Business-to-business transactions require series of document exchanges to ensure commercial and regulatory compliance. These documents reflect the strength of the process, internal controls, and terms of the transactions between the companies. Business purchases are not like a swipe of credit cards, as more nitty-gritty correspondence and documentation are vital in the process.
One of the widely used documents in the process of purchase is the purchase order. It’s prepared by the buyer and sent to the supplier with the requested quantity and terms of the transaction. Once the supplier accepts a purchase order, it’s a legally binding agreement.
However, the problem is that businesses have to make purchases regularly with some specific suppliers. So, it’s energy-consuming and laborious to send purchase orders every time (especially in recurring purchases).
Hence, buyers and suppliers agree to carry out the transactions on certain terms for some specific period without sending purchase orders on every delivery. So, a blanket purchase order is agreed upon between buyer and supplier that can be used for multiple deliveries and invoices.
In other words, a blanket purchase order is placed by the customer to get multiple deliveries from a supplier on the same terms and conditions for some specified time in the future.
How does BPO work?
The BPO works based on pre-negotiation. The pre-negotiation of the terms makes BPO different from simple PO. The negotiation may include the dollar amount of the purchase and the quantity to be purchased in some specific period. Once the timeline is reached, the companies may enter into another BPO. However, once BPO is done, it acts as a legally binding document for a specified period. So, a great precaution needs to be taken to ensure purchase efficiency by way of BPO.
It greatly reduces the laborious work and creates mutual understanding between the buyers and suppliers. It saves time and energy as prices and terms do not have to be negotiated again and again.
Hence, a single PO works for multiple transactions between buyers and suppliers as a single Purchase order covers multiple deliveries and invoices. That’s why it’s called a blanket purchase order.
BPO can also be formed for the supply of services. It’s formed when the business of the buyer needs to have some continuous service from the supplier. For instance, the buyer may need maintenance services of the machine throughout the year.
If the buyers enter in BPO with the service provider, the service provider can perform services on pre-agreed terms, and the price does not have to be negotiated every time of the purchase. Let’s discuss some aspects of the blanket purchase order,
Benefits of blanket purchase order- BPO
The blanket purchase order offers several advantages that include but not limited to followings,
- Blanket purchase order decreases the workload of the managers in the purchasing department as they don’t have to negotiate with the supplier for every time purchases. Further, the purchasing department does not have to get approvals for every purchase. The reduction of bureaucracy increases the efficiency of the purchasing department.
- This helps to improve the efficiency of the purchasing department. This improved efficiency can be realized in decreasing inventory ordering cost and holding cost, etc.
- The personnel in the purchasing department can focus on technical and research-related stuff rather than doing clerical works like the generation of the purchasing order.
- The blanket PO is an excellent approach to making purchases when the supplies’ price increases.
- BPP adds reliability to the budgeting process as the price of the material to be used in the production process is already known to the company.
- It helps to improve working relations with the suppliers as blanket orders are expected to be larger. Even economies of scale can be achieved with a blanket approach.
- BPO is beneficial for suppliers because they can manage the supplies to be delivered on a timely basis.
The BPO can be an excellent choice for the buyer in the following situations.
- The business operates in an environment where the prices of the material are increasing.
- The details of the purchases can be specified easily.
- The vendor is capable of delivering supplies on a timely basis. In other words, the vendor is credible and got the ability to ensure sustained supplies.
- The bulk orders produce economies of scale that lead to a lower price per unit and increase profit for the company.
However, there is a certain situation where BPO should be avoided to bring consistency and efficiency to the business. These situations include,
- There is a greater fluctuation in the product prices, and the market does not remain stable. Sometimes, there is an increase, and sometimes, there is a decrease in the prices.
- The business has greater fluctuations in demand for the product, and it cannot be estimated reliably.
- The company does not use the same level of inventory all the time. Sometimes, it uses good quality material, and sometimes, it has to use low-quality material (depending on the sales order).
It suggests that if there is uncertainty regarding purchase in the company’s business model, the BPO does not seem to be a suitable option of purchase. Due care needs to be exercised before entering the BPO as it may actually be a cause of loss for the company if due care is not exercised.
So, certain precautions are required to issue BPO as it becomes legally binding once both parties have approved the same. The BPO is a commercial document that acts as a contract between the parties like a simple PO. However, the difference is that simple PO is used only for a single purchase, and BPO can be used for several purchases and deliveries.
The companies can enter the BPO for material and supply orders and supply of the services. The material and supply orders are when the buyer needs to purchase products from the same supplier. For instance, a business may need packing material during the entire year and can enter BPO with suppliers.
Purchase order VS blanket purchase order
Purchase orders back all the purchases in the modern business environment. The normal purchase order is used for a single delivery, and a single invoice can be expected. The acceptance of a single purchase order brings liability on a supplier to deliver for one order.
On the contrary, a blanket purchase order is used for multiple deliveries, and multiple invoices can be expected from the supplier. It acts as a contract to deliver a specified quantity of goods/services over a specific period.
Similarly, a purchase order does not contain the concept of long terms pre-negotiation as it’s a negotiation for one time only. On the other hand, Blanket purchase order contains the concept of pre-negotiation as it’s a contract that covers some specific time of the future.