Types of purchase orders manufacturers need to know with examples

Brahm Meka
July 24, 2023
9 min
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Workers discussing what items need to be purchased from vendors

For a business to be successful, it is essential to have a good process for managing procurement. This means having a system for tracking all of your purchases and making sure you are getting the best deals. One of the most important parts of this process is purchase orders. There are four main types of purchase orders that businesses use every day.

What is a purchase order?

A purchase order is a document that shows what the buyer wants from the supplier. It is very important in the inventory ordering process.

A purchase order is a legally binding contract between a business and a supplier. This document helps to hold both parties accountable if any disagreements arise. If there is any confusion, the purchase order can help to clear things up.

This document will contain important information about the items ordered, such as their size and specifications. You will also need to state how much the item costs, when it will be delivered, and how you would like to be paid.

If businesses do not use purchase orders when ordering inventory, it will be hard to track expenses or look back at past data to make future decisions.

There are four types of purchase orders manufacturers can use. This article will discuss each type in detail and when to use them.

purchase order template
Sample Purchase Order Template

The four main types of purchase orders

There are different types of purchase orders. Each one is a little bit different, but they are all similar. The differences can make transactions go more smoothly or not.

1. Standard purchase orders (SPO)

Standard purchase orders are the most common type of purchase order. They are also the easiest to understand because they are the simplest.

When SPOs are used-

  • The request for goods or services is a one-time request.
  • The order details are known (such as the delivery date, quantity, description of the items being ordered, and price).
  • Both parties agree to make a payment and receive goods/services.

This type of PO is generally created and issued when the need for goods/services is not regular or recurring. For example, a soap manufacturer might raise the standard purchase order if they want to buy equipment to make soaps. This should be a one-time thing, and the contract will be fulfilled as long as the equipment is delivered in good condition.

2. Planned purchase orders (PPO)

The PPOs are very similar to the SPOs, except they are for when the delivery date is unknown.

When PPOs are used-

  • The goods/services are expected in the future.
  • The supplier and buyer have agreed to a plan for future orders.
  • The company expects to reach the reorder point at a particular time, so they have a loose delivery schedule based on that.

The planned purchase order delivery dates will eventually be finalized. For example, a soap manufacturer might need 20,000 soap packaging in one year. The purchasing manager could create a planned purchase order with a packaging supplier detailing the price and quantity with a tentative delivery schedule. After using the first 5,000 soap packaging, the manufacturer would create a release against the purchase order to order more.

3. Blanket purchase orders (BPO)

A blanket purchase order is similar to the standard purchase order but has less information. This purchase order type is used when the timing and quantity of goods are unclear.

When BPOs are used-

  • The company knows what service/good is needed, but they do not know how many items they will need or when they will need them.
  • A company predicts how much service or product it will need over a certain period.
  • The supplier and buyer have agreed on the spending limit and other terms and conditions.
  • Getting a better price on the guaranteed agreement will require you to buy again and again.

The blanket purchase order form will list the items that the company is buying. The terms of delivery will be specified, but the details won't be finalized until the company makes a release. The buyer and supplier will agree on a maximum quantity within a specific time frame. The buyer can then order any amount of items, as long as it's below the maximum quantity.

4. Contract purchase orders (CPO)

A contract purchase order is an agreement between a purchaser and a vendor. It sets out the terms of their relationship, including the products to be purchased, payment, and delivery terms. This document can be used to order products from the vendor. The purchaser may refer to the contract purchase order when raising a standard purchase order (SPO). Generally, CPOs are made under a set time frame with an expiry date, usually one year.

The importance of purchase orders

A purchase order is a very important document when two parties make a transaction. This document helps ensure that each party knows what they are spending money on and that they stay within their budget. It is also essential for creating reports on inventory expenses and avoiding mistakes in the supply chain.

Below are seven key reasons why purchase orders (POs) are essential.

1. Save Time

Generating purchase orders (POs) takes a bit of time in the short term but saves time in the long term. Having an established purchase order system in place makes ordering easier.

Once you’ve set up the system, it’s effortless to go in, find products approved for purchase, and place an order. For routine purchases, a purchase order is generated in a few minutes. And even for new orders, creating and sending a purchase order to your vendor is a breeze.

You will also save time when orders arrive. You will only need to check the invoice against the purchase order to ensure that the order is correct. All the purchasing records you need are at your fingertips using a software solution.

2. Easy for Auditing

Auditors use purchase orders to look at a company's past financial transactions. This makes it easier for auditors to understand the company's financial state. When a company is transparent in issuing, processing, and recording purchase orders, this prevents discrepancies in financial information.

3. Tracking vendor performance

The documentation that purchase orders provide also gives insight into which vendors are easy to work with and which are not. Using a purchase ordering system makes it easy to see if your vendors fill orders accurately and on time or are behind schedule and prone to mistakes.

This will help you find bad vendors early and work with good vendors who are helpful to your company. Ideally, you should only work with suppliers who follow your compliance policy and add value to your company.

4. Negotiating volume discounts

If you show your current suppliers how much you spent with them last year and what you bought, they might give you a better price for buying more products from them in the future. If you put all of your requests for products onto one purchase order from multiple departments and requesters, it will help you meet the supplier's requirements for getting additional discounts, such as free freight. Using purchase orders can also help you identify opportunities to get those discounts by consolidating spending on similar items with a single, high-performing vendor.

Types of purchase orders - negotiating volume discounts

5. Provide Legal Protection

A purchase order can act as a legally enforceable contract. It is vital to have a written agreement between you and the seller about the prices and quantities of items you buy. This protects both you and the seller.

A purchase order helps protect you by giving you a written record of what you ordered. It also protects your company from price increases you may not have expected. If you receive the wrong items or are charged the wrong amount, the purchase order can help resolve the issue.

Purchasing orders helps protect the seller. If someone in your company ordered too many items, they might complain about an order received incorrectly. Having purchase order documents lets you resolve potential issues before they damage your vendor relationship.

6. Better budgeting and spending management

By using purchase orders, you are building a clear picture of what, when, from whom, and for whom you are buying. Over time, you can look at this data to better understand your company's spending. This information can help you make more accurate budget plans in the future. 

Additionally, you can get an idea of where in the company money is being spent and identify potential areas for savings.

7. Inventory Management

Making a purchase is the first step in procuring inventory. And when you have an easy-to-use purchase order system, it helps with inventory management.

Purchase orders help you track what products should arrive at your company. You can then match them against the invoices to check for accuracy, so you know exactly what’s happening with your incoming inventory.

Purchase order software like an ERP system can help you keep track of all your outstanding orders in one place. This can save you a lot of time. You will not have to search through your email, spreadsheets, or paper files to find orders that are still waiting to be processed. It also makes it easy to process payments and track inventory, so you always know what you ordered and what you received. Brahmin Solutions is ready to help! Contact us today, and we will show you how easy it can all be.

Brahm Meka
Founder & CEO

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