What are the 4 types of PO?

Purchase orders play a crucial role in the procurement process, as they act as formal agreements between businesses and their suppliers. These documents outline essential details, such as the type, quantity, and price of the products or services being purchased.

Understanding the different types of purchase orders and their importance in the procurement and financial management of a business is essential for smooth operations.

In this article, we will discuss key purchase order terms, four types of purchase orders, and the reasons why your business needs a purchase order system.

Purchase Order Terms

Before learning different types of purchase orders, let’s understand the basic terms first:

• Legally Binding: A purchase order acts as a legally binding contract between the buyer and the supplier. Once both parties sign the document, they are obligated to adhere to the terms and conditions outlined in the purchase order.
• Encumbrance: An encumbrance refers to the funds that are set aside to cover the cost of a purchase order. This ensures that the business has sufficient resources to pay for the goods or services being procured.
• Release: Release refers to the process of finalizing and approving a purchase order after the successful fulfillment of a previous purchase order or after meeting certain criteria.
• Accounting Distributions: Accounting distributions involve allocating monetary amounts to specific general ledger (GL) accounts in a purchasing context. This process allows for better categorization of documented expenditures, ensuring funds are set aside for vendor payments after a purchase order is completed.

4 Types of Purchase Orders

There are mainly four different types of purchase orders:

1. Standard Purchase Order (PO)

2. Planned Purchase Order (PPO)

3. Blanket Purchase Order (BPO)

4. Contract Purchase Order (CPO)

 

Let’s take a look at the different types of purchase orders in detail.

1. Standard Purchase Order

A standard purchase order (PO) is typically created for one-time purchases of items. These orders are usually placed with suppliers that aren’t long-term collaborators or for items that aren’t purchased regularly.

Some of the critical aspects of a standard purchase order include:

• Item or service description: A detailed description of the products or services being purchased is essential for clear communication between the buyer and the supplier.
• Quantity: The exact quantity of items or services required is specified to avoid misunderstandings or discrepancies in the order.
• Price: The agreed-upon price for the items or services is documented to ensure transparency and accountability.
• Delivery schedule: The delivery date or timeframe is mentioned, ensuring that the supplier meets the buyer’s expectations and deadlines.
• Payment terms and credit period: Standard purchase orders establish the payment terms, including the desired credit period, to help maintain a healthy cash flow for the business.

Here are some examples of a standard purchase order:

• A manufacturing company creates a PPO for raw materials needed over the next six months, with specific delivery dates and estimated quantities based on projected demand.
• A business purchasing office furniture, which doesn’t require frequent replacement, would use a standard purchase order.

Creating a purchase order with a clear format will streamline procurement processes. To do so, try out the PO generation tool that Peakflo provides to create any type of purchase request with comprehensive details and automate data entry with higher accuracy using our OCR (Optical Character Recognition) technology.

 

2. Planned Purchase Order

A planned purchase order (PPO) resembles a standard PO but lacks specified delivery details. PPOs function as separate orders, initiated as business needs emerge.

PPOs are designed to be released when needed, with the timing of their release being a crucial aspect. PPOs may include unconfirmed tentative schedules for deliveries, but these must be verified through a release before the order is confirmed and ready for delivery.

Here’s a breakdown of the PPO structure:

1. Terms and conditions: These outline the legal framework and obligations for both parties, including payment terms, warranties, and dispute resolution processes.
2. List of items: This provides a clear and detailed description of the products or services being procured, ensuring both parties have a mutual understanding of the order.
3. Quantity: Specifying the exact quantity of each item helps avoid misunderstandings and ensures the supplier can meet the buyer’s demands.
4. Price: Including the agreed-upon price for each item in the order maintains transparency and accountability, preventing potential disputes or confusion.
5. An unconfirmed, tentative delivery date for each item (or for the entire PO): This provides an estimated timeframe for when the items should be delivered, allowing both parties to plan accordingly. However, as it is unconfirmed, it is subject to change based on further agreement.
6. An unconfirmed, tentative delivery location for each item (or for the entire PO): This indicates the estimated delivery location for the items, giving the supplier an idea of where the goods should be shipped. Like the delivery date, the tentative delivery location is subject to change upon further agreement.

Examples of planned purchase orders:

• A clothing store expects high demand for winter clothes soon. They create a planned purchase order (PPO) for winter items. As demand increases, they release the PPO in parts, specifying delivery details as needed.
• A construction company has a multi-phase project and needs materials like cement and steel throughout. They create a PPO with their supplier and release parts of it as each phase starts, specifying quantities and delivery details accordingly.

As a PPO is highly dependent on timing, make sure to incorporate automated AP workflows into your organizational approval matrix and eliminate any delays along the way.

Bypass the most complex approval by setting custom approval workflows, assigning multi-level approvers, and tagging to the right budget

3. Blanket Purchase Order (BPO)

A blanket purchase order (BPO), or “standing order,” is an agreement with a vendor for future purchases where item quantities are unknown. BPOs share similar details with PPOs but leave item quantities and delivery specifics unspecified.

Releases against a BPO are called “blanket releases.” Typically, a BPO has a maximum validity period and quantity limit, with potential discounts based on item quantity milestones throughout the BPO’s lifespan.

Here’s a breakdown of the components of a blanket purchase order:

1. Terms and conditions: These outline the legal framework, responsibilities, and obligations for both parties involved in the transaction. Terms and conditions may include payment terms, warranties, dispute resolution processes, and other essential aspects governing the business relationship.
2. List of items: This is a detailed and clear description of the products or services being procured, ensuring both the buyer and the supplier have a mutual understanding of the order. It helps to avoid misunderstandings and ensures the supplier can fulfill the buyer’s requirements.
3. Discounts: Discounts refer to any reductions in price or special offers provided by the supplier, often based on factors such as order quantity, frequency, or long-term relationships. Discounts can help businesses save money and encourage loyalty between the buyer and the supplier.
4. Pricing: Pricing refers to the agreed-upon cost of each item or service included in the order. It is essential for maintaining transparency and accountability between both parties, helping to prevent potential disputes or confusion.

Examples of blanked purchase orders:

• A restaurant sets up a blanket purchase order (BPO) with a supplier for a year to buy fresh produce without specifying quantities or delivery details. They create blanket releases as needed, with quantities and delivery information based on inventory requirements.
• An electronics manufacturer creates a six-month BPO with a vendor for components without specifying quantities or delivery details. As production demands change, they issue blanket releases with necessary quantities, delivery dates, and locations for a continuous supply.

 

4. Contract Purchase Order (CPO)

A contract purchase order (CPO) is an agreement outlining future purchase orders and their guidelines. It only specifies the negotiated terms and conditions between a business and a vendor, with minimal detail.

Unlike other purchase orders, CPOs aren’t released but help set up future orders.

A CPO typically contains a collection of negotiated and agreed-upon terms and conditions that serve as a foundation for generating future purchase orders.

Examples of a contract purchase order:

How Does a Purchase Order Work?

Here’s how the purchase order works:

Creation: The purchase order process starts as the buyer creates a detailed document outlining the required goods or services, including quantities, agreed-upon prices, and essential terms. This order is then sent to the seller for review and acceptance.

Approval: Upon receiving the purchase order, the seller evaluates its terms. If they align with the seller’s offerings and business conditions, the order is approved, signifying the seller’s commitment to fulfilling the requested items or services.

Delivery: Once the purchase order is approved, the seller proceeds to assemble or prepare the requested products or services according to the specifications. After completion, the goods are dispatched, or services are rendered to the buyer. Following this, the seller issues an invoice specifying payment details based on the purchase order.

Conclusion

The standard purchase order is an essential tool for businesses looking to make one-time purchases with suppliers they may not have an ongoing relationship.

By providing clear and specific information, these orders help ensure that both parties are on the same page, reducing the risk of miscommunication and facilitating a smooth procurement process.

Understanding the nuances of standard purchase orders can be invaluable for businesses aiming to optimize their purchasing strategies and maintain strong relationships with their suppliers.

Purchase order plays an important part in a lot of the company’s internal functions, namely inventory, supplier, and budgeting management. If not handled correctly, the company will have issues with its financial planning as a whole.

Having a centralized system to manage your procure-to-pay will facilitate your internal team with a full suite of automation that’ll streamline end-to-end finance ops. With Peakflo’s Accounts Payable solution, procurement and finance teams will be able to create POs, PPOs, BPOs, and CPOs effortlessly. The solution allows approvers to instantly check and approve POs, with their e-signatures added to the PO automatically.

Try out Peakflo today, and witness how the highest standards of data keeping, accuracy, management, and synchronization can transform the way you work.

 

This comprehensive purchase order guide defines the meaning of a purchase order and explains purchase orders. 

What is a Purchase Order? 

A purchase order is a legal document form used by a buyer and sent to a supplier for an order. A purchase order specifies items, quantities, prices, and credit terms for a purchase from the vendor. A PO becomes a legally binding contract when a vendor accepts the purchase order.

Purchase Order Form Example

What is the Main Purpose of a Purchase Order? 

The main purpose of a purchase order from a buyer is to initiate a business order for specific goods or services with a vendor. An approved purchase order states the agreed terms and offers legal protection for both the customer and the vendor selling the ordered items. 

Purchase order items, quantity, and prices (and receiving information) are matched with an invoice by the customer to ensure that the items have been ordered and billing is correct before paying the vendor. 

Purchase orders are sequentially numbered and provide an audit trail in the system. 

Why Do You Need a Purchase Order?

Issuing a purchase order results in better approval processes, spend management, and internal control over purchases. Purchase orders are numerically controlled with a sequential PO number on each form for internal control.

How Does a Purchase Order Work? 

The purchasing process (how a purchase order works) includes creating purchase orders (POs) after receiving an approved purchase requisition and getting vendor bids. For the following list of steps in the purchase order process, an explanation is provided. 

The purchase order process is:

• Create a purchase order for the selected vendor
• Purchasing approves the PO
• Send the PO to the vendor
• Vendor confirms acceptance of the received PO 
• Customer receives ordered goods or services
• Vendor invoices customer for products shipped or services delivered
• Customer completes 3-way matching  of documents 
• Customer approves the invoice
• Customer pays the approved vendor invoice
• Close PO 

1. Create a purchase order for the selected vendor

   After selecting a vendor and agreeing on terms, the purchasing department completes the purchase order form, preferably electronically, using an ERP system with a procurement module’s PO system. 

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2. Purchasing approves the PO

   Within the purchasing or procurement department, an authorized approver signs the purchase order. The approver will confirm that an approved purchase requisition exists if one is required. In some cases, to support large orders, a more detailed, formal legal contract is also created and signed by the parties. 

3. Send the PO to the vendor 

   The customer’s purchasing department sends the purchase order to the vendor. 

4. Vendor  confirms acceptance of the approved PO

   The vendor or supplier accepts the purchase order, sends the customer a purchase order confirmation, and begins fulfilling its terms by possibly ordering parts or products and manufacturing goods not currently in stock per its inventory management system, then delivering products or services to the customer. 

   A purchase order confirmation means that a supplier and its customer have agreed-upon terms, pricing, and delivery dates for an order. The purchase order form is a legally binding agreement at this point. 

5. Customer receives ordered goods or services

   The customer receives all goods or services ordered through the purchase order (or a partial shipment if items are backlogged). 

6. Vendor invoices customer for products shipped or services delivered

   Once the product is shipped, or the services are delivered, the supplier invoices the customer for payment, using the invoice number, customer account number, and purchase order number as identifying numbers on the invoice. The customer records invoice amounts as accounts payable and inventory, fixed assets, or expenses. 

   The vendor may use a PO flip to automate and create an invoice from digital PO information in the procurement system. 

7. Customer completes three-way matching of documents

   When the goods are received, the customer matches the vendor  invoice with supporting documents like the purchase order and receiving report or vendor packing slip for adequate internal control. The accounts payable process also includes checking invoices for mathematical accuracy. 

8. Customer approves the invoice

   Authorized approvers view the matched supporting documents and approve the invoices for payment. 

9. Customer pays the approved vendor invoice

   When it’s time to collect an early payment discount or when the invoice is due (according to purchase order terms), the customer pays the vendor invoice for goods or services received and reduces accounts payable in the accounting software by applying the payment to the applicable vendor invoice. 

10. Close the PO 

    When all goods and services listed in the PO have been received for this order the customer has been invoiced, and the invoice has been paid, the customer’s purchasing department closes the PO. 

What are the Different Types of Purchase Orders? 

Different types of purchase orders include:

• Standard purchase orders (PO)
• Planned purchase orders (PPO)
• Blanket purchase orders (BPO)
• Contract purchase orders (CPO), and 
• Digital purchase orders (DPO). 

A description of these types of purchase orders follows.

Standard Purchase Orders (PO)

Standard purchase orders (PO) are purchase orders made and issued for one specific order. A standard purchase order includes all purchase order details, including a purchase order date and delivery date. 

Planned Purchase Orders (PPO)

Planned purchase orders (PPO) are long-term contractual obligations with a commitment to buy products or services from a particular company exclusively over time. A planned purchase order includes purchase order details, including estimated quantities and pricing, the billing account, charge card or credit card, and tentative delivery dates. 

Scheduled releases are issued against a planned purchase order to initiate an actual order to buy goods or services from a supplier. 

Blanket Purchase Orders (BPO)

A blanket purchase order (BPO) is an order from a customer that covers an entire contractual order with deliveries made by the vendor over a period of time. When needed, the customer requests or schedules deliveries for recurring purchases included in the blanket PO total. One benefit of blanket purchase orders is receiving quantity discount pricing in return for the commitment.

Contract Purchase Orders (CPO)

Contract purchase orders (CPO) are also called contract purchase agreements that set the terms for later issuing standard purchase orders specifying items or services being purchased. The standard purchase order includes a reference to the contract purchase agreement.

Digital Purchase Orders (DPO)

Digital purchase orders (DPO) are electronic purchase orders created through an automated PO system as part of the PO process.

How to Create a Purchase Order 

A purchase order, prepared by Procurement, is usually supported by an approved purchase requisition to purchase goods or services. 

The purchase order includes billing and contact information, shipping address and other shipping information, delivery date, payment terms, line items with description, part number, quantity, pricing, and totals. 

Purchase order details include:

• PO number (purchase order number)

• Date – of the purchase order and delivery date

• Customer and vendor company name and contact information

• Billing address

• Shipping address

• Legal and payment terms

• Line items including:

— Product or service descriptions

— Product numbers or SKUs for retail and eCommerce businesses

— Pricing

— Quantity

— Extended amount

• Subtotal

• Any sales tax due for non-resale items

• Invoice Total

The product numbers or SKUs help businesses achieve inventory management related to the order. 

Purchase Order Template Resources

If your business doesn’t have software capable of creating a purchase order, consider using a Microsoft Excel purchase order template or Google Forms purchase order template. You can also consider using special-purpose software apps that integrate with your accounting software to create purchase order forms. 

Automating Purchase Order Creation 

Many ERP systems include purchase order systems integrated with the accounting and accounts payable system. Businesses can create an electronic purchase order (digital PO) using their e-procurement software. 

Some ERP systems include a purchase requisition to complete using the software, submitting for approvals, and notifying Procurement through the system. It may be possible to automatically create an electronic purchase order from a digital purchase requisition in the system. 

Customers choose to email or text purchase orders or submit them through a supplier portal. (Automated systems may still offer an inefficient choice of printing and mailing purchase orders to vendors in a company’s supply chain.) 

Some customers use an online supplier portal. The portal integrates with their ERP management software and third-party add-on AP automation software. It’s accessible to both the customer and its suppliers. Combining these tools will streamline workflows, eliminate manual tasks, prevent lost paperwork, save time, and minimize disruptions experienced by the accounts payable team. 

Purchase orders and other related documents like contracts, vendor W-9 tax forms, and vendor invoices can be submitted and stored centrally through the supplier portal. System communication capabilities include status and delivery inquiries or notifications through the portal. 

FAQs 

The following FAQs list and answer frequently asked questions about purchase orders. 

What is the Difference Between a Purchase Requisition and a Purchase Order?

The difference between a purchase requisition vs purchase order is that a purchase requisition may be considered a purchase order request. A purchase requisition is a form completed by an employee to gain management approval for purchasing goods or services from a vendor after issuing a purchase order by the purchasing department.

A purchase requisition is a form filled out by an employee requesting a purchase of goods or services. It’s approved or declined by an authorized manager with budgetary control responsibilities in the requester’s functional area. Company policy/procedure dictates whether a second approval signature is required at a higher level of authority if the purchase requisition exceeds a defined amount.

What is a Purchase Order vs Invoice?

A purchase order vs invoice is the difference between a customer placing an order to buy goods or services with a vendor using a purchase order form vs a vendor issuing a bill upon shipment, requesting payment. Purchase orders and invoices have corresponding line item information, including product description, product number, quantity shipped, totals, and payment terms. 

What Does PO Flip Mean?

A PO flip (purchase order flip) automatically converts a purchase order into an invoice and submits the invoice to the accounts payable department of the buying company making the purchase. E-procurement software creates an electronic invoice from digital purchase order information. 

What Does Purchase Order Financing Mean?

Purchase order financing (PO finance) means that customers can use their purchase orders to obtain the cash needed to pay suppliers before inventory is sold to its customers and it collects accounts receivable from the sales. 

Is a Purchase Order Considered a Contract?

A purchase order establishes delivery, billing, specific products or services ordered, legal, and payment terms. A purchase order is a legal document that’s a binding contract between the customer and supplier upon vendor acceptance.