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Purchase Orders 101: Everything You Need to Know

What do you do when you need to buy more ingredients than you could fit in a grocery cart? 

Purchase orders exist to help ensure big transactions go smoothly. 

When it comes to manufacturing CPG products, you are most likely going to need to buy wholesale ingredients from a supplier. While these orders are no small thing when it comes to cost,  buying in bulk from a wholesale supplier can actually save you money in the long term. However, unless you’re protecting yourself with a contract that clearly spells out the terms of the transaction, you could be opening yourself up to a potentially sticky situation for both you, the purchaser, and the supplier.

In this article, we’ll cover everything you need to know about purchase orders, like what they are, how they work, and why you need them. 

What is a PO in Business?

It’s not uncommon for a supplier to ask you to send over a PO. But what does PO stand for? And what is a PO number?

PO stands for purchase order, and the most basic purchase order definition is this:

A purchase order is a commercial document and first official offer issued by a buyer to a seller, indicating types, quantities, and agreed upon products or services. 

Each line item of a purchase order usually includes important information like the item code, product name, quantity, pack size, unit price, and delivery date. By clearly laying out all this info with a PO form, the transaction between the buyer and seller will be transparent and straightforward. 

In many industries, purchase orders are a legal requirement for business-to-business transactions. At ShelfLife, we require purchase orders for every transaction in our B2B ingredients marketplace

How is a purchase order different from an invoice? While both documents include details about the goods and services being purchased, an invoice is a payment request, and is only sent after the order has been fulfilled.

How Do Purchase Orders Work?  

Getting to the PO phase of the sourcing process involves a simple 4-step process.

Step 1: Submit a Request for Quotation

If you’re a buyer placing a wholesale order, you’ll first want to figure out a few things about the products you want to buy, such as which products, how many units, and from whom you are purchasing.

For example, let’s say you need to buy 20,000 pounds of organic peanuts for use in the granola bars your company produces. Once you have found a supplier that sells large volumes of peanuts, you would then send a request for a quote to that company so you can review pricing before making a purchasing decision. 

Once the company responds, you’ll want to agree on specifics like ingredient specifications, pack size, MOQ, and shipping so you’re both on the same page.  

Step 2: Draft the Purchase Order

There are many PO templates available online. As long as all the important information is present on the purchase order form, it’ll work just fine. Fill in all the items on the form, then prepare to send it to the supplier for review and approval. 

On ShelfLife, you can directly transfer quotes into purchase orders in seconds, making it easy to order ingredients in bulk. 

Step 3: Send the PO for Review and Approval

When you’re ready to place your order, send the PO as an email attachment. 

However, it’s important to note that a PO is not a guarantee that your order will be fulfilled.  Once the supplier receives your purchase order, they’ll check their inventory to make sure they can fulfill your order. Aside from confirming whether or not the quantity of items in your PO is in stock, the seller will also note any pricing adjustments or potential issues with the fulfillment date. 

You may need to amend the PO more than once before your order is shipped.

One common question about purchase orders is whether or not POs are a legally binding contract. There’s a bit of nuance here, as purchase orders are not legally binding when they’re initially sent out. However, they do become a legal contract once the supplier approves the PO. 

For bulk-ordering ingredients, ShelfLife helps you keep track of all of your POs, along with any communications with your suppliers, all in one place. 

Step 4: Delivery and Invoicing

Once the PO is approved, all that’s left to do is receive and pay for your order. 

Since the seller should have already approved the delivery date, you should know exactly when your items will arrive. Once delivered, an invoice will be issued by the supplier for your payment.

All that’s left to do is pay the agreed upon amount for your items. Transaction complete! 

In addition to requesting quotes and generating POs, you can also pay your invoices via ShelfLife. Our Stripe-enabled invoice tool allows you to pay your invoices by credit card or ACH. 

Managing your Purchase Order Process

There’s a reason businesses all over the world use PO forms to track buying and selling — it just works.

Purchase orders are a necessary part of modern business, but there’s nothing modern about manually creating purchase orders for each and every wholesale transaction. Instead, use a cloud-based solution like ShelfLife to automatically generate your POs for your raw material sourcing. 

Sign up now to start creating POs online.

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