Recurring purchases can be a time-sapper for businesses. For every purchase, they need to draft a purchase order, wait for an invoice, and go through the approval process before sending payment.
Doing that process on a weekly or monthly basis becomes a burden on finance teams, stealing their time from more valuable tasks.
With blanket purchase orders, you have a solution that takes back that time and could also save you money.
What is a blanket purchase order?
A blanket purchase order is a long-term purchase agreement between a supplier and its customer. It’s typically used for recurring purchases over a specified period, ranging from several months to a year.
The purchase agreement outlines the:
- Goods or services that will be provided
- Price of the goods or services
- Delivery dates of the goods or services
- Length of the agreement
The supplier benefits by locking in a long-term customer, guaranteeing them revenue over an extended period of time. The customer benefits by locking in a price, protecting them from price fluctuation, thus keeping costs in check.
For each delivery, the supplier creates an invoice that’s tied to the same purchase order number, and the customer pays within the payment terms.
Some blanket purchase orders allow for flexibility in the quantities. In this case, the blanket purchase order outlines the maximum and minimum quantities of the good or service for each delivery.
For example, the blanket purchase order may set a minimum quantity of 100 and a maximum quantity of 200, allowing the customer to purchase any amount between those bounds on a single delivery.
Blanket purchase orders vs standard purchase orders
The alternative to blanket purchase orders is the standard purchase order (PO) approach.
Standard purchase orders are designed for one-time transactions. A purchase order is created for each transaction, outlining the goods or services, prices, and delivery date.
This means standard purchase orders are best suited for non-recurring purchases, or for recurring purchases with a high level of variability. The unfortunate downside is that each purchase order goes through its own creation and approval process, adding some administrative strain to both parties.
Examples of blanket purchase orders
Some common examples of when blanket purchase orders are:
- Contractor work agreements: A business may want to lock in a contractor’s services for an extended period, setting a price for the service for each month of the engagement.
- Technology and software licenses: It’s common to use a blanket purchase order for a long-term software or technology license, which will be used throughout the year.
- Maintenance and repair work: Routine maintenance, such as office cleaning or landscaping, can benefit from a blanket purchase order setting the schedule and price.
- Raw materials in manufacturing: Blanket purchase orders with flexibility in quantities can be used when a business has a minimum required output each month.
What are the components of a blanket purchase order?
A well-structured blanket purchase order should cover the following information.
Basic identification information
The basic information of the business and purchase order includes the unique purchase order number, order date and contract period, buyer and supplier business information, as well as any cost codes used in each business’s internal accounting.
Product or service specifications
The blanket purchase order should provide a detailed breakdown and description of the goods or services covered. This includes an explicit definition of what will be provided and acceptable substitutions or alternatives if the goods or services cannot be provided.
Financial terms
The unit prices or pricing structure, summing to the maximum total contract value, needs to be defined. Payment terms and the payment schedule are also essential components.
Delivery requirements
To ensure that everything is provided on schedule, the blanket purchase order needs to be explicit about delivery locations and shipping instructions. There should also be deadline dates for each good or service provided.
Contingencies
Something may happen on the side of the supplier or the customer that prevents the blanket purchase order from being fulfilled. There should be a clear cancellation policy and procedure in this case.
There’s also the possibility that the customer may be unhappy with what was provided. Similarly, a dispute resolution mechanism should be defined in advance to guide these conversations.
Benefits of using a blanket purchase order
For businesses with recurring payments, they should consider using blanket purchase orders to reap these benefits.
Cost reductions
Suppliers are more likely to offer discounts for a longer-term purchasing agreement. It guarantees them more sales in the long run and ensures the customer won’t move to a competitor.
Budget predictability
Blanket purchase orders protect customers from price and market volatility. It allows them to lock in a price that they can forecast and budget for over a long-term period of time.
Administrative efficiency
Simply put, one purchase order is easier to generate than multiple purchase orders. It reduces administrative overhead and reduces the odds of making a mistake since the quantity of work is lower.
Improved supplier relationships
Committing long-term to a supplier shows trust, fostering stronger relationships. This makes them more willing to offer flexibility, assist you in situations where something may go wrong, and collaborate in building a long-term solution.
Procurement risk mitigation
Locking in a blanket purchase order protects customers from market volatility and supply chain issues. For example, if a raw material the vendor uses in production becomes scarce, they need to prioritize the fulfillment of long-term contracts over individual purchases.
When and when not to use a blanket purchase order
Blanket purchase orders can be a benefit for businesses, but that doesn’t mean it’s always the right choice.
Generally speaking, blanket purchase orders are best used for recurring, predictable orders. You should also only use a blanket purchase order with a supplier you have established trust with; after all, you wouldn’t want to be locked into a long-term contract with a new supplier who ends up underdelivering.
Avoid making a blanket purchase order with a supplier that has unreliable performance, if you have uncertain demand requirements, or if market volatility may favor you in the long run. As an example, you wouldn’t want to commit to a long-term contract if the costs of what you’re purchasing are at an all-time high and likely to come down.
How to create a blanket purchase order
Creating an effective blanket purchase order requires careful planning, consideration, and historical analysis. Follow these steps when structuring one:
- Analyze past purchase behavior: Identify opportunities for a blanket purchase order by reviewing your past purchase behavior and finding patterns. Look for regular, recurring purchases that have been for consistent quantities of goods or services.
- Evaluate suppliers: Even if you have recurring purchases with a supplier, you should still consider whether they’re one you’d want to work with long-term. Consider their trustworthiness, quality, and production or service capacity.
- Define the order details: Outline the goods or services provided, the delivery schedule, and the duration of the blanket purchase order before approaching the supplier.
- Negotiate terms and conditions: Work with the supplier to negotiate the unit price of the goods or services, as well as any discounts for committing to a long-term contract. You should also negotiate the cancellation and dispute policies.
- Draft and review the agreement: Create the blanket purchase order, capturing all the details hashed out in the negotiation phase, and send over a draft for review. All parties must be in agreement before the contract comes into effect.
- Monitor and evaluate performance: Regularly review the delivery of the goods or services for quality to ensure the supplier is fulfilling their promises. Additionally, track your cost savings by comparing the agreed-upon unit price against market values.
If it’s your first time using blanket purchase orders, you should check in with the finance team (and yourself) on whether the process was easier and saved them time. This is something that won’t show up in your costs explicitly and will depend on qualitative feedback.
Best practices for using a blanket purchase order
Ensure the quality of your blanket purchase order process by following these best practices.
Train staff on changes
Take time to make sure everyone who will be working with purchase orders knows the ins and outs of blanket purchase orders. They should know how to draft, approve, and assign invoices to the blanket purchase order.
It’s also best practice to document the workflow and have it in an accessible place so anyone can review it if they have questions.
Maintain regular communication with suppliers
Especially in the early days of the blanket purchase order, you should be regularly checking in with the supplier to address any issues with the purchase order. Show them your commitment to the quality of their experience and willingness to collaborate, and they’re likely to reciprocate.
Take time to review your needs
The perfect blanket purchase order may be too much or too little as it approaches its end. Be prepared for your shifting needs by regularly reviewing how your demands are changing. When it’s time to renew, you’ll know how the agreement needs to change to keep being effective.
Prepare for contract renewals
If you want to renew, reach out to the supplier well in advance to start negotiations when the contract is concluding. You want to have some buffer in case negotiations take longer than expected to ensure you don’t miss any essential delivery dates.
Check in with the team
The blanket purchase order should be a benefit to everyone involved. Keep in touch with anyone working with the blanket purchase order for feedback on the process and ways to improve. If the logistics are proving to be difficult, the process may not be the time saver you expect it to be.
Challenges of blanket purchase orders (and how to solve them)
Blanket purchase orders could save you time and money, but only if you prepare for these potential challenges.
Price risk management
Fixed pricing could save you money if prices go up, but you’re equally at risk of paying above market rate if prices come down.
Minimize the risk of a price fluctuating the wrong way by negotiating a price adjustment mechanism (such as prices as a function of the market value). You won’t save as much if prices increase, but you’ll save yourself from overspending on what you’re purchasing.
Demand forecasting accuracy
Just as prices may change throughout the length of a blanket purchase order, so too could your needs. What was the right amount at one point could end up being too much or too little as your needs change.
It’s possible to negotiate limits on quantities rather than hard-coded amounts (e.g. 100-150 units as opposed to strictly 100). You could also explore backup suppliers that can fill the gap with one-time purchases if the quantity of goods or services of the blanket purchase order is no longer enough.
Supplier dependency
Relying on a single supplier brings on risk if they can’t deliver on your needs or potentially can no longer fulfill the order.
Vetting your suppliers is an important part of the process, and you should only come into an agreement with a supplier you have complete trust in. But you can protect yourself by having contingency, alternative suppliers that are ready to take on an order on short notice.
Saving additional time and money with automation
Blanket purchase orders are one step you can take to streamline your accounts payable process, but depending on manual processes will continue to strain your workflows.
Enter BILL, an automated accounts payable platform that accelerates the process from input to payment. Our platform streamlines capturing, approving, paying, and syncing invoices with some of the top accounting platforms. No more manual entry or pestering a stakeholder for approvals.
And with access to payment options like ACH, credit cards, wire transfers, and checks, you have the flexibility to pay your way.
Reach out to schedule a demo and see our automation in action.
