Longer-Term Purchase Agreements

Longer-term purchase agreements usually cover a period of one to five years, with renewal based on a supplier’s ability to satisfy performance expectations. These agreements can reduce the transactions costs associated with lower-value purchases by eliminating the need for time-consuming annual renewal. Furthermore, once a purchaser and a supplier reach agreement, material releasing responsibility should shift to user groups. Ideally, material releasing becomes electronic rather than manual, even for lower-value items.

Although the two approaches are conceptually similar, differences exist between a blanket purchase order, which purchasers routinely use, and longer-term purchase agreements. Both approaches rely on a contractual agreement to cover specific items or services; they may be for extended periods; they are legal agreements; and they are highly emphasized ways to manage lower-value purchases. However, blanket purchase orders are typically used more often for lower-value items than for longer-term agreements. Longer-term agreements are usually more detailed in the contractual areas they address compared with blanket purchase orders.