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Purchase Order: What it is & What are the Different Types?

Business | July 20, 2022 | By Kausika Raajan Varatharaajan What is Purchase order

Purchase orders (POs) are not new. We release POs when we order something from Amazon or any other e-commerce site. In the same way, product manufacturing companies release POs when they require a new component or part. Before releasing a Purchase Order, a product manufacturing company goes through a set of processes. 

Once the product team finalizes the Bill of Material (BOM), representatives from production, sourcing, engineering and other departments meet and review the details of the parts or components. They decide whether the list of parts or components can be “make”, “buy”, or “make and buy”. The parts produced in-house are known as “make” parts. And the parts procured from outside are known as “buy” parts. Another category of parts that is “make and buy” is where some parts are produced in-house as well as procured from suppliers as per the company strategy. Then, Requests for Purchase (RFPs) are created and assigned to the appropriate buyers for the buy parts. The buyers ensure the correctness and completeness of the information and raise Requests for Quotation (RFQs) and send them to suppliers/vendors. Once the suppliers submit the quotations, the buyers then compare and review the quotations using spreadsheets. The buyers then release the Purchase Orders to the selected suppliers.  

The sourcing and procurement teams repeat the process of raising RFPs, gathering quotations from multiple suppliers, comparing them, and then finalizing suppliers every time a new part or a revision of an existing part is released.  

What is a Purchase Order?       

A Purchase Order is a legal document released by the buyer organization to the supplier or vendor organization to authorize the purchase. It contains the order details such as item types, quantity, payment terms, delivery date, and much more. . A PO is a key document for maintaining audit trail and keeping accurate and complete financial records.

Purchase Order Types

It is important to note that there are different types of Purchase orders for various purposes. Primarily, there are four types of POs:  

 1. Standard Purchase Order

 2. Spot Purchase Order

 3. Blanket Agreement

 4. Blanket Release

Apart from the above four main PO types, there are some variations in standard POs like sample POs and there are also purchase contracts and supplier agreements.  

Standard Purchase Order

Standard Purchase order The most common type of purchase order is the standard purchase order. A standard PO is generally created for a one-time purchase of various items, for example, purchasing a piece of machinery for production. Standard POs are released at the end of a supplier selection process for a part. They have limited validity in terms of supply period and quantity and are sometimes amended depending on the need. POs contain information about the buyer and supplier organizations, item/part numbers, ERP item codes, item descriptions, unit prices, UOMs, PO issue date, delivery dates, payment terms and conditions, and quality requirements. Also, organizations release every standard PO, after going through a due approval process based on the organizational approval structure. 

 

Spot Purchase Order

On Spot Purchase order

 

Spot POs are slightly different from standard POs. Though the details are the same as standard POs, Spot POs are one-time purchase orders released for items without any RFQ process. In most product manufacturing companies there is a cap on the value for spot PO. When product manufacturing companies use proper e-procurement software, the need for spot POs reduce.

 

 

Blanket Agreements

Blanket order A blanket purchase agreement is an agreement released at the end of production sourcing, that is, when the part and the supplier have been finalized. A blanket agreement is issued to fill repetitive needs at the buyer end. Its duration varies between a few months to a few years. A blanket purchase agreement allows the buyers and the suppliers to lock the terms of purchase, such as item cost, lead time, cost-saving over time, contract period, quality requirements, etc. A blanket agreement does not specify the exact delivery data and item quantity.

 

Some of the advantages of blanket agreements are:

1. It improves efficiency and reduces purchasing lead times. Also, it eliminates and streamlines the repetitive process of issuing a standard PO to buy the same item. 

 2. It allows the buyer and supplier organization to focus on the operational requirements. 

 3. It necessitates buyer organizations to perform demand forecasting and plan the purchases ahead of time thereby gaining volume savings and increasing negotiating power. 

 

Blanket Purchase Releases

Blanket order release

 

When the parts are required by the buyer organization, they issue a blanket purchase order against the blanket agreement. Such POs are sometimes called blanket releases, or Open POs. A blanket release is based on the terms and conditions of the blanket agreement; the only addition is the quantity and date of delivery.

 

Why Zumen for Purchase Order Management?

When companies lack a proper system to work with, the sourcing and procurement teams spend most of their time on administrative tasks. Understanding that the purchase order is a key document in managing financial expenses, a best-of-breed platform such as Zumen understands the benefits of purchase order collaboration in real time and enables companies to handle the changes and track PO statuses easily along with advanced PO capabilities such as:

  1. Streamlining the RFQ process so that the need for spot POs reduce
  2. Designating approval workflow based on commodity, region, or program or PO value.
  3. Blanket PO value automatically factoring the raw material rate changes

 

If you’d like to explore more, feel free to reach out to [email protected] or get a free demo.  

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