all purchases are properly documented.
  2. Tracking: Purchase orders help track purchases from initiation to completion, enabling businesses to monitor and manage their procurement activities effectively, all while allowing for open communication channels between vendor and purchaser.
  3. Accountability: Speaking of open communication channels, purchase orders promote accountability by requiring proper authorization before purchases are made. They ensure that purchases are approved by the appropriate individuals within the organization, reducing the risk of unauthorized spending, and opening up the chances of identifying issues and mistakes that might occur along the way.
  4. Cost Savings: Implementing an effective purchase order with a reliable supplier with whom you have established a strong relationship can lead to cost savings. By having a documented and controlled process, businesses can track their spending, identify potential cost-saving opportunities, and negotiate better pricing or terms with suppliers.
  5. Reduced Errors: Helping in minimizing errors in the procurement process, POs provide detailed specifications, quantities, and terms which reduce the likelihood of misunderstandings or incorrect deliveries. This leads to fewer returns, rework, or disruptions, saving time and resources.
  6. Compliance and Audit Trail: Purchase orders create a transparent audit trail, ensuring compliance with internal controls and external regulations. They provide documented evidence of the purchasing process, facilitating internal audits and regulatory compliance.
  7. Financial Planning and Analysis: Providing valuable data for financial planning and analysis, POs help businesses analyze purchasing patterns, track expenses, and make informed decisions regarding budgeting, forecasting, and supplier management.

Purchase Order Tools

There are various tools on the market that can assist businesses with the management of their purchase orders. Intuendi offers a powerful purchase order management software that, thanks to machine learning forecasting methods and accurate inventory management, can streamline procurement operations through AI-assisted intelligent purchase order suggestions.

Request a demo

Written by
 Tanique Allers
Content Marketing Specialist

A young South African with a passion for writing, social media management, and content creation. I graduated with a Bachelor of Arts in Film and Television majoring in Producing and a Bachelor of Arts Honours Degree in Political Communication. You'll be able to find me in 3 places: behind a laptop, behind a camera, or behind a makeup brush - creating in my favourite ways.

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