What is a Purchase Order?

Maintenance departments frequently purchase maintenance, repair, and operations (MRO) inventory to complete maintenance work. Doing so without documentation reduces administrative work, but creates problems when there are discrepancies with payment, delivery, or order accuracy.

Purchase orders formalize purchasing requirements and make it easy for maintenance teams to track what was ordered, when it will be delivered, and how much it will cost. In this article, we explain what purchase orders are and how they are used by maintenance teams.

What is a Purchase Order?

A purchase order (PO) is a document created by a buyer (your organization) and issued to a seller (a vendor) that indicates the buyer’s intention to purchase goods. It is a legally binding document that specifies what items are to be purchased, and provides details such as item quantities, pricing, delivery timeframe, and payment terms.

Purchase orders, at times, are used to purchase services, though the variability of project deliverables and timelines may prompt the need for additional service contracts and agreements.

Types of Purchase Orders

There are multiple types of purchase orders, suitable for different scenarios:

• One-time (or standard) purchase orders are the most used type of PO. They are used to make sporadic, infrequent, one-off purchases from a vendor. An organization may use a standard purchase order to purchase equipment or critical spares.
• Planned purchase orders (PPO) are used for long-term purchases with known demand, but delivery dates that are subject to change. They are typically used for items with fluctuating demand – for example, reams of printer paper in an office. Instead of delivering items on a specified date, the organization issues a release against the PO to confirm a delivery date.
• Blanket purchase orders (BPO) are used to make long-term recurring purchases from frequently used vendors. They simplify purchasing by allowing organizations to consolidate several standard POs into a single, standing order. What goods are purchased, and their amounts, may vary. However, organizations may set restrictions regarding what items can be purchased, the maximum purchase limit, and who is authorized to make purchases.

Purchase Order vs. Invoice

Purchase orders are often confused with other types of documentation used in the purchasing process, one of which is an invoice. An invoice is a document created by a seller (a vendor) and issued to a buyer (your organization) that requests payment for delivered goods (or services). Like a purchase order, it is a legally binding document that specifies what items were provided, the total cost, and the payment terms. Invoices typically reference the purchase order number.

Why Use Purchase Orders?

For busy maintenance professionals, paperwork simply slows them down. Often times, goods and services are purchased without formal documentation other than a vendor invoice. While convenient, vendor invoices only tell one side of the story. What happens when there’s a dispute about payment, delivery, or accuracy?

That’s where purchase orders come in. Purchase orders provide many benefits to maintenance organizations:

• Clearly communicates expectations: Purchase orders are highly detailed and ensure that both you and the vendor agree on what’s expected.
• Reduces mistakes: Using a formal purchase order reduces mistakes that occur from misinterpreting handwritten orders or orders taken over the phone.
• Improves recordkeeping: Maintaining a purchase order history makes it easy for finance teams to see what was purchased and why it was needed.
• Makes orders easier to track: Purchase orders make it easier to track what was ordered and when it will arrive, as well as verify that you received what was ordered.
• Provides legal protection: Purchase orders are legally binding contracts that offer protection to your organization and the vendor. They are a record of exactly what was ordered and can be used as a point of reference if problems arise.

How Purchase Orders Work

The purchasing process at a given organization consists of multiple steps, and varies based on their organizational structure, workflows, and requirements. An example of a “typical” purchase process is shown below. Note that the “buyer” is the organization; the vendor providing goods and services is the “seller”.

1. The buyer identifies a need for a good or service.
2. The buyer creates a purchase requisition and sends for approval.
3. Once the requisition is approved, the buyer issues a purchase order to the seller.
4. The seller reviews the purchase order and determines whether it can be fulfilled.
5. The seller accepts and fulfills the order.
6. The seller ships the order and issues an invoice to the buyer.
7. The buyer verifies the order and pays the seller.

How a Purchase Order Works in Maintenance Organizations

While the process above is “typical” for non-maintenance purchases, it is not conducive to efficient maintenance operations. For example, when an asset experiences downtime, money is lost with each passing second. The maintenance team simply cannot wait for a formal purchasing process to complete while production is stopped.

Instead, the purchase order process in a maintenance environment may look closer to the steps below. In this example, the “buyer” is someone designated to make purchases on behalf of the maintenance team; the “seller” is the vendor.

1. The buyer directly orders a good or service from the seller. The buyer pays upfront or the seller issues an invoice to be paid shortly after shipment.
2. The buyer creates a purchase order to document the purchase for recordkeeping purposes.
3. The seller ships the order to the buyer.
4. The buyer verifies the order and immediately uses the part to make the repair.

Due to the unexpected nature of maintenance needs, some organizations bypass purchase orders all together. Instead, the organization may provide the maintenance department with a credit card and communicate any restrictions for what can be purchased, credit limits, and so on.

Purchase Order Software for Maintenance Teams

As shown above, maintenance purchases have unique requirements that are not typical of other types of purchases. Therefore, maintenance departments do not require the robust purchasing capability of other systems, such as enterprise resource planning (ERP) or accounting software.

In fact, most maintenance organizations don’t even use the built-in purchasing functionality of their computerized maintenance management system (CMMS). Often times, the purchasing process typically takes place outside of the CMMS. Maintenance teams are afforded the flexibility to make whatever purchases are required to keep assets in service.

Organizations that do use the purchasing capability of CMMS traditionally fall into one of two categories: 1) they seek a simplified way to keep record of repair part purchases, and 2) they plan to integrate the CMMS with other purchasing systems.

CMMS software makes purchase order creation easy for organizations seeking simple maintenance purchase tracking. The CMMS has direct access to vendor and inventory information, making it easy to identify what goods are being purchased, and from whom. Some systems allow you to generate purchase orders based on inventory items that have reached their set reorder point. Historical purchase order records and purchasing reports track past purchases for review or auditing purposes.

Manage MRO Inventory Activity with FTMaintenance Select

FTMaintenance Select helps maintenance teams effectively manage their spare parts inventory from start to finish, including the ability to generate purchase orders. Robust inventory management features allow you to organize your inventory catalog and access key information related to costs, quantity, location, and more. Request a demo today to learn more about FTMaintenance Select.