5 Types of Purchase Orders You Should Know in 2023

Intro

A well-structured procurement process is vital for uninterrupted business operations. Documenting every step of your purchases increases visibility and is critical to maintaining buffers and optimizing decision-making.

In today's digital business landscape, purchase orders have taken on a new level of importance. They play a key role in keeping supply and demand in check, tracking invoices, and reconciling everything, ensuring everything runs smoothly.

Given this situation, making the purchase order process as efficient as possible is important. Not only does it improve operational efficiency and decrease processing time, but it also increases employee satisfaction.

This blog was created to break down five common purchase order types for you. We'll show you how each type can make your procurement process smooth and successful.

What is a purchase order?

A purchase order is a legal document that a buyer issues to a supplier for the purchase. It describes the entire transaction in detail, comprising item descriptions, quantities, prices, payment terms, delivery dates, and other pertinent information.

It is a legally binding contract that records the agreed-upon terms and serves as a reference for both parties during the procurement process.

It helps ensure you get the right products, and timely delivery simplifies purchasing, bringing clarity and accountability to your business operations.

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Purchase order management: A quick overview

The organized administration of a business's purchase order process is known as purchase order management. It is a collection of established principles and procedures that guarantee the availability of complete, up-to-date information on one or more purchase orders.

It entails creating, reviewing, authorizing, and tracking purchase orders from beginning to end. Effective PO processing ensures each of these stages is optimized for speed and accuracy, reducing errors and delays. Leveraging purchasing software can streamline this process by automating key steps, enhancing accuracy, and reducing manual workload.

This internal procurement procedure guarantees proper visibility and documentation on all purchases, making future audits easier.

Purchase order management serves as a road map for the purchasing journey. It provides all the important details about what, where, and how much to buy. This process helps things run smoothly and keeps a precise record of transactions, which is invaluable for making informed decisions.

What is the purpose of a purchase order?

Let’s not overload you with information. The purchase order’s integral purpose is to serve as a formal document between the buyer and seller. It lays out all the important purchase details, which is handy for future audits and record-keeping.

Initially, a purchase order isn't legally binding. However, once the vendor agrees to the terms and conditions, it becomes a legally binding document for both the buyer and the vendor.

Types of purchase orders that SaaS buyers should know

When it comes to purchase orders, one size doesn't fit all. Though you may have assumed that all purchase orders are identical, this is untrue. In actuality, there are five types of purchase orders, each with a different level of information.

So if you are ready to know about them, let us have a look;

1. Standard purchase order

The standard purchase order is the one that most buyers rely on the most. It shows the intention to carry out a single transaction with specified product types, item quality, and quantity. The purchase order contains all of the information required to complete the transaction.

Purchase order example 1:

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A standard purchase order is a simple and common solution for one-time purchases. It is appropriate for situations where the buyer understands the purchase details and can identify the item or service, the amount, delivery schedule, and payment terms.

For example, a_ SaaS company might need a new printer for its workplace. They create a standard purchase order that specifies the amount and specifications of the printer required, as well as the delivery date and agreed-upon price._

A Standard Purchase Order must include the following:

• Vendor information and item description
• Expected delivery date and location
• Agreed-upon payment, due date, and late payment penalties.
• Pricing details of each product.

2. Planned purchase order

A planned purchase order (PPO) enables buyers to plan for future requirements by submitting a purchase order beforehand. While the item, price, and payment terms are all known, the quantity and delivery date are based on informed estimations. PPOs are appropriate for semi-regular expenditures, such as Western Sydney office supplies.

Purchase order example 2:

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For example, an organization orders office supplies regularly, such as printer paper and stationery. The purchasing department evaluates previous consumption patterns before creating a purchase order with anticipated quantities and variable delivery dates. They release PPOs to vendors as needed to fulfill the requirements.

Planned purchase orders include more extensive information than standard ones, resulting in more efficient procurement for expected needs. Companies can optimize inventory management and maintain a consistent supply of essential goods by offering a detailed overview of expected purchases.

A Planned Purchase Order must include the following;

• Clear and specific information about the items or services
• Shipping and tax details
• Delivery instructions and pricing terms
• The price of each item.

3. Blanket purchase order

A Blanket Purchase Order (BPO) is where the buyer places multiple orders simultaneously to negotiate discounted pricing with the vendor. The interesting aspect of vendors is that they’re more open to offering discounts for bulk orders. Businesses can purchase products more efficiently through BPO, minimizing redundancy and streamlining procurement.

Purchase order example 3:

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For example, a business needs to buy printer cartridges and paper regularly. Instead of placing individual orders, they arrange a deal with a single vendor for bulk purchases over a period. The BPO specifies the quantity, costs, and agreed-upon discounts for every item, ensuring that procurement is affordable.

When it comes to business purchase orders (BPOs), they're like a super clear window into how products and services move. They help organizations make buying stuff efficient and wallet-friendly.

With BPOs, buyers can ensure they have enough supplies and dodge those awkward moments when stocks run out. All they need to do is mention how much they want and take advantage of discounts.

Blanket Purchase Order must include the following:

• Specify the quantity of products to be delivered over time
• Outline negotiated unit prices, any additional discounts or adjustments
• Include payment terms, quality standards, return policies or penalties
• Confirmed pricing information for every item

4. Contract purchase order

A Contract Purchase Order (CPO) is the most official and legally enforceable purchase order. It entails the buyer and seller executing a contract describing the purchase terms before issuing a purchase order. This agreement legally protects both parties.

Purchase order example 4:

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A Contract Purchase Order (CPO) offers greater flexibility and accommodates more detailed specifications than a Standard Purchase Order (SPO). It sets forth guidelines for issuing purchase orders to suppliers, managing extra costs, addressing errors, and other crucial aspects of the business partnership.

Contract Purchase Orders provide a secure and efficient framework for business transactions, particularly when working with resellers or in complicated procurement settings.

Contract Purchase Order must include the following:

• The agreed-upon contract’s reference
• Scope of the contract and Amendments
• Termination and exit clauses

5. Digital purchase order

A Digital Purchase Order is a modern and streamlined technique for electronically managing purchase orders that improves productivity and teamwork in the procurement process. Businesses can save time, minimize paperwork, and ensure accurate record-keeping by digitizing the purchase order procedure.

Purchase order example 5:

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One simple way to make and share a digital purchase order is by using Microsoft Excel or Open Office. These systems include pre-existing templates that can be readily modified to contain specific elements needed for each purchase order.

For example, a_ business purchasing office supplies can use an Excel digital purchase order template to convey the quantity, item description, and agreed-upon pricing_.

By exchanging the digital purchase order with the vendor, both parties can have a clear view of the purchase information, resulting in better communication and faster delivery.

Digital purchase orders also provide greater tracking and reporting capabilities, allowing firms to better manage their budgets and evaluate purchasing patterns. Transparency benefits buyers and suppliers, enabling a mutually advantageous and efficient procurement process. Supplier diversity can enhance the overall efficiency and effectiveness of the procurement process by introducing a wide range of suppliers from different backgrounds and perspectives.

How does a purchase order work?

Understanding the complexities of how a purchase order works is critical for organizations looking to optimize their processes.

Understanding the need for products

The process begins when the buyer recognizes a need for a certain product or service that the vendor can provide. The buyer specifies the item, the quantity necessary, and the desired delivery date.

For example, a manufacturing business can require an enormous amount of raw materials during the holidays to meet the increased demand for its products. The buyer must define the exact types and amounts of materials required and the delivery timeframe to ensure they have adequate raw materials to achieve their production goals.

Buyer creates a purchase order

Based on the defined needs, the buyer creates a purchase order that includes all pertinent facts, such as product description, quantity, price, delivery date, and additional terms and conditions. The purchase order is sent as a formal request to the vendor for the specified products or services.

To avoid irregularities or delays in the procurement process, the buyer must ensure the purchase order's details are precise and comprehensive for the vendor.

For example, the buyer can specify the specific kinds and quantities of raw materials needed, the agreed-upon unit costs, and the delivery date.

A purchase order is reviewed by the seller

Once the purchase order is sent to the vendor, they’ll carefully examine it to ensure that it corresponds to their inventory and ability to fulfill the buyer's request.

For instance, the vendor must ensure they have the desired items in stock and can supply them by the agreed-upon date. Overlooking inventory checks will lead to product delivery hassles; as a buyer, you must verify the product's availability beforehand.

The seller analyzes the purchase order and approves it

After the review, the seller will authorize the purchase order if it meets the buyer's specifications. The approval of the purchase order shows the seller's promise to provide the specific product mentioned in the order with no delays.

Purchase order fulfillment

With the approved purchase order, the seller completes the order by providing the customer with the specified products or services. This stage entails delivering the products or providing the agreed-upon services.

Invoice is paid

During this last stage, the buyer is liable for paying the invoice according to the seller's payment terms. Payment is approved for the products or services received, as the invoice states.

For example, the buyer pays the invoice for the raw materials delivered within the agreed-upon payment terms.

This is how a typical purchase order process works. It starts with creating the order and ends with invoice approval workflow from the buyer and the vendor.

Each organization has its own purchase order setting; some include quality controls before the invoice process, but the high-level aspect remains the same.

How SaaS management platform can streamline purchase order management?

Procurement workflow

You can simplify creating a purchase order using procurement workflows from SaaS management platforms like CloudEagle. The workflow will be triggered once the user raises the purchase request, and relevant stakeholders will be alerted via email and Slack to expedite the approval process.

Once the purchase request is approved, you can create the purchase order, and include the pricing terms.

Assisted buying

Negotiating the right pricing terms with the vendors can be overwhelming if you do it alone. In that case, you can leave the heavy lifting to SaaS buying experts. They adeptly handle negotiating pricing terms, SLAs, and other essential clauses on your behalf, ensuring you acquire the right products at the right price.

Contract management

Once the product is delivered, complete the invoice process and use a SaaS management platform’s contract management module to store all essential documents in one location. So, the next time you want to review the purchase or the contract, you can easily access the relevant documents with a few clicks.

Conclusion

There you go; these are the common purchase order types used between buyers and vendors to purchase any type of product or service.

Each purchase order serves a specific purpose and has its pros and cons. Ultimately, it is the responsibility of the SaaS buyer to decide the type of purchase order they want to send.

Involve stakeholders from finance and procurement teams to review the purchase orders before sending them out to ensure that everyone is in sync and you’re making an informed decision.

Take inspiration from the examples we added, use SaaS procurement software, and start creating your purchase orders for seamless purchase operations.

Good luck.

FAQs

1. What is the difference between a purchase order and an invoice?

Purchase orders are issued by buyers to vendors in order to monitor and track the purchasing process, whereas invoices are issued by vendors to customers once the order has been fulfilled.

2. Is a Purchase Order Treated as a Contract?

A purchase order specifies delivery, billing, the specific products or services bought, legal terms, and payment. When a purchase order is accepted by the vendor, it becomes a legally binding contract between the customer and the supplier.

3. What are the benefits of Purchase Orders?

The Advantages of Using Purchase Orders

• Keep track of incoming orders.
• Avoid duplication
• Minimize order mistakes.
• Legal paperwork
• Increase efficiency
• Scaling assistance