In this article
Talk to our experts- Purchase order
- A purchase order (PO) is a document listing the products, prices and quantities for an order that a business places with a supplier. Buyers send purchase orders to request fulfillment, and in B2B trade the purchase order process establishes the legal contract between the parties about the purchase.
Also called: PO
How it works
A typical purchase order cycle runs through these steps. Once the purchase order is issued, its PO number links the acknowledgment, shipment and invoice back to it:
The purchase order workflow
An internal purchase requisition tells purchasing which items and services are requested, the quantity, source and costs.
Managers approve requested purchases, and the approved purchase orders are sent to suppliers.
The seller acknowledges the purchase order, and the acknowledgment may affirm the order or indicate changes.
A ship notice advises the buyer about product being shipped on one or more purchase orders.
The seller invoices the buyer, and at a minimum the invoice must include a purchase order reference.
The buyer validates the invoice against its open orders, then schedules payment on the agreed terms.
Purchase orders have cut-off dates for changes. A purchase order can arrive as an email or a phone call, or electronically as an X12 EDI 850 or a cXML document.
What a purchase order contains
Most purchase orders contain little more than a list of the goods or services the buyer wants, with price, payment terms and shipping instructions. Purchase orders may require a SKU code. X12's supply chain flow lists the kinds of information an EDI 850 purchase order can accommodate:
- Buyer and seller party information
- A unique purchase order number
- Product prices, tax, and allowances and charges
- Packaging information and carrier details
- Product-related dates and delivery scheduling
In X12's example EDI 850, the BEG segment carries the PO number and date, and each PO1 segment carries a line's quantity and price.
Types of purchase orders
Reference sources name these kinds of purchase order:
- Blanket order. Also called a blanket purchase agreement or call-off order. It allows multiple delivery dates over a period of time, often at predetermined pricing, and release orders, also called blanket releases, are created against it as needed until the contract is fulfilled, the period ends or a maximum order value is reached.
- Planned purchase order. A buyer's commitment to buy from a single supplier on a long term basis, with individual purchase orders specifying the quantities required from time to time.
- Unpriced purchase order. In US federal buying rules, an order whose price is not set when it is issued. It is allowed only in limited cases, such as a repair whose extent is unknown until the equipment is taken apart, when pricing cannot practically be obtained in advance. Other federal purchase orders are generally issued on a fixed-price basis.
Example
A distributor sends purchase order 4512 to a manufacturer:
- Line 1: 300 filters at $8.00 each = $2,400
- Line 2: 50 housings at $30.00 each = $1,500
- PO total: $2,400 + $1,500 = $3,900, payable Net 30
The manufacturer acknowledges PO 4512, ships both lines, and invoices $3,900 referencing PO 4512. The distributor's accounts payable team matches the invoice lines to the PO lines and schedules payment 30 days out.
On Shopify
Shopify B2B records purchase order numbers in two ways. At checkout, B2B customers have the option to enter a purchase order number, and they can view it later on the order. If a company submits a purchase order outside your Shopify store, such as by email or on the phone, staff can create a draft order for it and add the PO number there. Payment terms on the company location set when the order is due, and the PO number is available on the order through the Admin API.
How Uncap helps
When an order starts as a quote, Uncap's quote to cash guide for B2B on Shopify explains that Uncap Quotes is built for the front half of the quote to cash chain, inside Shopify: an approved quote becomes a Shopify cart and order in a single click.
Sources
Frequently asked questions
What is a purchase order vs. invoice?
The buyer sends the purchase order to place the order. The seller sends the invoice after delivery or at another agreed time, stating the money due, and the invoice must reference the purchase order.
Who creates a purchase order?
The buyer does. The business placing the order lists the products, prices and quantities and sends the purchase order to its supplier.
What is meant by a purchase order?
It means the buyer's formal order document. In the X12 supply chain flow, the purchase order process establishes the legal contract between buyer and seller about the purchase.
