The Basics: What Is a Purchase Order?
So, what is a purchase order, exactly? Imagine you run a company and need to buy supplies. Instead of just calling the supplier, you send them a detailed document.
This document, called a purchase order, tells the supplier what you want, how much you need, and when you need it. It’s like sending a detailed shopping list.
Purchase orders make the business procurement process much smoother. They act as a formal agreement, so everyone knows exactly what’s expected. It prevents any mix-ups or disputes.
What Can You Find on a Purchase Order?
A purchase order includes a unique number for tracking. It has the names and contact details of both the buyer and the seller.
You’ll also find the date of the order, a description of the items, the quantity needed, and the price. The delivery date and payment terms are also spelled out clearly.
Purchase Order Definition: The Different Types
Understanding the different types of purchase orders can help you manage your procurement process more effectively. Let’s dive into the main types you might encounter.
Standard Purchase Orders
A standard purchase order is the most common type. It’s used for one-time purchases.
For instance, if your office needs new computers, you’d create a standard purchase order listing the specific models, quantities, and prices.
Blanket Purchase Orders
Blanket purchase orders are used when you need to buy the same items repeatedly over a period of time. Imagine you run a construction company and need a steady supply of cement.
Instead of creating a new purchase order each time, you set up a blanket purchase order with your supplier. It can cover multiple deliveries, making the process more efficient and less time-consuming.
Contract Purchase Orders
Contract purchase orders are agreements for future purchases based on terms and conditions that both parties agree on. For example, a healthcare facility might need to secure medical supplies at a fixed price over a year.
A contract purchase order would lock in these terms, ensuring stability and predictability in your procurement process.
Planned Purchase Orders
Planned purchase orders are used when you know what you need, but not exactly when you’ll need it. Think of it as a flexible order.
For instance, a media company might plan to purchase camera equipment for various projects throughout the year. A planned purchase order outlines the details and quantities, but the delivery dates remain open, to be confirmed as needed.
The Procurement Workflow: Step-by-Step
Navigating the purchase order process might seem daunting, but it’s pretty straightforward once you break it down. By following these steps, you can manage your purchase orders efficiently and keep your procurement process running smoothly.
Requisition
The process starts with identifying a need. Maybe your office is running low on supplies, or you need equipment for a new project. Someone in your team creates a requisition, a formal request for the items needed.
Approval
Once the requisition is created, it goes for approval. This step involves reviewing the request to ensure it aligns with the company’s budget and needs.
Managers or designated approvers check the details and either approve or deny the requisition. Approval helps keep spending in check and avoids unnecessary purchases.
Creation
After approval, the purchase order is created. It should list all the details:
• What’s being bought
• Quantities
• Prices
• Delivery dates
The purchase order is then sent to the supplier, officially placing the order. It formalizes the request and sets clear expectations for both parties.
Receipt
Once the supplier receives the purchase order, they acknowledge it and prepare the goods for shipment. When the items arrive at your business, they are checked against the purchase order to ensure everything matches.
At this point, make sure to verify that you received exactly what you ordered.
Fulfillment
The supplier fulfills the order by delivering the goods or services. Fulfillment means the order is completed, and all items have been received as requested. It’s important to inspect the delivery to make sure there are no discrepancies or damages.
Payment
The final step is payment. Once the order is fulfilled and everything is in order, your company processes the payment according to the terms agreed upon in the purchase order.
Depending on the payment terms, this could be immediate or after a certain period, depending on the payment terms.
Managing Purchase Orders Efficiently
First, keep things organized. Set up a system to track all your purchase orders. You can use a simple spreadsheet or more sophisticated software.
Staying organized helps you avoid mistakes and keeps your procurement process on track.
Use of Automation
Automation is your friend when it comes to managing purchase orders. Using automated systems can save you time and reduce errors. For example, software can automatically generate purchase orders when stock levels get low.
It can also track orders and send reminders for approvals and payments. Automation takes a lot of the manual work off your plate, making the whole process more efficient.
Importance of Regular Reviews and Clear Communication
Regular reviews are key to efficient management. Periodically check your purchase orders to ensure everything is accurate and up to date. You can catch any discrepancies early on and keep your records clean.
Clear communication with your suppliers is equally important. Make sure they understand your needs and expectations.
If there are any changes or issues, communicate them promptly. Good communication helps build strong relationships with your suppliers and ensures that everything runs smoothly.
Why Understanding Purchase Orders Matters
Knowing what a purchase order is and how it fits into your business procurement process can transform your operations. Purchase orders streamline procurement, improve financial management, and offer legal protection.
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