A blanket purchase order (also known as a standing purchase order) is an agreement arranged between an organization and a supplier to deliver goods or services at a predetermined price on a recurring basis for a specified time period (typically 1 year).
For example, if an organization determines that it submits eight purchase orders per month to a particular vendor, it can consolidate these purchases into a single blanket purchase order and issue one PO for the entire year — as opposed to issuing 96 smaller purchase orders.
In addition to establishing a set price and quantity to be purchased, these types of purchase orders are also useful when the specific quality or features of an item are important.
What are the benefits of a blanket purchase order?
1. Reduces costs and increases purchasing power
A blanket purchase order allows an organization to bulk together purchases that would otherwise happen over an extended period and receive quantity discounts. Furthermore, these POs allow an organization to consolidate purchases from across different departments and locations to further strengthen bargaining power.
2. Improves efficiency and shortens purchasing lead time
A blanket purchase order simplifies the ordering process of repeated purchases. As in the above example, rather than creating 100 different purchase orders a company can simply create one and receive against it multiple times. A blanket purchase also eliminates the need to search for new suppliers or renegotiate terms and prices which lowers administrative costs and allows staff to spend time on other key procurement functions.
3. Facilitates leaner operations by reducing stocking requirements
A blanket purchase order clearly lays out the terms and conditions of a purchase, including quantities required and delivery time. This eliminates the need for an organization to keep additional stock on hand because it is confident that the supplier will fulfill the order as previously negotiated.
When to use a blanket purchase order
Consider using a blanket PO when:
- Making repetitive and pre-specified purchases from the same supplier within a certain time period (typically 1 year).
- Ordering standardized products or services which require numerous shipments.
- It’s effective to use economies of scale.
When not to use a blanket purchase order
Try not to use blanket POs when:
- The price is not known at time of purchasing.
- The price is subject to change without notice.
- Quality of product or service is questionable.
A Blanket Purchase Order should include the following information:
- Price and pricing arrangements.
- The period which the agreement covers.
- Terms and billing conditions
- Description and details of items covered by the PO
- A cancellation clause
Once established it is important to continuously monitor a blanket purchase order to ensure that purchasing does not go beyond the arranged limits. Once these limits are exceeded, the item is subject to usual price and conditions. The best way to mitigate this risk is through the use of an effective spend management tool.