What is a purchase order?
A purchase order is a formal, legal document prepared by a retail buyer that outlines the items they intend to purchase from a supplier — including detailed descriptions, quantities, agreed prices, delivery dates, and payment terms. In the consumer goods industry, a retailer’s PO to a supplier serves as a contractual offer to buy specific goods. Once the supplier accepts the PO, it typically becomes a binding agreement – the supplier is obligated to deliver the items as specified and the buyer commits to receiving and paying for those goods.
POs ensure both parties have a clear, written record of the order requirements, helping to prevent misunderstandings or disputes about what was ordered and under what conditions.
Why are purchase orders important in the consumer goods industry?
POs play a crucial role in CPG supply chains by translating demand into execution. The purchase order is the critical commercial document that initiates the product flow in the CPG supply chain. It converts forecasts or sales plans into an actual order to be executed. They trigger the entire fulfillment process – from manufacturing to delivery – and serve as the reference point for all downstream activities. Key reasons POs matter:
- Clear communication and accountability: A PO includes exact requirements from a retailer to a CPG brand, providing a single source of truth for order details (product IDs, quantities, ship-to locations, etc.). This clarity reduces errors in order fulfillment. By using standardized electronic POs (via EDI or retailer portals), retailers and suppliers can automatically share order data and reduce manual data entry mistakes.
- Inventory planning and supply chain execution: For supply chain and demand planning teams, each PO is one indication of a demand signal that drives production schedules and inventory allocation. For example, a large PO from Walmart might trigger a CPG manufacturer to ramp up production or adjust its distribution plans to ensure the order is filled on time. In essence, POs link the sales side (incoming demand from retailers) with operations. They help manufacturers avoid guesswork by providing concrete orders to fulfill, which is critical for managing factory run times and raw material procurement.
- Financial and legal protection: The buyer gains assurance of supply at the agreed price, and the seller can treat the PO as a guarantee of future payment once goods are delivered and invoiced. Most large retailers won’t accept delivery without an accompanying PO reference, underscoring its importance in audit trails and payment processing. And, often, an invoice will only be paid if it matches the PO details (and what was delivered), a process known as 3-way matching in procure-to-pay cycles.
- Performance measurement: POs allow both parties to measure fulfillment performance and compliance. Suppliers track their ability to fulfill orders completely and on schedule, while retailers monitor whether suppliers meet the requested delivery dates and quantities. This forms the basis of vendor scorecards in the CPG industry. For instance, many retailers measure each supplier’s on-time delivery rate and fill rate per PO, and use these metrics to assess suppliers (sometimes even tying them to financial penalties or preferred vendor status).
Real-world example
Imagine a national retailer issues a PO to a beverage manufacturer for 50,000 cases of a new sports drink, to be delivered to the retailer’s DC by a certain date. The scenario might play out something like this:
- The National Account Manager at the beverage company receives the PO and coordinates with the supply chain team to ensure the product can be produced, packaged, and shipped in time.
- The Demand Planner checks that this order aligns with or exceeds the forecast for that product – if the order is larger than expected, they might adjust production plans upward.
- Because the retailer sent the PO via an EDI system, the order details (product codes, quantities, delivery locations and dates) flow directly into the beverage company’s order management system, triggering an acknowledgement and reserve of stock.
- Over the following weeks, the manufacturing team schedules the production of the sports drink, and the logistics team books transportation.
- When the cases are ready, the Third-Party Logistics (3PL) warehouse handling the beverage company’s distribution picks and stages the order.
- The shipment is delivered to the retailer as specified.
All documentation (packing list, advance ship notice, invoice) references the original PO number so the retailer can easily verify that the delivery matches what was ordered. This PO-driven process ensures the retailer gets the right product in the right quantity at the right time, and the brand records a sale under the agreed terms.
Relevant KPIs and metrics
Consumer goods companies and retailers track several key performance indicators related to purchase orders and fulfillment:
- On-Time In-Full (OTIF) delivery: OTIF measures the percentage of orders delivered exactly when expected (on or before the due date) and in the full quantities ordered. It is a critical metric in the CPG industry to gauge supply chain reliability. Major retailers like Walmart have even made OTIF a supply chain mandate for suppliers, imposing fines for deliveries that are not on time or not in full. These fines can cost some larger CPGs millions per year, making supply chain efficiency a key service level indicator.
- Fill rate: This is closely related to OTIF and indicates what proportion of the ordered units were actually delivered. High fill rates are important to avoid lost sales — a low fill rate on a PO means the retailer didn’t get all the product it wanted, which could lead to OOS’s. Companies aim for as close to 100% fill rate as possible on every order.
- Purchase order cycle time: This metric measures how quickly POs are processed and fulfilled. It can be defined as the time from when the order is received (or created) to when the order is shipped out to the customer. A shorter PO cycle time means a more responsive supply chain. For instance, if a retailer places an ad-hoc PO for an unexpected demand surge, a CPG supplier with an efficient process might confirm, pick, pack, and ship that order in, say, 2 days, whereas a slower process might take a week. Tracking cycle time highlights process bottlenecks and the effectiveness of order management systems.
- PO accuracy and error rate: This metric looks at the accuracy of order fulfillment relative to what was ordered. It is often measured as the percentage of POs delivered with no errors or discrepancies. Errors could include shipping the wrong product, incorrect quantities, or damage/missing items. A high PO accuracy (with an error rate approaching 0%) is a sign of operational excellence. Common issues like pricing discrepancies or missing items can be tracked to identify root causes (such as data entry errors or warehouse picking mistakes).
- Compliance metrics: Retailers often have specific compliance requirements tied to POs – such as correct labeling, advanced ship notifications, pallet configurations, or delivery window adherence. Suppliers monitor metrics like label compliance rate or on-time booking rate to ensure they meet these requirements. Non-compliance can lead to chargebacks. For example, if a retailer requires an electronic advance ship notice (ASN) 24 hours before delivery and a supplier fails to send it, that might count against their compliance score.
Suppliers should aim to be “in the green” on all of these key performance metrics. High performance on OTIF and fill rate strengthens a supplier’s reputation and relationship with a retailer. In contrast, chronic issues with late or incomplete POs can jeopardize future business. Thus, the humble purchase order, while just a document, is tied to a wide array of operational processes and performance indicators that are vital in the CPG industry.
