Blanket Purchase Order
Blanket purchase order is the purchase agreement between buyer and supplier over the quantity which will be delivered multiple times. The customer uses the blanket purchase order when the purchased quantity is huge and consistent. So it will help to reduce the workload on the repetitive tasks made by the purchasing department.
It will help both parties to fix the price, quantity as well as delivery date. The buyer will not spend the time looking for suppliers with reasonable prices. The production also is able to plan for future products which will not face cost fluctuation. The buyer will be able to fix the price with the supplier, so they will be able to sign other contracts with the customers as well. Blanket Purchase Order prevents any price increase in the future which can impact to company’s profitability.
Suppliers also get many benefits from this type of purchase order. Management will be able to plan for future products which will be sold to the customers at a predefined price. The warehouse can prepare the stock ahead of time and be ready to deliver to customers.
Both parties will be able to make a proper budget plan for the upcoming year. Blanket Purchase Order prevents any price increase in the future which can impact to company’s profitability.
For example, if the buyer plan to buy 10,000 units of products per month from the supplier. They both can sign a contract at a fixed price and the supplier will deliver 10,000 units per month to customers for a period of one year.
The Benefits of Blanket Purchase Order
| Buyer | Seller |
|---|---|
| To reduce the cost: as we have signed an agreement with the supplier, we will get a good price to compare to the normal customers. | To guarantee sale: the supplier will sure about the future sale as the agreement has already been signed. |
| To save time and increase efficiency: we will not waste time placing orders, negotiating prices, and arranging delivery. We just negotiate and prepare plans only one time a year. | Easy for planning: the seller already knows the exact quantity to be produced for each customer. |
| To save storage cost: as the inventory as it belongs to our company but keep them with suppliers. They will be delivered on the exact date which we need. | To save space: The supplier will produce only enough for the buyer, so they will not need to stay long in the warehouse. |
| Special discount: due to the large purchase, the buyer may be able to receive discounts from suppliers. | Sellers will be able to increase sales volume by providing a sale discount. |
When to Use Blanket Purchase Order
Blanket purchase orders are highly like to use in some situations such as:
- Quantities of the same materials are needed throughout a time period
- The unit cost can be defined and it does not fluctuate too much.
- The supplier is capable of providing enough quantity over the contract term.
- The supplier is providing a favorable term such as a bulk discount.
- The supplier is able to provide stage delivery which will minimize stocking risk and costs.
Blanket purchase orders should not be made for orders where the price is not guaranteed, the quality of the product is unreliable, or the vendor cannot be trusted.
Component includes in Blanket Purchase Order
Blanket Purchase Order should include the following items:
- Material specification
- Material price
- Term of invoice and payment
- Scope and coverage of blanket purchase order
- A cancellation clause
Challenge of using Blanket Purchase Order
The challenge of using blanket purchase orders is to quantify the amount need over a period of time. The customers will face a shortage as the actual usage over the forecast and they need to raise urgent orders to the suppliers. It is not a problem if the supplier has some surplus, if not they have to wait for the time which can impact the operation.
In order to prevent this issue, the buyers should spare some inventory in the warehouse to prevent the shortage. Suppliers are also required to have surplus stock for a fast-moving item, it will help the company in case of emergency need.
Moreover, the contract should be revised every year to reflect the actual need for production. It must comply with the business plan as well.
