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What Is a Blanket Purchase Order – When Is It Good to Use?

How to Streamline Accounting Processes? A Straightforward Guide

Want to simplify your purchasing process and save some extra dollars? If yes, a blanket purchase order (BPO) might just be the one thing you need to actualize these objectives.  

After all, research shows that using tools like BPOs effectively helps businesses streamline their procurement processes and reduce costs by up to 4.9% annually. 

Don’t know what a blanket purchase order is, how it works, and the benefits it can bring to your organization? Read ahead to find all the answers.

What Is a Blanket Purchase Order

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Understanding the meaning of blanket purchase order (BPO)

A blanket purchase order is a type of purchase order that is a long-term agreement between you and a supplier to provide goods or services at pre-negotiated prices over a specified period. This type of order is particularly useful when you have repetitive purchases, like office supplies or raw materials, that you need regularly. Instead of placing individual orders each time, a BPO allows you to streamline the purchasing process, making it more efficient.

For example, if your company regularly requires 1,000 units of a specific product each month, you can establish a blanket PO with your supplier for that quantity at a fixed price. This agreement simplifies ordering and ensures you always have what you need on hand without the hassle of constant reordering.

What’s included in a blanket purchase order?

When you create a blanket purchase order, there are several elements you need to include:

  • Quantity: Specify the maximum amount of goods or services you plan to purchase over the contract period.
  • Price: Establish fixed prices for the duration of the agreement. This helps in budgeting and financial planning.
  • Duration: Define how long the agreement will last, typically one year.
  • Cancellation term: Include terms outlining how either party can cancel or adjust the order if necessary.

These components ensure clarity and protect both parties involved in the agreement.

Now let’s move on to see when it will  be best to use blanket purchase orders for your business. 

When to use a blanket purchase order?

So, when should you consider using a blanket purchase order? Here are some scenarios:

  • Repetitive purchases: If your business regularly purchases certain goods or services (like office supplies or raw materials), a BPO makes sense.
  • Long-term contracts: When entering into long-term contracts with suppliers, BPOs provide stability and predictability.
  • Consistent delivery needs: If you require consistent delivery times for production or service operations, a BPO ensures timely supply without constant reordering.

For example, if your company has set up an agreement with a marketing agency where you expect ongoing services costing around $100,000 annually, creating a blanket purchase order can simplify billing and ensure that funds are available without needing multiple approvals throughout the year.

Benefits of blanket purchase orders

Benefits of blanket purchase orders

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Efficiency

One of the biggest advantages of using a BPO is efficiency. By consolidating multiple orders into one agreement, you save time on paperwork and streamline the processes of your procurement department. For instance, instead of issuing 12 separate purchase orders for monthly deliveries, you can create one blanket order that covers the entire year. This not only reduces administrative work but also speeds up the delivery time for your goods.

Pricing stability

A BPO locks in prices for the duration of the contract. This stability protects you from price fluctuations in the market. For example, if you negotiate a price of $50 per unit for a product now, that price will remain fixed throughout the year, even if market prices rise. This predictability makes budgeting easier and helps you manage costs effectively.

Cost savings and budget management

Using a blanket purchase order can lead to significant cost savings. By committing to bulk purchases, you may qualify for bulk discounts from suppliers. For instance, if your company typically spends $100,000 annually on office supplies, negotiating a BPO might reduce that cost by 10%, saving you $10,000 over the year.

Additionally, having a set budget for these purchases allows for better budget management. You’ll know exactly how much you’re spending and can allocate funds accordingly.

Better supplier relations

Establishing long-term relationships with suppliers through blanket purchase orders fosters trust and reliability. Suppliers appreciate committed customers and are often willing to provide better service or pricing as a result. This can lead to improved delivery times and priority service when needed.

However, it’s not just advantageous. There’s a fair share of challenges they bring along too. Let’s delve into them. 

Potential challenges of blanket purchase orders

When you choose BPOs, here are some issues you might face. 

Supplier dependence

While BPOs offer many benefits, they can also create dependence on a single supplier. If that supplier fails to deliver on time or goes out of business, it could disrupt your operations. To mitigate this risk, consider diversifying your supplier base.

Price lock-in issues

Locking in prices may not always work in your favor if market prices drop after you’ve signed the agreement. You could end up paying more than necessary if you’re not careful about negotiating terms.

Blanket purchase orders are legally binding contracts, so it’s essential to ensure compliance with all contract terms and conditions. Failing to adhere to these could lead to disputes or legal issues down the line.

Wrap-up

All in all, blanket purchase orders can offer numerous advantages for businesses like yours that are looking to streamline their procurement processes. They can enhance efficiency, stabilize pricing, and afford you other great benefits when used at the right times and cases.     

To further improve your financial operations, use Synder. It’s an accounting automation software that brings together over 30  sales and payment platforms, as well as accounting channels into one unified platform. You can automate repetitive tasks like data transfer and reconciliation, reduce errors in financial data entry, and focus more on strategic initiatives that drive growth for your business.

Sign up for a 15-day free trial or book a spot at a Weekly Public Demo and improve your financial operations today!

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