In this article, learn about:
What purchase orders are
How the purchase order process works in the supply chain
The different types of purchase orders
How retailers use purchase orders
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A purchase order (PO) is a document sent by a buyer to a supplier to authorize a purchase. It details what goods the buyer wants to purchase, such as product descriptions, quantity, price, and delivery details. Once it has been accepted by the supplier, the PO becomes a legally binding agreement between the two companies.
In the retail industry, purchase orders are critical for keeping operations smooth, reducing confusion, and ensuring that suppliers get paid accurately and on time. Whether or not you’re just starting out as a vendor, knowing how POs work can minimize mistakes and save revenue.
Understanding Purchase Orders
At its core, a purchase order acts as a contract. It tells the supplier:
Which items the buyer wants to order
The quantity of each item
The price the buyer is prepared to pay
Where and when the products must be delivered
What payment terms are to be used
For buyers, POs provide a convenient point of reference for invoicing, shipping, and production. And for suppliers, they are a valuable tool for tracking finances and inventory.
Related Reading: What Is Vendor Managed Inventory?
Elements of a Purchase Order
When it comes to a purchase order, there are several key elements you can expect to find:
PO Number: This is a unique identifier that helps track the order.
Buyer and Supplier Information: Here are the names, addresses, and contact details for both the buyer and the supplier.
Ship To and Bill To Addresses: This section indicates where the products are going and where the invoices should be sent.
Order Date and Delivery Date: These dates show when the purchase order was created and when the products are expected to arrive.
Item Details: This part includes product SKUs, descriptions, quantities, and unit prices.
Shipping Terms: This outlines who is responsible for the shipping costs (like Prepaid or Collect).
Payment Terms: This specifies when the buyer is expected to make payment after receiving the invoice (for example, Net 30).
Example of a Purchase Order
The Purchase Order Lifecycle
The purchase order process is a series of steps designed to keep everything flowing from when an order is placed to the time the last payment is made.
Step 1: Buyer Creates the PO
First, the buyer generates the PO and sends it off to the supplier. This is usually done through an EDI 850 document, email, or an online portal.
Step 2: Supplier Reviews and Accepts
Next, the supplier reviews the PO details to make sure everything is accurate. If everything is correct, they can start fulfilling the order. If there are any issues, the supplier will reach out to the buyer to discuss necessary changes.
Step 3: Order Is Fulfilled and Shipped
Once the PO is confirmed, the supplier starts to prepare the goods according to the requirements laid out in the PO and then ships it. Typically, an Advance Shipping Notice (ASN) and a Bill of Lading (BOL) accompany the shipment.
Step 4: Goods Are Received
Once the buyer receives the shipment, they verify that the items match what’s listed in the PO and ASN. Any discrepancies could lead to deductions or chargebacks (often in the form of a shortage).
Step 5: Supplier Sends Invoice
After shipping, the supplier sends an invoice that aligns with both the PO and the shipment amounts. Major retailers like Walmart often require invoices to be submitted through EDI 810.
Step 6: Buyer Matches Documents and Pays
Finally, the buyer conducts a three-way match between the PO, the receiving report, and the invoice. If everything aligns perfectly, the payment is processed according to the agreed-upon terms in the supplier contract.
Related Reading: Walmart Agreements and Allowances Cheat Sheet
Types of Purchase Orders
Suppliers might come across a few different types of purchase orders, depending on how the buyer organizes their purchasing process. Here are some different POs suppliers could come across:
Standard Purchase Order: This is a one-time order with defined items, quantities, and prices.
Blanket Purchase Order: This PO is used for recurring purchases where quantities and delivery dates might not be established right away.
Planned Purchase Order: This is similar to a blanket PO but instead has tentative delivery schedules. Each shipment needs to be “released” before fulfillment.
Contract Purchase Order: This is a framework agreement with no immediate deliverables. It ultimately sets extended terms between a buyer and supplier.
Understanding what kind of PO you’ve received helps ensure proper fulfillment and invoicing.
Purchase Order vs. an Invoice
While related, POs and invoices serve very different functions in the purchasing process.
Purchase Order
| Invoice |
Created by the buyer | Created by the supplier |
Sent before goods are delivered | Sent after goods are delivered |
Authorizes purchase | Requests payment |
Lists expected items and prices | Lists delivered items and charges |
In most cases, payments won’t be issued unless the invoice matches the PO and the items are received in good condition.
How Retailers Use Purchase Orders
Large retailers like Walmart, Target, and Amazon rely heavily on POs to manage their supply chain processes. Each retailer has built its own systems and expectations around POs, for example:
At Walmart, POs are issued through EDI 850 and managed through NOVA, an app within Retail Link.
Target sends POs via EDI and places a strong emphasis on high fill-rate accuracy for every line item.
Amazon uses Vendor Central to manage PO issuance and confirmations, requiring suppliers to follow detailed labeling, routing, and shipping instructions.
Related Reading: Finding the Right Purchase Order: EDI 850 vs. EDI 875
While the PO structure serves the same purpose (to formally request and authorize the purchase of goods) across different retailers, the specific processes and compliance expectations can differ significantly. Suppliers working with multiple retailers must stay proactive in understanding and adapting to each retailer’s system. Overlooking a detail unique to one retailer’s PO process can create complications across fulfillment, payment, and compliance.
Common PO Challenges for Suppliers
Even though POs are designed to create structure and clarity, suppliers can still encounter challenges throughout the process. Small errors in the PO can quickly ripple down into shipping delays, payment issues, and deductions.
One common challenge that often leads to a deduction is incorrectly acknowledging or accepting a PO. Some retailers ask suppliers to acknowledge receipt of the PO within a certain time frame. Missing that window or neglecting to inform the buyer can cause confusion later in fulfillment or regarding canceled orders.
Another frequent issue is invoice mismatches. When the supplier's invoice is not in agreement with the original PO in unit price, quantities, or item numbers, the variance can either hold up payment or initiate a deduction. In the same way, late shipping, missed MABDs, or partial shipping that fails to meet fulfillment expectations often results in compliance charges.
Duplicate orders are another risk when POs aren't tracked carefully, especially when buyers issue revisions or when multiple systems (like email and EDI) are in play. Accidentally shipping the same order twice not only impacts inventory but can also cause costly returns and deductions.
Related Reading: Common Root Causes for Retailer Shortages
Retailers have increasingly automated their deduction systems, flagging discrepancies without human intervention. That means suppliers have less margin for error, and any mistakes tied back to a PO can automatically result in a deduction, whether it’s for late delivery, quantity shortages, or pricing inconsistencies.
Handling purchase orders accurately from the very beginning, by auditing each PO thoroughly, confirming delivery on time, and verifying that all documents are consistent, is key to risk mitigation and revenue protection.
Best Practices for Managing Purchase Orders
To minimize issues and protect revenues, suppliers need to have strong internal PO management procedures. Validating every purchase order carefully, acknowledging receipts in a timely manner, matching documentation correctly, and diligently monitoring delivery dates are critical habits.
Investment in system integration and keeping the retailer's teams well-informed can also enable suppliers to steer clear of avoidable mistakes and decrease the potential for deductions related to purchase orders.
SupplyPike’s Solution
SupplyPike helps suppliers protect revenue by flagging discrepancies, automating documentation, and streamlining dispute resolution, so you can spend less time chasing down payments and more time fulfilling orders.
Meet with our team to learn how SupplyPike can help you avoid deductions, understand PO errors, and keep your accounts clean.