- Table of Content
Procurement is a complex field, full of jargon, but we're here for you. That's why we have created this encyclopedia which can be your quick reference tool. This glossary is handy for people who want to learn more about procurement and what it means to work in this area.
Getting familiar with the terminology employed in your company as well as its meaning can help you increase your professional competence, participate more actively in discussions, and avoid misunderstandings!
It also helps professionals from other fields understand procurement better when involved in projects with their procurement colleagues.
We know that there is no such thing as a perfect glossary (and even if there were one, it would probably be constantly changing), but we hope that this glossary will become an incredibly useful addition to your professional toolkit!
- Acceptance Letter: An acceptance letter is a letter that develops a binding relationship between your organization and the successful bidder before both parties enter into a formal contract.
- Account Payable: Accounts payable is money that a company owes its suppliers, which is recorded as a liability on the company's balance sheet.
- Accounts Receivable: If you sell goods or services to other businesses, accounts receivable are the funds that customers owe your company for products or services that have been invoiced and for which payment is expected.
- Accounting Period: The accounting period is the time used by an organization to calculate and report financial results.
- Acquisition: Acquisition (also called buying, purchasing, or acquiring) is the process of entering into ownership of something. In terms of procurement, it involves placing an order and arranging payment of the resulting invoice.
- Activity Based Costing: Activity-based costing means assigning indirect costs to products and services based on the activities they require.
- Adaptability: It's the ability to adapt to the changes or disruptions in your supply chain.
- Addendum: An addendum is an addition to a document. In simple terms, it means adding additional information or item to a procurement document.
- Ad-Hoc Purchase: Also known as a one-off purchase, an ad-hoc purchase is when you purchase things you need for one-time, specific use.
- Adressable Spend: A company's addressable spend represents the amount of money it spends on products or services over which its procurement department has some control. When a company's addressable spend is high relative to total annual revenue, it means the procurement department is able to get good deals and save money for the company.
- Aggregation: Aggregation is also known as "volume consolidation" or "leverage." It's the process of grouping together related products in order to negotiate with suppliers for better deals.
- Agile Procurement: In the current age of business, adaptability is a must to survive. When it comes to procurement, businesses are increasingly adopting an agile approach that focuses on outcomes and flexibility. The concept of agile procurement is becoming increasingly popular among organizations looking to optimize their purchasing practices. These practices allow for greater agility in the face of a rapidly changing business environment, which has led to agile procurement being dubbed the "driver of this adaptability."
- Allocation: When supply is short, a company may limit customer orders that only part of the original order is delivered. It's called allocation. Some suppliers ration customers' orders during times of high demand. For example, customers may be able to purchase only half the amount of a product they originally ordered. To be placed "on allocation" can cause buyers to worry about their company's ability to source products in the future.
- Approved List: An approved list is a list of vendors whom the organization has previously found to be reliable and consistently competitive.
- Arbitration: Sometimes, parties in a dispute may settle for arbitration if they fear litigation might be too costly or too long. An arbitrator makes a judgment about the issues upon which the original parties cannot agree and recommends based on their expert opinion. This may be binding or not, depending on what the parties originally agreed.
- As Is: An offer of goods for sale without a warranty and with the stipulation that the buyer takes the goods at their own risk, without recourse to the tenderer for the quality or condition of the goods.
- Auction: An auction is a process of buying and selling goods or services by inviting competitive bids from multiple participants. Online auctions are a common tool to help procurement specialists acquire services and supplies at the most competitive prices.
- Award: Award is a notice sent by a buyer to the concerned companies that their bid/offer has been accepted.
- Balance Sheet: The balance sheet is a snapshot of the company's financial condition at a particular time. The report details the company's assets, liabilities, and equity.
- Barter: In barter, goods are exchanged, but no money is used to buy things. In order to pay for some of your goods, you can give the seller some other goods.
- Battle of Forms: The battle of the forms refers to a situation that occurs when people exchange documentation with different terms. The courts may have to decide what was agreed, and in the absence of a contract, the courts in some jurisdictions will seek the last unchallenged counter offer. In practice, this often benefits the seller, as the quotation, order acknowledgment, proof of delivery, and invoice succeed buyer communications.
- Benchmarking: Benchmarking is a process of comparing your business or performance metrics with other companies in your industry. This allows you to see how you are doing against the best of the best in your industry. There are two types of benchmarking in procurement: price benchmarking and performance benchmarking. In price benchmarking, you compare commercial terms with other companies that offer similar services to determine whether the terms you currently have are fair or not. The other type of benchmarking, performance benchmarking, compares key metrics against other entities to identify areas of organizational excellence and opportunities for improvement. For example, you can evaluate the quality of your strategic sourcing processes versus competitors' processes.
- Benefits Realization Plan: When your company awards a contract, you look forward to all of the benefits you're going to get out of it. The benefits realization plan (BRP) is an agreement that spells out the planned steps for how your company will realize all the benefits promised in your business case.
- Best Practice: "Best practice" is a term used by different businesses in different ways. It's generally associated with seeking to identify the best processes that exist, usually in other organizations, which will lead to better outcomes if adopted in your company. Of course, this only works if you're choosing to adopt processes that have already proven to be effective elsewhere—which is why it's so important to seek out the advice of professionals who know what they're doing.
- Bid: A bid is an offer made on goods and services in response to an invitation to tender. A bid could also be a proposal made in response to an invitation to negotiate or an RFP or request for proposal. To make a bid, suppliers fill out forms or send documents that include financial information and technical details about the products and services they offer.
- Best and Final Offer: No matter how well you think an agreement was negotiated if you believe there is a chance for your contractor to revise and improve the agreement after your next meeting, let them submit a "Best and Final Offer." The primary purpose of this process is to allow the contractor a final opportunity to correct any mistakes in her original price proposal.
- Blanket Purchase Order: A blanket purchase order or blanket order is a purchase order (PO) issued by an organization that allows the buyer to order future products at prices that are available now, with delivery dates set in the future. This helps buyer receives discounts on the cost of goods sold and recognizes revenue incrementally over time as orders are shipped, reducing cash flow uncertainty.
- Bottleneck: We all know what a bottleneck is, but you might not have thought about it in this way: A bottleneck is a limiting factor in a supply chain or a process that constrains the performance of the overall system. A bottleneck is created when the capacity of an element in the system is insufficient to satisfy the workload. A bottleneck can be eliminated or reduced by adding capacity to the bottleneck or by allowing other parts of the system to temporarily handle some of the traffic which would normally go through the blockage.
- Breach of Contract: When you're in a contract, you and the other person agree to do stuff for each other. If one of you doesn't do the things you promised, that's a breach. The severity of the breach (how important the term that has been breached is) determines whether the other party can terminate or sue for damages.
- Broker: A broker is a person or an organization that arranges transactions between buyers and sellers. Unlike an agent who acts on behalf of one party to the transaction, the broker is independent and not responsible for either party's interests. Their function is to bring together a potential buyer and seller and help them to negotiate a deal that benefits both.
- Bundling: Bundling is a technique used to organize a variety of products in a way that simplifies the procurement process. It can also be used to secure standardized contract terms with the same supplier across the organization or pooling purchasing volume with one or fewer suppliers depending on what each specific business needs.
- Buyback: Buyback is a method of countertrade where the producer supplies equipment at little or no cost to the customer, and the customer 'pays' for it by supplying the producer with the output of the equipment.
- Buyer's Market: A buyer's market is when there is an excess of supply over demand, and buyers have many alternative sources of supply for goods or services. Supply-demand imbalances usually happen for various reasons, including the economic downturn, technological development, and the introduction of free trade. This may occur when - Economies suffer a downturn, causing less overall demand for goods and services - technological advances reduce the need for labor in some industries or sectors - Free trade increases competition from other countries.
- Bargaining: Bargaining is a form of negotiation in which you reach an agreement with someone that allows you both to successfully balance your wants against each other. Bargaining thus results in 'win-win' commercial relationships where each party creates value for the other. This can be contrasted with a 'win-lose' relationship, where one party claims value at the expense of the other.
- Best in Class: The term best in class can be used to describe a standard of performance associated with the best performing organizations or best practices in a relevant sector or business. Finding best-in-class performance and which organizations represent best practice requires third-party intermediaries to access relevant indicators and multiple datasets.
- Best Value: Best value is a combination of price, performance, quality, and total life costs that provides the greatest overall benefit. The value criteria can cover any number of factors, from cost to sustainability to how much time you'll save using an item.
- Budget: A budget is a plan that an organization creates to control costs, prevent overspending, and help the company reach its goals. Budgets are usually prepared at the beginning of the year and used during the year to measure performance.
- Bullwhip Effect: Also known as the Forrester effect, occurs when demand for a product increases due to supply slowdown. It occurs when there is a change in demand from retailers, resulting in an amplification of orders not only to supplying firms but to other levels of the supply chain. This change in demand at one level of a supply chain leads to a distorted perception of actual market demand.
- Business Case: A business case is a way to make decisions. It's like a report, but it's more transparent because it shows you all of the options and how they were evaluated. The purpose of a business case is to evaluate the merits of the options available to you. It provides an evaluation framework that forces you to think about what is really important when making decisions and helps you avoid being clouded by emotion or partial perspectives. In addition, it allows you to be held accountable for your decisions in the future, creating transparency around problem resolution.
- Buyer: The term "buyer" is commonly used to describe a person whose job involves acquiring goods and/or services on behalf of others. Organizational buyers acquire goods and services for their own organization; retail buyers acquire goods and services for resale.
- CAPEX: Capital expenditure, or CAPEX, is an amount an organization spends to either acquire or upgrade a long-term asset and is considered a major investment by that organization. CAPEX is considered a capital expense, not an operating expense. CAPEX can refer to an investment that provides the basis for future operations of the business, or it may be regarded as part of the cost of maintaining the business's assets.
- Carbon Footprints: Carbon footprints are used to assess the amount of carbon dioxide (CO2) and other greenhouse gases that are emitted as part of an organization's supply chain, including all of its direct and indirect activities. It can also be applied to events, products, or people. When organisations commission an emissions assessment, they are able to understand, measure, and monitor their impact on the environment.
- Carbon Credit: Carbon credits are marketable certificates that represent the right to emit one tonne of carbon dioxide or the equivalent amount of any other greenhouse gas, and they are part of an international effort to limit emissions of greenhouses gases.
- Carbon Offset: Carbon offsets are a way to offset your carbon footprint. They allow you to pay someone else to absorb or avoid the release of a tonne of CO2 somewhere else, thereby negating or reducing the impact of emitting one tonne of CO2 by you. Carbon offsets are credited in metric tonnes, and one carbon offset represents the reduction of one metric tonne of carbon dioxide or its equivalent in other greenhouse gases.
- Carbon Neutral: Many companies and organizations have adopted the practice to go carbon-neutral or have a net-zero carbon footprint or a net-zero carbon emissions position. This means that they actively work to reduce the amount of carbon they create while also seeking to balance out their measured amounts of carbon created by removing an equivalent amount of carbon from the environment.
- Carbon Tax: If you're a big company that produces a lot of carbon, you've probably heard about the idea of 'carbon taxes.' These taxes and trading schemes ensure carbon emitters pay the 'true' cost of their actions today. Under a tax, emitters are incentivized to reduce their carbon footprint, as the more carbon they produce, the more tax they pay. Under a trading scheme, emitters are granted a permit to produce a certain amount of carbon, and if they reduce their emissions below that cap, they can trade their permit for their unused emissions. If they produce too much carbon, they need to buy additional permits on the market from those with unused credits.
- Category: A category is a group of goods or services with similar characteristics. Categorization includes grouping products by their characteristics and then sub-classifying those categories into more specific groups. The most widely used classification structure is the UNSPSC (United Nations Standard Products and Services Code).
- Category Analysis: Category analysis seeks to develop a comprehensive understanding of the stakeholders, demand profile, supply chain, suppliers, and supply market characteristics. This approach is more than just spend analysis. It requires identifying the stakeholders and their interests, as well as gathering data on the competitive landscape of the industry. Category analysis looks at industries as a whole instead of just examining one supplier.
- Category Management: Category management is a strategy that companies use to ensure demand is met with supply and hence, is a prerequisite to supply chain management. It's basically an understanding of the category in terms of the attributes of demand for the category and the supply market for the category. Such a holistic approach to category management has many benefits, including increased sales, cost savings, and environmental sustainability.
- Centralization: Centralization is the process by which an organization consolidates its functions, activities, and decision-making into a particular location or group of people. Several factors can contribute to the movement towards centralization within an organization. With the advent of technology, for example, it has become more efficient for companies to centralize their spend management function due to the capabilities of tools like spend management platforms.
- Change Management: Organization-wide change management is the structured approach to aligning individuals, teams, and organizations from a current position to a desired future state. It is most commonly associated with transitioning from a traditional human-centric procurement function to a more agile digital procurement strategy.
- CIP: In the context of ocean shipping, the Incoterm "CIP (Carriage and Insurance Paid To)" means that the supplier pays for carriage and insurance up to the named port of destination, but risk passes to the buyer when the goods are handed over to the first carrier.
- Commodities: Commodities are goods that are frequently supplied by many different producers, who are in competition with each other. The price of a commodity is determined by the supply and demand for the good, as well as the number of potential buyers of that good. A good is considered a commodity if it exhibits certain characteristics: first, it is available from numerous producers at any given time. Second, there may be some variation in the quality of the product, even though all products within a commodity category are considered equivalent. Third, a number of sellers must be active on the market for that good at any given time to ensure that its price remains stable. Some examples of commodities include wheat and sugar, which can be produced on a farm or extracted through mining processes, such as coal and gold.
- Compliance: Compliance means to comply with a legal agreement or established standards, goods, services, and/or processes must adhere to specified requirements.
- Consumable: Consumables are products that are purchased repeatedly for repeated use, such as printer paper, cotton balls, bandages, etc.
- Contract: A contract is an agreement between two or more parties to perform specific acts and is legally enforceable.
- Contract Management: Procurement contract management is the process of managing contracts related to purchasing goods, services, or even both. It entails negotiating the terms and conditions in contracts with vendors, partners, or customers.
- Corporate Social Responsibility: Corporate Social Responsibility (CSR) is a concept that encourages companies to take responsibility for their actions towards people, the planet, and profit. The implementation of CSR has a clear impact on procurement, as it encourages organizations to adopt sustainable practices, standards, and specifications in their supply chain.
- Cost: Cost is the full economic value of an item. It is the price paid in cash or the opportunity cost of any expenditure made and includes all costs incurred in the creation of a product or service. The term 'cost' is used to describe the amount of money spent on producing goods or services, and there are many different measures of 'cost' in accounting.
- Cost Avoidance: Cost Avoidance is a reduction in cost resulting in a spend that is lower than would otherwise have been if the cost avoidance exercise had not been undertaken. This is done by negotiation or via using alternative suppliers. For example, when a supplier asks for too high of a price increase, we can negotiate it down to something more reasonable. This is an example of cost avoidance. Similarly, bulk orders can also help avoid costs.
- Cost Benefit Analysis: To determine a project's feasibility and explore alternative options, a company may wish to undertake a [Cost Benefit Analysis] (CBA). The calculation involves comparing each option's total expected cost against the expected benefits to determine whether the benefits outweigh the costs and, if so, by how much. CBA is useful for procurement management in validating that the total cost of each option is fully costed and that the benefits proposed are realistic in both scale and timing.
- Cost Drivers: Cost drivers are structural factors that influence the nature and level of costs incurred by business activity. They can be related to the value chain and include the scale of purchase, learning, supply chain linkages, vertical integration, and location. There are broadly three main types of cost drivers: 1) Internal cost (or structural) drivers, 2) Market-based cost (or non-structural) drivers, and 3) Financial value chain cost (or supply chain) drivers.
- Data: Data is the raw or lowest level of information from which knowledge can be derived after gathering and processing it.
- Data Management: In procurement, data management is the process of gathering, organizing, assessing, and maintaining all the data generated by a procurement organization. In addition, it also includes many other methods and functions to make this data accessible, accurate, analyzable, and thus, actionable.
- Decentralization: Decentralization is the process by which decision-making abilities are dispersed closer to the point at which decisions have their consequences and rely less on the central direction. In other words, decentralization is about moving power away from the top and distributing it throughout an organization.
- Deflation: Deflation is the opposite of inflation. It's a decrease in the general prices of goods and services. The inflation rate goes below 0% when this happens, meaning prices actually drop. Deflation can be good or bad: Good deflation occurs when the economy has grown so much that there is a surplus of goods and services (too much stuff) and no one wants to buy anything because they can get it cheaper later, so they wait until it decreases in price. Bad deflation occurs when prices drop lower than expected because customers are uncertain about the future.
- Demand Forecasting: Demand forecasting is the process of estimating the quantity of a product or service that will be purchased. It is an integral part of supply chain management. Demand forecasting is often referred to as "forecasting demand," "demand planning", or "demand analysis." It can be defined as a supply chain process in which future demand for products and services is projected at a market segment level, typically in terms of sales, capacity, and inventory requirements.
- Demand Pull: Demand pull is a method of supply chain management in which the trigger for supply is customer demand. In a typical demand-pull scenario, a supplier will place an order with their manufacturer or distributor when they reach a certain trigger point. The trigger point is the point at which a certain level of demand is reached, and it may be calculated by suppliers themselves or advised by their manufacturers or distributors.
- Distribution: In logistics and supply chain management, distribution refers to moving materials or products from one supply chain participant to another.
- Downtime: Downtime is a period of time when systems are unavailable. Downtime often occurs for scheduled maintenance and unplanned outages. Service level agreements may specify the minimum uptime that a system should provide.
- Delivery at Terminal: Delivery at Terminal (DAT) is a common trade term that refers to a shipment of goods being delivered by ship to a port or terminal designated by the seller. The seller pays for carriage to the terminal and assumes all risks up to the point of delivery. The buyer has to arrange and pay for import duty and transport to the final destination, which may be an inland port or site where the goods are processed into finished products.
- DIFOT or Delivery in Full and on Time: DIFOT combines the completeness of delivery and the timeliness of delivery into a multidimensional measure of supplier performance. It is calculated by multiplying the In-Full rate by the On-Time rate, both as percentages.
- Demand Management: Demand management is a process that involves understanding and influencing the way products are bought and used. It involves understanding what is bought, by whom, when, how, and why, and then seeking to change patterns of consumption so that total cost is minimized. For example, procurement processes may negotiate the rate for electricity so that it is purchased at the best possible tariff, but if usage is cut, this will result in the largest savings of all.
- Downstream: Downstream procurement activities can be thought of as the steps in a procurement process that occur after the contract is let or purchase order raised.
- e-Catalog: An e-catalog is an online catalog on which buyers can order and pay for goods and services from approved suppliers.
- e-Procurement: The concept of e-Procurement involves buying and selling goods and services using web-based applications. The significance of e-Procurement is not simply the automation of workflows such as requisitioning, creating purchase orders, and receiving and paying for goods. It also enables you to locate potential suppliers, review product choices, submit a quotation request in response to a Request for Proposal (RFP), schedule an e-Auction, or participate in an e-Marketplace.
- Early Procurement Involvement: Procurement early involvement is a strategy that has been used in the supply management field for many years. It involves the procurement department being involved in the project at an early stage of evolution when the nature and timing of demand, specification, sourcing strategy, and market engagement are still being defined. This allows procurement to have a strong voice in shaping the scope and direction of the project, which can result in positive outcomes for both buyers and suppliers.
- Early Supplier Involvement: Early supplier involvement is a process by which the client and supplier participate in the development of the project specification, requirements, or design during the concept phase. By involving the supplier early on, the client has an opportunity to clarify its requirements before any proposals are submitted by suppliers.
- Ethical Sourcing: Ethical sourcing means that products and services are procured responsibly and sustainably. This is a growing field within the business world because it's not just good for the environment but also for business. The more companies source responsibly, the more they reap benefits like increased productivity, higher product quality, and lower costs.
- Evaluation: When it comes to procurement, there's a lot of evaluation that goes into the decisions that are made. In a nutshell, evaluation is the process of determining the value, quality, importance, or worth of something or someone. This happens in organizations every day in processes like approving a potential supplier, deciding which offer represents the best value, and deciding whether to single source or adopt a different strategy.
- Expression of Interest: An expression of interest is an official notice given to potential suppliers of goods or services, inviting them to register their interest in being considered for a prospective purchase. It can be used as a tool to help buyers assess the level of competition in their supply market.
- ERP: Enterprise resource planning (ERP) is a computer-based system that integrates several different business processes of an organization by sharing information across many departments. Organizations use ERPs to manage day-to-day business activities such as accounting, procurement, project management, risk management and compliance, and supply chain operations.
- European Article Number: The European Article Number, now known as the International Article Number, was established in 1973 by the International Organization for Standardization (ISO), and it is a standard classification for barcoding products.
- Exchange Rate: An exchange rate between two currencies is the rate at which one currency can be exchanged for another. The spot exchange rate refers to the current exchange rate, and the forward exchange rate refers to the rate of exchange that a bank or other financial institution quotes and trades today, but for delivery and payment on a specific future date.
- Fairtrade: Fairtrade is a movement that has been growing steadily since it originated in the late 1980s, but it hasn't been without controversy. The movement was designed to help producers in developing countries build fair and equitable trade relationships. The underlying idea behind fair trade is that producers in developing countries should be paid a fair price for their goods since they aren't as developed as producers in developed countries, and so they need a leg up.
- Fleet Management: Fleet management is a quality service provided by professionals who ensure that the vehicles used by organizations are in optimal condition. Fleet management is extremely important to businesses, as the procurement of vehicles can be costly, and without proper maintenance, they can cause safety hazards.
- Flexible Warehousing: Flexible warehousing is a term used to describe any technique which allows the short-term ability to increase or decrease storage space. This ability can be advantageous in both the warehousing and shipping industries and allows for better response to the demands of customers and the fluctuations of supply.
- Forward Buying: Forward buying is a common supply chain strategy that helps businesses to buy more than they need for the sake of avoiding possible future price increases. Forward buying can be used for a wide variety of products, including raw materials, supplies, and finished goods. A purchasing manager might decide to engage in forward buying to ensure that the business will have enough of a certain product when it needs it.
- Fraud: Fraud is a criminal act of deception intended to benefit financially or otherwise. It takes many forms, from bribery and corruption to forgery, identity theft, and credit card fraud. The term is often applied to any criminal act in which the perpetrator attempts to gain a material benefit by deceiving others.
- Gap Analysis: Gap analysis, also known as a GAP analysis or comparison analysis, is a type of assessment that measures the difference between current conditions and future goals. Companies use gap analysis to identify where they need to improve in order to reach their goals or where they are already doing well so they can keep doing things that way.
- Global Sourcing: Global Sourcing is the process of sourcing from international vendors and building a worldwide supply chain. This can help businesses to reduce costs and find new markets.
- Greenhouse Gas: A Greenhouse Gas (GHG) is a gas in the earth's atmosphere that absorbs and emits heat, and it is the fundamental cause of the greenhouse effect. The primary GHGs in the atmosphere are carbon dioxide, methane, nitrous oxide, and ozone. GHGs affect the temperature of the earth and contribute to global warming. In recent years, corporate social responsibility (CSR) initiatives have sought to minimize an organization's carbon footprint by understanding, managing and reducing the creation of carbon in their supply chains.
- Green Procurement: Also known as sustainable procurement, green procurement is a strategy that minimizes an organization's adverse environmental impacts by responsible procurement of goods and services. This can include considering environment-related factors during the supply chain, such as: eliminating or reducing waste production, reducing carbon dioxide emissions, using recycled materials, and minimizing water usage. An organization can support sustainable development and environmental protection by considering these factors during the procurement process.
- Hedging: Hedging is a deliberate strategy adopted to limit the potential for future losses. It means buying similar products from two or more markets to mitigate the effects of price increases. There are three common hedging strategies: cost, calendar, and price.
- Hybrid Procurement: Often referred to as center-led, hybrid procurement is an organizational model combining both centralized and decentralized structures. Large, complex organizations often use it. The optimal implementation of the model is dependent on the size and complexity of the organization itself, as well as on the culture of specific departments within that organization. Hybrid procurement can be implemented in many different ways, depending on the organization's individual needs.
- Indigenous Procurement: This means purchasing goods and services from Indigenous-owned businesses. It is an important way to support indigenous communities and strengthen the economy.
- Indirect Procurement: Indirect procurement is the practice of buying goods or services necessary for the day-to-day running of an organization but not involved in the creation of a business's core product or service. Indirect procurement can also be referred to as "non-core procurement." These purchases are usually made without much oversight since they are not directly connected to the company's revenue generation. However, these purchases can still have a significant impact on a company's bottom line.
- Inflation: Inflation is the term used to describe a rise in the general level of prices in an economy over a period of time, which is usually expressed as an annual percentage. It's measured using indices such as the consumer price index [CPI] and producer price index [PPI]. Inflation has been a key target of economic policy for most governments as high levels of inflation devalue the value of assets and earnings.
- Information: Information is data that is structured, sorted, and analyzed to reveal patterns and make decisions. Data can be structured in such a way that information is revealed. For example, raw data about purchases may be sorted by supplier, revealing which suppliers have been awarded few orders, and those may be candidates for a reduction in the supply base.
- Integration, Data: Data integration is a process that can be done on multiple levels, often in different ways. The mechanisms involved in data, processes, or systems coming together are not a new concept and have been used for decades in order to achieve the goal of having data from various sources integrated into one place. Having this information in one place allows for a seamless view of the information, which can significantly reduce errors or discrepancies within the data and save time when trying to find specific information.
- Inventory Cost: Inventory costs are incurred by a business to hold its supplies in a warehouse for too long. This cost can be reduced through a Just-in-Time supply management strategy.
- Invoice: An invoice is a document that describes what has been done or purchased, in what quantity and at what price. This document will also include the agreed payment terms, which will trigger the payment process.
- Joint Venture: Under a joint venture, two parties pool their resources and create a new business to accomplish a shared goal.
- JIC: Just in case or JIC is a business-continuity strategy in which goods are stored in excess of immediate need but within limits allowing for a supply shock.
- JIT: Just in time or JIC is an inventory management technique that delivers goods to a manufacturing facility just as they are needed, reducing inventory costs and waste.
- Kaizen: Kaizen is a Japanese word meaning "good change." The Kaizen methodology focuses on small continuous improvements across every part of an organization. The aim of kaizen is to eliminate waste or to create a lean manufacturing environment by improving standardized activities and processes. In contrast to Six Sigma or other initiatives that may rely upon 'top down' initiatives and external experts, kaizen is a 'bottom up' initiative involving the generation of simple ideas by staff involved in the process. These are also known as 'quick-wins' or 'low-hanging fruit' and can lead to incremental improvement.
- Knowledge: Knowledge is a broad term encompassing information, facts, and skills gained through experience, training, or education. In procurement, knowledge is the ability to make decisions based on information, so the richer the information, the more likely it is that better decisions will be reached.
- KPI: Key performance indicators or KPIs are measures used to evaluate a company's production and quality.
- Key Risk Indicators: Key risk indicator or KRI is a standard method used by sourcing managers to identify the risk level of a specific activity.
- Kraljic Matrix: A Kraljic Matrix is a tool for identifying the strategic importance of categories by classifying them as either "vital," "preferable," "indifferent," or "avoid." It helps buyers identify the type of relationship they should consider building with their suppliers and what levers to use to drive down procurement costs.
- Lead Time: Lead time is a term in supply chain management that refers to the time between placing an order with a supplier and receipt of goods. It is an important component of a company's planning.
- Lean Supply: A lean enterprise achieves its full potential only when the participants in its supply chain--upstream and downstream suppliers--adopt similar behaviours and processes. In order for this to happen, each participant must pull inventory through the supply chain rather than store it, eliminating waste and creating value.
- Legacy Systems: Legacy systems are outdated software or systems that may be holding an organization back from achieving its goals.
- Letter of Credit: A Letter of Credit [LC] is a payment method where a buyer's bank guarantees payment to the supplier's bank on the condition that certain conditions are met, notably that the goods have been shipped. When the suppliers' bank presents a Bill of Lading--a document issued by a carrier detailing the shipment--as evidence of shipment, the buyer's bank credits the supplier's account. The supplier then uses the Bill of Lading to pick up the goods from the carrier.
- Letter of Intent: A letter of intent is a document outlining the status of an agreement that has not yet been finalized. It aims to give some comfort to one or both parties that they can anticipate a final contract will be forthcoming.
- License to Operate: A license to operate is a community's sanction, granted through public support or official permission, to a business or organisation to use property or conduct business in a certain area.
- Liquidated Damages: Liquidated damages are a pre-agreed sum of money that the buyer can claim from the supplier in the event that the supplier breaches their obligations under a contract. The purpose of liquidated damages is to restore the parties to where they would have been if the breach had not occurred, so they are intended to be compensatory rather than punitive (although this does not mean that they cannot be high). This means that damages cannot be arbitrary but must be reasonable and represent an actual loss suffered by the buyer as a result of the breach.
- Local Sourcing: Local sourcing is the practice of contracting with local businesses for goods and services.
- Logistics: The term logistics comes from the Greek words logos and taxis. Logos refers to logical order, while taxis means control or movement. Put together, logistics refers to a system for organizing and controlling the flow of goods from their initial point of production all the way through to their final destination.
- Low-Cost Sourcing: Low-cost country sourcing is a strategy of sourcing categories from countries with lower labor and production costs in order to minimize total cost. Low-cost countries include China, India, Malaysia, Indonesia, Thailand, Vietnam, and Brazil. While the focus on "low cost" highlights that this strategy is not necessarily low risk, supply chains are often elongated with greater risk of interruption.
- Lump-Sum: Clients agree to pay a fixed price for completion of a project, with payment made in installments. This is called lump-sum pricing, and it's the preferred choice when the scope of work is defined with some certainty. If that scope changes, the client may face additional costs. For this reason, lump-sum contracts are most appropriate when the scope of work can be clearly defined.
- Make or Buy: The make or buy decision determines whether an organization will produce goods or services internally (make) or purchase them from suppliers (buy). Organizations that understand their core competencies and know in which activities they have a competitive advantage over competitors find it more advantageous to manufacture goods or perform services internally.
- Maverick Spend or Purchasing: A maverick spend is an instance in which a business purchases goods or services from suppliers outside an established procurement policy.
- Market Analysis: When developing a procurement strategy, most procurement processes analyze the demand for the category alongside the attributes of the supply market to develop an appropriate strategy. Market analysis is the systematic review of the characteristics, capacity, and capability of both the supply market and the buying organization's needs in order to understand the extent to which both the supply market and buying organization meet each other's needs.
- Market Engagement: In procurement, market engagement is the process of interacting with potential suppliers.
- Matrix Structure: Matrix structures are organizational models that balance a centralized hierarchy with a decentralized network of coordinated activities. Matrix structures are suited to industries and companies whose products or services often change, as the matrix structure allows frequent changes in structure to be accommodated in the absence of rigid management hierarchies.
- Minimum Order Quantity (MOQ): The minimum quantity of units a supplier will accept for delivery.
- Monopoly: Monopolies are when one supplier supplies a particular category due to barriers to entry like patents or barriers to exit like mergers. Monopolists maximize profit, set the price of the category in the marketplace, and restrict the supply of their product or service.
- Negotiation: Negotiation is a conversation between two or more parties to make an agreement, such as for a bulk discount on specific goods.
- Offer: Legal definitions differ on what constitutes an offer, but in general, offers are made by businesses in the form of bids, quotes, or tenders, which may be accepted by the buyer. Usually, the offer specifies the terms upon which the supplier is willing to be bound—including price, date of delivery, payment terms, and a description of what is being offered. One of the essential elements for validly forming a contract is the existence of an offer.
- Offshoring: Offshoring is a strategy used by companies to reduce costs and lower risk by outsourcing business processes or services to low-cost countries (LCCs).
- Offset: In the world of international trade, offset is a form of countertrade, which involves an agreement to purchase a specified amount of product from a particular country. The principle behind offset is that if one country provides a good or service to another, then it should receive compensation for the provided good or service. Offsets are most commonly used in the defense and aerospace industries.
- Onboarding: The processes involved in bringing a new supplier into an existing system or platform.
- Oligopoly: Oligopoly is a market structure in which only a few suppliers exist. Regulators classify the industry as oligopolistic if the four largest firms in the market collectively control more than 60% of the sales. The top players usually have some pricing power, as they are the largest companies and may be able to set prices; they are referred to as "price makers."
- OTS: Off-the-shelf (OTS) is a term used to describe products or services that are standardized and cannot be modified.
- Outcomes-Based Procurement: A procurement strategy that defines customer needs and encourages suppliers to find innovative ways of meeting those needs.
- Outsourcing: A company may decide to outsource if they believe they have an opportunity to save money by doing so. One common reason for outsourcing is when a company decides that it could be more profitable for them to purchase goods from an outside source than to produce them in-house. An example of this would be a large retail chain that purchases its clothing from China rather than producing it in its own factories in North America.
- Pareto Principle: The Pareto Principle, also known as the 80/20 rule, is a rule-of-thumb that suggests that 80% of spend will come from 20% of suppliers, and 20% of spend comes from 80% of suppliers. This principle has been applied to numerous business situations, including marketing and manufacturing.
- Partner: A partner is a special type of supplier with which a buyer shares more than a transactional relationship in which both parties work to reduce waste, reduce cycle time, and create joint profit and other forms of value.
- Patent: A patent is a temporary monopoly that is granted for any device, substance, method, or process that is new, inventive, and useful.
- Performance Review: Performance reviews are a tool used by buyers and sellers to monitor and evaluate performance. As part of supplier relationship management, buyer and seller meet periodically to ensure adherence to standards.
- PEST Analysis: As the analysis of political, economic, social and technological factors surrounding a business, PEST analysis is often used as an initial framework to analyze the external environment of a company or market. The analysis is typically presented in a table format.
- Portfolio Analysis: One of the most widely used tools in procurement is portfolio analysis, based on the work of Peter Kraljic. This tool can be applied to any number of products and services. According to Kraljic, companies should not mechanically request bids for each of their requirements. Instead, he believes that companies should consider two key factors in developing their supply strategies: the strategic importance of a given category and the complexity of the market in which it operates.
- Price: The price of a good or service is the monetary sum paid for the good or service. Price levels are an outcome of competitive forces in the marketplace, including supply and demand.
- Price Variation Formula: Price variation formula is a methodology for adjusting prices in the future based on levels of cost factors such as labor, materials, fuel, and others.
- Procurement: Procurement is made up of all the day-to-day activities concerned with developing and implementing strategies to manage an organization's spend portfolio in such a way as to contribute to the organization's overall goals, increase value released, and minimize the total cost of ownership. Procurement is a specific term that is different from purchasing, which focuses more on the tactical acquisition of goods and services. Procurement encompasses both these aspects but also helps develop strategies to make sure that there are fewer wasted resources.
- Procurement Analytics: Procurement analytics can be defined as a method of collecting and analyzing data relating to expenses involving finished products or services. Procurement data, or cost-based data, can be broken down into purchase information, accounts payable, credit card expenditures, and so on. Analyses of such data can aid businesses in making informed strategic decisions.
- Pcard: A procurement card or Pcard allows an organization to buy goods and services using a credit card instead of a purchase order. Some organizations started using PCards for low-risk purchases, such as travel and entertainment, but more and more organizations use them for other goods and services.
- Procurement Process: The procurement process is the series of steps used to obtain goods and services, including identifying needs, RFQs (Request for Quotations), selecting a supplier, negotiating the terms of a contract, receiving the goods and services, paying for them, and managing their performance.
- Profit: Profit has several definitions. Some of them are gross profit, which is the difference between sales revenue and the cost of goods sold; operating profit, sometimes known as Earnings Before Interest and Tax [EBIT]; and net profit calculated as total revenue minus total expenses.
- Profit and Loss Statement: The profit and loss statement is one of the key financial statements provided by a company. It provides information about the company's overall performance over a specified period. It measures income minus expenses over the given period of time, to determine whether the business made or lost money.
- PPCA: Profit, price, and cost analysis, often called PPCA, is a financial framework for categorizing suppliers in the supply market, their pricing strategies and the total cost of the category.
- P2P: Also known as procure-to-pay or purchase-to-pay is a subset of the procurement process from purchase through to payment and is often referred to as “operational procurement”. P2P systems integrate accounts payable with procurement.
- Purchasing: Purchasing describes those transactional processes concerned with acquiring goods and services, including payment for invoices. It differs from procurement in that its scope is far more limited and reactive; it does not normally encompass strategic planning.
- Purchase Order: A purchase order is a document that a buyer sends to a seller requesting products or services, including quantities, specifications, and agreed prices.
- Purchase Request (PR): A document that can be issued for a number of reasons, often for the purpose of initiating a procurement action.
- Puffery: Puffery refers to exaggerated statements about a product or service that aren't meant to be taken literally.
- Quality: The standard ISO 9000 defines quality as the degree to which a product's characteristics fulfill requirements. Requirements are needs and expectations, and they refer to a product's ability to satisfy customer demands.
- Quality Control: Quality control is the practice of ensuring that the products and services received meet or exceed your expectations.
- Qualitative Analysis: Qualitative analysis involves non-quantifiable information, such as statements and opinions.
- Quantitative Analysis: Quantitative analysis is concerned with numerical or statistical data.
- Quid Pro Quo: In contract law, quid pro quo means "something for something" or an exchange of benefits. To be considered a contract, there must be an exchange of value, which can be monetary or not. When negotiating with a supplier, a quid pro quo is the exchange of two different negotiable variables—such as price and delivery terms—in order to reach an agreement.
- Quotation: A quotation is a statement from a supplier, often in response to an RFQ, that provides the costs of goods or services to be provided in a specific period.
- Rationalization: Rationalization is a strategy that companies use to increase their leverage by reducing the number of alternative solutions they purchase to meet the same need or by reducing the number of suppliers they use.
- Receipt: A goods receipt is an official document that records goods and services delivered. The supplier can present proof of delivery, and the buyer can generate a goods receipt note and invoice, which serve as proof that payment may be made.
- Requisition: A requisition is a request from the customer requesting that a purchase order be raised for goods or services he/she wants to buy.
- Responsive Supply Chain: A responsive supply chain is one that is sensitive to meeting customer requirements. This means planning for delays and other potential inefficiencies so that the company can deliver the products it needs when and where the customer needs them. A responsive supply chain will have a flexible supply chain with alternative sources of product, as well as a resilient transportation system with backup plans and contingency measures in case of delays.
- Reshoring: Reshoring refers to the trend of some companies moving business operations back to their original countries.
- Reverse Auction: A reverse auction is a type of auction where vendors place bids for the amount they are willing to be paid for a specific good or service. The lowest bid wins.
- RFI: A Request for Information, or RFI, is a document that solicits information about suppliers and their capabilities and solutions. It is generally issued before the RFP process.
- RFP: Request for Proposals are formal market surveys issued by buyers. These surveys invite commercial offers from potential suppliers and give potential suppliers the opportunity to learn more about the buyer's business and its needs.
- RFQ: A document that requests detailed pricing and payment information from vendors in order to evaluate them based on price. RFQs are sent out to numerous vendors in order to gather price quotes from multiple sources, with the goal of securing competition and evaluating product or service variants along other dimensions of value.
- RFT: A Request for Tender is a document sent to prospective suppliers to elicit bids on a project or service. The RFT is usually employed when the scope of work is clearly defined, and the specifications are conformance, meaning contractors are expected to conform to the buyer's standards.
- RFx: The generic name for market inquiries refers to any "Request-for" documents such as RFPs and RFQs.
- Risk Management: Risk management involves identifying, evaluating, prioritizing, mitigating, and controlling risks to an organization.
- Risk Mitigation: Risk mitigation involves taking actions to minimize the impact of a risk event.
- Savings: Savings represent financial measures of procurement effectiveness, often quantifying cash and non-cash benefits.
- Scenario Planning: Scenario planning is a technique for exploring possible futures by describing a number of scenarios based on combinations of events.
- Scope of Work: The scope of work is the range of activities you must carry out as part of a contract.
- Segmentation: Segmentation is a method of dividing up a large group in order to examine its parts further. Market segmentation is typically done by breaking down supply markets into specific subsets that share similar characteristics.
- Service Level Agreement: A service-level agreement [SLA] defines the services that one party provides to another and states the quality of those services, as well as the rights and obligations of both parties.
- Should-Cost Analysis: A should-cost analysis is used to break down the cost of a product or service into its various elements so that a realistic estimate can be made of what a project should cost.
- Show Cause: It is a procedure where the buyer is obliged to comply with the provisions in the agreement between the parties as to how the contract may be terminated.
- Six Sigma: A Six Sigma quality management initiative is a suite of practices to reduce variance in process outputs. A process with a Six Sigma rating produces 3.4 defects per million cycles.
- Socially Responsible Procurement: Socially responsible procurement (SRP) is a practice in which organizations design their procurement processes to deliver social outcomes as well as, or as an alternative to, normal economic measures of value.
- Sourcing: The sourcing process includes every activity that revolves around identifying, assessing, and selecting potential suppliers, as well as engaging with an appropriate supplier.
- Sourcing Strategy: A sourcing strategy is an organized plan for acquiring goods and services over time.
- Spend Analysis: Spend analysis is a way of analyzing spend data to find cost savings or efficiency improvements.
- Spend Data: The term "Spend Data" refers to all the transactional data that is generated by organizational spend. This data can be analyzed to provide insights into how an organization spends money and forms procurement strategy.
- Spend Cube: The Spend Cube is a multidimensional review of spend data is a tool that helps businesses better manage their spend. It offers insights into how money is spent across the organization and how it can be saved by making particular changes.
- Spend Leakage: Leakage refers to the extent to which category spend is placed with suppliers other than the approved suppliers. This can be expressed as a percentage of total spend, and affects 'indirect categories' more than direct ones.
- Spend Threshold: In a decentralized system, spend threshold is the monetary threshold over which procurement will get involved in a purchase decision.
- Spot Buying: Spot buying is used by businesses to buy goods to meet immediate needs. It involves frequent orders raised in the present at the prevailing price. Some businesses may use spot buying in a falling market, as it can minimize expenditure.
- Spend Classification: Spend classification is a procurement process that groups spend data by item category and assigns it to predefined categories in a Hierarchal Taxonomy or framework to bring visibility and clarity to spend data.
- Spend Management: Spend management is a term used to describe various procurement activities made to control spending. These activities help companies mitigate risks, enhance supplier relationships, improve efficiency, and regulate compliance.
- Strategic Procurement: Strategic procurement is a collective term used to encompass different procurement processes that support an organization's long-term development. It enables an organization to achieve its objectives by improving the effectiveness of the underlying process, optimizing the purchasing decision-making process, and enhancing the quality of purchased goods and services. Strategic procurement is a continuous and organization-wide process that helps create value through upstream activities to provide better visibility, market intelligence, and collaboration across the teams, thus making them proactive and agile.
- Strategic Suppliers: Strategic suppliers are those that are vital to a company's business operations. A supplier might be considered strategic if it supplies a product that is essential or unique, which would have an impact on the business if it failed to provide the product.
- Strategic Sourcing: Strategic sourcing is a process designed to purchase the best products and best services for the best value. It is not a one-time effort but a systemic process that continuously re-evaluates the company's purchasing activities (activities involving an acquisition or direct buying of goods, commodities, and services).
- Supplier: A supplier is an external organization that delivers a service or good to a buyer. While suppliers are typically businesses, they can also be individuals, groups, governments, or other entities. Some of the more common terms used to describe suppliers include vendor, service provider and contractor.
- Supplier Appraisal: Appraisal refers to the evaluation of potential suppliers. It differs from vendor rating, which is the assessment of existing suppliers. Typically supplier appraisal is undertaken on a multifunctional basis and involves a combination of desk-based evaluation, such as analysis of annual reports and field-based assessment such as a product trial, visit a reference site, or assessment of providers facilities.
- Supplier Development: Supplier development is a structured program, often undertaken in tandem with an organization's strategic plan, to improve the capability of suppliers. Supplier development is resource-intensive because it typically focuses on key long-term suppliers with whom cooperation is appropriate.
- Supplier Diversification: It is the practice of using two or more suppliers for a product or service.
- Supplier Evaluation: Supplier evaluation is the process of assessing suppliers, which can include both qualitative and quantitative measures.
- Supplier Management: Supplier management or supplier relationship management (SRM) is a management system that helps an organization to manage and improve relationships with its suppliers to ensure maximum value is obtained. Supplier management enables organizations to increase profits by reducing costs, improving productivity and customer service.
- Supplier Scorecard: A supplier scorecard is a tool used to track and assess the performance of suppliers towards goals and targets agreed upon in the contract.
- Supply Base: The supply base is the network of suppliers that procurement manages and contracts with.
- Supply Base Management: Supply base management is a holistic approach to an organization's supply base that considers the addition of new suppliers, the rehabilitation of dysfunctional suppliers, and the delisting of disqualified suppliers. An optimized supply base can result in savings and benefits to organizations.
- Supply Base Reduction: Supply base reduction [SBR], or "supply base rationalization," is a strategy for reducing the number of active suppliers in the supply base. The motivation for SBR is to consolidate the organization's spend to a smaller number of higher-value suppliers and to leverage better value from those relationships.
- Supply Chain: A supply chain is a group of organizations that provide goods and services to each other to deliver value to their customers. The participants are linked through shared linkages, such as being customers and suppliers.
- Sustainability: Sustainability is about meeting the needs of the present without compromising the ability of future generations to meet their needs. In practice, this means adopting a broader range of decision-making criteria than traditional economic criteria. These criteria can include social, cultural, environmental, and economic factors.
- Supplier Normalization: Supplier normalization is the process of making sure that supplier names are spelled consistently and correctly by standardizing misspellings, abbreviations, etc., either manually or with data rules.
- S2C: A source-to-contract or S2C process refers to the sequential set of steps involved in procuring goods or services. The process begins with analyzing a product or service's requirements and developing a procurement strategy. It advances to soliciting quotes and negotiating a contract before finally awarding the contract to a suitable supplier.
- S2P: The source-to-pay or S2P process manages the entire purchasing process, which can start with spend management, strategic sourcing, and vendor management, and end with accounts payable.
- Tactical Procurement: Tactical procurement is a short-term procurement strategy that is focused on fulfilling the company's immediate requirements through the best possible deals and with minimal risk. It does not look at broader business goals and objectives, and the relationship with the vendor is transactional and cost-driven.
- Tail Spend: Tail spend, also known as low-value spend or long tail, refers to the 20% of all business expenditures that occur infrequently, at irregular intervals, and without a corresponding paper trail. The purchases are often too small—or too routine—to be vetted for approval by the procurement department.
- Technical Evaluation: In the first stage of a bid evaluation, the tenderer is evaluated against the requirements specified in the RFP. This stage of the evaluation is referred to as technical evaluation and focuses on the tenderer's compliance with the requirements of the specification.
- Technology Stack: A technology stack is a suite of software solutions, each of which performs a different function within an overall process or function.
- Tenders: Tenders are formal offers suppliers in response to the RFTs and are used when there is a defined scope of work and multiple suppliers capable of bidding for the contract.
- Terms and Conditions: The terms and conditions section of a contract is the part that lays out all the legal provisions that apply to a given agreement. It may cover such topics as what happens if a party fails to live up to its obligations, how disputes will be resolved, how payments will be made, and what remedies are available in case of breach (failure to live up to one's obligations).
- Terms of Payment: In many cases, the parties involved in a business transaction will include a term in their contract that specifies the lapse of time between when the buyer receives an invoice with the correct information and when he makes a payment for the agreed sum. This is often referred to as "payment terms."
- Three-Way Match: A three-way match is an accounting process that reconciles a purchase order, the goods receipt note, and the supplier's invoice to determine whether the invoice should be paid in its entirety.
- Tier-1 Supplier: Tier 1 suppliers are those who supply products directly to the purchasing organization. Typically, a Tier 1 supplier will have more power over the relationship with their customer as they will be able to dictate the price and service provided for the product.
- Tier-2 Supplier: A tier 2 supplier is a company that provides products to a tier 1 supplier. Tier 2 suppliers often supply smaller businesses with the materials they need to operate, while tier 1 suppliers provide larger quantities of supplies to manufacturers.
- Total Absorption Costing: Total absorption costing is an approach to dealing with the allocation of overhead costs in which all the overhead costs, such as rent, rates, premises, head office administration, etc., are fully recovered by being incorporated into the costs of products created. This approach contrasts with marginal costing, in which only variable costs are allocated to products. See also Costing, Absorption.
- Total Cost of Ownership: Total cost of ownership (TCO) is the estimated cost of owning and operating a product over its lifetime, including purchase price, maintenance, and disposal costs.
- Transparency: Transparency refers to honesty and openness about financial information, keeping detailed records of transactions, and making all aspects of an operation accessible to outside parties.
- UNSPSC: In the United Nations Standard Products and Services Code [UNSPSC], each product or service is assigned to a UNSPSC segment. The UNSPSC segment is the top level of the four or five-level hierarchy, which uses the labels Segment, Family, Class, Commodity, Business Function (optional), and Supplier Characteristic (optional).
- Upstream: The procurement process can be divided into two distinct phases: upstream and downstream procurement. Upstream procurement is everything that happens from sourcing to awarding the contract. Downstream procurement is everything that happens after the contract is awarded.
- Unit of Sale: The unit of sale is the quantity of items in which a sale is expressed. In e-Commerce, it can be important to align the unit of purchase and the unit of sale.
- Unit Price: The phrase "unit price" refers to the cost of a single unit of a good or service, such as one labor hour. This is then multiplied by the number of units purchased to determine the total cost of that good or service.
- Value: The value of a transaction is defined in many ways. Most commonly, it is thought of as the sum of financial benefits realized by the buyer and seller. However, in some cases, it is difficult for the buyer to quantify these in financial terms. The term 'value' is then used more broadly to describe a range of benefits or utility derived by any party. Procurement practitioners typically use three broad areas to measure value: savings, cost avoidance, and value add.
- Value for Money: Value for money is one of the most common goals for the procurement process. When evaluating alternative offers, organizations must consider not only the lowest price but also the total lifetime cost of realizing those benefits. Typical factors taken into account in defining value for money include fitness for purpose, quality, total lifetime costs, risk, environmental and sustainability issues, and a variety of other factors relating to the contribution of the proposed solutions to the organization's overall goals.
- Variance: A variance is a figure that indicates the difference between an expected value and the actual value. It can be expressed as a positive number in business, finance, and statistics. Businesses use variances for cost accounting and budget control to track the difference between planned spending and actual spending during the course of a fiscal period or project. A positive variance means that the actual results exceed expectations; a negative variance means that plans were greater than what actually happened.
- Vendor: Vendor is the term used to describe a supplier or manufacturer. It is usually used to describe first-tier suppliers and may embrace manufacturers, distributors, or agents.
- Visibility: Procurement visibility is the ease with which procurement data or other relevant information can be found. Procurement visibility must be achieved by integrating all information pertaining to procurement in one single and easily accessible place.
- Volume Discounts: Volume discounts are an agreement between a buyer and seller where the seller offers a discount to the buyer that increases as the volume purchased increases.
- Volatility: Volatility is the degree to which a given supply and procurement market is subject to change.
- Walk-Away Point: In a negotiation, the walk-away point is the threshold or position beyond which a negotiator will decline a deal. The walk-away point can be determined by asking oneself, "What would I be willing to accept?"
- Warehouse: The warehouse is a building used to store inventory. Warehouses are typically single-story buildings with good transport links containing facilities for the receipt, storage, picking, and issue of goods. They can be made of brick, metal, or plastic.
- Warranty: Under common law, a warranty is a promise or affirmation made by one party to another that the promises will be honored. In commercial transactions, the term "warranty" refers to an assurance given by one party to another that specific promises will be honored.
- Waybill: A Waybill is a document prepared by a carrier that includes information about the shipment, including the point of origin, destination, method of shipment, consignee, and amount charged for transportation.
- Weighted Scoring: The Weighted Scoring framework is one way to assess suppliers by assigning numeric values to prioritize the things that matter most in a project.
- Wholesaler: Wholesalers are intermediaries in a supply chain who buy goods in bulk for resale to others in the same supply chain, who need smaller quantities without subsequent processing or conversion.
- Win-Win: Win-win is a concept in the negotiation where both parties work together to achieve some or all of their objectives.
- Yield: Yield is a term used in a variety of industries to describe the ratio of usable outputs to total output.
- Yield Management: Yield Management is a revenue management approach that seeks to price at different levels depending upon a number of factors, based on the premise that different customers are willing to pay different prices for the same product or service.
- Zero-Based Budgeting: Zero-based budgeting is a form of budgeting where every expense must be justified.
If you're interested in learning more about how procurement can help your business, take a look at our guide on strategic procurement. It covers the basics of strategic procurement, including what it is and why it's important. It also breaks down components of strategic procurement and discusses how they work together to maximize efficiency in your business.