Blanket Purchase Order Definition
A blanket purchase order is a simple way for many buying and finance directors to streamline the procurement process and enhance operational efficiency. Simply said, blanket purchase orders allow procurement managers to take advantage of preset costs while also reducing responsibilities.
A blanket purchase order, also defined as a standing purchase order, is a long-term agreement between a company and a supplier to offer items or services at a certain price over a specified length of time on a regular basis.
If your business makes many payments for the same commodities or services, executing a blanket purchase order with the details, such as price and date of delivery, already indicated is an efficient way to reduce time wasted and processing delays.
Suppliers may respond by sending several invoices with the same BPO ID. Blanket purchase order limits can be established for a specific time period, such as a year, or for a specific amount of money. In addition to the time duration, quantity, and price, blanket purchase orders may contain item quality standards.
Multiple invoices may be grouped under a single blanket PO, considerably simplifying logistics and planning for both parties. As a result, the invoice processing time is reduced, and delivery schedules are more regular. A construction business with regular planned work, for example, may need to buy the same raw materials on a regular basis, or an office building may require cleaning services every few weeks.
Are Blanket Purchase Orders Contracts?
It’s easy to get mixed up about when a BPO turns into a contract. It’s also (at times) tough to know when it’s a good idea to sign such a contract. BPOs and contracts appear to be comparable at first look.
But, just to be clear, when a contractor accepts a purchase order, it turns into a contract. However, not all contracts are purchase orders. The provisions of a negotiated contract may be cross-referenced in purchase orders.
The blanket purchase order is a business document, not a legal document, and it represents the buyer’s offer to a supplier. The PO becomes a legally enforceable contract if it is accepted.
Contracts are a complicated collection of agreements that are linked with a recurring order, such as the exact deliveries, quality standards, and any unique terms and conditions.
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What Should a Blanket Purchase Order Contain?
In blanket purchase orders, the following terms of the agreement should be defined:
- Duration of the agreement
- Pricing and terms of the contract
- Information about billing: how the provider will submit paying invoices
- The item’s specifications, including quality, size, and estimated quantity
- Quantity, delivery schedules, and locations are all factors to consider.
- Clause of cancellation
How a Blanket Purchase Order Benefits
When you predict recurring demand for products or services that can be obtained from the same vendor, a blanket purchase order makes good sense. The following are some of the benefits of using a blanket purchase order:
Blanket purchase orders do not need a great deal of data. Because it’s mostly for services, you don’t need information like manufacturing details, unit price, and so on. Users will require the following information to provide the service: supplier name, quantity, account numbers, start time, and completion date.
Blanket purchase orders simplify the process of purchasing many things. Rather than making 100 individual purchase orders, a corporation can just produce one and receive against it many times, like in the example above. A blanket buy also avoids the need to find new suppliers or organization gets and pricing, reducing administrative expenses and allowing personnel to focus on other important purchase orders.
Increase Purchasing Power
Blanket purchase orders allow a company to group together transactions 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.
If you lock in a price during discussions, every shipment of a large order will be the same price, even if the market value rises afterward. When opposed to changing dollar amounts, consistent prices are easier to plan for the finance office.
A blanket purchase order spells out all of the terms & conditions of a transaction, including the numbers needed and the expected delivery date. This reduces the need for a business to have extra stock on hand since it knows the supplier will complete the order according to the terms previously agreed upon.
Businesses must examine data that can offer the correct amount of the product/service they’ll need over a specific period of time in order to reap the benefits of a blanket PO. As products and services are supplied, companies may leave opportunities for revisions during contract talks. The business might lose money if a prediction proves to be wrong or if conditions change. If the product value decreases throughout the course of the order period, a price negotiated upon during contract talks might become a disadvantage.
When Should Blanket Purchase Orders be Used in Procurement?
First and foremost, as with any other sort of purchase order, be sure you truly need the items or services and that you can trust the provider in the issue. Blanket purchase orders should be utilized when the requirement for an item or service will remain constant over time, such as an indirect purchase items and you trust the provider to meet that need consistently.
Blanket orders are commonly used by procurement teams across a wide range of sectors. Because they are a simple method to cut expenses and create more efficient operations. Many suppliers are eager to give discounts when a firm places a large order or commits to numerous deliveries, as you surely already know. There are a few additional following circumstances in which blanket instructions are ideal and can be considered as blanket purchase order best practices:
- When the actual cost is well-defined and detailed information is available.
- When a big quantity of the same goods or services is required over an extended period of time, generally a year.
- When you buy in bulk, you may be able to take full advantage of better contract terms, such as bulk discounts.
- When supplies are staggered, stocking risk and expenses are decreased.
- When a single customer is capable of meeting all of the contract’s obligations throughout the term of the contract.
There are numerous advantages to using a blanket purchase order. Take the time to engage with your team and make sure that everyone knows how to create one; it will lead to better financial planning, stronger supplier connections, and a more efficient process overall
About the Author- Dr Muddassir Ahmed
Dr MuddassirAhmed is the Founder & CEO of SCMDOJO. He is a global speaker, vlogger and supply chain industry expert with 17 years of experience in the Manufacturing Industry in the UK, Europe, the Middle East and South East Asia in various Supply Chain leadership roles. Dr. Muddassir has received a PhD in Management Science from Lancaster University Management School. Muddassir is a Six Sigma black belt and founded the leading supply chain platform SCMDOJO to enable supply chain professionals and teams to thrive by providing best-in-class knowledge content, tools and access to experts.
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