Understanding Four Different Types of Purchase Orders
Updated: Oct 25
Types of Purchase Orders
If business owners and managers want to maintain enough supplies to operate and to meet the customer’s demands without overpaying, they must track their inventory. Some people are tempted to overlook this step, but they are putting themselves at risk of running low on supplies or buying more items than they need. While allowing their inventory to deplete can cause them to lose customers, buying more items than needed is a waste of resources. Those who want to avoid falling into the same trap will need to learn about the four types of purchase orders and the role that they play in the bottom line of every company.
Standard Purchase Orders
When someone’s goal is to learn about the different types of purchase orders, taking a look at standard purchase orders is a smart move. With this option, a business leader will order materials when the need arises. The number of items, price, timeframe and other specifications will be listed in a standard purchase order. For example, a company that is running low on printer paper might place a standard purchase order. To keep up with demand, businesses will also do so when they encounter a customer who places a large order.
Planned Purchase Orders
Although predicting the future needs of a company is not always possible, managers must do the best that they can. With a planned purchase order, a business leader will try to determine how many items the company will need over time. Based on the number of employees and customers that a business has, managers can make an educated guess about the amount of paper that they should stock, for example. Although they don’t always involve a formal agreement, companies will usually place purchase orders from the same supplier on a regular basis. A company won’t always need the same number of items, but having a plan creates a guideline to follow.
Rather than planning one purchase order in advance, blanket purchase orders involve planning several orders at a time. This path will likely consist of an informal pricing agreement between the company and its supplier. Because getting several orders from the same company is cheaper than acquiring new clients, suppliers will gladly offer discounted rates, allowing both sides to benefit from the arrangement.
Contract Purchase Orders
A contract purchase order is a formal version of the planned purchase order, involving a legal agreement between both sides. Of all the types of purchase orders, this one offers the most protection. The contract will normally list the number of items that a company will buy and the price that the seller will offer. These agreements ensure that no misunderstandings occur and that each side will live up to their promise. The company and supplier will usually negotiate the terms of an agreement to find a fair compromise that will give everyone the best possible results. The penalties for breaching the contract will vary but can involve legal action. Once the supplier or business has drafted a contract, lawyers from each side will review it before moving forward.