Blanket Purchase Order - Benefits, Example, and How To Set It Up

Alok Suman
August 30, 2022

Most business leaders have a hard time managing supplier relationships. This may be because of complexities in the supplier onboarding process or even difficulty in finding reputed suppliers. 

Thankfully, the concept of blanket purchase order solves this issue. It is a procurement framework many successful businesses follow because it eliminates the hassle of compliance and inefficiencies. But to implement blanket PO, you need to have a thoughtful strategy intact.

In this blog, we will talk about what a blanket purchase order is and how to implement it successfully for your business to ensure better ROI. 

What is a Blanket Purchase Order?

A blanket purchase order is a long-term contract between a buyer and a single supplier to supply a product or service at certain shipment and pricing terms.

Companies issue these purchase orders to reduce production delays and ensure cost efficiency throughout the supply chain. 

Let's explore this concept in more depth.

Recently, a supply chain crisis related to the delivery of semiconductor chips halted the production of many automotive companies. This has made the companies more aware of improving their production units and strengthening supplier relationships. Having the right supply partner by your side is critical for a business to thrive.

With the business environment becoming more complex due to rising customer expectations, you should ensure that you have the resources to create the best product and deliver it to your customers on time to stand out. 

A blanket purchase order is one such method to achieve your production goals. The simple yet effective procurement technique can improve your workflow and administrative procedures. 

With that said, let's move on to the contents of a blanket PO and how it can benefit your business. 

What are the Contents of a Blanket PO?

Most businesses assume that a blanket PO is similar to a contract. That's not the case.

Source

A blanket purchase order is a legal document, having all the details that help clear up any logistical confusion. Issued by the buyer, it defines the following things: 

  • Billing information of the buyer and the supplier, including the addresses of both parties, purchase date, product quantity, PO number, and more
  • Shipment terms and pricing
  • The item description and technical information
  • Delivery locations
  • Clause of cancellation

In addition to the above terms, some buyers also specify quality standards for better procurement efficiency. 

Here's an example that will give you clarity: Suppose XYZ company is running a hotel and is buying soaps and paper towels from ABC enterprise throughout the same year, XYZ will issue blanket PO for these two items upon an agreed price. 

Practical Instances Where Blanket Purchase Orders are Ideal

Here are a few practical instances where blanket PO can boost cost optimization and efficiency for your organization:

1. When You Need an Individual Item or Service for a Long Time

For the automotive and aeronautic industries, certain individual items are indisputable in the production process.

In such a situation, it makes sense for buyers to negotiate a blanket purchase order and set it up ahead of time on the agreed price and time. The provider will deliver the item to the buyer and receives payment upon delivery over time.

It is a simple arrangement that benefits both parties. This arrangement is also known as a recurring blanket purchase order. 

2. Limited Liability Orders

This is a popular form of blanket purchase order where you have a restrictive budget allocated to getting a product or service within a definitive time frame. 

For instance, say you have a budget of $15000 for building a website for your company. You can fix a $50 per hour rate for the developer and issue a purchase order accordingly.

This agreement is helpful when you want to limit the risk factor and have a budget limit.  

What are the Benefits of Using a Blanket Purchase Order For Businesses?

We have discussed what a blanket purchase order is. Let's now explore the benefits of using it for your business.

1. Increases Purchasing Power

With a blanket purchase order, companies can achieve economies of scale and boost their purchasing power. It also sets you up as the one with the negotiating power.

Moreover, most suppliers often offer bulk and loyalty discounts to companies that are their long-term customers, thereby increasing your purchasing power. 

2. Mitigates Risk and Improves Customer Experience

Due to the 'Amazon Effect,' most customers have become intolerant of delayed deliveries. More than 65% of customers switch to a competitor due to a bad customer experience.

To stop this from happening, you should keep your production cycle as seamless as possible. With a blanket PO, you can mitigate the risk of a bad customer experience by ensuring you have all the items needed for the production cycle.

As you get critical supplies on time, you can shift your focus from procurement to boosting the delivery pipeline. 

3. Convenient for Invoice Processing

From tax calculation to verification, invoice processing is a time-consuming and tedious process. Especially if you are a small business owner or a start-up, keeping track of hundreds of invoices can take a lot of your time.

Blanket purchase orders can provide you relief from sorting out hundreds of invoices. Since they are bulk orders, you can prepare a single order with critical information, enabling scalability and efficiency. 

4. Real-time Visibility

Your supply chain doesn't have to be complex. Research shows that successful businesses have a supply chain that offers them real-time data visibility to ensure that they make strategic decisions.

With all transactions in one place, you can streamline your workflows and create better cost optimization strategies. Furthermore, for blanket purchase orders, you have to deal with a single vendor and have complete access to data, enabling better analysis. 

But What's the Catch?

We have mentioned before that a one-size-fits-it-all procurement solution doesn't exist in the modern business world. While blanket purchase orders have many benefits, there are also some drawbacks you should know. Let's take a brief look at them.

  • Predicting Demand: When deciding on an agreement for a long-time, it is crucial to perform proper demand forecasting. However, demand forecasting is not always accurate, especially during disruptive times. 
  • Fluctuating Prices: Most of the things you buy today will have a price change in the future. So if you have brought an item at a higher price today, it will affect your balance sheet in the future. 
  • Year-End Reconciliation: For public companies, blanket purchase orders are a tedious process when doing year-end reconciliation. 

How to Set Up the Blanket Order Process for Your Business?

After weighing the pros and cons of using this framework, it is safe to say that it is more advantageous to implement.

While the implementation process differs for every organization, here are some steps you can follow for overall success:

1. Find the Right Supply Partner

Choosing a supplier or a vendor is the first step in transforming your business. The correct selection will reap many benefits, but the wrong choice will waste your precious resources.

It is best to form strategic alliances with partners that add value to your business and have a proposal that suits your business requirements. 

2. Do Thorough Research

Most business owners enter into long-term agreements with their suppliers without proper analysis and regret later on. This is why you should do thorough research before making any decision. Here are some questions you need to ask yourself before drafting a blanket PO:  

  • Will you need the item for a long time? If yes, then what is the cost-benefit analysis?
  • What will be the terms and conditions of the agreement?
  • Is a blanket PO better for your company compared to the standard PO?
  • What quality standards are you going to mention?
  • Does this method bode well with your company policies?

3. Talk with the Stakeholders

Getting stakeholders' feedback is the best way to proceed with issuing large purchase orders. Present the idea to them and get their views on how to accelerate things. 

4. Send the Order to the Supplier 

Once the details are confirmed and put on paper, it is time to send the final draft to the supplier and get their approval. Now, it's up to you to confirm that every shipment gets delivered on time.

Also, if the terms don't match the delivery schedules, you should talk with the supplier to cancel or renew the blanket PO.  

5. Improvise With Every Purchase Order

Like with every other business process, you should stop and consider whether this is the right step. If you think a blanket PO process doesn't work for you, it is time to consider other options.

You can work with a reputed procurement consultant to help you figure out the best solution and improvise the process. 

Use Hubbler to Streamline Your Procurement Workflow!

Having a technical stack is no longer a nice-to-have asset. It has become a priority for most businesses.

Platforms like Hubbler's Procure-to-Pay will make the entire procurement process seem like a breeze. From budgeting to managing purchase orders, Hubbler's procure-to-Pay platform gives you a unified view of all processes to ensure that you are always one step ahead. 

Now you can eliminate the headaches most businesses face with managing blanket purchase orders. You can also automate manual procedures like matching invoices and delivery records to eliminate inefficiencies and drill down specific data points for a deeper analysis. 

Gain a Competitive Edge By Streamlining Your Blanket Purchase Orders Today

With 91% of businesses already engaged in some kind of digital initiative, the competition is getting fierce.

Whether you are an e-commerce business owner or looking to accelerate your time-to-market, streamlining your procurement process gives you a competitive edge.

If you are still relying on traditional procurement methods, it's time to switch things up and focus on things that deliver results. So, get ready to automate everything and enjoy a boost in your supply chain.