On the stove top in a heavy bottomed saucepan cook together sugar, water, and butter over medium-high heat. Bring to a boil. Cook stirring constantly just until the sugar has completely dissolved. Remove from the heat.
Carefully pour into a stand blender. Add vanilla and powdered milk. Blend until smooth and thickened.
If needed, you can add additional boiling water 1 Tbsp at a time until you reach your desired consistency.
Cool to room temperature, if using immediately. The sweetened condensed milk will continue to thicken as it cools.
If making in advance, store chilled in an airtight container chilled for up to 5 days.
When chilled bring to room temperature to allow the condensed milk to loosen a bit before using.