Order Models: General Information and Considerations
Order (PO) - A type of contract between a buyer and a seller.
Regardless of what it is called, there is always something that serves the legal
function of "purchase order" when a buyer makes a request for goods or services
to be provided. When the seller agrees to provide the goods and services,
and both parties agree on the price, a binding contract exists between
buyer and seller. Note that the delivery dates don't have to be agreed
upon in order for a binding contract to exist. /The two major types of
orders are Discrete Purchase Orders and Blanket Purchase Orders
Discrete (Standalone) - A discrete, standalone PO is
a one-time commitment to a
supplier for material. The purchase order conveys information
such as quantity, description, and price of goods or services ordered.
A purchase order
specify terms and conditions, transportation requirements, etc. or one or more of these
items may be contained in a Terms and Conditions Agreement (TCA) referenced on the
purchase order. See also
Types of Discrete Purchase Orders.
Order - Blanket - A Blanket Purchase Order (BPO) is a long-term
commitment to a supplier for material against which multiple
short-term releases will be generated to
satisfy requirements. The BPO defines specific terms, conditions, and pricing terms not
already contained in or more specific than terms in the contractual agreement.
There are several
Replenishment Scenarios that use
different types of Blanket Purchase Orders.
- a/k/a Functional Acknowledgment, Control Message. When one party (e.g. buyer) sends an electronic message to another party (e.g.
seller), the recipient sends back a signal back advising the sender that the message reached the intended
destination, and indicating whether or not the message was syntactically correct and in
conformance to the standard identified in the message. The receipt acknowledgment
is called a "business
signal" by some in order to distinguish it from a business
document containing business data. A receipt acknowledgment has no legal authority - it does not address the business contents of the
The origin and destination are usually eBusiness gateways. The signal sent
back to the originator generally indicates that the message was
received at the recipient's gateway; it does
not guarantee that the message made into the recipient's back-end application.
The reliability of the interface between the recipient's gateway and recipient's
back-end application should be determined as part of the testing and
An acknowledgment advises a buyer that a purchase order has been received, and
indicates whether the supplier has accepted all or part of the order. An acknowledgment
may advise the buyer if any changes have been made or action is required, such as a
rescheduling of dates, adjustment to price and/or quantity, etc.
authorization to produce or ship
material which has already been ordered.
Release, Discrete - A stand-alone document or
message, authorizing the shipment of material against a
Embedded - See
Drop Ship -
A process where a buyer places an
order with a supplier for goods that are to be delivered to a third party.
All the financial transactions are handled by the buyer and supplier.
Goods marked for drop-ship should not affect the buyer's inventory counts.
- Example: An manufacturer's
customer may order a repair/replacement part, and the manufacturer may send an
order to the supplier indicating that the part should be shipped directly to
the manufacturer's customer.
- Example: An OEM may
outsource assembly of a product to a contract manufacturer. The OEM may
order component parts from their supplier and have them drop-shipped to the
Supplier-Managed Inventory (SMI) - (a/k/a Vendor-Managed Inventory). Any
replenishment process where the supplier determines when to ship parts and how many units to ship. Calculation of replenishment requirements may be forecast-based
Which Order Model to Use
The choice of
Replenishment Scenario to use
is the primary factor in deciding which Order model to use. A secondary
consideration is whether or not consignment (a/k/a supplier-owned inventory,
line side stocking) does or does not need to be supported.
A purchase order is either a discrete order or a
blanket order. EIDX has developed business models for two order types:
Discrete (Stand-alone) Purchase Order
- Blanket Purchase Order
A generally accepted
guideline is that a blanket
purchase order is cost-effective
if a buyer anticipates purchasing an item from the same supplier more than six times per year. The use of a BPO eliminates the
necessity of issuing a new discrete PO at the time of each release, resulting in
efficiency and administrative cost savings. Minimum dollar amounts and minimum time
periods BPOs may cover should be decided between trading partners.
For more information:
Buyer- vs. Seller-Initiated Changes
Sellers should set the Transaction Set Purpose Code (BCA01) to '00' in the 865
transaction when acknowledging buyer initiated changes.
Sellers should set the Transaction Set Purpose Code (BCA01) to '19' in the 865
transaction when acknowledging seller initiated changes. If the seller
initiated changes conveyed in the acknowledgment 865 transaction are
unacceptable to the buyer, an 860 transaction can be sent to request another set
of dates. If needed, further communications with the seller outside of the EDI
process may be necessary.
Both buyer and seller initiated changes in any 865 transaction should be
processed the similarly by the buyer’s system. The major purpose of
acknowledgments is to convey the scheduled ship or delivery date. Supplier
schedule dates are already established in the sales order system as noted in the
Relationships between Dates, Lead Times
and Supplier Performance Measures
If order placed inside lead time,
supplier's performance should not be based on requested delivery date if
promised delivery date is within agreed lead time. If order placed outside
lead time, supplier performance may be based on requested deliver date.
Partners need to agree as to
whether time will be measured in calendar days or work days. For example,
if buyer's factory runs 24x7 and seller's factory runs 8x5 ...
Transit times - buyer-controlled
carrier vs. seller-controlled carrier.
On-time windows - days early and
Typical Back-end Processing - Buyer
Generating the Purchase Order
See also Public vs.
Before it's an order -
talk about different procurement models, often the differences are in the
pre-order processes - what happens before something becomes an order. There are
some major categories:
- Sourcing - Determining who to
buy from and establishing their technical and financial qualifications
- Pricing - Determining what the
cost of the product or service will be
- Planning - Anticipating what
will be ordered, based on a buyer’s forecasted build plan or on historical
These are factors in the lead time for procuring a product.
Once a requirement exists -
application typically transfers orders to a procurement application; some ERP
applications include a procurement function.
- The system may assemble items for the same supplier onto
one or more orders, based on order policies and order parameters.
- The fields are used as criteria for segregating demand
into orders vary from partner to partner, and may include any of the
- Buyer's location
- Ship-to location
- Invoice-to location
- Seller's ship-from location, especially if supplier
ships from multiple countries
- Commodity type or accounting "spend" classification
- Which buyer is responsible for the order
- Shipment method
- Tax exemption status
- Order currency
- Some parameters considered when creating an order line
- Pre-pack (packaging) size - minimum number of units per
- Supplier requirement for minimum order value (minimum
amount of money) and/or minimum line item quantity for a product
- Bundled items - items that must be ordered together
- The system may automatically format and transmit the order
if all the necessary information is configured in the system.
- “Formatting” can be for hardcopy print, or can be the
creation of a file in a proprietary or standard format
- If any information is missing, the system may create an
exception for the buyer to review. In this case, the buyer has to manually
release the order for transmission
Processing the PO Response
When the buyer receives the PO response, processing activities
- Determining if the response matches a valid, open purchase
- Determining if the response is complete
- Evaluating critical data fields to see if the seller's
response matches or does not match the buyer's request, including:
- Correct product identification
- Line item total quantities
- Delivery schedule quantities
- Requested delivery or shipment dates
If the seller's response doesn't match the buyer's requests,
the buyer must decide whether the seller's response is acceptable and decide
what action to take.
Typical Back-end Processing - Seller
See also Public vs.
Most of this is “overhead” processing that can be avoided by
setting up repeat-buy products on blanket purchase orders, then generating
releases for replenishment. The seller typically does the following:
- Determine if customer is a valid customer and information
- Company name
- Credit status
- Tax certificate number
- Documentation requirements (certificate of conformance,
- Determine if the trading partner agreement or contract is
- Determine if it’s a new PO
- If it’s not new, is it a confirming PO or a duplicate?
- Determine whether the product a valid product
- If it’s a configured system, determine whether the
configuration valid and is standard or customized
- Determine if there has been product revision since last
- Determine product availability
- Is it an order for something that has been forecasted? If
forecasted, is product allocated in the system?
- If not forecasted, is the product available?
- Determine if the pricing is correct
- Generate order acceptance
- The order acceptance completes the contract.
- Same day ship may skip PO Acknowledgment generation and
go right to ship notice generation. The ship notice still indicates order
- If ship notices are not
enabled, same day ship may skip to invoice generation. Shipping the
items and sending an invoice still indicates order acceptance.
- PO acknowledgment should be generated if not same day
ship (or if customer requires it), and indicates order acceptance.
- Fulfill the order