Blanket Orders: Pros & Cons
As the calendar year comes to a close, one of the activities to consider for the upcoming year is to set blanket orders for regularly used items such as actuators. Blanket orders can benefit buyers by providing a steady stream of product availability, usually at discounted pricing. For sellers, predictable orders enable more accurate production planning for each release.
However, companies have different ordering parameters, so it’s important to be sure the details of the agreement really will work in your favor. Here are some tips to assess your blanket order.
1. How will our company benefit?
- Does the blanket order lock in the price?
- Does it guarantee product availability?
- Is the item use consistent?
- Will the blanket order save effort in managing purchases throughout the time period?
2. Projected quantity needed within the time period
- The number of releases and the frequency of those releases. Some vendors may have set parameters for blanket order quantities within a given period of time. Does that align with your needs?
- How flexible is your supplier if you need to reduce or increase the quantities?
3. Is your supplier willing to work within the blanket order parameters you require?
Suppliers may offer blanket orders only with certain minimum quantities or maximum time periods (the overall length of the blanket order).
For example, if price volatility is an issue, a seller will be less willing to lock in a price for an extended period of time. Whereas they may have previously offered 12-month blankets, now because of the price unpredictability they might only offer 6 months. If price volatility is too unpredictable, the supplier may not allow blanket orders at all.
There also may be contingencies that complicate the blanket order. Contingencies may come from either side of the negotiation. A supplier may only want to offer equal and regular releases, while the buyer may need different quantities to be released because of seasonality. Or a buyer may want flexible release dates, but the seller needs them to be locked in.
Sometimes contingencies can be negotiated so the blanket order makes sense for both sides. Sometimes they simply may not work.
4. Consider potential downsides to blanket orders
If demand for your product decreases, you will be locked in, paying for inventory you don’t need.
If blanket order pricing was set at a high point in market price and then the market drops, you may be committed to a higher price than what you could have paid later.
At the tail end of the blanket order, you could forget to reset or reorder the product – which could be detrimental, especially if the production lead time increases as a result. This is why your supplier’s customer service is so important. As a buyer, you should know when the blanket is ending. A good salesperson will also know that and will proactively suggest a renewal early enough to eliminate potential transition problems.
Things change, so you will need time to renegotiate. For example, projected quantities may have increased enough that the buyer wants a better discount. Or costs have increased and the seller needs to increase the price.
Keep in mind that a blanket order which requires equal quantities per release does not allow for the ebb and flow of your demand. This could impact your company’s cash flow, especially if the product has a high price tag. Bringing in regular releases during downtime unnecessarily increases costs when money is tight. Conversely, if inventory is tight, that has the opposite effect on cash flow by restricting your production capability.
Is a blanket order right for you?
These contracts are popular because they provide predictability. Productivity can be managed more effectively by both sides knowing what quantities are due and when. But the details have to align properly in order for everyone to benefit. So let’s talk about your parameters. Whether you need actuators or another type of product we offer here at W.C. Branham, we’ll help you get the best deal on the best quality products.