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What Is the Meaning of a Blanket Purchase Order?
A blanket purchase order, also known as a standing purchase order, is a long-term contract between a company and a supplier to supply products or services at a fixed price on a regular basis for a set period of time.
If your organization makes multiple payments for the same items or services, issuing a blanket purchase order with the specifics, such as price and delivery date, already stated is an effective way to reduce time spent and processing delays.
As a result, suppliers may send multiple invoices with the same BPO number.
Limitations on blanket purchase orders can be set for a specific time period, such as a year, or for a specific amount of money.
Blanket purchase orders can include item quality standards as well as a time frame, quantity, and price.
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When should you use blanket purchase orders?
Blanket purchase orders should only be used in the following situations:
- When a large quantity of the same goods or services is required over a long period of time, typically a year.
- When the unit price is well-defined and specific information is available.
- When a single client can meet all of the contract’s requirements for the entire term of the contract.
- If you buy in bulk, you may be able to take advantage of better contract terms, such as bulk discounts.
- When supplies are staggered, stocking risk and expenditures are reduced.
Blanket purchase orders should never be used for orders where the pricing is unknown, the product quality is questionable, or the seller is untrustworthy.
We’ll look at two scenarios to see how to use blanket purchase orders.
Case 1: Material and supply orders
A common type of blanket purchase order creates pre-negotiated line items for commonly used commodities or suppliers.
For example, if a company buys a lot of paper towels and garbage bags from the same supplier throughout the year, a purchase order with two line items is created 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 only needs to deliver items when they are needed; the customer receives the units and pays upon receipt.
Typically, the contract will be terminated when the contract’s line items, price amounts, or time constraints have been met.
Case No. 2: Limitation of Liability Orders
A blanket purchase order that is based on a specific time frame and risk limit but does not include individual line items is another type of blanket purchase order.
These types of agreements are useful when allocating a limited budget for advisory services for a specific project within a specific time frame.
For example, if the total budget for a report writing project is $10,000, the buyer would issue a single purchase order for 10,000 units at $1 per unit for a total of $10,000 to be completed in a year.
The amount would reflect the dollar amounts to be spent on various aspects of report writing as determined later in the year, agreed upon by both parties, and delivered in $1 increments.
If the initial report was specified, prepared, and delivered at the agreed-upon cost of $2,000, the customer would receive a quantity of 2,000 units at $1 per unit for a total of $2,000 payable to the consultant.
The remaining value of the purchase order would then be $8,000. Subsequent reports would be specified, prepared, delivered, and funded in the same manner until the entire $10,000 budget of the purchase order was depleted.
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What should a blanket purchase order contain?
In blanket purchase orders, the following contract terms should be defined:
- Contract’s duration
- Contract terms and pricing
- Billing information – the manner in which the vendor will submit invoices for payment.
- Product specifications, such as quality, size, and expected quantity
- Quantity, delivery schedules, and delivery locations
- Cancellation clause
What are the advantages and disadvantages of using a blanket purchase order?
Let’s look at some of the advantages and disadvantages of using a blanket purchase order.
Pros
Let us begin with the advantages of blanket purchase orders.
The framework is simple
A blanket purchase order does not require a great deal of information.
Because it’s mostly for services, you don’t need information like supplier part number, production details, unit pricing, and so on.
Users must provide the following information in order for the service to be provided: supplier name, amount, account numbers, start date, and end date.
Costs are reduced, while purchasing power increases
A blanket purchase order enables a company to group together purchases that would otherwise be spread out over a long period of time in order to save money on volume.
Furthermore, these POs allow a company to pool purchases from multiple divisions and locations to increase negotiating power.
Enhances efficiency and shortens the purchasing lead time
A blanket purchase order simplifies the process of purchasing multiple items.
Rather than creating 100 individual purchase orders, a corporation can create one and receive against it multiple times, as in the example above.
A blanket purchase also eliminates the need to find new vendors or renegotiate terms and pricing, lowering administrative costs and freeing up personnel to focus on other critical procurement tasks.
Cons
Although the method benefits both buyers and sellers, it does have some drawbacks.
Year-end accounting is a dreaded task
If your company is publicly traded, you must disclose your open liabilities in your 10-K annual report.
Employees are more likely to obtain clearance for a larger number of blankets than they require because they are so simple to set up.
The logic is that you have a backup plan in case you run out of money.
To properly reconcile and report liabilities, you must complete the following tasks:
- Calculate the amount based on invoices paid and those submitted but not paid by the supplier.
- Although the vendor has not yet sent bills, the job has already been completed.
Matching the purchase order to the correct one is a problem
In the benefits section, we discussed how simple it is for vendors to include the purchase order number on the bill.
However, it could be a disadvantage if the blanket goes bankrupt or its validity period expires.
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Other Purchase Orders vs. Blanket Purchase Orders
B2B transactions are far more complicated than the simple swipe of a credit card that most of us are accustomed to.
For financial audits and compliance purposes, every transaction requires detailed planning and communication, which is why purchase orders are used to confirm to both parties what is being procured and how delivery will be handled.
There are several types of POs that businesses frequently use:
- Regular Purchase Orders (PO) cover general one-time transactions as well as any unexpected demands that must be met quickly. Because you’re only covering a single purchase, the details in this contract are very specific, such as exact costs, quantities ordered, and fulfillment schedules.
- Blanket Purchase Orders (BPO): Also known as standing orders, blanket purchase orders are used when a company requires the same goods on a recurring basis for an extended period of time, such as an entire year. The delivery schedule may or may not be set in stone.
- Planned Purchase Orders (PPO) work similarly to regular purchase orders, except that the delivery date and time are not specified. The purchasing company simply waits until the need arises before requesting that the delivery be released.
- Contract Purchase Orders (CPO): These POs do not specify the specific items involved in a transaction. They merely serve as legal precedents for future orders.
If we just focus on the distinction between regular and blanket POs, the following are the key differences to keep in mind when making recurring purchases:
- Contract length: Rather than a single contract for a one-time purchase, you’re entering into a long-term agreement with your supplier with a set start and end date.
- Contract specificity: For a one-time PO, you should specify as much about the order as possible, whereas a single agreement covering multiple deliveries can afford to be more general.
- Order volume: Obviously, planning for repeat purchases means you’ll buy more than you would from a single PO.
- The nature of the deliverables: Blanket orders are more likely to be used for services than products because the former typically have recurring demand.
Conclusion
A blanket purchase order is a long-term contract between a company and a supplier to supply products or services at a fixed price on a regular basis.
Blanket purchase orders can include item quality standards as well as a time frame, quantity, and price limit.
A blanket purchase order is a type of agreement to allocate a limited budget for advisory services for a specific project within a specific time frame.
A blanket purchase also eliminates the need to find new vendors or renegotiate terms and pricing.
However, it could be a disadvantage if the blanket goes bankrupt or its validity period expires.
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