Purchase Orders Explained: Definition, Benefits, and the 4 Key Types

The Guide to Purchase Orders: Definition, Benefits, and the 4 Key Types

Think of the purchase order (PO) as the center square on a tic-tac-toe board. It’s the essential piece of data that every other part of your business operations - from the warehouse to the accounting office - has to connect with to stay aligned. Understanding the purchase order process is the first step in toward building a reliable procurement process. 

I’m Jill, and welcome to the PO Framework. I have spent the last 22 years processing and creating purchase orders. In this guide, we are going to define the purchase order (PO), explain why it’s the foundation of your supply chain data, and break down the four different types of POs that keep your operations moving.

If you want to see the video, check out this link: https://youtu.be/Z6V54ZqoOqE

What is a Purchase Order (PO)?

A purchase order is a formal document sent from the purchaser (or buyer) to the vendor (or seller) authorizing the purchase of goods or services. A standard PO will include vendor and buyer information, delivery details, the items and descriptions of what is being purchased, quantities, prices, and payment terms. 

While many define a purchase order as a legally binding document, it typically becomes a contract only after the vendor formally accepts the PO and sends back an order confirmation. Laws may differ by state and I’m not offering legal counsel, but that is the general business consensus. 

Why Purchase Orders Matter: The Key Benefits

While procurement definitions can vary depending on your ERP software system or industry, purchase orders are best understood by the level of detail they provide and the specific timing of the financial commitment. And why do they matter?

Implementing a formal PO system provides several critical advantages:

Accounting Payable Efficiency: Essential for enabling three-way matching (matching the PO to the packing slip to the invoice)

Inventory Management: Prevents duplicate purchases and unexpected invoices.

Audit Trails: Offers a clear picture of terms and keeps financial records clean for compliance

Legal Protection: Creates a formal commitment between the buyer and the seller to prevent pricing disputes

If the purchase order is accurate from the start, it will save you significant time and reduce operation costs on the back end.

Now, let’s look at the different types of purchase orders.

The Different Types of Purchase Orders

To optimize your procurement strategy, you must understand which type of PO best fits your needs.

1. Standard Purchase Order (SPO)

A standard purchase order is the most common type, used for a specific, one-time need with a clear end date. With these, we know the items, price, quantity, shipping destination, and the delivery date. 

Example: A restaurant wants to order a new griddle. Since they won’t need another one for a long time, this will be a one-time purchase.

2. Blanket Purchase Order (BPO)

A blanket purchase order is a long-term agreement with a vendor that simplifies repeat buying by triggering production. Pricing and terms are pre-negotiated.

Example: A restaurant chain needs to order prep tables for new stores. A blanket PO tells the vendor to start production on six units without needing a specific ship date yet. Releases (standard POs) are then issued against the blanket PO as new locations open. Additionally, the new units can be used as emergency replacements. If you do this right, you can have the vendor in a position to always be able to fulfill the need for a new unit.

3. Planned Purchase Order (PPO)

A planned purchase order is very similar to a blanket PO, emphasizing a commitment for future purchases by confirming quantity, pricing and terms. However, the ship date and destination remain unknown. The main difference you’ll see is that a planned PO includes a specific quantity, whereas the blanket PO may not. 

4. Contract Purchase Order (CPO)

The contract PO is more of a formal agreement with vendor terms and conditions, but the items, pricing, quantities, and delivery information are yet to be specified.

Backorder vs. Replacement POs

In addition to the four main types of purchase orders, businesses often use two other distinct terms:

Backorder PO: Used when a vendor cannot fulfill the entire quantity in a single shipment.

Replacement PO: A brand new order issued specifically to replace goods that were refused due to damage, defects, or incorrect specifications.

Conclusion: Streamlining the Procurement Process

Different PO structures are used mainly to remove the friction between the vendor’s production line and the customers front door. For the customer, they don’t really care what type of purchase order was used. The bottom line for them is they get what they need when they need it. At the end of the day, an accurate purchase order protects your cash flow, respects the vendor’s time, and ensures the customer gets exactly what they ordered.