What Is a Purchase Order and How Does It Work?

Businesses often use purchase orders to assist with everything from ordering supplies to tracking expenses and managing inventory. A purchase order is a document created by a buyer and presented to a seller to request purchasing products or services. The typical purchase order is essentially a detailed list of the items a customer wants to buy.

A purchase order often spells out the types and quantities of the products and services needed, as well as the prices, delivery details, and payment terms. After receiving a purchase order from a buyer, the vendor usually generates a sales order that records its acceptance. At that point, the purchase order becomes a legally binding contract.

In addition to establishing an agreement between the buyer and seller, a purchase order also helps the buyer coordinate procurement efforts and manage inventory needs. Having a purchase order on file helps keep track of supplies to avoid either running out of inventory or duplicating the purchase of materials.

A purchase order differs from an invoice, however. While both include much of the same information, such as prices, billing details, and shipping information, a purchase order is generated by the buyer as a request for the product or service at the start of the purchase process. An invoice is generated by the vendor, usually after the delivery of the product or service, to request payment from the buyer.

Types of Purchase Orders

The information included in a purchase order may vary depending on the terms and conditions of the agreement between the buyer and seller.

Here are the four main types of purchase orders:

1. Standard

The most common type of purchase order is the standard purchase order, which is typically used to make one-time purchases. For instance, a company that needs new light fixtures for a photo studio would send a standard purchase order to initiate the purchase of these items from a vendor. Since the business is buying these fixtures once and isn’t pursuing a long-term relationship with the vendor, the purchase order will typically call for plenty of specific information, including a list of requested items, prices, delivery specifications, payment details, and other terms and conditions.

2. Planned

Businesses often rely on planned purchase orders when they want to initiate a long-term agreement that commits to buying items from a vendor, but the delivery schedule for the products is uncertain. This purchase order includes other pertinent details, including the items to be purchased, the quantities, and the prices of the items, but does not confirm the delivery date with the seller. Businesses often use a planned purchase order to restock items as needed and may include tentative delivery dates. For example, an office manager may initiate a planned purchase order for printer cartridges, and the manager will release the order when its ink supplies run low.

3. Blanket

Blanket purchase orders, also called standing orders, are used when a buyer outlines a predetermined price for items it will purchase from a vendor. This type of purchase order often allows buyers to lock in prices with vendors during a specific period of time, so the buyer doesn’t need to regularly negotiate prices for ongoing orders. For example, a fast-food restaurant may generate an annual blanket purchase order to buy a specified number of takeout containers each month at a negotiated price that’s set for the year.

Businesses use different types of purchase orders depending on which supplies they need and when.

4. Contract

A buyer looking to establish a long-term relationship with a supplier may use a contract purchase order to record the high-level terms and conditions of their partnership, but leave out certain details. The contract purchase order is meant to facilitate ongoing purchases between the buyer and vendor and is often used to guide the creation of future purchase orders that spell out more specifics, including the items, prices, and delivery specifications. For example, a buyer and supplier might negotiate certain terms that are included in a contract purchase order, such as stipulating that the seller will provide increased discounts on supplies when the buyer orders a larger quantity of products. 

How Purchase Orders Work

Purchase orders are initiated by buyers at companies of all sizes, from small-business owners to purchasing managers at larger enterprises. Businesses often rely on purchase orders to buy supplies in large quantities.

For example, a home improvement store may need to purchase several tools and paint supplies from different vendors. The store would start by sending purchase orders that specify the items the store wants to buy from each vendor. The information included in a purchase order varies depending on the type of purchase order, but standard purchase orders typically specify:

• Details about the products needed, including brand names and model numbers
• Quantities of each product
• Prices per unit
• Delivery dates
• Terms for payment

Purchase Order Process

While some businesses still handwrite purchase orders, most buyers submit them digitally. Software can streamline the steps in the purchase order process by automatically sending a purchase request to the appropriate team member for review and approval, and once it’s approved, automatically creating the purchase order and sending it electronically to a vendor.

Automation allows purchase orders to be easily shared with accounting and inventory management departments to ease the flow of data. An increasing number of businesses are expected to adopt software automation to handle purchase orders and maintain inventory in the next five years. According to Verified Market Research, the size of the global procurement software market is currently growing 7.6% per year and will reach $9.5 billion by 2028.

After the seller receives and accepts the purchase order, both sides sign off on the purchase, which makes it a legally binding contract, and the seller generates a sales order. The seller then delivers the inventory, marks the order complete, and generates an invoice.

The Takeaway

Purchase orders are useful for tracking business inventory and expenditures. Once a seller accepts it, the order is considered legally binding. Businesses use different types of purchase orders depending on which supplies they need and when. The four main types of purchase orders are standard, planned, blanket, and contract orders.

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