A purchase order (PO) is a document created by a buyer and given to a supplier when ordering more products, items, or materials. Purchase orders typically include a tracking number, the quantity and types of items (with listed SKUs) the buyer wishes to purchase, as well as payment and delivery information. They also serve as a legally binding contract between the buyer and seller, committing the buyer to purchase goods for an agreed-upon sum and giving the vendor insurance against non-payment.
How do purchase orders work?
Purchase orders are used by retailers, e-commerce businesses, wholesalers, manufacturers, and other businesses to buy the goods they need from vendors and other suppliers. Buyers create purchase orders by listing everything they need to buy from the seller in detail, including SKU numbers, quantities, pricing, any agreed-upon discounts, and any other terms like specific shipping methods, preferred currency, and minimum order quantity. They then submit the PO to the seller.
The supplier will then accept or reject the purchase order. If accepted, the seller will fulfill the order and deliver the items on the stated date. The supplier then sends an invoice to bill the buyer for the items, which the buyer pays.
Often, buyers can create special orders, such as standing purchase orders or blanket purchase orders, to help streamline the process for large or recurring purchases.
- Standing purchase orders. Standing purchase orders allow buyers to repeatedly purchase the same set of products using the same PO number, rather than filling out a new purchase order each time.
- Blanket purchase orders. Blanket purchase orders serve as an agreement between a buyer and seller for multiple deliveries over a specified period of time for a set price. These are usually used between businesses with long-term relationships and may include special discounts or incentives.
What are the benefits of purchase orders?
Purchase orders provide a variety of protections, benefits, and documentation for merchants and suppliers, including:
- Legal protection for buyers and vendors. Once a purchase order has been submitted by the merchant and signed and accepted by the vendor, it becomes a legally binding contract that ensures the transaction will be completed.
- Cash flow management. Tracking PO numbers gives businesses transparency into how and where they are spending money, allowing them to be more strategic with ordering, payments, and cash flow.
- Accurate financial reporting. Purchase orders help catalog and organize spending, helping to improve inventory management, month and year-end reporting, and overall financial health.
Working with international suppliers
A proper purchase order gives your supplier all the necessary information to produce your goods, meet your quality expectations, and deliver the product on time. This is especially important when doing business with international suppliers and manufacturers.
Once a PO is received, a supplier will most likely start manufacturing your product immediately. If you’re using a generic template and your precise specifications and QA requirements are not included or vaguely defined in your purchase order, by the time you inform the supplier, they may already be in production using the wrong specifications, which can disrupt and delay your order.
Using the correct international shipping terms on your purchase order
International Commercial Terms, or Incoterms, are used to specify when and how ownership of the goods will be transferred to you. They ensure your order ships when needed at the agreed-upon cost and provide detailed information regarding how the goods you ordered will be transported.
For example, the term Free On Board (FOB) indicates that the seller will cover loading costs and inland transportation to the port from which the items will be shipped. Other important incoterms include:
- Ex-factory date refers to the date when the goods will leave the factory, which can help avoid delays and unnecessary supply chain disruptions.
- Ship via refers to the specified method your supplier will use to ship the goods to you. This can include a specific carrier or mode of transport.
- Packaging methods refers to the packaging requirements for the product to protect it while being loaded and packed in shipping containers.
How Inventory Planner can help
The most challenging part of inventory purchasing is determining when to place a purchase order to ensure the goods will arrive on time and how much stock to order to meet customer demand. While there are a variety of purchase order templates available to use, they don’t tell you exactly what to order and when in the way inventory planning software does. The purchase order process can also become tedious and error-prone when you have a high ordering frequency or need to deal with multiple different suppliers, each with their own supply requirements, order minimums, and delivery schedules.
Intelligent solutions like Inventory Planner can help streamline the purchasing process from end to end, saving you time, money, and hassle. Inventory Planner’s purchasing suggestions show you exactly when and what you should be ordering from each of your suppliers based on accurate demand forecasting and supply patterns, such as lead and transit times, and can even automate purchase order creation.
If you use an Inventory Management System, Order Management System, Warehouse Management System, or an ERP to keep track of your inventory already, coupling it with Inventory Planner’s easy-to-use forecasting and inventory planning capabilities will further reduce excess inventory, avoid stockouts, boost your cash flow, and save hours on complex spreadsheet calculations to determine order cadence and quantity.
Inventory Planner also allows you to pre-set your suppliers’ specific requirements, such as currency, minimum order quantity, minimum order value, weight or volume limits, and more. All these supplier specifications are automatically applied to any new POs for the vendor, saving you time and reducing human errors.
Purchase order FAQs
What’s the difference between a purchase order and an invoice?
Purchase orders and invoices are both legally binding documents exchanged between merchants and vendors, but they aren’t the same, even though one is usually used to create the other.
- Purchase orders are created and issued by a buyer to a supplier and outline what is being ordered and when it needs to be delivered.
- Invoices are essentially a bill created and issued by a seller after an order has been delivered that outline how much is owed and when it needs to be paid.
What information is included in a purchase order?
A purchase order should include the following information:
- Your company name, address, and contact information
- Order date
- PO number
- The supplier’s company name, address, sales representative, and contact information
- The products or services being purchased (including brands, item types, SKUs, and model numbers)
- Quantity per item
- Price per unit
- Shipping address
- Billing address
- Delivery dates
- Payment terms
- Any additional terms and conditions
Is a purchase order considered a contract?
A purchase order that has been submitted by a merchant and accepted and signed by a seller is considered a legally binding contract that ensures the goods described on the PO must be delivered for the price and on the date stated.