4 Types of Purchase Orders and Their Differences
One of the most important elements of successfully running a company is knowing how to work well with both vendors and suppliers. This is because your relationship with your vendors largely influences the growth of your business.
The good news is that you can easily boost your interaction with your vendors by learning the four types of purchase orders.
Types of Purchase Orders
These purchase orders are different, and based on your business needs; you might find it more efficient to use one instead of the other three. To help you understand them better, let's look at all four and the features that make them distinct.
- Standard Purchase Order (PO)
You are likely familiar with this purchase order as it's the most commonly used. Vendors and companies typically prefer the Standard Purchase Order for orders they don't use regularly.
The standard purchasing order is created when all the details of the goods are known to both parties. It's more common in technical industries since it requires clients to know all the parts they are buying by name.
Similar to all other purchase orders, this purchasing order specifies the quantity, price, location, payment terms, and delivery timeline. For example, a company uses a standard purchase order when it needs to buy parts/ equipment in the same configuration.
- Planned Purchase Orders (PPOs)
A planned purchase order has much in common with the standard purchase order. However, the delivery date and location are not listed. Companies mainly use planned purchase orders to replace or restock items that may be needed at irregular intervals.
- Blanket Purchase Order (BPO)
The blanket purchase order is also referred to as the standing order because the agreement is made for future purchases for which the quantity of items is unknown to the vendor. Therefore, blanket orders require payment to be made over an extended amount of time.
It includes details such as prices of the products, location, and delivery schedule. Some of the instances you can use a blanket order include:
- The products required may change over time
- The maximum order amount is open to being adjusted over time
- The order has set contract start and end days
If your company uses the same vendor for the same products over time, it's wise to use a blanket purchase order instead of drafting a new purchase order after each transaction.
Advantages of Blanket Purchase Orders
There are many pros to using this purchase order. Not only does it save both you and the vendor time. Procurement departments also use it to reduce costs and build a more efficient work process, especially in hardware companies.
Using a blanket purchase order allows the company to secure a lower bulking price based on total order quantity even when multiple deliveries are required. It also saves the procurement professionals from sourcing and securing contracts for each order, thereby allowing them to focus on more urgent orders.
- Contract Purchase Orders (CPO)
The contract purchase order has the least details compared to the other three purchase orders. It only specifies the negotiated terms and conditions between the company/business and the vendor.
As the name suggests, a contract purchase order is a contract that states that there will be purchase orders in the future and the guidelines they will occur under. When made without an expiry date, a contract purchase order can streamline and safeguard the purchasing process between the two parties involved. However, most CPOs have a set time frame of 1 year.
The Purchasing Process
The purchasing process differs from company to company. There are, however, several general steps that all companies follow to make the purchasing process efficient. For example, a hardware company would follow the following procedure:
- Prototype phase- this phase occurs at the beginning of a startup and only includes ordering a few things to build a prototype.
- Production phase- once a hardware company grows, they need to produce more products, which means ordering more items from vendors.
- Warehouse phase- when a company grows to the warehouse phase, they need to order more products to keep up with demand. They can do this by working with a warehouse or from different vendors.
- Delivery phase- the next step after placing the orders is the delivery phase. During this phase, the vendor needs to ensure that the products are delivered on time, in good condition, and in the proper condition.
- Continued growth- a company needs to continue ordering goods from vendors as it grows to keep up with demand.
How to Avoid Purchasing Mistakes
A purchasing mistake can look like duplicating orders, ordering the wrong products, or not considering all aspects of the product's life cycle. These mistakes can end up costing the company money and reducing its output.
Some of the ways the purchasing department can avoid purchasing mistakes are by:
- Tracking inventory
- Using a purchasing order software
- Being in frequent communication with the suppliers/vendors
- Maintaining accurate records
- Coming up with a purchasing policy