A blanket order is a commitment from a customer to purchase a specified quantity of material over a defined period (typically 3 to 12 months) at a fixed price. For the customer, it provides price certainty for budgeting and project planning. For the service center, it provides revenue visibility and volume commitment. The risk is that the market moves against whoever locked in the price.
The Pricing Risk
If you lock in pricing for 6 months on 200 tons of HRC and the market rises $100 per ton during that period, you lose $20,000 in potential margin. You are selling at yesterday's price while buying at today's cost. If the market drops $100 per ton, you capture $20,000 in additional margin because the customer is paying above-market pricing.
For a service center operating on 20% gross margins, a $20,000 swing on a single blanket order is significant. A few poorly priced blanket orders can wipe out a month's profit.
Strategies for Managing Blanket Order Risk
Index-based pricing. Instead of a fixed dollar-per-CWT price, tie the blanket order price to a published index (CRU HRC, Platts TSI) plus a fixed conversion margin. The price adjusts monthly or quarterly based on the index movement. The customer gets predictable margins (they know their markup above the index). The service center maintains consistent margins regardless of market direction.
Capped pricing with a floor. Set a ceiling price (the customer never pays above X) and a floor price (the service center never sells below Y). Between the floor and ceiling, the actual price adjusts with the market. This structure protects both parties from extreme moves while allowing natural price adjustment within a range.
Inventory-backed pricing. If you have the material in stock (or can purchase it now at known cost), price the blanket order based on your actual cost plus your target margin. Lock in the price and lock in the material. This eliminates market risk because you are selling material you already own. The risk shifts to inventory carrying cost (storage, insurance, opportunity cost of capital), which is calculable and manageable.
Tiered pricing by delivery period. Price the first quarter at current market pricing. Price the second quarter with a small premium (reflecting uncertainty). This approach gives the customer a better price upfront (when your cost is known) and a fair price later (when costs are less certain).
Contract Terms That Protect Both Parties
Volume tolerance. Allow a plus-or-minus 10% to 15% variance on the total blanket quantity. This protects the customer if their demand decreases and protects the service center from over-committing inventory.
Release schedule. The customer should provide a release schedule (how much material they need each month) with lead time for changes. A typical structure: firm releases for the current month, tentative releases for the next two months, adjustable with 2-week notice.
Price escalation clause. For blankets longer than 6 months, include a clause that allows price adjustment if the market moves beyond a defined threshold (for example, if the CRU HRC index moves more than 15% from the date of the agreement). This protects the service center from catastrophic market moves without making the pricing unpredictable for the customer.
Cancellation terms. Define what happens if the customer cancels before the blanket is complete. Typically, the customer takes delivery of material already purchased for the blanket or pays a restocking/cancellation fee.
The Margin Math
A well-structured blanket order should generate slightly lower margin per ton than spot orders (2 to 3 points lower is common) in exchange for volume certainty and customer commitment. If your spot margin is 22%, a blanket at 19% to 20% is reasonable. Below 18%, the volume commitment is not compensating adequately for the pricing risk.
Track blanket order performance separately from spot business. Monthly comparison of blanket margins to spot margins reveals whether your pricing strategy is working. If blanket margins consistently trail spot margins by more than 5 points, your blanket pricing is too aggressive. If they match or exceed spot margins, you are pricing blankets well (or the market moved in your favor).
Blanket orders are a valuable tool for both service centers and customers. Priced correctly, they provide revenue stability, strengthen customer relationships, and reduce the sales team's monthly prospecting burden. Priced incorrectly, they lock you into below-market deals that erode profitability for months. The difference is in the pricing structure and the contract terms.