Blanket Purchase Order: Definition, Benefits, and When to Use
A Blanket Purchase Order is a legally binding agreement between you, a buyer, and a supplier who has come to a long-term deal to deliver goods or services for a specified period. But what does that actually mean? What are the benefits of using this kind of agreement? And when is a good time to start using a Blanket Purchase Order for your business?
Keep reading to find answers to these questions and much more on the benefits of when a Blanket Purchase Order makes sense and how it differs from a standard Purchase Order or general contract terms.
Blanket Purchase Order Definition
Blanket Purchase Orders increase business efficiency for buyers and suppliers when it comes to accounts payable and keeping track of monthly and yearly invoices.
The simplest way to explain the process is that a Blanket Purchase Order is a standing agreement between a buyer and supplier that a product (or products) will ship in intervals without the need for a new invoice for each purchase.
This type of purchase order, which is more comprehensive than a Purchase Order, or PO, cuts down on the tedious paperwork covering consistent goods and services needed from the supplier. For example, let’s say a building contractor regularly needs wood for framing.
Instead of setting aside time to order wood each month, the contractor will create Blanket Purchase Order contract terms for a specified time period, like every six months to a year. Then, the same supplier will automatically refill and deliver the wood shipment to the contractor each week or month without additional paperwork.
The favorable contract terms of a Blanket order can save a sizable amount of time and money based on the agreement. It also avoids potential headaches for buyers who have a habit of forgetting to place orders or would need to hire more in-house staff to handle such responsibilities.
Blanket Purchase Orders guarantee a consistent delivery schedule of quality supplies to a specific location.
Blanket Purchase Orders are referred to by several colloquial names or might be known as a few other terms, but they all generally mean the same thing. Therefore, if you see any of the following terms for purchase contracts, feel confident that these are all synonyms for Blanket Purchase Orders.
- Blanket PO
- Blanket Orders
- Framework Agreement
- Framework Contract
- Master Agreement
- Blanket Purchase Agreement
- Umbrella Contract
- Outline Agreement
Just because these titles sound different, know that they are Blanket Purchase Orders. The proof is in the long-term contract details you and the supplier agree to when signing a BPO.
However, before we get into what’s in a detailed BPO, let’s look at the benefits of working with a Blanket Purchase Order.
Benefits of Blanket Purchase Orders
When you set up a Blanket Order, you can agree on a specific price for the commitment as well as a certain timeframe for receiving shipments. For example, you can give the supplier $100,000, or you can sign on for a one-year term contract. Then, the supplier will send auto shipments until the amount runs out. Alternatively, you could negotiate a monthly bill until the contract is fulfilled.
Other than being convenient for your budget, there are several other advantages to setting up a Blanket Order. There are a multitude of benefits in choosing Blanket Purchase Orders over a Standing Purchase Order depending upon how you need to ship the products that are part of the purchasing process. Here are some of the most recognizable.
Easy To Set Up
First and foremost, it’s extremely easy to set up a Blanket Purchase Order. Setting up the orders is simple since most suppliers process the information. Your part is ensuring the money gets to where it needs to go.
For example, you should know the supplier’s name, the amount of the contract, the account it’s coming from, and the start and end dates. A few conditions should be put into your BPO, but we’ll get to that later.
Set It and Temporarily Forget About It
Once you set up the Blanket Purchase Order, you can forget about the responsibility of the ordering process each week or month. If the BPO has a set amount of money in the account, the service will continue uninterrupted until the money has all been used up.
Much Lower Administrative Costs
Businesses that purchase in bulk can streamline vendor management, which allows them to save on company resources and administrative costs. Choosing BPOs also lets you and your company negotiate those terms (that we’ll be delving into later) with the supplier.
Minimizes the Processing Time
Using the same supplier for multiple orders under a single Blanket Purchase Order minimizes processing time. The Blanket Order is filled out once for recurring shipments while using the same BPO number for the contract, even when the contract includes numerous products with multiple deliveries with the same unit price for term.
Consolidated Purchasing Orders
Consolidated Purchasing Orders is a process where multiple products can be put under the same umbrella as a Blanket Purchase Order. It simplifies your business needs while helping the supplier keep all your products under one contract instead of relying on multiple invoices.
Consistent Pricing on Products
Consistent pricing happens at the time of the contract. Negotiate fair prices with the supplier for the term of the BPO contract. By doing so, you can avoid falling market value issues. Each delivery will continue to be the same price no matter what.
Potential Savings on Bulk
A BPO contract can save money if the market fluctuates, but buying in bulk can save a substantial amount of money right out of the gate.
The more product you buy, the more you can save with most suppliers. Some suppliers might offer discounts for longer-term contracts as well.
Moreover, BPOs are budget-friendly since they require much less paperwork, which equals a generous savings of money, time, and peace of mind for many buyers.
What To Include in a Blanket Purchase Order
Purchase Orders guarantee quality and quantity. Still, Blanket Purchase Orders allow you to be a single client who can contract the duration, multiple payments, and shipment specifics while gaining a fixed price regularly on supplies for the term of the contract.
Creating a BPO is straightforward. However, several things should be included when putting together a Blanket Purchase Order to protect you and the supplier as part of the approval process.
Here’s a list of the items to include as you write the binding agreement.
Including product quality in the contract is essential, so you don’t accidentally get stuck with a delivery of damaged goods or services. Blanket Purchase Orders and standard Purchase Orders contain quality guarantees.
Product quantity is usually found in both BPOs and POs. You need to know the proper amount in your shipment for each delivery, as uncertainty or discrepancies might cause significant issues down the line.
Having a fixed price on all shipments is what truly makes a Blanket Purchase Order worthwhile. Indeed, it could save you money in the overall purchase. Getting a guaranteed set price protects you from any exposure, no matter how the market fluctuates.
Contract duration encompasses the start and end dates for purchases of bulk discounts. Having a defined time frame will keep your shipment on track and determine how many loads you will receive before your money runs out. Most duration periods average one year.
Preferred Method of Receiving Invoices and Making Payments
It’s vital to list your procedures for receiving invoices and payment methods for future shipments. If you agree to a specific overall amount, you need to be able to pay a lump sum, or the supplier might require multiple payments for each delivery.
Time and Location of Delivery Specifics
You’ll want to incorporate the delivery time and location delivery into a BPO. As with other parts of a BPO, specifying these key elements eliminates the potential for supply uncertainties.
Most suppliers take this part of their services very seriously since a missing order is liable to jeopardize a business relationship.
Terms and Cancellations
Terms and cancellations are easy to overlook when crafting a Blanket Purchase Order, but they might be the most important clauses to put into this contract.
It would be disruptive to your business to be stuck with inadequate supplies, missed deliveries, and loss of goods and money yet be unable to do anything about it. Specific terms and a cancellation clause give you a layer of protection.
When To Use a Blanket Purchase Order
A Blanket PO has concrete applications in several scenarios, and you’ll need to be familiar with these situations to know when it could be most beneficial. After all, a standard Purchase Order might have worked well for you for some time.
But as you establish a business structure that requires a consistent supply of materials on time, it might be time to pivot into the Blanket Purchase Order process.
If you have two or more of the following factors in common with the business or the supplier, you should strongly consider starting a Blanket Order with your supplier:
- A large quantity of the same product or material is needed over an extended period.
- You have a determined budget allocated for the supplies.
- A unit price is defined and could save you money in the long run if there is a possibility of price fluctuation.
- The supplier can fulfill the purchase agreement over an extended period.
- The supplier is willing to give guaranteed bulk discounts.
- The supplier is capable of delivering increments of the supply over time, which will avoid significant storage costs.
- You are capable of meeting all the requirements of the contract throughout the term.
When Not To Use a Blanket Purchase Order
It might be evident that there are specific times when it’s not okay to use a BPO, but let’s look at the biggest reasons one should not engage in a Blanket Purchase agreement.
You Don’t Trust the Supplier
Just in case this needs to be said, you shouldn’t do business with someone you don’t trust. So, remember, if you don’t have confidence in your supplier, you could be risking a lot of money and peace of mind.
While you don’t need a personal relationship with the supplier, trust your gut and the reviews. If there’s a question about the supplier’s abilities in any way, a Blanket Purchase Order isn’t the best option.
You Don’t Know the Average Prices
If you aren’t aware of the market value of the materials you are looking for, it’s best to do your research before committing to a Blanket PO. It would be frustrating to find out later that you have been overpaying for the supplies and still have several months remaining on the contract.
The Price Might Decrease
Getting locked in on a bulk price is excellent when it’s in your favor. However, there are times when prices can go down on materials. For example, let’s say that lumber is currently high, but there are rumors prices will fall within the following year.
If you are locked in at a high price, you are stuck paying the extra money no matter what is happening in the market. So, it’s essential to keep an eye on market projections before committing to a Blanket Purchase Order.
Blanket Purchase Order vs. Purchase order
A Purchase Order is a document that a buyer gives the supplier for specific products and quantity for a single order to be delivered within a specific time frame. However, it differs from the Blanket Purchase Order process since it is usually for a single transaction. Here are a few ways the two differ from one another.
Details on Invoice
Typically, a Purchase Order will have more detailed product information with SKU numbers and details, which is great if you need an itemized list of supplies. In contrast, a Blanket Purchase Order is broader on part numbers and focuses more on a consistent delivery schedule, which is perfect for bulk orders.
A Purchase Order has a specific amount on an invoice, while a Blanket Purchase Order invoice might differ per delivery since the total contract equals the predetermined price. However, either transaction should be acceptable if you budgeted appropriately for the shipments.
The volume of Blanket Purchase Orders is much larger than a standard Purchase Order since a Blanket Purchase Order requires deliveries over a staggered period. Therefore, BPOs are beneficial when the buyer doesn’t have a large quantity stocking option.
A Purchase Order is not a legal agreement. Since it usually consists of a single transaction, a Purchase Order is a direct sale. Meanwhile, a Blanket Purchase Order is a legal document with binding contract terms that ties you and the supplier to fulfill the contract to term. In that context, legally, BPOs are in place to protect you and the supplier regarding delivery and payments.
Timeframe of Agreement
Time is the most significant difference between POs and BPOs since a Purchase Order is a single transaction as opposed to a term agreement with a Blanket Purchase Order. POs are great if your business fluctuates. Still, Blanket Purchase Orders are important for consistent needs for supplies delivered by a specific time.
Blanket Purchase Order vs. Contract
A Contract Purchase agreement is very similar to a Blanket Purchase Order in that it’s a binding commitment between buyer and supplier. However, a general contract focuses only on future purchases by terms and conditions while a BPO centers on the original agreement.
With a Blanket Purchase Order, you and the supplier are locked into the original agreement for the agreed term and payment to issue repeat purchases.
Nevertheless, a general long-term contract might include purchasing efficiency but add conditions that ultimately change the price points on requested materials due to market fluctuations. Therefore, the terms might be different in a general contract as well.
Blanket Purchase Orders and general contract terms are both legal documents. However, before signing either kind of agreement, be sure to know all the conditions, terms, and settlements.
Purchase Orders or signing a long-term contract is often suitable for companies that need a single order or can’t stockpile goods or services. Nevertheless, Blanket Purchase Orders can be beneficial for businesses that need to cover multiple shipments over a period of time. In addition, Blanket Orders aren’t affected by price fluctuation or process delays since a BPO is a priority long-term contract with the supplier.
If you are uncertain if a Blanket Purchase Order could be to your advantage, it’s time to look at how you can save time, money, and peace of mind by switching to Blanket Orders with your suppliers. If you feel your company could gain from a BPO and can justify using one, it’s recommended to talk with your supplier about terms and conditions when it comes to starting the process for your next shipment.