A blanket purchase order is a long-term agreement between a company and its suppliers. While a regular purchase order is used for a one-time purchase, a blanket purchase order contains multiple delivery dates over a period of time.
There are several reasons why blanket purchase orders make sense if your vendor is willing to accept and honor this type of purchase agreement.
- They prevent you from having to hold unnecessary stock in your warehouse and tying up your cash
- You may qualify for a discounted price through volume commitments or price breaks
- Since your vendor knows what your projected demand is this may reduce the lead time to procure the product
- They cut down on the administrative cost of processing multiple purchase orders for one time buys
So how do blanket purchase orders work?
Let’s say your company wants to purchase hard drives and your ERP software shows that you’ll probably need about 10,000 over the course of the next twelve months based on current usage and new business forecasts. You certainly don’t want all 10,000 at once, so your vendor agrees to enter into a blanket purchase order agreement with your company to ship 850 per month at a set price with the last shipment equaling 650.
Keep in mind that since you are asking your vendor to build/procure this product for you, there may be a penalty involved should you fail to meet your obligation to purchase 10,000 in twelve months. Make sure everyone agrees to purchase terms up front so there are no surprises down the line for either party.
The blanket purchase orders is entered for a quantity of 10,000, which is then divided into multiple delivery dates. These dates should print on the PO you email to your vendor so they can schedule accordingly.
Your ERP software should include a pending release report that you can run periodically (or have set to run automatically on a daily basis) that will list all blanket purchase orders that have pending releases scheduled before a given date – or you may want to set up an email alert that is sent to the buyer when releases need to be done. When releases are made against the blanket order, the purchase order number assigned to each release should be the blanket purchase order number with the release number as the suffix.
Using blanket purchase orders makes sense for both you and your vendor. Your vendor knows what to expect from you as far as your company’s purchase requirements, and you can lock in a good price, cut down on your administrative costs and not tie up your cash unnecessarily by overstocking your warehouse.