Procurement 101Guide To Understanding Blanket Purchase Orders
It’s not uncommon for companies to order the same product regularly – covering the same quantity, price, and contents.
If this is something your business does, it makes sense to place a blanket PO, blanket purchase order.
For those who don’t know, this is a long-standing arrangement between an organization and a supplier, where they agree to deliver their goods or services at a specified price (regularly) for a set period.
Blanket purchase orders work wonders for simplifying the buying process for both parties. Suppliers can submit multiple invoices citing the same BPO number, and businesses save time defining and placing their orders.
So, with all that in mind, this guide takes a look at everything you need to know about making blanket purchase orders work for your business.
Let’s dive in!
What are Purchase Orders, and Why are They Important to Business?
New business owners and people who have never dealt with purchase orders have likely only viewed everyday transactions.
These don’t require more than a swipe of a credit card or an exchange of cash for a product.
But, business to business (B2B) transactions are more challenging. Namely, because more detailed communication and documentation are necessary. Often, orders are made by a department that has to report to other sectors of the company.
This is where purchase orders come in handy. They’re used to kickstart transactions with a supplier when a business wants to make a purchase.
This allows both parties to match their records so they can verify the purchase, the price of the transaction, and when it took place.
A significant amount of administration is, therefore, involved in detailing all the purchase order requirements and keeping a record of the price, delivery date, and stock.
Not only do these documents allow both the supplier and the business to keep on top of these transactions, but orders can also be subject to financial audits where clear documentation is required.
As you can see, purchase orders are useful for larger businesses who want a clear image of their costs and need to keep tabs on the status of each order.
(Purchasing procedures can get wild without proper control.)
Pro Tip: The administration side of things can be tedious and complicated, so many businesses benefit from installing purchasing administration software.
What’s Specified in a Blanket Purchase Order?
When you place a blanket purchase order, you set the specifications that determine the order details throughout the length of the agreement.
Here are some of the factors BPO arrangements (usually) define:
- Pricing and contract terms
- The number of items required, delivery times, and locations
- Quality specifications
- The size of the items
- The period the BPO runs for (this could be time-based or once your order hits a specified budget)
- Cancellation clauses
- Billing information
Of course, blanket purchase orders aren’t limited to the above info, but you get the idea. The exact information included is determined by the requirements of the arrangement.
The Blanket PO Process Flow
The process of setting up a BPO isn’t too different from other types of purchase orders.
The flow is as follows:
First, the blanket order is defined and specifies the items required.
This is a research-heavy stage as the procurement department needs to decide whether a blanket order is appropriate for their forecasts and whether this will save them time and money in the long term.
Once they’ve identified opportunities for blanket orders, they can detail their requirements and send them to the necessary people/department for approval.
Your business likely has procedures in place for signing off on things like BPOs. For instance, your director may need to approve it.
At this stage, the price might be an estimated one, so you’re seeking approval to spend up to the specified amount of money.
The Vendor Processes the Order
Once you’ve followed all your internal protocols, the purchase order can be sent to the vendor. They’ll then invoice against the required amount of items or services.
To ensure your business doesn’t get charged more than was signed off for (should the estimate be higher than the actual price), communicate with the supplier what your upper limit is.
Pro Tip: To begin with, try and low ball the vendor. This should give you a better feel for what their bottom line is. Needless to say, this massively increases the chances of scoring your company a saving, which we’re sure your boss will be thankful for!
The vendor will send invoices to your business during the specified time your blanket order is active. Internally, you can review and approve each invoice for every interval.
Once you’ve done that, the necessary department in your company will issue payment to the vendor as per the agreed terms.
The Benefits of Blanket Purchase Orders
It’s common for procurement departments in businesses across an array of industries to use blanket orders. Namely, because they’re an easy way of reducing costs and building more efficient workflows.
As you probably already know, lots of suppliers are willing to offer discounts when a company makes a bulk order or agrees to multiple deliveries.
These are just a couple of the perks attached to bulk purchase orders, so below we’ve highlighted the advantages in more detail:
BPOs Eliminate the Need for Product Sourcing and Contract Organization
With a blanket purchase order, you just need to specify your requirements once (at the beginning of the agreement) – and that’s it.
This saves procurement departments lots of time that would otherwise have been spent renegotiating terms with every order they make. This frees up staff to focus on other vital activities that generate money for your company.
Regular Shipments Minimize the Need for Storage
Once a procurement department realizes how many supplies they need at specified intervals, they can use a blanket purchase order to make more efficient purchases. This ensures they fill their warehouses as required.
That way, you’ll never over or understock. Consequently, the business can save on unnecessary storage costs that arise when you over order.
In short, standing orders secure regular and reliable shipments that allow for better planning.
(Unintentionally empty spaces aren’t just disappointing – they’re bad for business!)
They Protect You from Price Fluctuations
Blanket purchase orders often specify a total cost for the items during the period of the agreement, even if multiple shipments are required.
With this detailed in the contract, businesses don’t suffer from fluctuating prices on products they order regularly. If the cost of these items shoots up, they’ll still pay the agreed-upon product price covered in the BPO.
When Should a Business Use a BPO?
While blanket orders can efficiently streamline repetitive purchases and allow companies to leverage lower purchasing costs, it’s only a sensible option for businesses in certain circumstances.
For instance, a blanket purchasing order may present a benefit if:
- Staggering your deliveries will minimize stock risks and costs
- Ordering in bulk entitles you to a decent discount
- The unit costs can be well-defined, and details can be specified
- A single vendor can deliver throughout the length of the contract
- Specified quantities of the same goods or services are required throughout a set duration.
- It’s favorable for you to form a long-term working relationship with your supplier
You get the idea. If the above list doesn’t apply to you, then a BPO probably isn’t the way to go for your company.
Challenges of Using Blanket Purchase Orders
Utilizing a BPO presents a higher risk when forecasting the needs of the business proves difficult.
To enjoy the benefits from a blanket PO, businesses need to analyze data that can provide the exact quantities of the product/service you’ll need over a defined period of time.
Companies may leave room for adjustments during contract negotiations, as goods and services are delivered.
If a forecast proves inaccurate or conditions change, the business could suffer a loss as a result. A price agreed upon during contract negotiations can also become a drawback should the product value decline during the length of the order period.
(Performing cost divination rituals isn’t advisable when raising a BPO.)
To be safe, blanket purchase orders should be avoided if:
- The exact price isn’t known at the time of purchasing
- Prices are subject to change without notice
- The business is unsure of the quality of a product or service
- Quantities needed can’t be reliably forecast
It’s imperative that as you consider a BPO that you review this list.
Are Blanket Purchase Orders Contracts?
It’s easy to get confused over what stage a BPO becomes a contract. It’s also (sometimes) difficult to judge when it’s wise to enter into such an agreement. At first glance, BPOs and contracts seem similar.
But to clarify things for you, when a vendor accepts a purchase order, it becomes a contract. But not every contract is a purchase order. Purchase orders may cross-reference the terms of a negotiated contract.
The purchase order is a commercial document rather than a legal document – i.e., it’s the offer a buyer makes to a supplier. If it’s accepted, the PO then becomes a legally binding contract.
Contracts generally refer to a complex set of terms associated with the recurring order, such as the exact deliverables, quality standards, as well as any specific terms and conditions involved.
What are the Different Types of Purchase Orders?
To better understand the use of blanket purchase orders, it might help to take a quick look at what other types of purchase orders there are and when they’re applicable.
Simply put, there are four types of purchase orders, and they’re as follows:
1. Standard Purchase Orders (PO)
This is the most used type of purchase order and the easiest to understand. Standard purchase orders describe the order of one-off purchases or occasional offers.
They usually meet specific requirements as a business encounters a particular demand and are thus, more detailed than most other POs.
2. Planned Purchase Order (PPO)
Planned purchase orders contain the same level of detail as a standard PO. But, they omit delivery information. This is an order placed by a buyer that specifies the type, quantity, and price of items.
The delivery information such as date and location are held until the buyer knows when the order will be needed; at this point, these details are ‘released.’
3. Blanket Purchase Orders (BPO)
Also referred to as ‘standing orders,’ blanket purchase orders agree to a regular supply of the same quantity and type of item to meet predicted and recurring business needs.
They’re often set for a year, and the BPO agreement details the intervals, order, and delivery details.
4. Contract Purchase Orders (CPO)
Contract purchase orders are similar to both PPOs and BPOs, but for this purchase order, the list of items required for purchase isn’t included. The function of a CPO is to set legally binding reference terms that other POs can follow and be bound to.
Blanket Purchase Orders Could Improve Your Business’s Bottom Line
Working with the appropriate type of purchase order is a crucial step for the efficient running of your procurement departments.
It makes sense to analyze and forecast your supply needs early so that appropriate blanket orders can be arranged with trusted vendors. Not only will you make a saving, but it also helps to free up the precious time of your employees.
All in all, if you regularly order from the same vendors and accurately predict these transactions will continue to recur for several months or even a year, consider setting up a blanket PO, blanket purchase order. It’s one of the simplest things you can do to streamline workflows.
If you have any questions or want more information on this topic, please reach out and contact our friendly team!
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