Blanket Purchase Order (PO): An In-depth Guide

Every organization, large or small, needs a reliable and efficient procurement process to manage its spending and ensure a steady supply of goods and services. One powerful tool in the procurement arsenal is the blanket purchase order.

But what exactly is a blanket purchase order? How does it differ from a regular purchase order? When should you use one, and what are the benefits and drawbacks?

In this comprehensive guide, we'll dive deep into the world of blanket purchase orders, providing examples, process flows, best practices, and more. By the end, you'll have a thorough understanding of this valuable procurement tool and how to leverage it effectively in your organization.

What is a blanket purchase order?

A blanket purchase order, also known as a standing order or open purchase order, is a type of purchase order that covers multiple deliveries of goods or services over a period of time, usually at a fixed price per unit and up to a maximum dollar amount or quantity. 

Instead of issuing a separate PO for each purchase, a blanket PO allows you to consolidate many related purchases under a single agreement.

Here's a simple definition: A blanket purchase order is a long-term agreement between a buyer and seller for the provision of goods or services at pre-negotiated prices and terms, with multiple delivery dates over a set period.

Example of a blanket purchase order

Imagine your company is a large enterprise that relies heavily on SaaS applications for various business functions. You have identified a need for a new customer relationship management (CRM) system to be used by your sales, marketing, and customer service teams.

After evaluating several options, you select a SaaS provider that offers a suitable CRM solution. You anticipate needing licenses for 500 users over the next year, but you want the flexibility to add or remove users as your needs change.

Instead of placing individual purchase orders each time you need to adjust the number of licenses, you set up a blanket purchase order with the SaaS provider for up to 500 licenses to be provisioned over the next 12 months at a fixed price of $100 per user per month. The blanket PO has a total potential value of $600,000 if all 500 licenses are used for the full year.

Each month, the SaaS provider provisions the requested number of licenses and invoices against the blanket PO based on the actual consumption. This continues until the end of the 12-month term or until the maximum value of the PO is reached, whichever comes first.

Throughout the year, you can easily add or remove licenses as needed, without having to go through a new procurement process each time. The blanket PO gives you the flexibility to scale your usage up or down, while also securing a fixed price and streamlining the ordering and invoicing process.

Difference between a PO and blanket purchase order

A blanket purchase order is a more flexible, long-term arrangement that allows for multiple purchases over time, while a regular purchase order is a one-time, specific commitment.

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Here is a detailed breakdown:

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When to use a blanket purchase order

Use a blanket purchase order when you have a recurring need for specific goods or services from a single supplier over an extended period, and you want to streamline the procurement process, lock in favorable pricing and terms, and build a stronger supplier relationship.

Let’s have a deeper look:

1. When you have a consistent, ongoing need for specific goods or services from a single supplier. This could include raw materials for manufacturing, office supplies, or professional services.
   
   
2. When you can reliably estimate the total quantity or spend amount needed over the PO term, even if the exact delivery dates or quantities per order are not known upfront.
   
   
3. When you want to lock in favorable pricing and terms for a set period to protect against market fluctuations. This is especially beneficial for critical or high-volume purchases.
   
   
4. When you have a strong, proven relationship with a supplier and are confident in their ability to meet your quality, delivery, and service requirements over an extended period.
   
   
5. When you need better visibility into your long-term spend commitments for budgeting and forecasting purposes.

Before deciding to use a blanket PO, consider your historical spend patterns, the stability of your demand, the maturity of your supplier relationships, and your procurement team's capacity to manage long-term agreements.

What to include in a blanket purchase order

A basic blanket purchase order should at the least include a unique PO number, buyer and supplier information, a detailed description of the goods or services, the maximum quantity or spend amount, and pricing and payment terms. 

A well-crafted blanket purchase order should include the following key components:

1. PO number: A unique identifier for the blanket PO, usually assigned by the buyer's procurement system.

2. Buyer and supplier information: The full legal names, addresses, and contact details for both parties.

3. Description of goods or services: A clear, detailed description of what's being purchased, including any relevant specifications, part numbers, service level agreements (SLAs), or acceptance criteria. Consider whether any supporting documents, such as technical drawings or statements of work, should be referenced or attached.

4. Maximum quantity or spend amount: The total quantity or dollar value of goods or services to be purchased over the PO term. This sets an upper limit but doesn't obligate the buyer to purchase the full amount. Consider whether to include any minimum order quantities or spend commitments.

5. Pricing and payment terms: The agreed-upon price per unit, any volume discounts based on order size or cumulative spend, and the payment terms (e.g., net 30 days). Consider whether to allow for any price adjustments based on market indices or cost changes.

6. Delivery terms and schedule: The expected delivery frequency (e.g., weekly, monthly), any specific delivery requirements or Incoterms, and the delivery locations or ship-to addresses. Consider whether to include any lead time requirements or expediting options.

7. Period of performance: The start and end dates of the blanket PO term, typically aligned with the buyer's fiscal year or budgeting period. Consider whether to include any options for renewal or extension.

8. Terms and conditions: Any special terms and conditions specific to the blanket PO, such as warranties, indemnification, confidentiality, termination rights, or performance incentives. Reference the buyer's standard purchase order terms and conditions as well.

9. Authorized signatories: The names, titles, and signatures of the buyer and supplier representatives authorized to enter into the agreement. Consider whether any additional approvals, such as legal review, are required.

10. Reporting and communication: The expectations for supplier reporting on PO usage, performance metrics, and any regular business reviews or check-in meetings. Consider specifying the format, frequency, and recipients of reports.

When drafting the blanket PO, think carefully about what terms need to be explicitly defined upfront and where flexibility may be needed. Engage stakeholders from procurement, legal, finance, and the end-user departments to ensure all relevant considerations are addressed.

Blanket purchase order process flow

A Blanket purchase order flow usually consists of these steps: Identify need, develop requirements, select supplier, negotiate terms, create and issue PO, place releases, receive and inspect, process invoices, monitor performance, manage changes, and close or renew.

Here's a more detailed breakdown of the typical process flow for establishing and using a blanket purchase order:

1. Identify the need: 

The procurement team, in collaboration with end-users and budget owners, identifies a recurring need for specific goods or services that could be suitable for a blanket PO. They consider factors such as historical spend, demand patterns, and supplier market.

2. Develop requirements: 

The team develops detailed specifications and requirements for the goods or services, including quality standards, SLAs, and any specific delivery or service needs. They engage stakeholders to refine and validate the requirements.

3. Conduct market research: 

The procurement team researches potential suppliers who could meet the requirements, considering factors such as supplier capabilities, capacity, pricing, and past performance. They may issue a request for information (RFI) or request for proposal (RFP) to gather information and proposals from suppliers.

4. Evaluate and select supplier: 

The team evaluates the supplier responses against the requirements and selection criteria, which may include price, quality, delivery, service, and risk factors. They may conduct supplier site visits, reference checks, or negotiations to finalize the selection.

5. Negotiate terms: 

The procurement team negotiates the specific terms and conditions of the blanket PO with the selected supplier, including pricing, discounts, deliverables, performance metrics, and any special clauses. They work with legal and finance to ensure the terms are acceptable and compliant.

6. Create blanket PO: 

The procurement team creates the blanket PO in their procurement system, populating all the agreed-upon details and terms. They route the PO for internal approvals, which may include budget owners, department heads, and finance.

7. Issue PO to supplier: 

Once approved, the buyer sends the blanket PO to the supplier, who reviews and acknowledges receipt. The supplier may need to provide a formal acceptance or sign the PO, depending on the terms.

8. Close or renew: 

As the blanket PO approaches expiration, the procurement team evaluates the ongoing need and the supplier's performance. They decide whether to renew the PO for another term, renegotiate the terms, or let it expire and start a new procurement process. They work with the supplier to ensure a smooth transition.

Potential challenges of blanket purchase orders

Challenges include demand forecasting, supplier performance management, contract management, change management, stakeholder alignment, systems integration, and risk management.

Some of the most important challenges that needs to be addressed are:

1. Accurate demand forecasting: 

One of the biggest challenges with blanket POs is accurately predicting the total quantity or spend needed over the PO term. Overestimating can lead to excess inventory, obsolescence, or wasted spend, while underestimating can result in shortages, expediting costs, or the need for supplemental POs. Procurement teams must work closely with end-users and analyze historical data to develop reliable forecasts, building in some flexibility for unexpected changes.

2. Supplier performance management: 

With a longer-term commitment, it's critical to monitor the supplier's performance closely and address any issues promptly. Procurement teams should establish clear performance metrics and SLAs upfront, such as on-time delivery, quality, responsiveness, and cost. They should conduct regular performance reviews with the supplier, discussing any deviations and improvement plans. Teams must also have a structured process for escalating and resolving performance issues, up to and including termination of the PO if necessary.

3. Contract management:

Blanket POs are a form of contract and require careful management to ensure compliance and minimize risk. Procurement teams must track key dates, such as expiration and renewal deadlines, and ensure all terms and conditions are being met. They must also maintain accurate records of all PO documentation, amendments, and communications.

Best practices for blanket purchase orders

To effectively implement and manage blanket purchase orders, procurement teams should follow these best practices:

1. Conduct thorough supplier due diligence: 

Blanket POs involve a significant commitment to a single supplier, so it's critical to thoroughly vet potential suppliers before signing an agreement. Procurement teams should assess suppliers' financial stability, operational capabilities, quality track record, and references. They should also consider the supplier's ability to scale and adapt to changing needs over the PO term.

3. Negotiate favorable terms: 

Blanket POs offer an opportunity to negotiate favorable pricing and terms, leveraging the long-term commitment and volume. Procurement teams should seek to secure discounts, rebates, or other incentives based on spend volume or growth. They should also negotiate flexible terms around pricing adjustments, quantity changes, and termination rights to mitigate risks.

4. Set clear performance metrics and SLAs: 

To hold suppliers accountable and drive continuous improvement, procurement teams should establish clear, measurable performance metrics and SLAs in the blanket PO. These may include on-time delivery, quality, responsiveness, and cost savings targets. Teams should also define the consequences for missing targets and the incentives for exceeding them.

Conclusion

Blanket purchase orders can streamline procurement, reduce costs, and build stronger supplier relationships. However, they come with challenges and risks that must be managed.

Spendflo's SaaS spend management platform helps procurement teams optimize their blanket PO processes:

• Gain visibility into SaaS spend, usage, and performance
• Automate procurement workflows, saving time and reducing errors
• Monitor supplier performance against metrics and SLAs
• Identify opportunities for cost savings and efficiency improvements
• Manage risks and ensure compliance with policies and regulations

Curious?

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Frequently Asked Questions on Blanket Purchase Orders

1. How long does a blanket purchase order typically last? 

Blanket POs are often set up for a company's fiscal year, but they can cover any agreed-upon period, such as six months or multiple years. The term should align with the buyer's budgeting and planning cycles and the supplier's capacity to commit.

2. Can a blanket purchase order be modified during its term? 

Yes, blanket POs can be amended if both parties agree. Reasons for modification might include changes in business needs, pricing adjustments, or performance issues. It's important to have a clear change management process and to document any amendments in writing.

3. What happens if the maximum quantity or spend amount is reached before the end of the blanket purchase order term? 

If the maximum is reached, the buyer has a few options. They can issue a separate PO for additional quantities, amend the blanket PO to increase the maximum, or start a new blanket PO with the same or a different supplier. The best approach depends on the specific situation and the relationship with the supplier.

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