A blanket order should not earn a volume discount unless the customer also accepts a defined obligation to buy the stock behind it. Otherwise, you are pricing against forecast volume while funding inventory against firm supplier commitments. The unit margin may look acceptable, but the agreement gives the customer flexibility at your expense.

This shows up in distributors and manufacturers that hold dedicated stock for scheduled releases. The customer sends an annual quantity, purchasing orders a large batch, and sales treats the program as secured business. Yet the customer may only be obliged to pay for individual releases, leaving the remaining stock on your balance sheet indefinitely.

Read the obligation, not the order total

The commercial issue is not what the document is called. A blanket order can contain a firm purchase commitment, or it can be little more than an agreed price attached to a forecast. The release terms, cancellation rights and treatment of unused stock determine which one you have.

Start with the point at which your spending becomes irreversible. That may be a supplier deposit or the start of production on a customer specification. Compare that date with the point at which the customer becomes liable for payment. Any gap is credit you are extending through inventory rather than through an invoice.

Accounts receivable reports cannot show this exposure because no invoice exists yet. Inventory aging can also understate it when recent receipts make a stalled program look current. You need to see stock by customer program, including open supplier orders, alongside the remaining enforceable purchase obligation.

Separate cash exposure from gross margin

Consider an illustrative program with expected sales of 100,000 dollars and product costs of 70,000 dollars. If all units ship at the agreed price, the quoted gross profit is 30,000 dollars before any other costs classified within cost of sales. But purchasing all the stock upfront creates a cash requirement that the gross margin percentage does not describe.

Suppose 35,000 dollars of that stock remains unpaid for by the customer for six months longer than planned. At an illustrative annual borrowing rate of 12 percent, the extra financing cost is 2,100 dollars, assuming the full amount stays outstanding. Interest ordinarily sits outside EBITDA, so subtracting it from reported gross profit would confuse the accounting. It still belongs in the commercial decision.

Obsolescence is a different problem. If a specification changes and dedicated stock cannot be sold elsewhere, a write down can reduce earnings as well as the cash recoverable from the program. A buyer reviewing inventory reserves may challenge reported earnings if those losses have been deferred. Strong shipped margins do not establish the quality of the inventory left behind.

Price the stock obligation separately

A higher unit price is not always the right remedy. If the customer never releases the remaining units, you never collect the additional margin intended to compensate for holding them. The payment mechanism needs to follow the exposure, rather than depend entirely on future shipments.

For dedicated material, that could mean a deposit before the supplier order becomes firm. For finished goods, it could mean a minimum release schedule with payment for unused stock after a stated period. The terms need clear treatment of cancellation and specification changes, reviewed for enforceability rather than accepted as reassuring language.

Standard stock that other customers buy deserves different treatment from a custom component with one possible user. Purchasing should estimate the realistic alternative demand, not assume that anything technically saleable is recoverable at cost. Sales can then offer a lower price for a firm commitment and a different price or stocking policy for forecast demand.

Review five programs this week

Choose five customer programs with dedicated stock or scheduled releases. Put sales, purchasing and finance in the same review, using the actual agreements rather than the order summary in the system. This is a specific operations control, not a request for another monthly dashboard.

  • Record inventory at cost and uncancellable supplier commitments for each program, without counting the same stock twice.
  • Identify which amounts the customer is contractually required to purchase, by what date, and under which cancellation provisions.
  • Estimate alternative sales recovery for uncovered stock, using actual demand and expected selling costs.
  • Assign one owner to propose a remedy before the next replenishment, such as a deposit, a purchase deadline or a smaller stocking quantity.

Keep the first review narrow enough to finish with decisions. For each program, record whether purchasing can place the next supplier order under existing terms or needs a revised customer commitment first. Set a date for resolving the oldest uncovered stock, even if the decision is to recognize a loss.