Academic journal article Journal of Purchasing & Materials Management

A Comparison of Blanket and Systems Contracts

Academic journal article Journal of Purchasing & Materials Management

A Comparison of Blanket and Systems Contracts

Article excerpt

A Comparison of Blanket and Systems Contracts

Blanket and systems contracts are commonly used to procure repetitively needed materials and supplies. The author reports the results of a study in which the structural and performance features of these contractual devices are empirically examined. As expected, blanket and systems buying arrangements differ structurally with respect to a number of salient contract characteristics. Additionally, firms using systems contracts exhibit higher turnover rates than do firms using blanket contracts. Some implications of these findings for buyers are discussed. Purchasing is the boundary-spanning function that links firms to external supply sources.[1] Through purchasing, buying firms procure needed materials and supplies, and utilize, de facto, outside suppliers' imagination, creativity, and specialized know-how.[2]

One of purchasing's key assignments is the acquisition of repetitively used materials and supplies. Such items range from routinely needed maintenance, repair, and operating (MRO) items to repetitively ordered production materials. A large percentage of repetitively used items are procured using long-term purchase contracts. The lower value items often are purchased using some form of blanket or systems contract.

Despite their widespread use, little empirical research exists on blanket and systems contracts. Empirical research on the relative structural properties and performance features of these contractual devices has been particularly scarce.

This article reports the findings of a study in which the organizational (i.e., structural) and performance features of blanket and systems contracts are empirically examined. The first section of the article introduces the rationale for long-term purchase contracts, such as blanket and systems contracts, and proposes empirically testable hypotheses regarding expected differences in structure and performance. The second section outlines the sampling and data collection procedures used in the research, along with the empirical measures used. The third section reports the analysis conducted and the results. The final section summarizes the findings.

CONTRACT PURCHASE ARRANGEMENTS

For routinely acquired maintenance- or repair-type items, or production items purchased on a regular basis, the standard purchase order is a costly and time-consuming procurement device, if one considers the administrative costs on a per-unit basis.

It also typically does a poor job of coordinating the order/delivery of items with a buying firm's logistical need for such items. Orders are placed, and deliveries are made, at specified points in time rather than precisely as needed. The result is that received materials are not all used immediately, and the costs of inventorying some materials are incurred.

In an effort to overcome the costly disabilities associated with conventional purchase order procurement systems, buyers and sellers of repetitively used items frequently employ long-term contracts. Blanket and systems contracts are especially popular.

Blanket Contracts and Systems Contracts

An agreement between a supplier and a buyer in which the latter expresses the intention to buy all or part of its requirements of repetitively used items from the supplier for a specified period of time is termed a blanket contract.[3] A blanket contract significantly simplifies the ordering process, because instead of relying on the conventional purchase order to obtain materials, the buyer uses a release form to notify the supplier as requirements arise.[4] This saves time and money, since the need for repetitive vendor evaluation, selection, and multiple purchase orders for supplies from different sources is obviated.[5]

Blanket agreements clearly restructure buyer-supplier relationships away from conventional bid-buy techniques. Systems contracts, it is generally agreed, effect an even more radical restructuring. …

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