Understanding Purchase Orders: Definition, Implementation, and Strategic Importance

Whether large or small, purchase orders remain the lifeblood that fuels manufacturing businesses. Unfortunately, tracking the movements of your inventory and purchasing budget is not always a manageable task. 

Even more, some organizations do not understand the significance of purchase orders or realize how their role can make or break a company’s success. 

In this article, we will explore the definition, importance, and features of purchase orders, plus we’ll introduce a better way to keep track of them. Learn how UpKeep’s versatile CMMS can help you manage purchase orders efficiently and effectively. 

What Is a Purchase Order (PO) and How Does It Work?

A purchase order is a formal, legally binding document used in commercial transactions that identifies a product or service's quantity, type, and price. 

Here’s how purchase orders work:

1. Creation – The buyer creates the initial document that serves as an offer to buy goods from a vendor.
2. Send to vendor – Once the purchase order is filled out, it is sent to the vendor for confirmation or negotiation.
3. Fulfillment – The order is sent by the vendor and finalized once the buyer receives it.
4. Invoice and payment – After the order is received, the vendor will send an invoice that reflects the purchase order.
5. Reconciliation and record-keeping – The buyer reconciles with the received goods and services with the payment made. Both parties keep the invoice and purchase order as proof of purchase/payment for later audits and order tracking. 

POs are pretty straightforward in terms of process, but what is the purpose of a purchase order?

As a crucial part of the procurement process for many businesses, POs benefit businesses in a variety of ways, including:

• Inventory management
• Cost control
• Supplier relationship support
• Legal protection
• Time savings 
• And more

However, purchase orders rely on a strict management system to bring out their full potential. 

If you’re still managing purchase orders yourself, you may not be accessing all of their benefits — or worse, be put at a disadvantage if they are mishandled. 

UpKeep’s CMMS adds an extra level of quality assurance to all of your maintenance management operations. By simplifying purchase orders with our software, you can:

• Avoid stockouts
• Store previous purchase order information in one place
• Communicate with vendors
• Remove the middle man in the process by automating purchase orders

Types of Purchase Orders

There are four types of purchase orders, which include:

1. Standard purchase orders – This type of purchase order is created and issued for one specific order with a complete set of specifications such as price and quantity, defined payment, delivery timelines, and location.
2. Planned purchase orders – Long contractual obligations between buyers and sellers are often associated with planned purchase orders. They detail a commitment between the buyer and seller to buy products or services exclusively over time. 
3. Blanket purchase orders – This type of PO covers an entire contractual order with deliveries made by the vendor within an agreed-upon time. Whenever a procurement is needed, the buyer requests or schedules deliveries for the recurring purchases included in the blanket PO total.
4. Contract purchase orders – Also referred to as contract purchase agreements, contract purchase orders define the terms for later issuing standard purchase orders specifying the specific products or services being bought.  

8 Key Components of a Purchase Order

It’s essential for purchase orders to contain detailed information about both the company and the vendor. 

Fields such as quantity, price, description, taxes, and payment terms must be completed so that both parties are in agreement. If discrepancies arise, the purchase order can be consulted for verification.

Let’s take a look at what is included in a purchase order. 

#1: Contact Information

The name, address, email, phone number, and other contact information for both companies should be completed in the PO form. Since the purchase order will be used by both the ordering business and the contractor, contact information is critical for future communication.

#2: PO Number

Both the ordering company and the outside vendor will need to track purchase orders, often within a centralized computer system. Assigning a precise PO number will help both parties access the information quickly and efficiently.

#3: Item SKU

If an order involves raw materials, the PO should include individual stock-keeping unit (SKU) numbers. This ensures the correct items are being selected, packed, and invoiced. The purchase order can also be used to cross-check received items.

#4: Item Description 

The items' names and identifying information, such as size, color, or model number, should be listed in further detail. By providing apt descriptions, you can quickly identify items based on their appearance rather than an alphanumeric number or barcode.

#5: Quantity

The number of each item ordered should be listed. Quantities should correspond to the item number and description. It is particularly important to keep a clear association of what and how much to order if a given quantity is back-ordered, has a long lead time, or is not currently available. That way, you can make concessions or connect with another vendor. 

#6: Price

Prices for each item should be listed with the quantities so that both parties can clearly see the original amounts being charged. Typically, discounts or sale amounts are listed elsewhere on the purchase order.

#7: Subtotal, Taxes, and Totals

Subtotals, taxes, and totals are usually found on the bottom right side of the purchase order. These amounts allow both parties to see the taxes being charged and the grand total of the order. If discounts are applied, they can also be calculated in this area.

#8: Payment Due Date

Both the ordering company and the vendor should have determined payment terms during the contract negotiations. Listing the payment due date on the purchase order allows everyone to be on the same page. Both parties know when the invoice will be billed and when it should be paid.

Why Would a Buyer Issue a Purchase Order?

Purchase orders allow businesses and clients to initiate, confirm, and procure orders systematically. Buyers often issue purchase orders for the following reasons:

• Legal protection – Purchase orders are legally binding documents that should be kept in paper or electronic form. If disputes arise, you may need them to prove that an order was delivered or received.
• Track orders –  Both the purchasing company and the vendor use purchase orders to track transactions over time. Both businesses may want to examine their purchase orders as a whole to save money or increase efficiency.
• Set expectations –  Although agreements and contracts are typically drawn up before a purchase order is issued, the PO provides documentation. If either party cannot recall the terms, they are laid out in the purchase order.
• Budgetary control –  POs ensure budgets and expenditures are appropriately managed by creating clear roadmaps of previous purchases.
• Inventory management – POs facilitate efficient inventory management by specifying quantities of goods needed, which may help prevent overstocking or understocking.
• Audit and compliance –  By clearly demonstrating purchase order procedures and justifying expenditures, POs serve as valuable documentation for audits and compliance checks. 

The balance of client and supplier relations, checkbooks, and legal defense hangs upon how your business handles purchase orders. There is no room for error when it comes to keeping up with your enterprise.

UpKeep’s CMMS offers a streamlined system for creating and coordinating POs. 

Our cohesive maintenance management software allows you to:

• Create purchase orders for new parts and inventory directly within our software.
• Manage communication with buyers and suppliers with SAP integrations.
• Promote transparency within the procurement process by providing one centralized place to store purchase order documents. 
• Automate the generation of purchase orders based on predefined triggers, such as low inventory alerts from work orders.
• And more. 

What Is a Purchase Order vs. Invoice?

Purchase orders and invoices differ based on the following:

• Requesters – Purchase orders and invoices are sent by different companies. The business ordering goods or services initiates a purchase order. The vendor or third-party organization sends invoices once goods have been shipped or services performed.
• What is requested – Just like the companies issuing the purchase order and invoice are different, so are the requests. Purchase orders ask for items or services to be shipped or performed, while invoices request payment to be sent.
• Timing – Typically, purchase orders are sent at the beginning of a transaction, requesting that goods be sent. Invoices usually follow at a later time once the goods have been received and accepted.
• Tracking – Purchase orders help buyers and sellers track and manage inventory. Invoices help compute spending and organize information for taxes. 

How UpKeep’s Comprehensive CMMS Helps With Purchase Order Management

Your business relies on the efficacy and organization of your purchase orders for supply chain efficiency and business continuity. The proper maintenance management software is critical to ensuring your PO activities remain beneficial to your facility and maintenance operations. 

UpKeep’s software combines the power of CMMS with enterprise asset management (EAM) functions to help you oversee everything from parts consumption to purchasing control and more.

Our intuitive system is easy to use and all-encompassing for every one of your operation’s maintenance needs. 

A few UpKeep features that allow you to manage your purchase orders include:    

Centralized Storage

A good paper trail is one of the most necessary practices when it comes to managing your POs. 

UpKeep's software thrives on centralizing storage for all of your most important documents. When you generate a purchase order through UpKeep, it is saved in a designated location within the system. This ensures that all your purchase orders are stored in one place and accessible for audits and reviews. 

Additionally, our CMMS allows you to attach relevant documents or notes to each purchase order, further aiding procurement operations. 

Automated Purchase Order Creation

UpKeep creates automatic purchase orders by leveraging its integration capabilities with various Enterprise Resource Planning (ERP) systems, such as: 

• SAP
• Infor 
• Oracle ERP
• And others 

These integrations streamline the purchase order process by automating the creation of orders based on predefined triggers or thresholds set within UpKeep. By automating purchase order creations, your maintenance managers can eliminate manual intervention and ensure seamless procurement processes within the maintenance management workflow.

Integration

Managing purchase orders and vendor/client communication can be messy if you use various platforms for communication and purchasing. UpKeep eliminates this problem by centralizing vendor communications through multiple integrations, such as Coupa and Zapier. 

Our integrations enhance vendor communication to optimize your procurement processes while also making it easier to collaborate with external partners within the UpKeep platform.

Discover the benefits of UpKeep’s CMMS and purchase order software. Request a free demo today.