A blanket order is a purchase order the customer makes with its supplier which contains multiple delivery dates over a period of time, often negotiated to take advantage of predetermined pricing. It is normally used when there is a recurring need for expendable goods.
Blanket orders are often used when a customer buys large quantities and has obtained special discounts. Based on the blanket order sales orders (release orders) and invoice items can be created as needed until the contract is fulfilled.
Having a blanket order prevents the customer from having to hold greater than necessary amounts of stock and avoids the administrative expense of processing frequent purchase orders, while favoring discount pricing through volume commitments or price breaks. A blanket order is set at a fixed priced contract for a period of time. The buyer looks for the best pricing among competing supplier bids. After the best one is chosen, the prices of goods are fixed, and also quantities of each products are given to the supplier to prepare stock for on requested delivery.
Forecasted quantity is provided by the buyer as full usage quantity recorded historically few years or as needed for quantitative analysis. The supplier may give a condition of quantity to supply for this [contract]. For example, 80% of the forecast quantity must be bought at the end of the contract, which may be one or two years. The blanket order will charge the delay delivery if the supplier could not supply the products in the contract on time. Anyway, since the supplier has already kept the stock for ready delivery for
the first year or agreed period, if the buyer could not fulfill the contract’s conditions, such as “must buy 80% of forecast quantity within a year,” the contract may be extended, or the delay charge could be no more, or no other charges requested by the buyer.
Realistically, at the end of the blanket order contract, the buyer would not buy at forecasted quantity as agreed in the contract say, 80% of the demand sent to the supplier. The buyer will also allow the supplier to sell the products in the contract to reduce the quantity. The supplier also has to talk and inform the buyer the quantities of goods kept in order that the buyer could know the status of the stock. Before the buyer issuing the purchase order to supplier, the buyer must ask the supplier first about stock availability to avoid the problem from no stock availability.
The blanket order is very useful for the buyer. The most difficult part of having a contract is determining the forecast quantity arranged by the user of the product. As the forecast quantity can be difficult to get, the supplier must be aware of the quantity to keep in stock. An easy way to do this is to discuss with the buyer what quantity to keep in stock. For example, they might keep only 20% in stock in the first 6 months, so that the supplier and the buyer are able to review the quantity and adjust it appropriately. This reduces the stock burden of the supplier during the contract period and might help the buyer at the end of the contract if the stock doesn’t
move as quickly as anticipated. The contract might be extended year after year, but it can be adjusted each time as more relevant forecasting history will predicate the need to decrease or increase stock requirements. Such purchasing Agreements:
A blanket order system offers seven important benefits:
1. It requires many fewer purchase orders and reduces clerical work in purchasing, accounting, and receiving
2. It releases procurement professionals from routine work, giving them more time to concentrate on value-added activities
3. It permits volume pricing by consolidating and grouping requirements
4. It can improve the flow of feedback information because of the grouping of materials and suppliers
5. Because some suppliers stock materials for prompt delivery, this system may reduce the buyer‘s lead times and inventory levels
6. It allows the supplier to plan and buy more effectively, reducing the buyer‘s price
7. It develops longer-term and improved buyer-supplier relationships
Summary on BPO
A Blanket Purchase Order (BPO) is a long term agreement that includes a description of the items needed, unite price, and contractual provisions. Although a single blanket purchase order number is only set up one time, it can allow multiple releases against it at different times throughout a set time period. A ―release‖ occurs each time a blanket purchase order quantity is fulfilled and invoiced against.
A BPO is conducted in a Blanket Order System (BOS). A BOS is a system where a store comes into an agreement with a supplier to supply small quantity items repetitively. This type of system solves the problem for the thousands of items a store can‘t carry in inventory due to space, time and cash flow. The BOS increases efficiency by eliminating repetitive data entry and multiple one-time purchase orders.