Procurement 101What is a Purchase Order? Everything You Need to Know
There’s no denying the importance of a smartly planned purchase order (PO). To be frank, skipping a single critical step in the purchase order process can mess up many things – vendor relationships, effective planning, and cost control are just a few examples. But what is a purchase order and what do you need to know about them?
So, how do we go about addressing this? By getting reacquainted with why purchase orders not only matter in the 21st century but can still make a tremendous impact. Purchase orders remain relevant and useful in the modern age thanks to the constant tweaks and innovations made to them. The formula is always being worked on and refined to ensure present-day operations benefit from the clarity and compliance that these powerful documents can help teams achieve.
Today, let’s explore more of the fundamentals.
What is a Purchase Order?
To put it simply, a purchase order acts as a documented confirmation of an order placed with a vendor. It is submitted by the purchasing company and then authorized if all the required details are accurate and agreed upon by both parties.
Is a PO a Contract?
Yes. A complete, accurate purchase order approved by the purchaser and vendor acts as a binding agreement. As the buyer, you’re responsible for ensuring addresses and contact details are accurate, and the same applies to what exactly you need to order (proper inventory analysis and planning is crucial here). The vendor needs to stick to their commitment once the order is approved and receipts are sent.
What’s the Difference Between a PO and a Purchase Requisition?
A purchase requisition is a completely different type of document. It precedes the purchase order’s creation. It is used internally at the purchasing company, usually from one department to another to request permission to purchase the goods or services in the first place. Once the requisitioning is complete and your team has the go-ahead, they can then create the purchase order.
Want to learn more? Read about the difference between a purchase order and a purchase requisition.
What are the Different Types of POs?
Unsure which type of purchase order you need for your specific operations? Let’s help you out and look at the four types of purchase orders, briefly summarizing them:
- Standard POs are as simple as they come but also the most detailed; they’re ideal for one-off or sporadic orders where clarity is a must.
- Planned POs do just what they say on the tin; they’re optimized for recurring commitments, so the biggest change is that delivery details such as the date and location for items are omitted.
- Blanket POs are similar to a PPO in terms of omitted data, except the item quantity and sometimes even the price is also not included. The list of items otherwise remains.
- Contract POs take the others’ omissions to the next level; the list of items doesn’t appear. This format is normally used to serve as a binding contract, hence the name.
Noticing a pattern? All four of these formats continue to rely on data accuracy, resulting in informed and more effective purchase orders. Many businesses even automate purchase orders and take advantage of powerful new, transparent insights to improve their chances of a healthy, long-lasting vendor relationship.
What Does a PO Look Like and What Does it Contain?
Using this example below, we can paint a clearer picture of what a purchase order looks like. Notice the specific contact and address details included. This indicates that the document is a standard purchase order, as explained earlier, as these details are retained and not omitted.
Check out some great purchase order templates.
Digging into the PO Process
Let’s explore every critical step of planning, submitting, and (hopefully) achieving PO approval:
- Data and content analysis to inform the order
- Purchase requisition complete, internal approval given to order
- Initial order drafting
- Send-off for approval
- Upon purchase order approval, sending to the appropriate vendor
- Confirmation by the vendor that the order can be filled, acting as a binding contract
- Three-way matching to confirm purchase order number and contents
- Payment and completion of order obligations by the vendor/your company
The collective goal of these steps is simple: minimize hassle, make sure everyone is on the same page, and create a document that acts as a binding contract to ensure all parties deliver on their promises.
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