I frequently see companies early in their supply chain maturity journey using blanket purchase orders almost like a “light contract.” At first I found this somewhat odd, but for a company with a small supply chain, it makes sense. Blanket orders don’t require nearly the resources for negotiating a contract, but they do strengthen the supplier relationship and spread risk between the parties. Today’s article is all about blanket orders–what they are, different types, when to use them, common system limitations, risks, and opportunities.
Definition and Blanket Order Types
Blanket orders are also called blanket purchase orders (BPOs), blanket purchase agreements (BPAs), contract purchase agreements (CPAs), Framework agreements, or a few other names depending on your Enterprise Resource Planning (ERP) system. I’m going to choose to call them “blanket orders” for the purpose of this article for ease of typing and a reasonably generic term. If a standard purchase order purchases one good or service at a single point in time, a blanket order makes a purchase or purchases over a period of time. This time period can be fairly long, months or even years, or it can be shorter such as putting in orders or making progress payments over weeks. Essentially, if an order is planned to be received or invoiced in pieces instead of all at once, it is functioning like a blanket order. Reversing that, if an order is set up with multiple lines or multiple payments but will be invoiced or received all together, I would consider that a standard purchase order instead of a blanket order.
While there are many names for blanket orders (I once had a supply chain leader call them “Type 1” and “Type 2” blankets, but haven’t been able to find references to those terms online elsewhere), I think of blanket orders falling into three types:
- Scheduled orders for set quantities at set times – this type of blanket order has very specific orders for goods or services and dates for delivery or completion. Each line on this type of blanket order will be received or invoiced separately (depending on if the requirement is a two-way or three-way match) and is considered to be a distinct order. Each line contains firm information on price, quantity, and date. Example: A company puts in a blanket order for long lead time pumps, with 1000 pumps on January 31, 1500 pumps on April 30, 500 pumps on July 31, and 1000 pumps on October 31. All pumps are at the set rate of $150 each through the year.
- Set amount of money WITHOUT specified release amounts – this blanket order type has a set amount of money available to spend with a certain supplier over a period of time, but does not specify release amounts, pricing, or quantities. When I used this type of blanket order daily, I used to describe it to my internal customers like a bucket of water. They could take money out of the bucket with whatever size container they liked, but there was only so much water available in the bucket. This type works best when tied directly to a budget. Example: A company puts in a blanket order with a landscaping company for $10,000 for mowing services over the spring and summer season, to be invoiced after each time the supplier mows the grounds based on how fast the grass grows, whether trimming is needed, etc. While $10,000 is budgeted, it is expected the cost of the service will be a little less than that over the course of the season.
- Set amount of money WITH specified release amounts or pricing – this last type of blanket order is similar to the second type, but has more structure around how purchases are released from the blanket to be purchased. In the “bucket of water” metaphor, this is a bucket of water, but now there are multiple dippers sitting beside the bucket and the purchaser has to pick which dipper to use. Example: A company hires an IT implementation partner who estimates the project at 250 hours and a mix of labor resources between $150 and $350 per hour. The total project budget is $70,000. So the blanket has a total amount of $70,000 with lines for each of the primary supplier job descriptions and prices but no quantities. Invoices will be sent at set milestones based on the mix of labor resource hours the supplier uses to complete the implementation (i.e. 40 hours of a Developer I, 20 hours of an IT Supervisor, etc.).
When to Use Blanket Orders
Blanket orders have a number of uses, and sometimes a buyer will write a purchase order to serve as a blanket order without realizing it is a blanket (such as when an order has multiple delivery dates). Some common uses for blanket orders include:
- Recurring payments such as monthly payments for a subscription or paying a legal or consulting retainer. The advantage of this blanket order type is it prevents bad supply chain bureaucracy and prevents cutting multiple purchase orders where one will do.
- Progress payments toward a large purchase can be an excellent way to track the true cost of a purchase and keep records together. This would include when a purchase has a downpayment or certain percentages of the purchase due at certain milestones, and is especially useful for preventing scope creep.
- Tying budgets to spend is an excellent place to use a blanket to ensure a certain project or department stays within budget. With the water bucket metaphor used earlier, when the blanket order is empty (the water is all gone), there has to be a conscious decision to add more funds to the blanket order. In very strict budget environments, the executive team can even require that any addition to an existing blanket order require reducing a different blanket order by the same amount.
- Compliance with contracts can be an excellent use for blanket orders that is often overlooked. When a supplier charges the wrong rate for a purchase and the wrong rate isn’t even available on the blanket order, it means the purchasing company catches the error earlier in the process. For contracts with dozens of lines or large suppliers with multiple different rates for different customers, it is very easy for them to charge the wrong rate for a particular part of the invoice. If the blanket order kicks the order out as an exception, the mismatch can be dealt with right from the first invoice instead of getting stuck somewhere in the accounting chain.
- Securing a forecast means sending a blanket purchase order outside lead time. What I mean by that is if the lead time for sheet steel is six weeks but a company puts in orders for the next six months, the company is both signaling their firmer forecast to the supplier and securing that production. Especially in markets of scarcity, securing orders before their lead time can make the difference between having product available and being unable to fulfill customer orders.
- Process adherence is another benefit to blanket orders. By having a blanket order authorized by the correct authority, a company can prevent receiving invoices before purchase orders (invoice-before-PO or No-PO-No-Pay) and ensure purchases were fully authorized before the supplier billed the company. Especially when budgets are tight, blanket orders can help prevent unauthorized spending.
- When a supplier needs a commitment, a blanket order can serve as that commitment. Perhaps for their own creditors or cash flow, the supplier may need to show that they truly have secured customer orders and produce documentation to that effect. A blanket order can serve this purpose, but the company must remember that a blanket order (like a purchase order) is a form of contract. Once a company sends a blanket order to a supplier, it is truly a commitment to that supplier to make the purchase.
- Secondary suppliers often receive a promise of a certain percentage of business in a commodity as a company risk mitigation method. If a company commits 20% of the work to a secondary supplier following a request for proposal (RFP) process, a blanket order can be a good way to ensure some business (but not more than intended) does indeed go to the secondary supplier. By writing a blanket order for 80% of the budget to the primary supplier and 20% of the budget to the secondary supplier, the supply chain team can monitor the amounts left on the blanket orders and ensure business is going to each supplier proportionally.
System Limitations
As with all things ERP and technology, there are sometimes limitations to using blanket orders. First, there may be things a company has to do to make certain types of blanket orders work. The most common I’ve seen is reversing the quantity and currency for the blanket orders with one overarching amount of money. This means instead of writing the purchase order with a quantity of 1 and a purchase amount of $100,000, the purchase order is written for a quantity of 100,000 for a purchase amount of $1. Then as the company uses the blanket order, they simply receive the amount of the relevant invoice. This is also a method of building a blanket order without having an ERP system sophisticated enough for a full blanket. Some ERP systems do this automatically when blankets are issued.
A less-sophisticated ERP system is the second main limitation to creating blanket orders. The ERP might not be able to create all three types of blanket noted above, with the third type (set amount with individual pricing that can be issued in any quantity) as the most common one unavailable in some ERP systems. This is where my argument about assigning part numbers to non-materials comes in as a way to control pricing without a blanket order.
Lastly, internal customers might find blanket orders confusing and difficult to use. Especially in an organization where the lines between procurement and the business units are somewhat blurry and the business units are cutting purchase orders, getting quotes, or managing suppliers, blanket orders are one more level of complexity for them to manage. Consider carefully the impact to the business before adding something the team may not be ready to manage. Or consider first making sure basic functions that should be with the supply chain team are assigned to the right resources.
Risks and Opportunities
As with anything that has a benefit to a business, there are risks. Blanket orders are no exception. First, when a company writes a blanket order by reversing the price and quantity as noted above, there is an opportunity for that to cause accounting mismatches and other issues. Any time people do things “outside the norm,” that carries some risk. Second, it’s important that a supplier is willing to hold pricing for the time period of the blanket order, either through the blanket order itself or a separate contract. Blanket orders where the buyer is constantly changing pricing are not truly blanket orders. True blanket orders require a commitment from both parties, just as with standard purchase orders. Work with suppliers to write the blanket order for the period of time the supplier is willing to hold to the terms of the order. If the supplier is not willing to hold pricing, ensure you’re negotiating pricing with every order instead of simply taking the pricing the supplier provides. Make it a little painful to change pricing all the time instead of committing to you as the buyer.
The biggest risk for blanket orders is when the purchasing company has major changes in their demand (either up or down). With increased demand, both buyer and supplier scramble to meet the increased need. With decreased demand, buyer and supplier typically have to negotiate who carries the cost of the excess inventory. Options usually include the buyer still taking the original amount as planned and storing the excess, the buyer paying a penalty to cancel the extra (like a restocking fee), both parties agreeing to extend the time period of the blanket order to allow the buyer more time to purchase the full volume, or the supplier allowing the buyer to cancel the excess without penalty. In a well-organized blanket order, the potential paths and penalties are already outlined in the agreement, perhaps with a note on the blanket order itself if not outlined in a separate contract.
The last risk with blanket orders comes when suppliers and business units start to treat blanket orders like a perpetual blank check. Blanket orders do benefit from a little good bureaucracy (but not too much) to prevent them from getting fully out of control. There are also probably situations where a buyer might not actually send a copy of the blanket order to the supplier, concealing the amount of money allocated to the project. An example would be when the blanket order is written for more than the project proposal or when the accounting team needs the supplier to bill against individual release numbers for the order instead of using the overall blanket order number. Be careful in what you choose to share with suppliers, but also remember that good suppliers are partners and will work with you however you write and share the blanket order.
A couple of things to note before wrapping up this discussion on blanket orders: maintenance requirements and automation opportunities. Blanket orders require some maintenance over time in the form of changing the total amount allowed (such as with budget changes), working with the supplier on any quantity changes, matching the blanket order to any other written agreements, and ensuring they do not stay open perpetually. While blanket orders can save a lot of time and labor over cutting individual purchase orders for every order from a supplier, that does not mean they are free of all maintenance requirements.
In a world increasingly looking at automation and AI, there are also opportunities to streamline the blanket order process just like any other business process. Building the blanket order process to be efficient, useful, and well-governed can save a company significant time and headache when done well. Don’t forget the blankets when you are looking for processes to adopt and improve.
Consider where you are using blanket orders well, where you could add some additional efficiencies, and how using blanket orders could help your process all the way along your supply chain. Be wary of using blanket orders instead of full contracts with critical suppliers, but they also can be handy and efficient for your lower-spend and less-risky suppliers. If you’d like to talk about how you’re using blanket orders, let’s chat.
