Types of purchase order
01 Jul 2021
Spendings are very important for any business. And one component of their spendings refers to purchase orders. This component is crucial as it helps business owners determine precisely the amount of finances needed to spend on purchases. As for the purchase orders, they vary according to the standard types. Keep reading the article, and you’ll learn everything you need to know about the types of purchase order.
What Is A Purchase Order?
A document that the buyer sends to the seller so that to require some definite amount and type of goods or services is called a purchase order.
In this document, all the details connected to products are described. For example, the record includes information regarding the quantity, type, dates, payment options, etc. Vendors accept purchase orders, and as a result of this, the document becomes a legal representation of the deal between the two parties. At the same time, you can just verbally request an order.
Using a purchase order instead of just oral agreements has got a bunch of advantages. For example, it makes transactions run smoothly because all the requirements and expectations are thoroughly described in a written form. Purchase orders also protect the suppliers legally. As a supplier, you can also get financial funding with the help of your purchase orders.
Purchase Orders and Invoices
The majority of people, no matter whether they are newcomers or professionals in the business, sometimes confuse purchase orders and invoices. There is, of course, a difference between the 2.
The main difference is the order of these 2 documents. A purchase order is required first. Then after it is composed and sent, the supplier creates an invoice. So an invoice is a document that proves the purchase order after the delivery.
Types of Purchase Orders
There are 4 main types of purchase orders used for different situations. Usually, they are determined by the amount of detailed information. Let’s see them all separately and find out how and when to use them.
- Standard PO
- Planned PO
- Blanket PO
- Contract PO
Standard Purchase Order (PO)
Standard PO is popular, and it is straightforward to understand how and when to use it. It is the best choice for those companies, who are sure in their requirements. You can also use Standard PO for one-off orders. There are some standard PO components, which are:
- Item list
- Quantity of items
- Delivery date
- Terms of payment
- Location of delivery
Standard PO example: a business that lacks printing papers. For this reason, the appropriate department makes standard purchase orders and mentions how many printing labels they need. They also note the time when they expect the labels to be delivered. Businesses of different policies keep purchase orders as references.
Planned Purchase Order (PPO)
Planned purchase orders (PPO) are similar to standard purchase orders. The information is mainly the same, except for delivery information. So when creating a PPO, there is no location and date of delivery included. The rest is added, like information about item quantity or price. However, companies use planned purchase orders when they aim to get particular products at a specific time. PPO components are:
- Order terms and conditions
- The list of purchased items
- The number of items
- The price of commodities (per each)
Planned PO example: the business core is a line of clothes. The buyer mentions that he needs 1,000 pieces of clothes yearly. Accordingly, he claims about 100 components to ship monthly.
Blanket Purchase Order (BPO)
The next one of the types of purchase orders is a blanket purchase order, also known as standing orders. This type is usually used for repetitive transactions. With this type of PO, businesses choose the required items and their delivery terms. As for the amount of those items, they are usually unknown. Their delivery and payment can be expected to be made in batches within a specified period.
As a rule, this one of the types of purchase order is suitable for companies that need goods in bulk and small quantities. In the case of bulk orders, it is pretty predictable to get possible discounts. Thus the blanket purchase order method can be quite advantageous for the buyers. Some issues to think about with this method are the vendor’s reliability and the number of needed items.
Suppliers can also get the advantage from blanket purchase order because, with this method, they can be sure to have constant buyers. They have more time with this method and thus work in a more relaxed way. As for the product quantity, it should be perfectly forecasted by the businesses ordering. BPO components are:
- Order terms and conditions
- The list of purchased items
- Discounts when having bulk products
- Confirmed pricing details for each item
Blanket PO example: services that rely on mechanical components that may potentially break down, for example, hospital businesses connected to different suppliers. Hospitals are not sure about the quantities for a specific period. Here you can also include fields, which need printing paper or ink.
Contrast Purchase Orders (CPO)
Contract purchase order information is minimal, but this is the most flexible method. There are only the terms of payment. Quantities and products needed aren’t specified here. Import businesses commonly use this from the types of purchase orders. For instance, someone importing different items can’t tell precisely those items he needs in case the customers are not present. So the buyer creates a standard purchase order against the contract purchase order whenever they want items shipped.
The 4 types of purchase orders discussed actually serve the same purpose. They enhance the function of purchasing within a business. The difference is that they do so in different ways.
- POs include the highest level of detail.
- PPOs and BPOs are for purchasing arrangements for some time.
- CPOs are good to get info about the terms and conditions.
Effective financial management necessarily includes an understanding of how and when to use each type of purchase orders. It will help scale companies establish advanced relationships with their suppliers.