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What Is a Purchase Order? - Definition & Profess

Instructor: Tara Schofield
This lesson discusses what purchase orders are, how they are used, and what information they provide. Additionally, the benefits for both the buying company and the vendor are explained.

What is a Purchase Order?

A purchase order, or PO, is a document that a company issues to a vendor to place an order for products. It outlines all of the details of the sale, including quantity of product, sales price, delivery date, terms, and requirements for the order to be fulfilled. For instance, a giant grocery store might place an order for bananas from a fruit company. The purchase order would detail how many bananas are being purchased, when they would be delivered, etc.

Purchase orders are very important forms for both the purchasing company and the business supplying the products. Especially for large businesses that have multiple locations, having a purchase order ensures that the policies of the buying company are clearly communicated and agreed to before products are sent.

Purchase orders are a critical tool in keeping inventory straight and products delivered on time. Imagine Wal-Mart, a company with thousands of locations and hundreds of thousands of products in each store, trying to organize and keep track of orders from thousands of vendors without having purchase orders and a consistent system for managing incoming products.

Every inch of empty shelf space in a store is a potential loss of income. Having a purchase order system that regulates what products are ordered, when they are going to be delivered, the price the company is paying for those products, and what both companies can expect from the transaction is necessary to protect both businesses.

From a manufacturer or vendor perspective, a purchase order represents sales and revenue. It documents a company's commitment to purchase products at definite terms, which results in revenue for the supplying company. The more purchase orders, the more demand for products and the more revenue the company is earning!

Purchase Order Process

Every issuing company will have their own process, but the basics of a purchase order process applies to most businesses. Often a presentation or sales pitch is made to demonstrate products, review past sales history of products already being purchased, and discuss ideas or products yet to be released.

Some companies review products regularly. Other companies have specific timeframes set up to consider products for new releases or store re-sets (reorganizing the store and offering a different mix of products). Either way, a review of products is needed to determine which items will be ordered, either for business operations or re-sale.

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