4 Types of Purchase Orders & When to Use Them

A purchase order is a vital part of the inventory ordering process. This document clearly lays out the inventory purchase requests from the buyer to the supplier. Purchase orders are legally binding contracts, which means that it is meant to hold both the business and the supplier accountable. If there is any disagreement between the two parties, this paper trail can help clear up any confusion. While it seems relatively straight forward and simple, this form will contain vital details such as product specifics, quantities, additional instructions, service/item price, payment terms, and delivery times. When businesses neglect to use purchase orders in their inventory ordering processes, it will be far more difficult to record and track expenses or look back on historical purchasing data for future reference. There are four different types of purchase orders that businesses can utilize. In this article, we'll discuss each type in greater detail and when to use them.

A purchase order is an essential backend business process when making large transactions involving two parties. Having clarity over business expenses is vital when sticking to a budget, creating inventory expense reports, and avoiding supply chain errors. Below are five key reasons why purchase orders (POs) are essential. 1. Clear Information for Auditing Auditors use purchase orders to look at historical data of transactions. When a company is transparent in issuing, processing, and recording purchase orders, this prevents discrepancies in financial information and allows auditors to clearly understand a business's financial state. 2. Tracking Expenses Company expenditure can be clearly tracked with purchase orders. Knowing not only how much is spent, but also the specifics of what is being purchased gives companies key information on ordering data to optimize this process in the future. A simple look at past purchase orders and sales statistics can show whether it's more desirable for a company to buy in bulk rather than in smaller quantities. 3. Accuracy for Invoicing An invoice is essentially the opposite of a PO. This is a document issued from the supplier to the buyer to request payment. It's still vital for the PO to be used along with invoices, however, as it offers even more clarity and accountability during the transaction process for both parties. 4. Smooth Operations When the finance and inventory departments of a company have access to purchase orders, this creates a smooth, transparent process of restocking and fulfilling orders. 5. Legal Contracts Purchase orders offer legal protection for both parties. If the supplier of the goods/services doesn't meet the agreements stated in the purchase order (price, quantity, item specifics, delivery date), this document can be used as proof of a breach of contract.

Types of Purchase Orders

When a company is creating purchase orders, it's important that the correct type is being issued. Though each variation is quite similar to the rest, the small differences can still impact the efficiency of transaction processes.

1. Standard Purchase Orders (SPO)
Standard purchase orders are the most common POs used. These documents are also the easiest to understand as they are the most simplistic.

When SPOs are used-

• The request for goods or services is a one-off' request.
• The specifics of the order are known (delivery date, quantity, description, price.).
• Both parties are being bound in a legal agreement to make the payment and send/receive the goods/services.

This type of PO is generally created and issued when the need for the goods/services isn't regular or recurring. For example, administrative office supplies that need to be restocked rarely or occasionally would need an SPO.

2. Planned Purchase Orders (PPO)
The PPO's are very similar to the SPOs except they are reserved for when the date of delivery is unknown.

When PPOs are used-

• The goods/services are being anticipated for the future.
• Suppliers and buyers are setting up a provisional agreement for ongoing orders.
• There's a loosely defined delivery schedule, based on when the company expects to reach the reorder point.

The planned purchase order delivery dates will eventually be finalized and can be adjusted. For example, the PPO could initially be written up for 300 items with no set delivery date, and later adjusted to have 100 items delivered each month from the supplier.

3. Blanket Purchase Orders (BPO)
This is another type of purchase order that is similar to the standard, but again with less information. BPO's are primarily used when the timing and quantity of goods remain uncertain.

When BPOs are used-

• A company knows what service/good is needed, but the item quantity and timing is not known.
• A company anticipates its demand for services/goods over a specific period.
• Limits for spending and other terms and conditions have been agreed upon by the supplier and buyer.
• To secure a better price within the guaranteed agreement that will require recurring purchases.

The blanket purchase order form will detail which items the business is purchasing on specific delivery terms. However, further details will not be established until the business makes a release. The buyer and supplier will agree on a maximum quantity within a specific time frame and when the need arises, the buyer can order any amount of items as long as it's beneath the maximum quantity.

4. Contract Purchase Orders (CPO)
The contact purchase order (CPO) is the most complex of the 4 types of purchase orders. These are considered to be purchase agreements' that are used to establish the legality of terms and conditions for future transactions.

When CPOs are used-

• There's a formal long-term agreement between the supplier and buyer.
• To set legally binding terms and conditions for all transactions in the future.
• They are used as the overarching framework where SPOs can later be made.
• Without expiry dates, they are used to streamline and safeguard the purchasing transaction process between the two parties.

CPOs are used by companies to establish a contract with a supplier when they know they'd like to do business with them, yet the actual transaction (purchase of goods/services) is not yet being undertaken.
It sets the standards by which the transactional relationship will operate in the future - including the SPOs that will eventually be made. Generally, CPOs are made under a set time frame with an expiry date, which is usually 1 year.

This type of PO is generally created and issued when the need for the goods/services isn't regular or recurring. For example, administrative office supplies that need to be restocked rarely or occasionally would need an SPO.The PPO's are very similar to the SPOs except they are reserved for when the date of delivery is unknown.When PPOs are used-The planned purchase order delivery dates will eventually be finalized and can be adjusted. For example, the PPO could initially be written up for 300 items with no set delivery date, and later adjusted to have 100 items delivered each month from the supplier.This is another type of purchase order that is similar to the standard, but again with less information. BPO's are primarily used when the timing and quantity of goods remain uncertain.When BPOs are used-The blanket purchase order form will detail which items the business is purchasing on specific delivery terms. However, further details will not be established until the business makes a release. The buyer and supplier will agree on a maximum quantity within a specific time frame and when the need arises, the buyer can order any amount of items as long as it's beneath the maximum quantity.The contact purchase order (CPO) is the most complex of the 4 types of purchase orders. These are considered to be purchase agreements' that are used to establish the legality of terms and conditions for future transactions.When CPOs are used-CPOs are used by companies to establish a contract with a supplier when they know they'd like to do business with them, yet the actual transaction (purchase of goods/services) is not yet being undertaken.It sets the standards by which the transactional relationship will operate in the future - including the SPOs that will eventually be made. Generally, CPOs are made under a set time frame with an expiry date, which is usually 1 year.

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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.