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A Complete Guide To Creating Purchase Orders
Running a direct-to-consumer (DTC) brand means you regularly hand over cash to buy new inventory. And purchase orders are essential to this process.
Get POs wrong, and you’ll likely be left with a stockout or overstock situation (both of which can cost you a pretty penny). But get POs right, and you can build a more accurate and efficient replenishment process (which means reclaiming more time and more of your profits).
Interested in improving your purchase order process and retaining more revenue? No sweat — we’re here to help you navigate the sometimes-confusing, almost always time-consuming work of PO management.
| 👋 TL;DR: Build accurate purchase orders in less than 5 minutes |
| Start your Cogsy free trial, sync your Shopify account, and draft your next PO today. Start now. |
A purchase order (PO) is an official contract a buyer (AKA, your DTC brand) creates and presents to a seller (your supplier) to purchase a specified number of goods.
In short, a PO is a list of items your brand wants to buy from a vendor. It details the types and quantities of products you need, as well as information on payment terms and delivery timelines.
So, when you submit a PO to a vendor, you commit to purchasing those specific products for an agreed-upon price. But the transaction hinges on whether your supplier has those goods available when you need them.
If so, you and your supplier need to nail down all kinds of other important details — like delivery timelines — before that PO is officially approved and can be fulfilled.
There are 4 types of purchase order forms that retailers use to run their operations and manage their supplier relationships: standard, planned, contract, and blanket.
Of these different types of purchase orders, standard POs are definitely the most popular among small businesses and established enterprises.
The standard purchase order is a common form that includes basic transactional details like precisely what items you want, when you need them delivered, and where.
This basic form is best for one-off needs and reactionary purchasing requests. If your business is running low on something, using a standard PO form can save you from a stockout.
Standard purchase orders work like going to a grocery store on the way home to buy a gallon of milk. Though you still need to make a more comprehensive grocery run soon, for now, this 1 gallon of milk can hold you.
Retailers might also use this type of form for seasonal packaging design or restocking a best-selling SKU for an upcoming marketing promotion.
Unlike standard purchase orders, planned purchase orders are pre-scheduled. They work like a subscription with your preferred vendor.
On a planned purchase order form, your team includes the SKUs it needs, how many, and where those shipments are heading. Down the road, you’ll determine the exact delivery schedule.
With this type of PO form, your brand can secure inventory without having all the details ironed out yet.
But wouldn’t suppliers hate this wishy-washy commitment? Not at all! Planned purchase orders benefit the supplier since your business is committing to buying items or services from them regularly.
Back to our grocery example: Planned purchase orders are like signing up for an ongoing subscription for nut milk.
Let’s say a gallon of almond milk covers your weekly needs, from morning coffee to afternoon oatmeal. Your subscription secures your weekly gallon beforehand (let’s say you try out a 6-month subscription).
Meaning, you commit to a gallon a week for 6 months, but you only pay when you receive the next gallon. This reduces upfront costs. And if you run out early, you can rush your next shipment.
Contract purchase orders are a more formal version of the purchase order.
This PO form details terms and conditions rather than exact items. And it includes vendor details, payment, shipping, and delivery terms – but not what goods you want to buy or when.
Your team can use these POs to negotiate vendor contract terms and establish your relationship. That way, both you and your supplier are clear on the terms and costs of working together before you officially start purchasing any inventory from them.
Blanket purchase orders are ideal for recurring needs, like restocking bestsellers. With this type of PO, companies agree to order a general amount from a supplier over time without pre-scheduling those orders.
For example, Niels Tervoort, Director of Supply Chain at Organifi, used planned purchase orders to secure a million units from one of his vendors, which he’ll receive and pay for over an extended time.
This allows Organifi to adapt faster to supply chain issues. How so? Because Niels’ vendor is expecting his order and can fulfill it a lot faster, giving them a leg up when issues clog the global supply chain.
And because they’re not receiving all these units all at once, it simultaneously reduces holding costs.
Plus, blanket purchase orders are a guarantee that the partnership will be ongoing. So, retailers can use these agreements to lock in prices – even amid rising inflation – since the cost and number of units are pre-negotiated.
| 🔥 Tip |
| You can make any of the above purchase order types into a digital purchase order. These paperless versions are easier to track and search, not to mention faster to build and process. |
While they sound like a bore to fill out, purchase orders aren’t just superfluous paperwork. POs are a huge help when it comes to running your business and keeping an eye on your business’s financial health.
While establishing a PO process requires more time and effort on the front end, you save yourself many headaches (and hours) in the long run.
That’s because a purchase order system uses item catalogs from your favorite vendors to simplify the procurement process. So, you just need to select from the products available and place your order.
And if you regularly purchase the same products and quantities, you can automate POs and reorder inventory on a recurring schedule. Meaning, you can nix all those manual orders while still getting your goods on time.
Even better, a PO process also makes deliveries more efficient. Since you have an itemized list of everything you’ve purchased, when you get your order, all you have to do is match up the items you received with what’s written on the PO. So, verifying order accuracy is a breeze with detailed POs!
You can simply quickly double-check that no items are missing and that suppliers are following through on their part of the contract.
If there is a mismatch between the PO and the products in your shipment? No worries >– you’ll find it right away and can quickly flag that discrepancy with your vendor.
Because purchase orders list all your product’s pricing information, they’re also handy for budgeting. More specifically, POs are a record of your spending.
By cross-referencing your previous POs with your up-to-date sales data, you can better estimate how much inventory you need to turn a profit.
And with this greater visibility into your spending, you can set aside the right amount of cash to buy whatever inventory you need based on your demand forecasts.
Plus, implementing a purchase order system means you can establish standard policies on who can make purchases and how much of each item to buy at once.
These guidelines help to control your spending. Since only authorized people can place purchase orders, it’s easier to account for any unexpected (or unnecessary) purchases and adjust as needed.
Matching your physical inventory counts with your inventory records is mind-numbering. Not to mention it’s a strain on your time and resources.
But with a PO process in place, inventory management becomes much simpler. That’s because POs track when items will arrive at your warehouse and in what quantities.
As we mentioned, once those products show up, you can compare the items received with what’s listed on your PO. This makes maintaining your inventory records quick and easy.
Even better, purchase orders create a paper trail that helps with any audits. Since POs keep all your product info organized and accessible, inventory audits should be relatively painless with these documents on-hand.
| 🚨 Spoiler |
| Using a purchasing tool like Cogsy makes it easy to centralize these documents, so you can reference them in seconds. This way, you can quickly compare those numbers to your current financial records and complete an audit in no time. Try for free. |
Purchasing the wrong product quantity or type can be costly a mistake — especially for small businesses with a limited budget.
Fortunately, POs minimize errors and inaccuracies in the purchasing process.
How, exactly? Well, purchase orders are a clear record of your product’s quantities and specific prices. So, if there’s a miscommunication between your procurement team and the supplier, they can cross-reference the PO and correct potential mistakes.
And as we teased earlier, having all your previous POs at your fingertips makes it easier to accurately forecast demand. This, in turn, can save you from losing thousands of dollars in sales due to dreaded stockouts or dead stock.
That’s because stockouts cost retailers an average of about $1 trillion annually, while dead stock costs 30% more than the inventory’s value (on average). In other words, having too much or too little stock has a massive impact on your bottom line.
Purchase orders are far more than just a list of products you need. They’re binding legal documents between you and your suppliers.
So, if there’s ever a problem with the wrong products or quantities being delivered, the PO offers clarity (and legal protection), so you can resolve the issue faster.
A PO can also guard your brand against unexpected price increases because the cost for each item is clearly listed on the document and formally agreed upon. So, there’s no way for the supplier to pull a fast one.
This documentation is a massive perk, given how the costs for raw materials continue to climb. And while someone has to pick up those hefty extra costs, your POs (and vendor terms) ensure that person isn’t you!
| 👉 Did your supplier just raise prices? Here’s the right way to respond. |
While PO creation is fairly straightforward, you might face a few challenges during this process.
Like it or not, doing tasks manually will never be as efficient as automation. You could spend several hours filling out a PO yourself — and it could take days of back and forth if you have to amend your order or related invoices.
When it’s all said and done, processing a purchase order manually can cost anywhere from $50 all the way up to several hundred dollars (per individual order).
In fact, the American Productivity & Quality Center (APQC) found that manual processing costs businesses as much as $506.52 per PO on average.
In addition to being so time-consuming and expensive, manual POs are more likely to have errors in reporting or calculations, which further delays your orders.
On the other hand, automating how you fill out POs with a tool like Cogsy bypasses these kinds of infuriating errors completely. Automation improves the accuracy of your orders by eliminating manual mistakes while organizing all your PO data in one centralized place. (All for a flat cost.)
For instance, Cogsy does this with handy restock recommendations that calculate what you need restocked (and how much to order).
You can then bulk-add these recommendations (all, some, or none) to build out your next PO in mere minutes. All while radically reducing your risk of error.
“[Cogsy has] made our purchasing procedures faster, more efficient, and more accurate.Chris Kresser, founder at Adapt Naturals
A minimum order quantity (MOQ) is the smallest number of units you have to buy in a single order from your supplier. Suppliers often set MOQs to save time, money, and materials on orders that offer little to no profit.
Sometimes, purchasing the minimum order quantity is your most cost-effective option — particularly if a supplier’s MOQ matches your customer demand.
But be mindful that when suppliers set MOQs, it’s usually the required minimum number of units you have to order.
So, if the MOQ is way more than you need to fulfill demand, that supplier might not be a good fit for your business. And you’ll likely want to shop for another supplier with a lower MOQ.
Doing this kind of bargain hunting for the right-fit MOQ helps you avoid racking up a bunch of holding costs from storing inventory you don’t need.
| 📝 Note |
| While it’s tough to negotiate MOQs down, you might be able to spread it out by placing smaller orders more frequently. That way, you’re fulfilling the supplier’s MOQ without receiving too much inventory all at once. Here’s how. |
These days, Shopify’s market share accounts for about 33% of all ecommerce websites in the US. Meaning, about 1 in 3 online businesses in the US use Shopify to power their stores.
Despite it’s popularity, Shopify’s PO process isn’t very intuitive. And the success of your Shopify process hinges on accurate forecasts and timely purchase orders that consistently meet customer demand. Fortunately, Cogsy helps you with both.
Cogsy’s PO workflow was built with Shopify merchants top of mind. And it’s the only purchasing process that saves Shopify merchants 20+ hours a week.
As we already mentioned, Cogsy’s restock recommendations and bulk-add functionality mean you can build a purchase order in mere minutes. No Excel spreadsheets, guesswork, or self-doubt involved.
But it doesn’t stop there. With Cogsy, Shopify merchants also get a bird’s eye view of which milestone all their open POs are at — from draft to delivery. Not to mention a comprehensive edit log that tracks who made what edit for added accountability.
There’s always room for improvement — even with the most efficient PO process.
Curious about how you can upgrade your PO management? Some of the best practices include using purchase requisitions and leaning on an inventory purchasing platform.
A purchase requisition (PR) is an official document submitted to the person on your finance team who controls funds within the PO approval process.
This advanced approval cuts down on mistakes and redundancies, and it guarantees your ordering fits into your budget.
You’ll create these purchase requests whenever you need to replenish inventory and provide details about the products you want to order (like the number of items and the date you need to receive them).
Though they have some similarities, POs and purchase requests aren’t synonymous.
The main difference is that you use a PR internally to get permission from your accounts payable department to place an order. In contrast, POs are external for you to actually order products from your suppliers.
But there’s no need to double your workload here. A purchase request can simply be a drafted PO you slide across finance’s desk for approval. (Just mark that it’s not an official PO.) Easy, right?
For instance, you can quickly draft an electronic purchase order in Cogsy and then send that draft to whoever in finance needs to approve it. Once approved, you can officially submit it to your supplier.
When tools work together, you can take even more tasks off your to-do list. That’s why it’s wise to integrate the tools your brand relies on to create a single source of truth.
This move alone can help you decrease stockouts and get a better read on your inventory levels.
For instance, Cogsy connects Shopify, Amazon, ShipBob, and more to store and monitor all your product insights in real-time and in one place. That way, you’re always working with the most updated inventory info (since it’s being refreshed around the clock).
This kind of inventory visibility is the key to creating accurate forecasts — which also leads to more accurate purchase orders.
After all, your forecasts are the foundation for creating POs since they tell you the exact inventory you need to meet your current demand.
So, integrating these tools only feeds your system of records more handy data. This means more accurate demand forecasts. And just like that, this feedback loop continues.
| 👋 TL;DR |
| Because inventory management systems keep close track of your stock levels, they can improve the accuracy of your forecasting and purchasing efforts. |
Implementing cloud-based PO software puts you on the fast track toward success.
This type of tool makes it easy to create, submit, and adapt your POs as often as needed — and it does all of this without tons of pesky data entry on your part.
Take Cogsy, for example. Cogsy is an end-to-end purchasing platform that streamlines how Shopify merchants and Amazon brands place purchase orders by removing any guesswork.
Whenever you draft a PO, Cogsy provides specific, data-backed restock recommendations based on your brand’s historical sales, real-time inventory levels, and future forecasted demand.
You can use these recommendations as a guide so you only order what you need – nothing more, nothing less. Even better, you can even bulk-add these recommendations with a single click.
Thanks to this expedited purchasing process, DTC brands save an average of 20+ hours a week with Cogsy, which they can reinvest into growing their business.
But how Cogsy can streamline your purchase order process doesn’t stop there.
Partnering with Cogsy is the smartest way to streamline your PO workflow and bypass bottlenecks in the supply chain.
For one, Cogsy tracks your inventory levels in real-time. So, the moment you start running low, you’ll get a friendly replenish alert, letting you know it’s time to restock.
Plus, handy restock recommendations streamline the purchase order creation process and safeguard against potential human errors (like overestimating your inventory needs).
How exactly? By outlining exactly what to order, how much, and where to send that inventory. That way, you only invest in stock that will turn a profit.
Even better, Cogsy gives you a bird’s eye view of where all your open purchase orders currently stand, from draft to delivery. So, you know what inventory is on its way, where it’s at, and when it’s scheduled to arrive.
But why not see for yourself? Try Cogsy free for 14 days.
Though purchase orders and purchase requisitions share similarities, these documents aren’t the same. The main difference between the two is that purchase requisitions are used internally to get permission from your finance team to place orders. In contrast, POs are used for external communication (and approval) with your suppliers.
A sales order is a document that’s issued from the seller to the buyer and authorizes the quantity, quality, and price of goods being exchanged. A purchase order is issued from the buyer to the seller and includes details about the types and quantities of products needed (as well as information on payment terms and delivery timelines).
A purchase order is issued by a buyer and fulfilled by a supplier. It provides details about the products the buyer needs (plus payment terms and delivery dates). An invoice is a bill issued by a supplier and paid by the buyer. Typically, invoices are sent after a PO is fulfilled.
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