What is a Blanket Purchase Order(PO)?: A Complete Guide

If you run a daycare, you’ll probably end up going through a lot of baby wipes. Critical in caring for babies and young toddlers, baby wipes need to be replenished regularly, ensuring that your daycare center always has some on hand. If baby wipes run out, the babies will receive sub-standard care and staff members will feel like they lack the support needed to do their jobs to the best of their abilities. 

With a bit of administrative foresight, avoiding a dynamic like the one above is easy, especially when blanket purchase orders are involved. A blanket PO is the simplest way to obtain recurring business supplies on a set schedule. No matter what type of business you run, optimizing the supplier payment dynamics and partnerships in general will have an impact on your organization’s success.

Restaurants may rely on blanket purchase orders to keep napkins and sugar packets stocked while office-centric companies often use blanket POs to fill the supply closet. Anytime goods or services are needed on a regular basis, consider working with your suppliers to create a blanket PO. We’ll show you how to use them, illustrate the best use cases for blanket purchase orders, and even highlight some of the pros and cons of approaching the procurement process this way. 

What is a Blanket Purchase Order?

If a buyer is being supplied with goods or services on a regularly scheduled basis, a blanket purchase order can be used to cover all the separate transactions under one PO. Although it acts similar to a requisition order at first, once a vendor agrees to a blanket PO, it becomes a long-term contract between a buyer and a seller. A blanket PO fixes the purchase price and delivery details for a set amount of time.

For a daycare provider buying wipes, a blanket PO with the wipe supplier may detail that every week, a new box of wipes is going to be delivered at a price of $250. A blanket purchase order details the items being bought, the quantity supplied at each interval, the associated pricing, delivery timelines, and more. Now that “What is a blanket PO?” has a clear answer, we can take a look at everything included on these types of POs:

• Length of the agreement
• Product quantity and pricing
• Vendor contact information
• Customer Billing information
• Delivery details (timeline, location, etc.)
• Cancellation policy stipulations

Whether you’re on the buyer side or seller side of a blanket purchase order, it’s best to limit its validity to a year or less. If the business relationship continues in the next year, a new blanket PO can be created. This simple consideration helps insulate both parties from risks associated with price fluctuations or changing business needs. 

Finally, keep in mind that a blanket PO is a type of purchase order. A purchase order refers to a purchase agreement between a buyer and seller. POs can be for one-time purchases, and they often are, but what makes a blanket PO stand out is its ability to be used multiple times within a given period.

When to Use a Blanket PO?

Blanket purchase orders are a great tool for simplifying vendor relationships, but they aren’t meant for every situation. In general, purchase orders are used when a customer or buying entity is looking to purchase goods or services from a vendor or supplier. If a uniform quantity of the goods or services in question is needed on a regular basis – such as weekly or monthly – blanket POs can and should be used.

As long as the unit cost isn’t expected to fluctuate too much within the validity period of a blanket PO, this approach serves vendors and buyers well. Blanket purchase orders give vendors the chance to anticipate a portion of upcoming orders, ensure inventory levels are high enough to cover recurring orders, and account for incoming customer payments on a regular basis. 

On the buyer side, blanket POs are easier to track since they have one single PO number associated with all orders of the goods or services listed on the PO. This process simplification may not seem like it would have a massive impact on business productivity, but in the fast-paced business environment that exists today, every second counts.

Let’s say that an office employee needs a new set of pens and a new notebook. In this case, since they are just placing a one-off order, a requisition order is more appropriate than a blanket PO. However, in another situation, the same office employee may be in charge of keeping office snacks stocked in the breakroom. Since people prefer the same snacks to be available at all times, this employee should coordinate a blanket purchase order with the snack supplier for those specific items. 

Pros of Blanket Purchase Orders

In the procurement process, a blanket PO serves a unique role; it creates a lasting business agreement where the buyer is guaranteed a steady stream of supplies for a certain period and the vendor is guaranteed a certain amount of income from the order. Although blanket POs aren’t meant for every B2B purchasing scenario, when they are used, they bring many benefits to the table: 

Productivity

 Every purchase order takes time to create, fill out, and send back and forth before an order is in motion. This time spent – on both sides of the purchase – adds up quickly. Instead of requiring the sales team and the procurement team in two different organizations to spend time creating a fresh PO for every order, blanket POs only need to be created once, then they stand for as long as they are valid.

Cost Savings

 Optimizing vendor management saves time, and in business, time is money. Less time spent onboarding vendors, matching purchase orders to invoices, and following up on outstanding orders can create an opportunity for your employees to invest time in other areas. Even further, blanket POs are often used for bulk orders which can lead to discounts or better purchasing terms. 

Fixed Pricing Structures

Since a blanket PO uses a fixed price for the quantity of goods or services being purchased, it’s easier for accounting teams to track the financial implications of each transaction. Accounts receivable experts know to look for a payment of the same dollar amount each month and AP teams who are helping make the purchase can better anticipate cash outflow within a specific accounting cycle.

Optimized Procurement

With blanket POs, inventory management is simplified, and the procurement process becomes more uniform and easier to anticipate. Enhancing the procurement process, even in small ways, can have a very big impact on your business. 

Simplified Payment Process

 If there is only one purchase order to verify, accounts payables teams can be quicker when reviewing, approving, and paying invoices associated with the blanket purchase order.

Cons of Blanked Purchase Orders

In business, the only constant is change, and sometimes, with a stagnant document like a blanket PO, changes can be hard to accommodate. If you’re going to use blanket POs, you need visibility into the challenges that might come to the forefront.

Market Changes 

The fixed pricing, which can work for you in some situations, is a bit of a gamble when dealing with blanket POs. Let’s say the daycare center secures wipes for $250 a week, but a major market shift happens 4 months into the 1-year blanket PO, driving the cost of wipes up to $350. The vendor would then be losing out on $100 with every transaction remaining. On the flip side, if prices go down, then the buyer is stuck purchasing the product at an inflated price for the rest of the year. 

Demand Accuracy

Sometimes, the needs of your business will change, too. If you have active blanket POs in place, it could be difficult to meet the needs of your business. If you actually need fewer baby wipes for your daycare, you’re buying in excess and wasting money.

Audit Trail

During the source-to-pay or procure-to-pay processes, procurement teams work diligently to ensure incoming goods fall within the pre-approved parameters of a blanket PO. If anything is recorded incorrectly on the PO, or numbers get mixed up in your system, there is the possibility of a blanket PO causing audit challenges.

How Technology Comes into Play

 We all know that procurement management is impossible without the input and hard work of sales teams, procurement professionals, accounts payables experts, and AR departments. These types of employees will always play a crucial role in the vendor/buyer relationship, but in today’s landscape, technology can do a lot to make their lives easier.

An AP automation software like Nanonets, paired with invoice processing software and a solid manufacturing ERP can simplify and automate inventory tracking, approval workflows, order monitoring, three-way matching. These tools can even enable electronic payments such as ACH or EDI payments.

Blanket POs aren’t going anywhere, but with the right software solution, the pros associated with them are amplified and the cons are muted. As we continue to refine the procurement process with technology, incorporating blanket POs is a must.