It is a nice looking blanket. I assume you didn't buy retail and thus cannot return it? I can't really tell from the picture, but was it mouse chewed or something along that line?
It appears to be a woven fabric so the best way to mend it is to darn it. Go to a yarn/wool store and buy a ball of yarn of similar colour; ask for worsted weight (I think that should match up well enough - kind of hard to see in the picture); if you don't have one already you can get a darning needle at the store at the same time. To darn, stitch in a number of closely placed rows all going in the same direction (eg north to south) and the same tension. Next stitch and weave the needle and yarn through those in a perpendicular direction (eg east to west); by weaving I mean go over top of one strand (or row) and under the next one then over top the one after that and then under and so on. Try to keep the weaves fairly close together. It's not really difficult just a little time consuming.
I find that they rub. Before I knew better, I gave my mare big white spots on her withers when using one. I switched to felt pads, or using a thin felt liner under my SMX pads. Those wool pads are really only good for covering a plain pad for shows and for playing with colts, IMHO
I think if your saddle fits properly you will be fine with that pad/blanket. Anytime a saddle fits well a thin pad or blanket should be sufficent. It is to keep the sweat from breaking down the fleece of the saddle, not correct saddle fit but they are used sometimes help in that area too.