What is a Blanket Purchase Order?
A blanket purchase order is an easy way to place orders that will require multiple payments over a period of time. Blanket purchase orders are long-term contracts with specific suppliers that help a buyer order the same goods or services at regular intervals.
This aggregated purchase order is most commonly used when a business has a recurring need for expendable goods. It can be a win-win for suppliers, too: Suppliers also benefit from blanket purchase orders because they guarantee ongoing business and assist the suppliers with their own orders and cash-flow projections.
Not all products are eligible for blanket purchase orders. Read on for more insight into the benefits of blanket purchase orders and when to use one.
What goes into a blanket purchase order?
A purchase order is not the same as a contract, and what is included in a purchase order will help bring the contract to fruition. Remember, the purchase order goes from the buyer to the supplier, indicating what the buyer needs and the terms and conditions around purchasing and receiving those goods. Once the order is accepted, it becomes a legal and binding contract.
As a result, the blanket purchase order should include
- The quantity and quality of the product
- The fixed price for each shipment
- The start and end dates of the contract
- The preferred method for invoicing and payment
- The times and locations for each delivery
- A cancellation clause
When to use a blanket purchase order
Blanket purchase orders aren’t the best option for every sourcing need. They’re best suited for goods or services that are regular, recurring purchases. Blanket purchase orders usually cover the duration of a year and are used for relatively stable demands, in which the unit cost can be well-defined and details can be specified. BPOs also minimize risk and cost, since vendors know well in advance how much you need and when.
Likewise, it’s important to have the right vendor in place when using a blanket purchase order. These contracts necessitate using the same vendor over the entire lifespan of the purchase order; as a result, the buyer must be assured that the vendor is capable of delivering the entire duration of the contract. (This is where strong supplier relationship management can make a huge difference!)
Look for products or services that can achieve cost-savings when ordered in bulk. Blanket purchase orders often facilitate more favorable contract terms, since the supplier can anticipate demand and manage their costs proactively. They’ll be more open to giving you a bulk discount for issuing a blanket purchase order.
Benefits of a blanket purchase order
In addition to minimizing risk, lowering costs, and streamlining your supply chain, blanket purchase orders can also lead to lower admin costs and improve internal processes on the buyer side.
BPOs offer a way to save more money. By linking together the small purchases from several different departments, you can qualify for quantity discounts based on the overall increase in the number of items included in each order. And, you can submit fewer purchase orders to your regular suppliers — saving internal resources and time.
As an added benefit, consolidating purchases with one supplier enables your procurement team to considerably diminish the total number of vendor interactions that take place on a monthly basis.
Blanket purchase orders also create the opportunity to negotiate the simultaneous arrival dates and quantities of every material or product necessary for a company’s ongoing production schedules of projects. As a result, your organization will be able to tether materials to one another and take concurrent possession of every required production component. Your supply chain can devote less time to superfluous materials, and allocate space that would otherwise be used for storage to more constructive pursuits.
Finally, blanket purchase orders often include clauses to cover subsequent purchases during the contract period. These clauses allow your company to submit additional invoice items as needed until the terms of the agreement are fulfilled, the order period terminates, or some other threshold is reached. Inclusions like these within the structure of the contract will allow you some flexibility and peace of mind.
Drawbacks of using a blanket purchase order
There are some challenges to using a blanket purchase order, especially in today’s business environment.
First, blanket purchase orders require companies to forecast demand. Predicting demand for some industries can be akin to fortune-telling. If you’re buying the same goods every month, how will you know if you’ll still need them a year from now? Consumer demand can be tricky to understand, so try to pick stable inputs that you’ll always need — office supplies can be a good example.
Next, in using a BPO, you’re also betting on the stability of the good’s market value. If a product or input suddenly drops in price, you’ll be unable to take advantage of those cost savings. BPOs set prices from the beginning, which can work in your favor if prices rise — or against you if they fall.
Finally, blanket purchase orders still require oversight on behalf of the teams receiving each shipment to make sure the right quality, quantity, and delivery timing are as agreed in the BPO. You’ll need a strong method for capturing, matching and validating invoices and receipts to enforce contract compliance.
To learn more about purchase order consolidation and blanket purchase orders, check out our blog, The Source.