Types of Purchase Order Processes & Purchase Order Examples

You may already know that purchase orders are used by companies to improve business spend management and control - but were you aware that several different types of purchase orders exist?

‍There are four primary types of purchase orders used by businesses. The selection of which type of purchase order should be used is determined by how many details are known about the order prior to the placement of that order, and subsequent purchases

Purchase Order Definition

A purchase order, commonly abbreviated as PO, is a formal document issued by a buyer to a seller, indicating the types, quantities, agreed-upon prices, and other essential terms for the products or services the buyer wishes to procure. Essentially, it serves as an official offer between the buyer and the seller, specifying the details of the transaction, serving as a legal contract once accepted by the seller.

Components of a Purchase Order

Identification Information: The PO typically includes details such as a unique identification number, issue date, names, and addresses of both the buyer and the seller.

Itemized List: This section delineates the specifics of the goods or services being purchased. It includes descriptions, quantities, unit prices, and any applicable codes or references.

Terms and Conditions: The purchase order might contain payment terms, delivery schedules, quality standards, and any other special conditions agreed upon between the parties.

Signatures and Approvals: Upon mutual agreement, the document requires signatures or acknowledgments from both parties, solidifying the acceptance of the terms laid out in the purchase order.

What does a Purchase Order Look Like?

Understanding the appearance of a purchase order is key to navigating the intricacies of business transactions. This essential document follows a standardized format, facilitating clear communication between buyer and seller. Let's dissect what a purchase order typically looks like.

1. Header Section:

The purchase order number, issuance date, and contact details of both the buyer and seller form the top section. This area sets the groundwork for identification and reference.

2. Body of the Purchase Order:

An itemized list delineates the products or services, specifying descriptions, quantities, unit prices, and total amounts for each item. This section also outlines agreed-upon terms and conditions.

3. Footer Section:

Signatures or acknowledgments from both parties at the bottom finalize the agreement, signifying acceptance of the terms stated in the purchase order.

How does a Purchase Order Work?

Here's a concise overview of how this crucial document works within the purchasing process.

Initiation and Issuance

A purchase order commences with the buyer drafting a detailed document specifying the required goods or services, including quantities, agreed-upon prices, and any essential terms. Once completed, the order is sent to the seller for review and acceptance.

Acceptance and Execution

Upon receipt, the seller evaluates the purchase order. If the terms align with their offerings and business conditions, they approve the order, signifying their commitment to fulfilling the requested items or services.

Delivery and Payment

With the approved order in hand, the seller proceeds to assemble or prepare the requested products or services according to the purchase order specifications. After completion, the goods are dispatched, or services are rendered to the buyer. Subsequently, the seller issues an invoice, outlining the payment details based on the purchase order. The buyer reviews and verifies the accuracy of the invoice, settling the payment according to the agreed terms.

A Purchase Order Usually Does Not Include

1. Payment Details

A purchase order outlines the agreed-upon prices for goods or services but doesn’t incorporate actual payment. It doesn't contain information regarding the actual transfer of funds or payment methods. That information is usually found in an invoice, separate from the purchase order.

2. Legal Terms and Conditions

Detailed legal terms or comprehensive conditions are usually absent in a purchase order. While it might cover basic terms, extensive legal jargon or intricate conditions are generally part of a broader contract or agreement between the buyer and seller.

3. Post-Delivery Obligations

A purchase order focuses on the items or services to be delivered and their terms but often excludes any post-delivery obligations such as warranties, maintenance, or ongoing support. These aspects are typically part of separate agreements or contracts.

Work Order vs Purchase Order

The primary distinction between a work order and a purchase order lies in their purpose and intended recipients. A work order directs internal or external workers on tasks to be performed, while a purchase order is a buyer's request for goods or services from an external vendor. Work orders focus on the execution of tasks or services, whereas purchase orders focus on the acquisition of goods or services from external suppliers.

Understanding the contrast between these documents is crucial for efficient business operations. While they both play essential roles, they cater to different stages and aspects of a company's workflow. In our upcoming content, we'll delve deeper into the specific uses, best practices, and how these documents integrate within business operations to ensure smooth and coordinated processes.

The four types of purchase orders are:

• Standard Purchase Orders (PO)
• Planned Purchase Orders (PPO)
• Blanket Purchase Orders (BPO) (Also referred to as a “Standing Order”)
• Contract Purchase Orders (CPO)

In this article, the functions of these different purchase order types will be reviewed, along with a few situational examples of when and how each type may be used to support different methods of purchasing required goods and services.

Terminology and concepts to understand before reading

There are a few terms and concepts that are sometimes used when talking about these different PO types.

Legally Binding

All purchase orders become legally binding documents once they’ve been confirmed and accepted by the supplier receiving them. This means that any terms, conditions or other details included in the PO must be adhered to by both the buyer and the supplier once the PO has been issued.

Encumbrance

This accounting term refers to reserving business revenue for future use. When planning out certain types of POs, encumbrance is sometimes used to plan out the expenditure for the order.

While encumbrance is an accounting function, it can pay to understand the concept in depth from a purchasing perspective. Here are some great sources for further reading on the topic:

• What does “encumbered” mean in accounting?
• What is "encumbrance" in accounting?
• What is an “encumbered expenditure open item”?

Accounting Distributions

Accounting distributions in a purchasing environment refer to monetary amounts issued to specific general ledger (GL) accounts - allowing for better categorization of documented expenditures in accounting records.

Release

This term refers to creating a “release” against (or in other words, in relation to) a standing purchase order type. Effectively, some types of purchase orders act as a set of pre-established ordering information, terms, and conditions, while the “release” is the act of placing an order based on those already established agreements.

‍To combine a few of these different terms, “encumbering a release” means that accounting is reserving the funds necessary to pay for a release order against an active purchase order.

Thankfully, with all of this supporting terminology out of the way, it’s time to take a look at the different types of purchase orders in depth.

The Four Types of Purchase Orders Include:

1. Standard Purchase Orders (PO)

Standard purchase orders are (not surprisingly) the most used type of purchase order, and the easiest to understand.

Standard purchase orders are comparable to "vanilla" orders in purchasing.

The use case for a standard PO often falls under the need for a sporadic order, one-off purchases, and orders where the details of the order are exceptionally important.

Despite sometimes being raised responsively to certain situations, standard POs are the most detailed PO type and are used in situations where businesses are very certain about the requirements surrounding a purchase.

It’s worth noting that sometimes, for very basic purchasing requirements, filing an expense record can be far more efficient in some businesses than raising a PO. This is because PO documents are sometimes associated with time-consuming company purchasing policies, which make filing a basic expense record a more time-effective option than a PO for bypassing the procedures associated with them.

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What information and details are included on a standard PO?

A standard PO typically includes these details:

• Terms and conditions of the order
• The list of which items will be purchased
• The quantity of each item
• The price of each item
• The delivery date for each item (or for the entire PO)
• The delivery location for each item (or for the entire PO)

Example of a standard PO being used:

If an office ran out of printing paper and/or ink cartridges, based on the scale of the company, a standard PO may need to be raised and provided to a purchasing manager for approval before those items were purchased from a supplier.

Depending on company policy, for a small order of these items, the PO may be kept as a reference document, while the items are purchased and picked up directly from the supplier.

For a very large order of printing paper and/or ink cartridges, the PO may be sent to the supplier to have the order delivered to a specific office location on a specific date.

Again, depending on company policy, a PO may not be raised at all for a small order of these items, and instead, a basic expense record may be filed to reduce processing time, while maintaining accurate purchasing records.

2. Planned Purchase Orders (PPO)

A planned purchase order (PPO) contains all of the same details and information as a standard PO, but omits delivery information. This means that the date and location for each item is not included in the creation of a PPO.

All of the other details are committed to by the buyer, including which items will be purchased, the quantity of each item, and the price of each item. This also means that if items are being purchased in batches, bundles, or sets, that the quantity of those groups

When the delivery information for some or all of the items is confirmed, what’s known as a “release” against the PPO is created to confirm the details of the delivery schedule.

‍Releases that are created against a PPO are referred to as “schedule releases”.

PPOs may sometimes include unconfirmed tentative schedules, but these schedules must always be confirmed by a release prior to the order being confirmed for delivery.

What information and details are included on a PPO?

A PPO typically includes these details:

• Terms and conditions of the order
• The list of which items will be purchased
• The quantity of each item
• The price of each item

A PPO sometimes includes these details:

• An unconfirmed, tentative delivery date for each item (or for the entire PO)
• An unconfirmed, tentative delivery location for each item (or for the entire PO)

A PPO does not include:

• Confirmed delivery dates for each item (or for the entire PO)
• Confirmed delivery locations for each item (or for the entire PO)

Example of a PPO being used:

A retail business may intend to regularly purchase 120 items of a certain type each year to sell. The retail business may establish a PPO with a supplier, including a tentative schedule to order 10 items each month throughout the year. The items may be confirmed to be purchased in sets of 10, with a fixed price for each set of items purchased.

However, these monthly purchases would not be carried out until the retail business creates a release against the PPO to confirm the delivery date and location for each order even though a tentative delivery schedule exists.

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3. Blanket Purchase Orders (BPO)

First and foremost, blanket purchase orders are sometimes known as “standing orders”. A blanket purchase order (BPO) is the same as a PPO, but in addition to omitting delivery information, a BPO also omits the item quantity and (sometimes) the item price. The list of what items will be purchased is still included in a BPO.

Similar to a PPO, a release that includes item quantities, item prices, delivery locations, and delivery times for each item type must be created against an established BPO before any form of purchasing or delivery can take place from the arrangement.

‍Releases that are created against a BPO are referred to as “blanket releases”.

In most cases, when a BPO is established with a supplier, a maximum time frame that the BPO will be valid for is determined, alongside a maximum quantity of items that will be ordered within that time frame. In some cases, discounts are provided when certain item quantity thresholds or milestones are passed through multiple releases within the lifespan of the BPO.

Use-cases for a BPO typically arise in situations where unpredictable purchasing circumstances may make forecasting exact requirements difficult or impossible.

What information and details are included on a BPO?

A BPO typically includes these details:

• Terms and conditions of the order
• The list of which items will be purchased

A BPO sometimes includes these details:

• Discounts and discount milestones based on item quantities purchased
• Confirmed pricing details for each item

A BPO does not include:

• Confirmed delivery dates for each item (or for the entire PO)
• Confirmed delivery locations for each item (or for the entire PO)

Example of a BPO being used:

As a few examples, services that rely on mechanical components that may potentially break down without notice, or businesses that require components like printing paper and ink in order to serve an undetermined number of clients with varying volume requirements would benefit from establishing a BPO with their primary suppliers.

In both cases, the BPO is established to account for the uncertain requirements surrounding when and how frequently the items may need to be purchased.

As with a PPO, releases against the established BPOs would be required before any purchasing or delivery took place.

4. Contract Purchase Orders (CPO)

A contract purchase order (CPO) is somewhat similar to both the PPO and BPO, but for this type of purchase order, even the list of items required for purchase are omitted from the arrangement.

There are a few distinct differences between contract purchase orders when compared to planned purchase orders and blanket purchase orders.

Most notably, the function of a CPO is exclusively to serve as a set of legally binding reference terms, which subsequent POs that reference the CPO will be bound to.

‍Additionally, the creation of POs against a CPO is not commonly referred to as a “release”, contrary to the term used for PPOs and BPOs (standard POs are simply "raised" or "created" against the established contract).

‍Typically, the only thing confirmed between a buyer and a supplier when establishing a CPO are the legal terms and conditions surrounding future POs that are raised in reference to the CPO. Some CPO arrangements have validity time frames specified, while other times these terms and conditions may remain available for reference indefinitely between a buyer and a supplier.

In essence, CPOs can be considered to be high-level, long-term purchasing agreements established to facilitate ongoing business between a buyer and a supplier.

What information and details are included on a CPO?

A CPO typically includes these details:

• A set of negotiated and confirmed terms and conditions, from which subsequent purchase orders may be created

A CPO does not include:

• The list of which items will be purchased
• The quantity of each item
• The price of each item
• The delivery date for each item (or for the entire PO)
• The delivery location for each item (or for the entire PO)

Example of a CPO being used:

CPOs are the most flexible of any PO type.

As one of an infinite number of different examples that could be made for a CPO, a buyer and a supplier might negotiate a set of terms that states that the buyer can order items from the supplier at a 50% discount during events that the buyer hosts, provided that the supplier is listed as a sponsor for the event.

Again, the use case of a CPO is solely to establish long-term purchasing terms and conditions.

How to create a purchase order?

Creating a purchase order is a fundamental step in establishing a clear and formal agreement between a buyer and a seller. To generate an effective purchase order, follow these essential steps:

1. Identify and Input Details

Start by identifying the buyer and seller information, including names, addresses, and contact details. Assign a unique purchase order number and input the issue date for easy reference.

2. Itemize Products or Services

List the items or services to be procured. Provide detailed descriptions, quantities, agreed-upon prices, and any specific codes or references. Clarity in this section is crucial for accurate deliveries.

3. Outline Terms and Conditions

Define the terms of the purchase, including payment terms, delivery schedules, quality standards, and any other specific conditions agreed upon by both parties.

4. Review and Approval

Ensure all details are accurate and complete. The purchase order typically requires approvals or signatures from authorized personnel within the buying organization before being sent to the seller.

5. Distribution to the Seller

Once finalized and approved, send the purchase order to the intended seller. Ensure proper transmission and keep a copy for your records.

In summary

POs, PPOs, BPOs, and CPOs all serve the same purpose of enhancing the function of purchasing within a business, but do so in different ways.

POs are used to specify the highest level of detail when issuing the order.

PPOs and BPOs are used to establish purchasing arrangements over a period of time, with some specifics known about the order(s) released against them.

CPOs are used to establish terms and conditions, which multiple standard POs can be released against.

Understanding how and when to use each type of purchase order is an essential part of an effective financial management strategy for any mid-sized organization, and can also help scaling companies establish effective policies early on while building relationships with their suppliers.

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