Purchase Order: Definition, Benefits, Types, and How to Create One

A purchase order is a document sent by a buyer to confirm the purchase of a product/service to a provider or supplier.

In addition to having to pay attention to effective marketing efforts, creating an appropriate purchase order is also an important part of a business so that it can grow and become more complex.

Usually this purchase order is used for large orders or bulk orders with fairly large transactions.

So, what are the types of purchase orders and how do you make one that is right for your business? Check out the full explanation in the article below.

Definition of Purchase Order

Quoted from HubSpot, a Purchase Order (PO) is a document that must be sent by a buyer to a supplier or service provider vendor to confirm an order for a product/service.

A purchase order can also be a legal document or proof of approval for the purchase of a product/service. Why do buyers and providers/suppliers need this one thing?

A purchase order will actually be beneficial for both parties to the transaction. Through this document, small businesses/SMEs can provide more specific information regarding what they need from the supplier and when they need it.

PO will also make sellers and service providers confident that they can meet the buyer's request and give the buyer time to adjust their plans before making payment.

Benefits/Importance of Purchase Orders

CFI explains that PO is an important thing to understand in business. Some of the important reasons for purchase orders and their benefits for business are as follows:

1. Avoiding Duplicate Orders

One of the main benefits of using PO is avoiding duplicate orders. Companies that are expanding their business will find it easier to review incoming orders and who they come from.

2. Easier to Track Orders

PO also helps businesses review incoming orders. A good ordering system in business will also simplify the process of inventory and shipping products. PO helps this system be more organized.

3. Can Be a Legal Document

As previously explained, PO can be a legal document, usually the PO document becomes an approval document. This will help avoid issues that could arise related to transactions if they occur in the future.

4. Monitoring Budget Spend

PO also helps your business track expenses. Using PO will help you in this process through automation.

Purchase Order Types

There are at least 5 types of purchase orders based on the type of information they convey, here is a complete explanation:

1. Standard Purchase Orders

Standard purchase orders are the easiest and most frequently used type of PO. The seller can make clear details about the purchase including what items, the quantity, the delivery schedule, and the terms and conditions of payment.

This type of PO is good for sellers who do not need to have a long-term contract with their buyers. For example, a gym creates a PO for the purchase of gym equipment from a provider that contains a list of the equipment purchased, the quantity, and the cost.

2. Planned Purchase Orders

A Planned PO is a type of PO where a buyer will make an estimate of the need for what items to buy by creating a PO in advance.

Usually this type is used by sellers and buyers who have long-term and regular work contracts. PPOs are usually used when buyers want to make deliveries not directly.

For example, a construction company needs materials for a building. Then the company can send PPOs to suppliers with a list of items and a tentative delivery time, so there is still time if there are changes.

3. Blanket Purchase Orders

Blanket Purchase Orders or BPOs are also called standing orders, where the seller and buyer have a long agreement and trust each other. Unlike other types of POs, this BPO is not too detailed/specific in regulating the items ordered and the delivery schedule which is also uncertain.

BPOs are usually used for regular orders and transactions are certain. For example, a restaurant will make a BPO to a supplier for a period of one year with items that vary and can change.

4. Contract Purchase Orders

Contract Purchase Orders or CPOs are one type of PO that can be a legal document in the form of a contract between the seller and the buyer for subsequent purchases.

In a CPO, the seller and buyer both sign a contract with certain terms and are legally protected. The CPO contains the agreement and details of the terms of the order. CPO is good to use when you want a long-term relationship with the seller/vendor.

5. Digital Purchase Orders

A digital PO is a process/ordering system that helps this process be more efficient and profitable for both the seller and the buyer.

You can create this digital PO in Microsoft Excel or Open Office. Usually there will be many templates that can be used to create a PO.

How to Create a Purchase Order

Quoted from Indeed, in creating a purchase order it is important to pay attention to the details of the information in it. This is because the PO form will be a tool to review the incoming order process.

Making a PO is also inseparable from the use of templates that you can find on the internet. You can also change it according to your needs and the details you want.

Here are the steps in creating a PO that you should pay attention to:

• When the buyer has decided what items to buy from the supplier, the buyer will create a PO and send it to the supplier.
• Next, the review process is carried out by the seller by looking at the completeness of the information and details of the PO sent by the buyer. After that, there will be approval or rejection from the supplier, if the detailed information is approved, the order will be processed by the supplier.
• When the supplier has determined to process the order, the PO has been approved.
• After getting approval from the supplier, the seller will get information that their order has been fulfilled.
• Finally, the buyer then pays for the order according to the provisions in the PO and the agreed payment time/period.

Purchase orders will help supply chain management and benefit both sellers and suppliers.

By understanding how PO works for your business, the supply chain that is created will be faster, more efficient, and more efficient for the business/company.

To deepen your understanding of supply chain management and aspects in it such as PO, you can register for the Supply Chain Management program from prasmul-eli.

Starting from basic knowledge to the latest trends in supply chain management, take the class and find more information here.