What is a purchase order? How does it work?

In international trade, a purchase order can be defined as a type of commercial document, which is generated by importer in order to authorize an import transaction.

Importer prepares and sends the purchase order to the exporter, who is expected to check the details.

If exporter confirms the purchase order by sending back a signed copy to the importer, then the purchase order becomes a binding legal document for both parties.

Purchase Order Definition Picture

By preparing a purchase order; importer mainly defines and conveys following information to the exporter:
  • the price of the goods
  • description of goods
  • quantity and quality of the goods 
  • packaging
  • delivery terms 
  • delivery period 
  • modes of transport   
  • payment method
  • transport company details, that will pick up the goods from the exporter, in case freight will be arrange by the importer.
Contents of the purchase order may change from industry to industry, customer to customer or country to country. There is no fix and single format available.

How does a purchase order work?

Purchase orders are issued by importers. Especially, well organized, professional importers tend to work with purchase orders.

Purchase order flow diagram
In most cases, an ordinary importer may not be having full details of the transaction, when ordering for the first time from a new supplier.

As a result, importers may require a proforma invoice, which is issued by the exporter, to complete a purchase order, especially on their first order from a new supplier.

Once, importer assures himself that he has the full details of the order in hand, such as the description of goods in detail, package amount, cartons per pallet, pallet quantity, loading place or port of loading etc., then he issues the purchase order.

The exporter should be checking the terms and conditions of the purchase order carefully. If everything is suitable, then the exporter confirms the order by sending back a signed copy to the importer.

If an importer and exporter have an ongoing business relationship, the importer may send purchase orders to the exporter time to time, when the importer's stock level drops below a critical level, to place a new order.

These purchase orders mostly take exporters by surprise, as no preliminary proforma invoice has been sent.

How to prepare a purchase order?

As explained above, purchase order can be prepared in various forms without any restriction.

In order to help my readers to understand the structure of a basic purchase order, I will outline the core contents of this document below.

  1. Purchase Order Date: Date on which the purchase order is issued.
  2. Purchase Order No: Purchase order number is one of the key elements, along with the purchase order date, to give a proper reference for any future uses.
  3. Supplier Name and Supplier Reference Number: Exporter company details including company title, address, telephone numbers, contact person and legal reference numbers such as VAT number, along with unique supplier reference number.
  4. Package Amount, Gross Weight and Net Weight: If available, shipment details should be mentioned on the purchase order such as package amount, gross weight and net weight.
  5. Description of Goods: Goods should be described on the purchase order in detail, so that the exporter could verify goods' characteristics without any difficulty.
  6. Unit Price: Unit price of the goods should be mentioned on the purchase order, if available.
  7. Total Amount: Total amount of goods should be stated on the purchase order with the agreed currency.
  8. Loading Period: Also known as delivery period. 
  9. Payment Method: Agreed payment method should be mentioned on the purchase order.
  10. Delivery Terms: Purchase order should indicate agreed incoterms with proper reference to delivery point and correct incoterms edition. 
  11. Additional Instructions: Sometimes importers want to draw supplier's attention to specific points in regards to the order. These additional instructions may refer anything about the order. For example, specifications of the goods, extra documentation requirements etc.
Purchase Order Sample

Below you can find a purchase order sample, which covers dentist equipment shipment from Italy to Saudi Arabia via sea transportation.
Purchase order sample picture
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