Blanket Purchase Order [Complete Guide]

blanket_purchase_orders

Bonus: Download the purchase order implementation template 

Finance teams love the convenience of a Blanket purchase order but worry about compliance and misuse.

You can use this strategy to simplify your repetitive purchases orders by leveraging blanket PO’s (Purchase Orders)

Compliance issues are common with blanket purchase orders.

You could be leaking money instead of decreasing transaction costs.

This article will cover how to use blanket purchase orders in your Company.

Specifically, we will answer the following questions:

  1. What is a blanket purchase order?
  2. How do blanket orders create a commitment between a buyer and a supplier?
  3. How to effectively use blanket purchase order strategy and reduce your administrative costs?
  4. Five best practices you can use to get the most out of blanket purchase orders.
  5. Practical examples of how to use Blanket order in your purchasing process.

But before we get started, download the Blanket Purchase Order Implementer.


https://us-ms.gr-cdn.com/getresponse-GqvOM/documents/17804a0c-6347-4241-b82e-a75c459c8701.pdf

And then follow along with step by step process to implement a blanket purchase order at your Company.

What is a Blanket purchase order?

A Blanker purchase order, also called (BPO) is a purchase order with a maximum order amount or not to exceed amount.

A blanket purchase order is a legal document binding on the buyer for the commitment with a supplier.

A blanket is for a fixed amount. The AP (Accounts Payable) team can process invoices from a single vendor against the purchase order until the supplier invoice amount remains below that blanket purchase order amount.

Generally, buyers get approval for a blanket amount, and then they keep on using that purchase order till the amount is consumed or throughout the length of the blanket purchase agreement.

When to use a Blanket purchase order

Here are some examples of how to best use the blanket purchase orders in your procurement process

Example 1 – Recurring services – Marketing agency

Let’s say your company has set up an agreement with a marketing agency.

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 develop a fixed rate.

However, you know that you spent $100,000 on creative services last year, and if the business demand is the same, that is not likely to change.

This is a classic example where using a Blanket purchase order makes a lot of sense.

Here is what that could look like:

blanket_order_creative_services

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.

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 – IT consulting services

Let’s take another example where Procurement can use a Blanket order.

Let’s say you are in the IT department and are responsible for managing the corporate website, including enhancements to the site.

You have outsourced the enhancement development to an outside development company. You don’t know how much you would spend in a year because all enhancement requests need to be estimated.

You have set up an annual budget of $50,000 for enhancements according to your correct vendor rates.

And the vendor has agreed to a fix per hour rate of $100/hour. Based on the enhancement request, they will estimate the cost and charge your Company for the development.

So, in this case, you can create standing orders, i.e., a blanket order like the following:

Blanket_with_unit_price_services

As you can see in the screenshot above, the blanket order amount is $100,000. However, the unit price is $100.
So, in this case, when the vendor sends the invoice, the system will check for the total amount and 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.

We hope the two examples have given you some idea of the type of purchases you can use a Blanket purchase order.

Bonus: Ready to implement blanket purchase order process but don’t know how to get started? Download our free purchase order implementation checklist here.

Different types of purchase orders

Here is 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 representing a commitment from the buyer to the seller.

It also helps 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,

  1. You could have a purchase order for purchasing physical, tangible products—for example, raw materials for manufacturing.
  2. You could have a purchase order purchasing services from vendors—for example, Janitorial services for the office.

Further, you can categorize purchase orders in one of the following categories.

One-time purchase orders

As the name suggests, one-time purchase orders are non-recurring 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 you are purchasing, including line-item details, quantity, price, and delivery terms.
For example – the following is an example of a one-time purchase order:

Standard-Purchase-order-Example

 

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 regularly.

For example, you purchase kitchen supplies every month to support staff needs.

The product requirement might not be the same every month, so you could say that it is a one-time purchase order.

A use case for recurring purchase orders is raw materials purchased by manufacturing companies.

This purchase order is to support the manufacturing needs and support a smooth delivery schedule.

Manufacturing companies generally have MRP (Material Resource Planning) software. This software helps them with planning the raw material requirements and placing the purchase order for raw materials.

 

Supplies-purchase-order

In this case, you have a fixed unit price for the product you are purchasing.

In some cases, you are purchasing a service that 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 an excellent example of issues companies face when creating orders where the standard purchase order doesn’t work.

Blanket purchase orders cover this very well, and that is covered next.

Bonus: Ready to implement blanket purchase order process but don’t know how to get started? Download our free purchase order implementation checklist here.

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.

Both standard purchase order and 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.

Length of the contract

A purchase order is typically for a shorter period, while a blanket is usually for a more extended period with a specific contract start date and end date.

We typically see our customers create annual blanket orders.

So think of it 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 particular. For example, it would describe the items you want to purchase, the supplier part number, and the internal part number.
While a blanket purchase order is very generic, for example, a blanket order would describe the high-level need, but that is all.

Order Amount

A purchase order has a set amount.
You can calculate that by multiplying the quantity and the item purchase cost. However, a blanket might or might not have a set amount.

Product vs. Service

Employees can use a purchase order for purchasing material or services or a combination of both. Employees should use a blanket order 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?

If you haven’t done it yet, download the blanket order process optimizer and a follow-along on how to best implement the blanket purchase order process in your organization:
https://us-ms.gr-cdn.com/getresponse-GqvOM/documents/17804a0c-6347-4241-b82e-a75c459c8701.pdf

Let’s look at the typical process flow for a blanket purchase order. On the surface, the steps are the same as standard purchase orders. The main difference is in details within each step.

blanket_purhase_order_process_flow

1. Setup Blanket Purchase Order

The first step 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.

If you are a purchasing professional, you understand these concepts. It should be easy for you to decide between a blanket and a standard order.

However, if you are not purchasing professional, choosing between a blanket and standard purchase order could be confusing.

So what guidelines can purchasing professionals 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.

  1. First of all, set up a blanket order for services only. If you purchase a tangible product, use the standard purchase order.
  2. Employees should only create a blanket if they receive multiple invoices over a more extended time—for example, multiple invoices over six months. If the service is already scoped and the vendor will invoice only once, use a standard purchase order.
  3. Use blanket orders where you are unsure if the monthly invoice amount could vary because of the supplier’s scope of work.
    With all the guidelines, it is also helpful to provide specific examples of services you are purchasing.

We do not recommend 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 a director must approve every purchase order over $100,000.

The approval policy should be consistent whether you use a purchase order or 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 will 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, go with your best estimate for the blanket order amount.

We get a general question from our customers: 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 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 reaps the benefits of using a blanket purchase order.

3. Vendor process

The process for sending a purchase order to the vendor is no different from a blanket purchase order.

Once a blanket is approved, You send the PO to the vendor.

The vendor invoices against the purchase order after delivering the service or performing the agreed-upon work.

There is a difference, though, in what amount the vendor would see.

As we discussed earlier, you might show a different amount to the supplier compared to the approved blanket amount.

If you want to set up the process that the vendor will see 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.
  3. You should also set up a review process for Invoices, which we will discuss in the Invoices section.

4. Receipts

Since blanket purchase orders are generally set up 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. The review process serves as confirmation that the vendor has performed the work per the agreed scope.

5. Matching invoices for blanket orders

Matching the invoices is essential in the blanket life cycle, and 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:

  1. The Blanket ran out of money, i.e., The approved blanket amount is 100% used.
  2. Or the Blanket is not active anymore because the blanket end date has passed.

So how do you ensure that you are paying invoices after the correct stakeholder review?

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 somebody who approved it.

The review should be done by the person 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 close to the deliverables of the project

6. Payments

Once the invoice is approved, the payment is 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 for the Procurement department and employees.

Advantages of a blanket purchase order

First, let’s look at the pros of blanket purchase orders

Easy to setup

Setting up a blanket purchase order doesn’t need a lot of details. Since it is mainly for services, you don’t need information like supplier part #, manufacturing details, unit price, etc.
Users need minimal details, namely – supplier name, amount, account codes, start date, and end date for the service.

Set it and forget it

You can keep using the blanket order until it runs out of money. So you avoid creating multiple orders for the same service.

This leads to better service lead time.

Instead of creating recurring orders, you can create one blanket order, and the AP team can create multiple invoices against that one order.

Very convenient for processing of invoices

It is convenient for vendors, too, especially for small vendors.
Many companies have a No PO No Pay policy, i.e., every invoice must have a matching purchase order number; otherwise, AP will not pay the vendor.
The vendor should enter a purchase order number for every issued invoice for the process to work.

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.

It is easy for suppliers to remember the single number they can enter on all the invoices with blanket purchase orders.

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.

Tedious Year-end reconciliation

You must declare your open liabilities in your 10-k annual report if you are a public company.
Now that blankets are easy to set, employees generally tend to get approval for an amount higher than they 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 that have been paid and which have been submitted by the supplier but not paid.
b) There might be invoices that the vendor does not yet submit, but the work is already performed.
c) You 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 for AP and procurement professionals.

 

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 every invoice and then match it with the contract terms to confirm whether you are paying what you agreed to pay.

In contrast to the above process, you have a defined unit price in a standard purchase order, and a 2-way or 3-way match process can automatically capture any pricing issues.

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, especially when the Blanket runs out of money or has passed its validity period.

For example, it is not uncommon to see vendors enter a blanket order number from the past year on the invoice.

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 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 familiar with blanket purchase orders.

Limited visibility into Spend

Blanket orders can help you understand what you are spending with a vendor, but if you want to understand what you are spending money on, you would have difficulty 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.”
Amount: $50,000
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 review every invoice for the details of the jobs performed by the vendor.

Bonus: Ready to implement blanket purchase order process but don’t know how to get started? Download our free purchase order implementation checklist here.

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 the preferred method for service purchase.
It is important to communicate regularly on how to use Blanket orders to ensure that employees are using Blanket orders effectively.

We recommend the following cadence to ensure that your employees are only using it for services.

1. It makes perfect sense to train your users on how to effectively use blanker purchase orders at the time of launching a new procurement system.

 

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 of blanket purchase agreements

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. Also, make sure that it is not an evergreen PO, it should be for a specified time period. We generally see anywhere between 6-12 months timeframe. You can also align the blanket purchase order end date with fiscal year-end.

Some recommendations

1. Set the blanket order 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 three months but the maximum duration of a blanket order should not be more than a year.

3. Review the blanket orders every six 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 for a buyer’s review who has complete knowledge of the deliverables.

ay 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.

Bonus: Ready to implement blanket purchase order process but don’t know how to get started? Download our free purchase order implementation checklist here.

Common Questions about Blanket POs

Is a blanket purchase order binding?

Yes, a blanket order is a binding agreement between buyer and supplier. However, there are a couple of ways in which you can limit the risk of committed Spend. 

For example, you have a consulting agreement with a consultant and don’t know the exact amount you will Spend with them.

So internally, you might get approval for potential Spend, let’s say $100,000, but you can then choose not to print that amount on the purchase order. 

You could say something like this: 

This purchase order is limited to Spend per the scope of the work performed by the consultant.

How do I make a blanket purchase order?

You can use your standard purchase order template to create a blanket order or use ProcureDesk for creating the blanket purchase order.

The elements of the purchase order remain the same whether it is blanket purchase order or standard purchase order. 

Blanket purchase orders have an overall spend vs. specific amount and quantity. 

How do blanket orders create a commitment between a buyer and a supplier?

Yes and No.

Yes, it is a commitment from the buyer to Spend with the supplier.

No, that it is not for a fixed amount.

The idea for using blankets is that it allows you to keep the spending flexible without getting approvals for every purchase.

In other words, you might create a purchase order for $10,000 and only use $5,000.

Conclusion

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 service use cases.

Would you like to see how Blanket orders can improve your purchasing efficiency?

Then click on the button below to schedule a demo with one of our product specialists and see how ProcureDesk can help you implement a blanket purchase order process in no time.

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