A Guide to Blanket Purchase Order (BPO)
Key takeaways
- A blanket purchase order is a contract established between the business and its supplier, stating that the supplier will provide goods or services regularly for a specified period at a fixed price.
- The blanket purchase order is generated when the two or many parties involved agree to the prices and time period set for the purchase.
- Here the buyer gets the advantage of acquiring goods at the same unit price for the entire contract period.
- Cflow is an all-in-one solution with automated notifications, categorized workflows, flexible routing, and real-time tracking. Using these features, businesses can make faster decisions, transparency, and budget control.
What is a Blanket Purchase Order?
Also known as a standing purchase order, the blanket purchase order is a contract established between the business and its supplier, stating that the supplier will provide goods or services regularly for a specified period at a fixed price. This purchase order type is used when there is a recurring need for particular goods. It is an excellent way to streamline the procurement process in a business. This is an effective practice for businesses, especially enterprise ones, where all invoices can be consolidated under one purchase order number.
Using blanket purchase orders encapsulates several advantages for the buyer and supplier. First, it significantly reduces the time taken to generate and process invoices and offers consistent goods/services delivery. Second, it reduces the risks of price fluctuations in the market and ideally helps in planning procurement management.
The blanket purchase order is generated when the two or many parties involved agree to the prices and time period set for the purchase. Here the buyer gets the advantage of acquiring goods at the same unit price for the entire contract period. This also ensures that only the quality and quantity of the products ordered have to be checked, however, the rest of the BPO processing is carried out without facing interruptions.
Table of Contents
What Goes Inside a Blanket Purchase Order?
Here are the following contract terms that are used to define the contract established.
- Header information
- Description of goods and services
- Contract duration – start and end dates
- Contract conditions and pricing
- Purchase order number
- Basic billing information – method of invoice submission
- Specifying the good’s or service’s quality, numbers, quantity, etc.
- The delivery times and locations
- Important terms and conditions for cancellation
4 Types of Purchase Orders
1. Regular/Standard Purchase Order
Regular or standard purchase orders are POs that are used for a single purchase from purchase. This type of PO is often short-term and fulfills a sudden demand. On a standard PO, the details of the requested goods will be mentioned specifically that intending a one-time purchase. The details include the exact quality, quality, delivery date, and the cost.
The regular purchase order includes –
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2. Blanket Purchase Order
A blanket purchase order as discussed earlier, is a standing purchase order that is viable for a longer time. Used in case of a consistent need, a business can initiate a blanket purchase order that acts like a contract for goods and services delivery.
The regular purchase order includes –
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3. Planned Purchase Order
Planned purchase orders have a similar purpose to a standard PO, however, the date and time of the delivery will not be specified. The PO will only be released when the need arises. As the need arises, the buyer will request for the ordered goods to be delivered by specifying the date and time.
4. Contract Purchase Order (CPO)
A contract purchase order is a type of PO that is generally used for legal agreements between the buyer and supplier. The contract purchase order also works for a specific period and does not usually describe the exact items involved in the purchase.
The contract purchase order includes –
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When to Use Blanket Purchase Orders?
Using a blanket purchase order may not be ideal for all situations. When certain criteria are met, blanket purchase orders can be beneficial to the business as well as the suppliers. Here are some examples –
- When there is a need for a large amount of the same goods or services for a fixed period.
- When the cost of the unit and service period is defined precisely that works for both parties.
- When purchasing in bulk, it is advantageous to generate contracts and offer bulk discounts.
- When a single vendor can manage the production of the goods for a while and cater to the high needs.
- When building a strong supplier relationship is crucial.
- When there is a projected need created where the business has to place orders for the same product for a longer period from the same supplier.
When to Not Use a Blanket Purchase Order?
Here are some examples of when a blanket purchase order should not be used.
- When the price of goods or services falls or fluctuates soon.
- When the supplier or vendor is not reliable in delivering the goods on time.
- When there is no consistent need for the same product over a period of time.
- When the price is not known at the time of purchase.
- When the quality of the product/service is not to the standard.
How Does a Blanket Purchase Order Work?
The purchase order process can vary based on the type and size of the business. However, here is a generalized guide to the process of establishing a blanket purchase order.
Do the Research
Before finalizing a long-term contractual relationship with your suppliers, it is essential to do detailed research on the needs and requirements. Preparing a short list of the pros and cons will help you determine whether a blanket purchase order is the need of the hour. Once this is done, the business needs to communicate the need clearly and the terms and conditions for the purchases that will be made consistently.
Some important premises for initiating a blanket order process –
- It is ideal for acquiring services. For tangible products or goods, it is better to go with a regular purchase order.
- A blanket purchase order must only be created when the business receives multiple invoices for the same product for a longer period.
- It is important to use blanket purchase orders if the invoice cost could vary.
Create the Blanket Purchase Order
Before getting the contract approved by the appropriate stakeholders, it is important to create a document that will be presented to them, with all the details that will go inside the blanket purchase order.
Get Approval
Once the blanket purchase order is created, it has to be approved by the top management and the stakeholders. This approval might take a little longer than getting a normal purchase order approved. The BPO is where the team has requested more money than a usual purchase. This requires the business to make a deeper commitment to the vendors.
Fulfilling the Contract
Once all the required approvals have been garnered, the blanket purchase order is sent to the supplier. Using the details on the invoice, the supplier understands the type, quality, and quantity of the goods or services required, and creates an invoice accordingly. This is followed by the buyer confirming the order through which all the parameters requisites can be cross-checked to avoid any mistakes.
Invoice Matching
Once the order has been fulfilled, the next stage is when the shipped orders arrive at the destination. At this stage, the arrived products or the given services have to be reviewed and matched with the PO and invoice
Payments
Once the invoice and blanket purchase order have been matched, the payment is initiated and paid.
Pros and Cons of Using a Blanket Purchase Order
Let us take a look at why a blanket purchase order can be beneficial in comparison to a normal PO in certain situations. Here are some notable pros.
Pros
- Framework is Easy- The setting up of a blanket purchase order is simple and has an easy framework. It does not involve a lot of information. Details such as the supplier part, specifications in the production, or the unit pricing do not have to be mentioned in the
- Costs are Reduced and Purchasing Power is Increased – Since all the purchases made by the company are clubbed together, there is a considerable reduction in the costs of the goods or services. Having separate POs may spread out the purchasing period and may not bring in any volume savings. Negotiation power increases with the clubbing of POs from multiple divisions and locations.
- Improves Efficiency and Reduces the Purchasing Lead Time – As a blanket P.O. consolidates multiple purchases, the purchasing lead time is reduced significantly. Moreover, the blanket PO will also negate the need to look for a different vendor once the order is fulfilled. Negotiating every time may not succeed with all the vendors. This way, the process efficiency improves and also successfully reduces the purchase lead time.
- Fixed Pricing During Market Fluctuation – The prices for all the purchases made within the period of the invoice remain the same. The negotiated prices can be leveraged for a long time, even if the princess fluctuates in the market. This is one of the most notable advantages of blanket purchase orders. This also facilitates accurate budget management in the organization.
- Consolidated Purchasing – Consolidating purchasing makes internal arrangements easier. Consolidation of multiple orders from all the departments can be put under a blanket purchase agreement (BPA). Doing so simplifies inventory management to the core.
- Flexibility in Delivery Date or Quantity – BPO makes the procurement process highly flexible. The organization can easily adjust the quantities and schedules of the delivery based on the needs. The buyer does not have to provide a specified quantity or the dates upfront. This also helps in tackling an unprecedented demand for supply.
- Improved Supplier Relationship – A blanket purchase order means a long-term agreement between the supplier and the buyer. This helps in deepening and strengthening the relationship. There is better understanding and clarity in the needs placed and catered to, helping in improving the service provided.
- Convenient for Processing of Invoices – With BPO, processing invoices becomes easier, specifically for small vendors. For most small businesses there will not be an accounts payable team that would ensure that the PO number matches to that of the invoice. However, in the case of a blanket PO, the supplier can easily remember and match the PO with every invoice correctly.
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Cons
Although the pros of the BPO look promising, there are some cons to using blanket purchase orders.
- Risk of Over-Ordering or Under-Ordering
Bulk ordering can often lead to over-ordering or under-ordering. This happens due to the flexible nature of the BPO. Since the quantity and delivery date do not have to be fixed for every purchase that will be made under the PO, it can quite lead to over-ordering or under-ordering, leading to extended inventory costs.
- Supplier Dependence
Even when BPO facilitates forming a good relationship with the suppliers, it can lead to supplier dependence. If the supplier faces a disruption in the supply chain due to financial loss, production issues, or even problems in quality standards, it can tamper with the business of the buyer. Hence, supplier dependence can be a big disadvantage.
- Lack of Competitive Pricing and Price Fluctuation
As discussed earlier, fixed prices are an advantage when the prices fluctuate and go up in the market. However, the business might lose competitive pricing from a different supplier way later into the BPO agreement. It may not be ideal to break the contract if maintaining a good supplier relationship is the goal.
- Contract Management Complexity
Consistently, the BPO contract will require regular reviewing of the terms and conditions set in place. This includes monitoring schedules, checking quality, evaluating cost variations, and ensuring supplier relationships. All these can add up to the complexity of the process.
- Reduced Flexibility with Other Suppliers
Initiating BPO means a long-term commitment to a single supplier. This might lead to missing out on other offers and flexibility. The company will not be able to take advantage of other available offers.
Best Practices for Blanket Purchase Orders
To overcome some of the common challenges discussed above, it is important to inculcate some best practices to avoid any practical errors.
Staff Training
Every department in an organization should have a clear understanding of how a blanket purchase order works. The management has to identify who or which department is most likely to leverage blanket purchases. They can be trained in using such a PO and how to make it advantageous to the organization.
Accurate Approval
Approval has to be streamlined and fixed concerning authority. The approval must be limited to the person or department that needs it.
Have an End Date
Having an end date for a long-lasting purchase order like the BPO is ideal. It may not be wise to leave a BPO open. It is also ideal to limit the contracts to a year, by aligning terms with the fiscal year.
Regular Reviews
The blanket purchase order must be reviewed at regular intervals, preferably once or twice a year. This ensures that the BPO is active and relevant to the demand. Hence regular reviews are crucial to successfully initiating a blanket purchase order.
Constant Compliance
It is important to ensure that compliance is maintained throughout the process of buying and supplying. Data must be protected and censored wherever necessary.
Communicate Efficiency
The communication channel between the buyer and supplier must be smooth and intact. This will ensure that there is no confusion on the estimated quantity, cost, etc.
Use Technology
Today every business leverages some sort of technology to make their operations more efficient and smoother. Blanket purchase order processing can also be transformed into an accurate and efficient process. A huge amount of invoices can be matched to POs in an instant using automation. Businesses that initiate a PO through an automated workflow efficiently carry out the invoice and PO matching.
How Can Cflow Help Manage Purchase Orders?
Automation software like Cflow is built for core processes such as procurement. The software offers an effective way to automate the operation and reduce the burden on the workers. All the requests raised can be tracked in real time, helping in managing the inventory as well as improving the pace of the approval process. The software helps in identifying the spending patterns of the purchases, carrying out audits, and acquiring an effective spend management system.
POs can be created and approved instantly by ensuring compliance with the terms and conditions. In nurturing a healthy relationship with the supplier, automation software plays a key role in enhancing communication and collaboration. This helps in deepening the trust and understanding.
The reports and analytics generated by the tool can be used to monitor supplier performance, helping in making necessary improvements. The tool automatically initiates the three-way matching and simplifies the manual labor.
Why Cflow Procurement Suite?
Cflow is one of the most seamless platforms with an advanced procurement suite for effective buying and selling. The software can be used to build blanket purchase orders from scratch and automate the complete process from initiation to payment.
Cflow is an all-in-one solution with automated notifications, categorized workflows, flexible routing, and real-time tracking. Using these features, businesses can make faster decisions, improve transparency, and practice budget control.
Conclusion
A blanket purchase order is an advantageous way to make procurement decisions smoother and faster. With effective PO matching and planning, purchase orders and supplier relationships can be part of strategic planning. Business requirements and demands change consistently hence, the functions have to be upgraded as well. Upgrading means simplifying it and automating the blanket purchase order is an excellent example of that. Leveraging a workflow automation platform can make this process seamless and eliminate all the hassles in the process.
Cflow is a one-stop solution for streamlining the procurement process from start to finish. Experience fine procurement and supplier management with Cflow today. Sign up now!
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