Learn to Hedge Against Inflation through Proactive Purchasing
The world of manufacturing is filled with risks. Staff turnover, overseas competition and third party vendor issues can all threaten your service level and put pressure on your organization. But one of the biggest risks in 2018 is inflation.
Rising material prices and inflationary forces are impacting costs at every level. Master suppliers are reporting price increases of 7%+ on steel products and 10%+ on stainless steel. What is a manufacturer to do?
One of the most powerful ways to mitigate the risk of rising prices is through a proactive supply chain strategy that includes issuing Blanket Purchase Orders (BPO). With a stable price for a fixed period of time, the BPO serves as a hedge against inflation.
- What is a Blanket Purchase Order?
A blanket Purchase Order is a contract to buy parts at a guaranteed price within a specific time period or schedule (typically one year). For example, a manufacturer forecasts to use 10,000-12,000 pieces of an MS16555 stainless steel dowel pins annually. They issue their supplier a Blanket PO for 12,000 pins a year at a negotiated price with 12 monthly releases of 1,000 pieces. This gives them 12 months of predictable costs at today’s 12,000 piece price, rather than tomorrow’s 1000 piece price. As we start to see double digit price increases in the industrial marketplace, the savings multiply.
- What are the benefits of Blanket Purchase Orders?
A Blanket PO can add certainty to a business and can make your production process leaner, guaranteeing the price and availability of parts without the burden of holding the parts in stock. Suppliers also benefit because they have a predictable revenue stream. Both sides have certainty concerning quantity, price, delivery requirements and payment terms.
Beyond certainty, the top benefits of BPOs for manufacturers are:
- Reduces unit costs through quantity discounts.
- Guarantees pricing & reduces time spent on price negotiation.
- Shortens lead time and eliminates stock outs.
- Assurance of quality of products and vendors.
- Improves efficiency of ordering, receiving and bill paying process.
- Leaner operations with reduced stock burden.
During inflationary times, the benefits of locking in today’s prices for up to 1 year multiply.
- When should a manufacturer issue a Blanket PO?
- When an item has a high minimum annual usage ($500 minimum EAU).
- When a quantity discount can be achieved.
- When you are already making repetitive purchases from the same supplier within a certain time period (typically 1 year).
- When parts are used according to a production schedule.
- When parts have a lead time.
- When should a manufacturer NOT issue a Blanket PO?
- When minimum annual usage of item is low (under $500).
- When part is only used for project work and usage in unpredictable.
- When price is subject to change without notice.
- When quality of product or supplier is questionable.
- What other factors should I consider?
The main risks when using Blanket Purchase Orders occur when BPOs are not monitored or extended past their final scheduled release, which can lead to price changes and inventory availability problems. The best way to mitigate this risk is through the use of an effective spend management tool that includes a minimum safety stock level. Collaboration with your supplier is also recommended.
The other main risk occurs when a blanket order is issued for more than the needed quantity of a specific part due to demand forecast issues or product changes. This risk can be mitigated by working with your supplier to set conditions to manage this gap, such as extending a 1 year blanket to 18 months.
Blanket Purchase Orders at MF Supply:
Here at MF Supply, we can help you effectively craft a proactive BPO strategy based on your organization’s unique needs. We offer blanket orders for up to 18 months with flexible terms and low minimums.
For more detailed information about Blanket Purchase Orders, to request a line card, or to send an RFQ, visit our website. And if you don’t see what you need listed, as always, ask us. “Finding the right screw for you” is our tag line after all!
Contact me at firstname.lastname@example.org with your questions, comments or helpful hints!