Businesses usually spend a lot of effort and resources on regular activities like procurement and sourcing. Many organizations struggle with their routine procurement-related issues rather than spending time on increasing sales and expanding the customer base. One of the solutions that can help you get past the procurement challenge is by opting for a blanket purchase order. A blanket purchase order or a blanket PO is a long-term contract with a specific supplier for a pre-decided quantity at a specified rate at regular intervals.
A blanket order helps you streamline your procurement, logistics, and planning process. It is also known as a standing open account blanket order that provides certainty to both the supplier and the buyer. It is important to understand a blanket PO and how it can be used effectively to manage your operations.
Here is all you need to know about blanket purchase order.
What is a Blanket Purchase Order?
A blanket purchase order or a standing purchase order is an instrument that helps a business secure the supply of a product or service following a fixed duration at a fixed price. As a blanket PO includes specific information such as price, duration of the PO, time of delivery, it becomes easier for the business to handle its procurement requirements, invoicing and payments with ease.
At the same time, blanket purchase orders are helpful for suppliers as they provide certainty about the future orders that the business will receive as part of the order. A blanket PO is typically used by businesses that require a consistent supply of a specific product or service for a long period. It is better to sign a blanket purchase order rather than getting into individual POs for procuring such products or services regularly.
What Does a Blanket Purchase Order Include?
Typically, a blanket PO includes the following:
- Quantity of product or service to be delivered
- Quality specifications of the product or service
- Contract period in which the bulk purchases will have to be supplied
- Preferred mode of payment and invoicing
- Location of delivery and specific time, if any
- Cancellation policy
Advantages of Blanket PO
There are several advantages of using a blanket PO as compared to other types of POs like regular purchase orders, planned purchase orders, or contract purchase orders. Here are some key advantages of using a blanket PO:
Ease of Procurement
Using a blanket PO makes the procurement process seamless and more efficient. As you deploy blanket POs for your regular purchase requirements, you can expect the procurement process to improve.
Reduced Processing Time
Blanket POs reduces the processing time between the two orders. As you have already identified the vendor, fixed the price, and are sure of the quantity, you can simply reduce the processing time in your processing exercise.
The biggest advantage of a blanket PO is that you can get a consistent price for all your current and future purchases. As a result, your business can be safeguarded against future price increases.
Many purchase departments can club orders from various departments to a single blanket order. As the identified vendor would be supplying the goods or services regularly during the agreement period, it would simplify the inventory management exercise to a great extent.
Lower Administrative Costs
Blanket purchase orders help you reduce administrative costs and effort on regular procurement-related tasks. It also helps in improving vendor management.
Disadvantages Of Blanket PO
It is important to consider the disadvantages of using a blanket PO. Some disadvantages of using a blanket PO are as follows:
Falling Market Value
As you get the same price for the set duration, even if the price goes down for the product or service, you cannot enjoy the falling market value as you have agreed to pay a predetermined price.
Predicting Demand in Advance
It is not always easy to predict demand for a particular product or service accurately in advance. As a result, in cases where you are not certain about the exact quantity of the product or service, you should not opt for a blanket order.
A blanket order needs you to have the same vendor for a specified product or service for a set duration. In such a scenario, the vendor must be reliable. However, it has been seen that companies sometimes face issues with the quality of service of the vendor under a blanket PO.
When to Use Blanket PO (and When Not To)?
Blanket purchase orders can be used in specific situations, such as these:
- When your need for a product or service is expected to stay consistent throughout a set period
- You can agree on a set price of a product or service at the start of the PO period
- You have no trust issues with the vendor
- You are getting bulk discounts
- Making separate purchases is a hassle for your day-to-day operations
Similarly, these are the situations where you should never go for a blanket PO:
- You can’t ascertain a price point for the PO period
- You can't trust the vendor to supply the expected quality of product or services during the contract period
Blanket PO system can be a helpful instrument for streamlining your sourcing activities and ensuring that you are getting the best price for the product or service. However, you must check the cost-benefit analysis and the quantity you may require during a specified period.
A blanket PO can bring attractive cost savings along with a level of certainty for the price the organization may pay in future for procuring various products or services.
Advanced, AI- and ML-driven supply chain software such as GEP NEXXE™ is equipped to handle blanket purchases, efficiently and effectively. With robust approval routings and streamlined blanket order workflows, enterprises can significantly improve their purchasing efficiency and shorten purchasing lead time.