What is a blanket purchase order and when should you use it?

A blanket purchase order (BPO) is a convenient purchase order (PO) designed to facilitate regular deliveries of goods or services from a single vendor over a specified time. It’s a long-term agreement that typically spans months or even a year. The agreement establishes a predetermined total quantity and unit price for the deal.

BPOs don’t usually specify delivery dates for goods or services or individual purchase quantities. They only specify the total number of units, a fixed unit price, and the contract length.

Additionally, it may also include cancellation clauses, providing much-needed flexibility (for a long-term contract) if your business needs change.

These features make BPOs particularly useful for repetitive purchases, where you need a reliable and predictable supply of goods or services over an extended period.

Industries with fluctuating demands or unpredictable usage patterns and those in all sectors buying office supplies, raw materials, or maintenance services find them advantageous. Instead of creating a new purchase order for each purchase, companies can simply reference the BPO, saving time and reducing administrative costs.

Creating a BPO is like making a pre-approved shopping list with a set spending limit. This quality saves time and reduces costs, allowing for an efficient procurement process flow.

While blanket purchase orders are a cost-effective and practical option for recurring purchases, there are other types of purchase orders that you might use in different situations. Let’s look at some of the most common types of purchase orders.

Standard purchase orders

A standard purchase order is a one-time purchase order for a specific quantity of goods or services. It’s the most common type of purchase order.

Businesses typically use standard purchase orders when they don’t have a recurring need for the goods or services. Contrary to the BPO, a standard PO does include specific product quantities, delivery times, and the preferred delivery method.

Planned purchase orders

A planned purchase order (PPO) is similar to a standard one, but you use it to plan purchases in advance.

For example, you might use a planned purchase order to buy inventory for an upcoming sale or equipment for a new project. Planned purchase orders help you budget for future expenses and increase the likelihood that you have the goods or services you need when you need them.

The key difference between a planned purchase order and a BPO is that while neither specifies the delivery date, the PPO does specify the products, quantities, and qualities of each future purchase.

Contract purchase orders

A contract purchase order (CPO) is a long-term agreement between a buyer and a seller that provides a framework for upcoming transactions. While CPOs establish general terms and conditions for future purchases within the contract period, like payment options and delivery timeframes, they don’t include specific details such as products, quantities, or prices.

Businesses typically use contract orders for large purchases or purchases requiring a long-term commitment. The most common industries include:

• Information technology

• Manufacturing

• Construction
  
  

Blanket purchase orders offer a range of advantages that can strengthen your purchasing process and save you money. Let’s explore some key benefits.

Consistent pricing

With a blanket purchase order, you can lock in a set price for goods or services over time. This protects you from price fluctuations. You won’t have to worry about falling market value issues, as each delivery’s price will remain the same.

By negotiating fair prices with suppliers and ensuring that each delivery remains the same price, you can maintain cost predictability and budget more effectively.

Increased efficiency

Blanket purchase orders simplify the ordering process by combining multiple POs into a single blanket purchase order, saving you valuable time and resources. Instead of creating a new purchase order for each purchase, you can simply reference the blanket purchase order.

These characteristics simplify the procurement process by eliminating the need to search for new suppliers, negotiate prices, and fill out paperwork whenever you need to make a purchase.

Improved inventory management

Blanket purchase orders can help you improve your inventory management software. By knowing how much of a particular item you’ll need over time, you can order the right amount and avoid stockouts.

This can simplify your operations, optimize resource allocation, and reduce waste. Accurate inventory tracking can also increase sales and improve customer satisfaction.

Fewer delays

Blanket purchase orders can help you minimize delays in the ordering process. Since the BPO provides a concise overview of multiple shipments, you involve less detail when placing a particular order than with a standard PO. This means less time-consuming development and a faster turnaround time.

Reduced admin costs

By using blanket purchase orders, you can reduce administrative costs associated with vendor management and purchasing.

According to the American Productivity & Quality Center (APQC), processing a single purchase order can cost $50 to $150. These costs come mainly from procurement professionals’ salaries and administrative expenses like issuing and approving requisitions, placing the purchase order with the vendor, and invoice matching.

With a BPO, since you’re consolidating multiple purchases into one order, you’ll have fewer invoices to process and fewer payments to make, saving you time and money.

For example, suppose you’re a small business making 1,000 purchases annually. Consolidating 30% of your recurring purchases under a blanket purchase agreement can save you $30,000 annually on PO processing costs alone. You may even be able to negotiate bulk discounts with your suppliers, which can further reduce your costs.

Blanket purchase orders are a valuable tool, but they’re unsuitable for every situation. Here are some factors to consider when deciding whether to use a BPO:

• Regular, recurring purchases: Blanket purchase orders are best suited for goods or services that you purchase regularly. A standard purchase order might be a better option if you only need to buy something once or twice a year.

• Established supplier relationships: BPOs are best when you have an established relationship with a vendor and a clear understanding of their reliability, product quality, and pricing. With a new supplier, it’s best to start with smaller, individual purchase orders to assess their performance before committing to a long-term agreement.

• Defined unit cost: The unit cost of the goods or services should be clearly defined. This will help you avoid any surprises down the road.

• Supplier’s ability to fulfill the agreement: Make sure that your supplier can satisfy the blanket purchase order over the specified period. You don’t want to run into any delays or shortages.

• Flexibility: If your business needs are likely to change, a BPO’s cancellation clause can provide flexibility. However, a standard or planned purchase order might be preferable if you need more spend control over individual purchases.

• Tail spend management: If your organization is focusing on tail spend management, BPOs can be instrumental in consolidating and optimizing the numerous small purchases that typically make up tail spend.

Use these tips to help you modernize your purchasing process and achieve success with BPOs.

Automate with software

Automating your purchase order management can save you time and reduce errors. Many software options are available that can help you create, track, and manage blanket purchase orders.

By selecting software that natively integrates with your existing procurement system, you can automate the purchase order process, improve efficiency, and reduce the risk of manual errors.

Look for software that offers features such as:

• Automated order generation: Automate the creation of purchase orders based on predefined parameters within the blanket purchase order. Eliminate the need for manual data entry and reduce the risk of errors.

• Real-time tracking: Gain real-time visibility into your BPOs, including order status, delivery schedules, and remaining balances. Proactively manage your inventory and avoid stockouts.

• Approval workflows: Establish automated approval workflows to route purchase orders for approval by the appropriate personnel. This step ensures that purchases are compliant with company policies and spending limits.

• Reporting and analytics: Generate reports and analyze data to gain insights into your spending patterns and identify opportunities for cost savings.

Train your staff

It’s important to train all staff members on blanket purchase orders, not just those in procurement or finance. Identify and regularly train employees most likely to make repeat purchases. Verify that everyone understands how blanket purchase orders work to avoid confusion and make purchases correctly.

Maintain accurate data

Procurement departments often use several methods and processes to maintain accurate data. Matching invoices is vital to enforce contract compliance. However, matching invoices to blanket purchase orders can be challenging.

You must use a multi-matching system, and your review as a buyer plays a crucial role in financial auditing. Ensuring accurate data helps you track spending, identify potential issues, and make informed decisions.

Collaborate with vendors

Effective communication with vendors is critical to a smooth procure-to-pay process. Make sure your vendors understand the difference between purchase orders and blanket orders. Inform them about the estimated purchase order amount.

Blanket purchase orders are powerful tools that can optimize your purchasing process, reduce complexity, reduce costs, and improve efficiency. By understanding their benefits and best practices, you can make informed decisions about when and how to use them in your business.

If you want to simplify your purchasing process and save money, consider using blanket purchase orders and the right software.

Our AI-powered spend management software can help you manage your company’s spending, including purchase orders. With Brex, you can easily create, track, and manage purchase orders and gain insights into your spending patterns.

Get started with Brex today and see how it can transform your finance team from reactive no-sayers to proactive growth drivers.