Have you ever considered placing a purchase order for something that will be delivered in the future but for which you may choose a price now? It is now achievable since both the provider and the organization want to find a solution to achieve a long-term win-win partnership. Gradually, a single name for this agreement has emerged: blanket purchase order. It is currently widely used in many types of businesses. This article might answer the question of “what is a blanket purchase order?” and how it works.
What is a blanket purchase order?
Blanket purchase order definition
A blanket purchase order (BPO) or blanket agreement, sometimes known as standing purchase order, is a long-term contract between an organization and a supplier to deliver goods or services at a fixed price regularly for a certain length of time. Nowadays, you can make a blanket purchase order online easily through your POS system with automated purchasing order processing and one-point supplier coordination.
Is blanket purchase order a contract? A blanket agreement can be considered as a contract type. It is different from normal purchase orders in that they establish an ongoing relationship between a business and its supplier and set time and cash limits.
Blanket purchase order application
People may wonder when to use and not to use this type of agreement. If you are purchasing from one supplier with the same products several times in a year, you should consider this contract type since it can help you save much cost in the context of price fluctuation. Besides, it will be helpful when ordering in quantity facilitates more favorable contract terms, such as bulk discounts. On the other hand, if you are not sure about the price at purchasing time and the price is subject to change without notification, it is not a good choice for your business.
Blanket purchase order’s benefits
A blanket purchase order can bring many benefits to the business if you use it correctly.
Reduce costs and increase purchasing power
The blanket agreement can help organizations group all the good or service purchases that would otherwise be spread out over a long period and gain volume discounts. Besides, it also helps reduce administration costs significantly since you don’t have to involve all departments several times to manage the same purchase and find new suppliers or renegotiate terms and prices again for each order.
Improve efficiency and shorten purchasing lead time
A blanket PO streamlines the procedure of ordering repeated items. Rather than creating many individual purchase orders, you can just create one and receive it many times. On the other hand, when the supplier has all order information for a long period in advance, they can actively prepare all orders and reduce lead time.
Reduce stock holding
A blanket agreement specifies all of the terms and conditions of purchase, including the numbers needed and the expected delivery date. Therefore, it eliminates the need to have extra stock on hand which can help reduce inventory carrying costs and increase efficiency.
What is the difference between a purchase order and a blanket purchase order?
There are four types of purchasing orders used by businesses including:
- Standard purchasing order
- Planned purchase order
- Contract purchase order
- Blanket purchase order
Among 4 types, a standard purchase order is the most popular type and also the easiest since it is specific with all information about quantity, price, and delivery. But blanket PO is needed to achieve cost-reducing and purchasing efficiency. We can make a comparison between these 2 main types in 3 criteria:
Contract length
A standard purchase order is used for a shorter amount of time, whereas a blanket order is used for a longer period and includes a firm contract start and end date. The parties can then prolong the period of the blanket agreement, which is unusual in standard contracts.
Level of detail
A standard purchase order is quite specific, containing all of the details about goods or services being ordered. On the other hand, a blanket PO is more generic, containing only high-level purchase information since it is set for the long term.
Total amount
A standard purchase order specifies a fixed amount depending on the item’s cost and quantity. However, it is quite difficult to set a total amount for a blanket order because of its nature. People can not fix the items and quantity in advance for a long period. Therefore, setting a precise quantity for a blanket order is recommended but not required.
Blanket purchase order process flow
There are six main steps in the process flow of a blanket purchase order:
Step 1: The very first step is to set up the order based on what the company’s departments need and plan. Before deciding the order type, it is also important to consider whether it should be a blanket order or a standard order.
Step 2: The next step is to get the order request reviewed and approved. You are only obtaining approval to spend up to that amount of money with a blanket order, and you may not end up spending the entire amount. Sometimes, you may go over your estimate in some circumstances, in which case the amount will need to be changed later.
Step 3: After the request has been approved and BPO is created. It is sent to your vendor for checking and finalization.
Step 4: Vendor then creates an invoice in advance or after each delivery based on the agreement between two parties.
Step 5: Company receive an invoice and match the receiving information
Step 6: Then the company makes payment based on the invoice.
The vendor will keep invoicing for the next delivery and get paid until the BPO finishes.
Wrap up
In general, a blanket purchase order can provide a corporation with several benefits. If your company makes any payments for the same things or services, it is considered an efficient method of reducing time wasted and processing delays. It is not, however, appropriate in all circumstances. We hope that this article has given you a better knowledge of what is a blanket purchase order and how to use one. So you’ll figure out when or in what situation you should employ it to get the best results for your company.
