What Is a Blanket Purchase Order?
A blanket purchase order also known as a standing purchase order is a long-term contract between an organization and a supplier to supply products or services at a fixed price regularly for a certain amount of time.
Issuing a blanket purchase order with the specifics, such as price and delivery date, already stated is an effective approach to decrease time spent and processing delays if your organization makes several payments for the same items or services.
In turn, suppliers might send several invoices with the same BPO number. Limitations on blanket purchase orders might be set for a given period, such as a year or a given amount of money. Blanket purchase orders may specify item quality standards in addition to the time frame, quantity, and price.
When to use blanket purchase orders?
Blanket purchase orders should only be used in the following situations:
- When large amounts of the same goods or services are required over a long period, usually a year.
- When the unit cost is well-defined and specific information may be provided.
- When a single client can fulfill the contract’s requirements for the whole duration of the contract.
- When you purchase in bulk, you may take advantage of better contract conditions, including bulk discounts.
- Stocking risk and expenditures are reduced when supplies are staggered.
Blanket purchase orders should never be used for orders if the pricing is uncertain, the product quality is suspect, or the seller is untrustworthy. We’ll look at how to use blanket purchase orders with two scenarios.
Case 1: Orders for materials and supplies
A popular sort of blanket purchase order establishes pre-negotiated line items for frequently used commodities or suppliers. For example, if a company buys a lot of paper towels and garbage bags from the same company throughout the year, a purchase order with two line items is set up ahead of time with an agreed-upon unit price for each item and a limit on how many units or dollars can be spent on each line item in a year. The provider simply has to deliver when items are required; the customer receives the units and payments upon receipt. Usually, the contract will come to an end when the line items, price amounts, or time constraints have been met.
Case 2: Limit of liability orders
Another form of blanket purchase order is one that is predicated on a certain time frame and risk limit but does not include individual line items. When allocating a restricted budget for advisory services for a certain project within a defined time window, these sorts of agreements are useful.
For example, if a report writing project’s total budget is $10,000, the buyer would issue a solitary purchase order with a quantity of 10,000 units at $1 per unit for a sum of $10,000 to be completed in a year. The quantity would reflect the dollar amounts to be spent on various aspects of writing reports as established later in the year, agreed upon by both parties, and then delivered in $1 increments. The customer would get a quantity of 2,000 units at $1 per unit for a total of $2,000 payable to the consultant if the initial report was specified, prepared, and delivered at a cost of $2,000 consented upon. The purchase order’s remaining value would then be $8,000. Subsequent reports would be specified, prepared, delivered, and funded in the same way until the purchase order’s entire budget of $10,000 was depleted.
What to include in a blanket purchase order?
The following contract terms should be defined in blanket purchase orders:
- Duration of the contract
- Contract conditions and pricing
- Billing information – how the vendor will submit invoices for payment.
- Specifications for the item, including quality, size, and number expected
- Quantity, delivery times, and locations
- Clause of cancellation
What are the benefits and drawbacks of using a blanket purchase order?
Let’s take a look at some of the benefits and drawbacks of using a blanket purchase order.
Let’s start with the benefits of blanket purchase orders.
- Framework is easy: A blanket purchase order does not need a lot of information. You don’t need information like supplier part #, production specifics, unit pricing, and so on because it’s largely for services. For the service to be given, users need the following information: supplier name, amount, account numbers, start date, and finish date.
- Costs are reduced, and purchasing power is increased: A blanket purchase order allows a company to group together purchases that would otherwise be spread out over a long period of time and gain volume savings. Furthermore, these POs enable a company to pool purchases from many divisions and locations in order to increase negotiating power.
- Improves efficiency and reduces the purchasing lead time: A blanket purchase order streamlines the procedure of buying several items. Rather than making 100 individual purchase orders, a corporation can just produce one and receive against it many times, like in the case above. A blanket purchase also avoids the urgency to find new vendors or renegotiate terms and pricing, reducing administrative expenses and allowing personnel to focus on other important procurement tasks.
Although the method is beneficial to both buyers and providers, it does have certain drawbacks.
- Year-end reconciliation is a dreaded task: If you’re a public business, your open liabilities must be disclosed in your 10-K annual report. Because blankets are so simple to set up, employees are more likely to gain clearance for a larger number than they require. The reasoning is that you have a safety net in case you run out of cash. You must accomplish the following to reconcile and report liabilities correctly:
- Determine the amount based on the invoices that have been paid and those submitted but not paid by the supplier.
- The vendor may not have sent bills yet, but the job has already been completed.
- Problems match the purchase order to the proper one: We discussed how simple it is for vendors to include the purchase order number on the bill in the benefits section. However, it might be a drawback if the blanket goes bankrupt or its validity time has expired.
Why Kissflow Procurement Cloud?
Kissflow Procurement Cloud is a flexible cloud-based procurement management software that has the provision to make a blanket purchase order. Kissflow allows you to build your automated purchase order system with simple drag-and-drop tools and minimal code. If you are looking for a fully functional procurement cloud solution that takes care of everything from purchase orders to purchase requisition to vendor management, Kissflow Procurement Cloud is your best bet. Request a free demo to try it for yourself.