Blanket purchase orders used correctly can significantly reduce the purchase or transaction cost for a company.
But if not used correctly, it could cause compliance issues and you could be leaking money instead of decreasing transaction cost.
In this blog post, we will cover all you need to know about blanket purchase orders, specifically, we will answer the following questions
- What is a blanket purchase order?
- How blanket orders create a commitment between a buyer and a supplier?
- How to effectively use blanket purchase orders?
And we will also share some practical examples of how to use blanket orders.
Different type of purchase orders
This is just a basic explanation of purchase orders, feel free to skip to the next section if you are already familiar with purchase orders.
A purchase order is a commitment from the buyer to the supplier to purchase a product or service. Since most vendors submit an invoice after the work is done, vendors need a commitment from the buyer before the work starts.
In simpler terms, a purchase order is a legal document that represents a commitment from the buyer to the seller.
It also helps to clarify the deliverables so that there is no confusion on what is being delivered and when.
A purchase order could be of different types. For example,
- You could have a purchase order for purchasing physical, tangible products. For example, raw materials for manufacturing.
- You could have a purchase order purchasing services from vendors. For example, Janitorial services for the office.
Further, a purchase order can be categorized as
One time purchase orders.
As the name suggests, one-time purchase orders are non-recurring in nature and are for one time purchases. For example, you are setting up a new office and you need to purchase office furniture for that office.
The purchase order mentions what is being bought, specific quantity, price, etc.
For example – following is an example of a one-time purchase order
If you have received a quote from the vendor, then the quote is usually converted into a purchase order.
Recurring purchase orders
Recurring purchase orders are for those products or services which are purchased on a regular basis.
For example, you purchase kitchen supplies every month to support staff needs.
Now the product requirement might not be the same every month, so you could say that it is a one-time purchase order.
The other use case for recurring purchase orders is manufacturing companies purchasing raw materials to support the manufacturing needs.
Most of the manufacturing companies have MRP (Material Resource Planning) software that helps them plan the raw material requirements and sometimes automatically places the purchase order for raw materials.
In this case, you have a fixed unit price for the product you are purchasing.
In some cases, you are purchasing a service which has a fixed monthly price. Recurring purchase orders can work very well for that too.
However, there are cases when you might not have a fixed price for the service but you don’t know the final amount.
For example, you are recruiting a software developer for a project. You pay the developer based on the number of hours they worked in a week or month. Let’s say you agreed to pay them $100/hour.
However, the number of hours can vary based on the number of hours worked every week but you have a minimum commitment of $5,000 every month.
The example mentioned above is a good example of issues companies faces when creating purchase orders where the standard purchase order doesn’t work.
Blanket purchase orders cover this very well and that is covered next.
What is a Blanket purchase order?
A Blanker purchase order also called (BPO) is a purchase order which is a legal document and binding on the buyer for a commitment with a supplier.
You set up a fixed amount and till the time supplier remains below that amount, invoices can be processed against the purchase order.
Generally, buyers get approval for a blanket amount and then they keep on using that purchase order till the amount is consumed or the blanket purchase is not valid anymore.
Example 1 – where to use Blanket orders
Let’s look at some examples where a blanket purchase order might be helpful.
Let’s say you enter into an agreement with a marketing agency whereby the marketing company will provide creative design services for your company.
The pricing is based on each job because the creative work required in each job might be different.
Now you can create a purchase order for this whereby you come up with some notional unit price they would charge, maybe a per hour rate. But since the rate is blended (due to multiple resources) it might not be easier to come up with a fixed rate.
However, you know that last year you spend $100,000 on creative services and if the business demand is the same, then that is not likely to change.
This is a classic example where using a Blanket purchase order makes a lot of sense.
Here is how that could look like
So a blanket order is an amount you are setting aside or committing to spend with the vendor without knowing the exact details of the job.
For example, in the case above – the blanket order is for $100,000 and till the time invoices are below $100,000, the buyer doesn’t need any further approvals.
Example 2 – where to use Blanket orders
Let’s take another example where a Blanket order can be used.
Let’s say you are in IT and you are responsible for managing corporate web site which also includes enhancements to the site.
You have outsourced the enhancement development to an outside development company. You don’t know how much you would land up spending in a year because all enhancement requests need to be estimated.
You have setup up an annual budget of $50,000 for enhancements.
And the vendor has agreed to a fix per hour rate of $100/hour. Now based on the enhancement request, they will estimate the cost and charge your company for the development.
So in this case, you can create a blanket order like the following
As you can see in the screenshot above, the blanket order is set for $100,000. However, the unit price is set at $100.
So in this case, when the vendor sends the invoice, the system will check for the total amount as well as unit price.
So till the time unit price is $100 and the total of all invoices is under $100,000, the system would allow the invoices to be processed in the system.
We hope the two examples have given you some idea on the type of purchases for which you can use a Blanket purchase order.
Difference between Standard purchase order and Blanket purchase order
Now let’s look at some differences between a standard purchase order and a Blanket purchase order.
- First of all both standard purchase order and a blanket order is a commitment from the buyer to the seller. So no matter what, you are obligated to pay the vendor for the amount mentioned on the purchase order unless specified otherwise.
Duration of the order
A purchase order is typically for a shorter period of time while a blanket is usually for a longer period of time. We typically see our customers create annual blanket orders.
So think of this way, you need to purchase office supplies, you create a purchase order.
You need to pay a vendor for monthly cleaning services, maybe a blanket order is a better option.
Generic vs Specific
A purchase order is very specific, for example – it would have the description of the item being purchased, the supplier part number as well as the internal part number.
While a blanket purchase order is very generic. For example, a blanket order would have a description describing the high-level need but that is all.
A purchase order has a set amount which is based on the quantity being purchased and the item cost. However, a blanket might or might not have a set amount.
Product vs. Service
A purchase order can be used for purchasing material or services or a combination of both. A blanket order should be used exclusively for services.
There are few cases where it makes sense to use blanket orders for material purchases, but those use cases are few and far between.
For example, you are setting up a blanket for software development services. We might not know the exact amount you are going to spend.
In that case, users could set up a $0 blanket or a very minimal amount and then later revise the amount when they have a better idea about the annual spend amount.
What is the blanket purchase order process flow
Let’s look at the typical process flow for a blanket purchase order.
On the surface of it, the steps are the same as standard purchase orders. The main difference is in details within each step.
1. Setup Blanket Purchase Order
The first step of-course is setting up the blanket purchase order. The process could vary based on the system you are using. In case it is a manual process, then it might be ok to stick with a non-PO invoice process and not create a blanket order at all.
The first step to decide is whether you need a blanket order or not. Now if you are a purchasing professional then you understand these concepts. It should be easy for you to decide between a blanket and a standard order.
However, if you are not in purchasing and you are deciding whether to use a blanket or not then you might be totally confused!
So what guidelines purchasing professionals can provide to non-purchasing professionals on when to create a purchase order.
We recommend the following, but feel free to change it based on your business process.
- First of all, set up a blanket order for services only. If you are purchasing a tangible product, then use the standard purchase order.
- A blanket should only be created if you are going to receive multiple invoices over a longer period of time. For example, over a period of 6 months or more. If the service is already scoped and the vendor is going to invoice only once, then use a standard purchase order.
- Use blanket orders where you are not sure if the monthly invoice amount could vary because of the scope of the work provided by the supplier.
With all the guidelines, it is also helpful to provide specific examples of services you are purchasing.
We are not recommending that you document a purchasing flow for each supplier, but take 4-5 suppliers/categories and add that to your guidelines.
Your users will be able to use the examples to decide if they should use a blanket order.
2. Blanket Order Approval
The approval process is no different from your standard purchase order approval process.
So for example, if your purchasing policy is that every purchase order over $100,000 must be approved by a director, then that should be consistent whether you use a purchase order or you use a blanket purchase order.
The main difference here is what amount you should put on a blanket purchase order for approval?
Should you use an estimate or should you use the actual amount?
If you know how much you are going to spend or a ballpark, you can always enter that amount and later adjust the amount if it is lower than that.
With a blanket, you are just getting approval to spend up to that amount of money, you might not land up spending the total amount.
In some cases, you might go over your estimate, in which case the amount needs to be adjusted later.
So to summarize, Just go with your best estimate for the blanket order amount.
A very common question which we get from our customer is – what if I don’t want to let the vendor know about the exact amount we have kept aside.
The reason for that is if the vendor knows we have this much budget, they will overcharge or find a way for us to spend that money.
That is definitely a valid concern and hence you should limit the use of BPO’s.
However, some systems allow you to show a different amount to the vendor. So for example, you can get approval for $100,000 but choose to show only $25,000 on the blanket for that supplier.
In our view, that solves the issues around vendors but at the same time still reap the benefits of using a blanket purchase order.
3. Vendor process
The process for sending a purchase order to the vendor is no different for a blanket purchase order.
Once a blanket is approved, it is sent to the vendor so that they can invoice against it after the service has been delivered or the work being performed.
There is a difference though in what the vendor would see. As we discussed earlier, that you might choose to show a different amount to the supplier as compared to what the blanket was approved for.
If you want to set up the process that the vendor will see exactly the same amount as on the Blanket, then you do the following
1. In case it is an estimated amount and not the exact amount, you should clearly state the purchase order. Something to the effect of “This is just an estimate and not a commitment to spend the entire amount with you. The actual amount might vary based on the terms of the services defined in the contract”.
2. You can, of course, start with a lower amount and then revise the amount as you have a better idea about the actual purchase amount.
You should also set up a review process for Invoices, which we will discuss in the Invoices section.
Since blanket purchase orders are mostly setup for services (at least we recommend that), there is no process of creating a receipt.
However, there should be a process to ensure that the invoice is approved, which in turn is proof of the receipt of the services.
5. Matching invoices for blanket orders
This is an important process in the blanket life cycle, so we will spend extra time on this.
In a typical purchase order workflow, Invoices are paid when the product is received.
The receipt of the product is generally done by creating a receipt and uploading the packaging slip.
For services, there is no such thing.
Also for blanket orders, your vendor can keep on sending invoices until one of the following happens
- The blanket ran out of money i.e the whole amount has been consumed.
- Or the blanket is not active anymore because the blanket end date has been passed.
So how do you ensure that you are paying invoices which are reviewed by the right stakeholders?
The answer is to set up a review and approval process and every invoice against a blanket should be authorized.
Who should review it?
The review is not meant for the authorization of the spend, so there is no point in sending it for approval to people who actually approved it.
The review should be done by the person who is responsible for working with the vendor and who knows about the accuracy of the invoice. That is typically someone in operations.
For example, if the blanket order is for a software development project, then the review can be done by the project manager or someone who is close to the deliverables of the project
Once the invoice is approved, the payment can be issued to the vendor as per agreed terms. The process of payment is no different as compared to a standard purchase order.
What are the advantages and disadvantages of a blanket purchase order?
Now let’s look at some of the advantages and disadvantages of using a blanket purchase order
Advantages of a blanket purchase order
First, let’s look at the pros of a blanket purchase orders
Easy to setup
Setting up a blanket purchase order doesn’t need a lot of details. Since it is mostly for services, you don’t need information like supplier part #, manufacturing details, etc.
Users need minimal details, namely – supplier name, amount, start date and end date for the service to be provided.
Set it and forget it
You can keep on using the blanket order till it runs out of money. So you avoid creating multiple orders for the same service.
Instead of creating recurring orders, you can create one blanket order and multiple invoices can be created against that one order.
Very convenient for processing of invoices
It is convenient for vendors too, especially for small vendors.
Many companies have No PO No Pay policy, i.e. every invoice must have a matching purchase order number otherwise the vendor will not be paid.
For the process to work, the vendor should enter a purchase order number for every issued invoice.
Now if you are a small vendor, you might not have a dedicated Accounts Receivable team and you need to ensure that you are not entering just any valid PO but the specific purchase order for that invoice.
With blanket purchase orders, it is easy for suppliers to remember the single number which they can enter on all the invoices.
There is no need to enter the specific purchase order for every invoice. That saves effort and money on both sides.
DisAdvantages of a blanket purchase order
Though the process is convenient for buyers and suppliers, there are certain disadvantages too.
Tedious Year-end reconciliation
If you are a public company, you have to declare your open liabilities in your 10-k annual report.
Now since blankets are easy to set, employees generally tend to get approval for an amount higher than the amount they really need. The justification is that you have an extra cushion so that you don’t run out of money.
For you to effectively reconcile and declare liabilities, you have to do the following
a ) Calculate the amount based on the invoices which have been paid and which have been submitted by the supplier but not paid.
b) There might be invoices that are not yet submitted by the vendor but the work is already performed.
c) You then have to ask each stakeholder if you can close the blanket purchase order and forfeit the unused amount.
Depending upon the volume of the blanket purchase orders, this could be a laborious process.
Audit risk – What is being purchased at what price
Blanket purchase orders generally don’t have unit pricing details. So if the auditors want to know if the service has been purchased as per contracted terms, there is no easy way to know that.
You have to review each and every invoice and then match with the contract terms to confirm whether you are paying what you agreed to pay.
In contrast to the above process, in a standard purchase order, you have defined unit price and any pricing issues can be automatically captured by a 2-way or 3-way match process.
Issues with matching to the correct purchase order.
In the advantages section, we talked about how easy it is for suppliers to add the purchase order number on the invoice.
However, it could be a disadvantage too, especially when the blanket runs out of money or has passed its validity period.
For example, it is not uncommon to see that the vendors keep on entering a blanket order number from the past year.
Once the invoice shows up, the system captures it as an exception and since the blanket is not valid anymore, it needs to be reviewed and managed through an exception review process.
This leads to a lot of work for AP teams because they need to reach out to the vendor and have them resubmit the Invoice with the correct blanket order number.
We are not suggesting that this doesn’t happen with regular purchase orders but this scenario is more common with blanket purchase orders.
Limited visibility into spend
Blanket orders can obviously help you to understand what you are spending with a vendor but if you want to understand what exactly you are spending money on, then you would have a tough time finding that information.
Let’s take an example –
Let’s say you are purchasing creative design services from a marketing company, the services are priced based on the scope of the work performed.
A user would typically create a blanket with limited service, for example
Description: “Creative design services for marketing collaterals”
Start date: 01/01/2020
End date: 12/31/2020
Now if you want to know how much you paid for specific services, there is no way to know unless you are reviewing each and every invoice for the details of the jobs performed by the vendor.
What are blanket purchase order best practices?
As we mentioned above, there are advantages and disadvantages of using blanket orders as compared to standard purchase orders. So we want to conclude this topic by mentioning some best practices readers can deploy to make the best use of blanket purchase orders.
1. Use them only for services
There are certain use cases where Blanket orders might make sense for materials but for the most part, it should be exclusively used for services purchase.
To make sure your end users are using Banket orders as designed, it is important to communicate regularly on how to use Blanket orders.
We recommend the following cadence to ensure that your employees are only using it for services.
1. If you are launching a new system, then it makes perfect sense to train your users on how to effectively use blanker purchase orders.
2. You should do refresher training or reminders to users on how to effectively use blanket orders.
3. If possible, have an in-system reminder or walkthrough, so that every time someone is using a blanket order, they are reminded about the correct usage.
4. You could identify some power users who often create more than average purchase orders. Once those users are identified, you could do a targeted campaign to communicate the correct usage of blanket orders.
2. Setup access control
Prevention is the best cure and the same is true here too.
If you look at your user base, not everyone is purchasing services.
Among users who are purchasing services, not all of them are purchasing recurring services where blanket orders make more sense.
So instead of opening blanket purchase orders for everyone, you can limit access to only those users who most need it.
Based on our experience, most users can work fine with standard purchase orders, especially for one time purchases.
You always have the option to extend the access later.
So to summarize, provide access to only a limited set of power users at first and then expand the scope on a need basis.
3. Set up a cadence for 6 months and yearly review
As we mentioned earlier, one of the biggest drawbacks of blanket purchase orders is that reconciliation is a challenge and more specifically, knowing whether the remaining amount should be used or forfeited.
To solve this problem, we recommend a regular review cadence to ensure that the blanket orders have the correct amount and validity period.
1. Set the blanket orders validity to the shortest period possible. If the work is projected to complete over 3 months, then there is no reason to set up a blanket for 1 year.
2. The shortest time period could be 3 months but the maximum duration of a blanket order should not be more than a year.
3. Review the blanket orders every 6 months to check the utilization and whether the blanket has been used or not. If the Blanket order has not been used at all, You should reach out to the stakeholder and ask if the Blanket can be canceled.
4. At the end of the year, you should review all Blanket orders and close the blanket orders. The only exception is those orders for which the work has been performed but the invoice has not been issued by the vendor.
5. We recommend that you ask users to create a new blanket for the new calendar year.
The idea here is to ensure that you don’t have blanket orders which are used over the years.
4. An efficient Approval process for Invoices
Since it is a blanket amount for services to be rendered in the future, it is important that invoices are properly reviewed and approved before they can be paid.
So the workflow process should be focused on ensuring that the approval comes from the person who can verify that the service has been delivered and as per the satisfaction of the customer/stakeholder.
There is no benefit of routing the invoice to a manager for approval because they might not have complete knowledge of the deliverables.
To summarize, ensure that your workflows are routing the invoice approval who is responsible for the day to day operations and have complete knowledge of the deliverables.
5. Educate your vendors
Vendors play a critical role in ensuring an efficient procure to pay process.
It is the job of purchasing to let vendors know how to efficiently use a blanket process.
Here are a few recommendations
1. Communicate the process to the vendors – In an ideal scenario, the same vendor should not have a purchase order and a blanket order process. So the vendor shouldn’t have any confusion between the two types of orders.
2. In case you are using an estimated amount, then the vendors should know that it is an estimated amount. For example, if you created a blanket order for $100,000 and unless you are committing the full amount, vendors need to know that it is for estimate only
3. It is important to let the vendors know about the validity, so they can update the purchase order numbers on the invoices. This will ensure that you don’t have reconciliation issues because the vendor used an old blanket purchase order number.
Blanket orders used correctly can greatly increase the efficiency of the purchasing process and reduce the number of transactions.
However, it should only be used for limited use cases or more specific services use cases.