A blanket purchase order (BPO), also known as a standing purchase order, can be an extremely valuable type of PO to get familiar with. This guide will provide a comprehensive dive into the concept, as well as the general context and process around it. We’ll also include some best practices and other tips to issue purchase orders in the most efficient way.
Blanket purchase orders will increase the efficiency of your accounts payable process, which many businesses identify as a pain point. Read on to learn how to make blanket purchase orders work for your business’s purchasing and procurement processes.
What is a Blanket Purchase Order?
A blanket purchase order, a long-term contract with a specific supplier, helps businesses efficiently order the same shipment of goods from a single vendor at regular intervals. Such an order greatly simplifies logistics and planning for both companies, as multiple invoices can be categorized under a single blanket PO. The result is less invoice processing time and a more consistent delivery schedule. For example, a construction company with regular scheduled work must order the same raw materials every so often, or an office building might need cleaning services every few weeks.
Both sides agree on a set price and an order period. This way, the buyer takes advantage of keeping the same unit price for the whole contract (thus minimizing risk of price fluctuation), while the seller can guarantee sales throughout the extended period.
This special type of purchase order works best when you know the exact price and order volume you need ahead of time, and can trust that those parameters won’t change for the entire period. Once the shipments are underway, the buyer must monitor the received goods to check that the quality and quantity are correct according to the agreement.
Blanket purchase orders are used by a variety of organizations, from commercial companies to universities and municipalities. Many of these large organizations have protocols in place for handling blanket orders. The U.S. General Services Administration even has its own documentation.
What’s Included in a Blanket Purchase Order?
It’s important to note that a purchase order is not necessarily the same as a contract. A PO is an offer from a client business to purchase from a supplier. Once accepted, it then becomes a legal document and binding contract. A BPO must naturally define several contract terms:
- Product quality and quantity
- The fixed price of the shipments
- The contract periods in which the bulk purchases are made (i.e. start and end dates)
- The preferred method of invoicing and payment
- Specified time and location of delivery
- A cancellation policy
These contract terms are just examples of what you’d likely find in such a document. Feel free to customize your own according to your specific circumstances and vendor contract negotiations.
The Blanket Purchase Order vs Other Purchase Orders
B2B transactions are a lot more complex than a swipe of a credit card that most of us are familiar with. Every transaction needs detailed planning and communication for financial audits and compliance purposes, hence the use of purchase orders to verify to both parties what’s being procured and how delivery will be handled.
There are many types of POs businesses often work with:
- Regular Purchase Orders (PO) cover general one-time transactions and any sudden demands that must be fulfilled short-term. The details in this contract—like exact costs, quantities ordered, and fulfillment schedules—are most specific since you’re only covering a single purchase.
- Blanket Purchase Orders (BPO): Also known as standing orders, blanket purchase orders are used when a business needs the same goods on a recurring basis over a specified period, such as an entire year. The delivery schedule may or may not be predetermined.
- Planned Purchase Orders (PPO) function similarly to a regular purchase order except that the date and time of the delivery is not specified. The buying company merely waits until the need arises and then asks for the delivery to be released.
- Contract Purchase Orders (CPO): These POs don’t outline the exact items involved in a transaction. They merely work as legal templates for future orders.
If we’re just focusing on the distinction between regular and blanket POs, the key differences to note when you’re making recurring purchases are:
- Contract length: You’re making a long-term agreement with your supplier with a set start and end date rather than a single contract for a one-off purchase.
- Contract specificity: For a one-time PO, you want to specify as much as possible about the order, whereas a single agreement covering multiple deliveries can afford to be more general.
- Order volume: Planning for repetitive purchases obviously means you’re buying more than you would from a single PO.
- Nature of the deliverables: Blanket orders are more likely to be used for services than products since there is typically a recurring demand for the former.
The Advantages of Blanket POs
A blanket purchase order makes the most sense when you can expect regular demand for goods or services that can be ordered from the same vendor. The advantage of choosing a blanket purchase order then includes the following:
Lower Administrative Costs
Companies buying in bulk from the same supplier are likely to have fewer total active vendors. This way, they can streamline their vendor management and can save on resources otherwise used to negotiate terms and conditions with new suppliers.
Minimize Processing Time
When you only need one contract to cover multiple shipments, you’re saving on processing time and manpower compared to writing up a contract for each and every delivery. That is, you submit multiple invoices citing the same BPO number. A BPO may also be less detailed than a regular purchase order and is therefore easier to set up.
Savvy procurement departments can consolidate different orders from multiple teams into a single blanket purchase agreement. And since the supplier will deliver goods regularly, inventory management becomes simplified as well.
If you pre-set the price during negotiations, every shipment of a bulk order comes at the same price even if the market value goes up later. Consistent pricing is easier to budget for the finance department compared to variable dollar amounts.
Suppliers often have volume discounts when you order in bulk, and a blanket order raises your chance of reaching for those savings, even if the orders are made over an extended year.
Potential Challenges of Blanket Purchase Orders
A blanket order makes sense in a lot of contexts, but there are drawbacks to using them to look out for.
Predicting Your Demand
If you’re buying the same goods every month for a year, how do you know that you’ll still need those products by then? While some providers do allow for a degree of adjustment later, forecasting your own demand is still an important part of getting the most out of blanket purchase orders.
Falling Market Value
The same advantage we’ve mentioned before about set prices can actually work against you if the market value of what you’re buying goes down during the contract terms.
Ensuring Order Accuracy
Procurement departments must undergo an approval process to make sure the delivered products do not exceed the maximum order. You need a robust method of matching invoices for validation purposes to enforce contract compliance.
Similarly, a buyer’s review is necessary for financial auditing, as matching an invoice with a blanket contract isn’t always easy. A multi-way matching process is heavily recommended when you work with a blanket purchase order.
When To (And When Not To) Use the Blanket Purchase Order
As with any other type of purchase order, ensuring that you genuinely need the products or services first and that you can trust the supplier in question are important first steps. But other circumstances that suggest using blanket orders are ideal include:
- When your projected need for a particular item will stay consistent throughout a period.
- You can decide on a set unit cost upfront.
- You can trust one vendor to handle your entire need during that time.
- Building trusted long-term relationships with suppliers matters to you.
- Bulk discounts are available.
- You’re not interested in making separate purchases that require multiple payments.
Conversely, you may want to avoid the blanket order when:
- The price of the goods or services in question may fluctuate during the period.
- You aren’t sure what the price is now.
- The vendor cannot be trusted to continue providing the items at the same quality and quantity.
At this point, you should have a solid idea of where you want to apply the blanket transaction to your procurement processes. Let’s move on to undergoing the ordering process for such a purchase.
Planning the Ordering Process
The exact process flow for BPOs differs depending on the organization, but a general outline to follow is below.
- Setting Up the Opportunity
Start by going through some of the advantages, disadvantages, and use cases of blanket purchase agreements we’ve discussed earlier. The purchaser must do research and decide whether such a contract is ideal under present circumstances.
Once you’ve found the opportunity and supplier, it’s time to define what you need and the terms and conditions of the contract. Remember that you’re essentially committing to these shipments for a long time.
- The Approval Process
Just like with any other purchase order, the stakeholders and upper management in the business must approve of the transaction. Getting the right approvers to sign off on the blanket purchase order is especially important since you’re ordering a large amount at a time.
The BPO document is sent to the supplier, which will then issue its own invoices to fulfill the order. Regular two-way communication between both parties matters here to avoid overspending or sending the wrong amounts.
- Invoice Matching
The shipments should start coming in at this point. All your organization needs to do is internally review each invoice to ensure accuracy. Then, make sure the payment for each iteration goes through to the vendor.
So now you know the general use cases of the blanket purchase order and the standard process. Consider also going through a best practices check
- Train your staff on blanket orders: Even those who are not procurement or finance professionals should have a basic understanding of how this process works. Identify the stakeholders in the company most likely to issue repeat purchases and train them regularly on how to effectively use this type of document.
- Have accurate approval flows set up: Most employees should be aware of the blanket purchase, but not everyone needs the authority to instigate one. Limit the ability to authorize the blanket purchase order to only those who need it.
- Regularly review BPOs: It’s recommended to do this either yearly or twice a year. Keep in mind that some vendors allow you to cancel an agreement under certain conditions if you believe you aren’t getting the most out of the shipments.
- Plan to have a stopping point: We strongly advise against “evergreen” BPOs. It’s far easier to manage a limited contract that ends within 6 months to a year. In fact, consider aligning the contract terms with the end of a fiscal year.
- Ensure compliance at every step: Data security is in high demand thanks to the legal and moral obligations companies have today. When working with financial documentation, redact sensitive information like personal data and bank account information whenever necessary to avoid leaks.
- Communicate with vendors: The suppliers must be on board with the plan to avoid confusion. Be clear about your estimated amounts and PO numbers whenever you’re working directly with them.
- Use digital tools: It should be clear from our description of the blanket process that smart financial management is essential to maximizing the benefit of the blanket purchase order. An efficient invoice approval protocol is part of the job, and many automated procurement tools and services are available to help in that regard.
Conducting a blanket purchase order can bring about many benefits. Take the time to work with your team and ensure that all stakeholders involved understand how to generate one; it will encourage better financial management, stronger supplier relationships, and a smoother AP process overall.
The main difference between a purchase order and a blanket purchase order is that a regular PO is generally used for a shorter time frame, while a blanket PO is used for recurring orders over a longer period of time with a concrete contractual start and end date.
A blanket purchase order should be used when the need for an item or service will stay consistent throughout a set period of time, and you trust the supplier to fulfill that need consistently.
You process a blanket purchase order like any other PO, but you’ll first sign a contract with your chosen supplier for a set long-term period. Using an automated procurement process can make approving these requests and managing multiple POs a lot faster and simpler.