What is a Purchase Order?

A purchase order is a written authorization from a buyer to acquire goods or services. The document authorizes a supplier to deliver to the buyer at the price, quality level, delivery date, and certain other terms specified in the agreement. A purchase order is legally binding after the supplier counter-signs it.

Master Purchase Orders

A purchase order is time-consuming to create. To reduce the workload, some organizations issue a master purchase order to each supplier, authorizing considerably more than is initially needed, and then issue releases against the master purchase order, as needed. To save time, many purchase orders are now delivered in electronic format over the Internet.

When to Issue a Purchase Order

There are specific situations in which it makes the most sense to issue purchase orders. These situations are as follows:

When buying in bulk. A purchase order helps formalize large or bulk purchases, ensuring clear documentation of quantities, prices, and terms.
When dealing with new suppliers. A PO provides legal protection and clear expectations when working with new vendors, reducing the risk of misunderstandings.
When purchasing expensive items. High-cost purchases should be backed by a purchase order to provide an official record and control over approval and payment processes.
When long lead times are involved. For orders requiring advanced scheduling or long delivery times, a PO ensures the supplier is contractually committed to deliver as agreed.
When a purchase requires customization. If goods or services are customized, detailed specifications in the PO clarify exactly what the business is ordering.
When internal control policies require it. Many businesses have internal policies that mandate issuing POs for purchases over a certain dollar amount to ensure accountability.
When creating a formal audit trail. Purchase orders help create a paper trail for auditors, making it easier to verify purchases and match them to receipts and payments.
When managing inventory levels. Issuing a PO helps the business plan and control inventory purchases, preventing shortages or overstocking.

Disadvantages of Purchase Orders

Despite their common usage, there are a few problems associated with purchase orders, which are as follows:

Time required. The development of a purchase order can be a time-consuming process, especially when it is assembled manually. As such, it can significantly impede the purchasing process within a business.
Preparation cost. Purchase orders are prepared by employees of the purchasing department, so there is a labor cost associated with them. This can be substantial when there are a number of details to be included on the document.
Non-value-added. The preparation of purchase orders does not increase the value of the items purchased, and so can be classified as non-value-added.

Given these issues, purchase orders are usually restricted to higher-value purchases.