Procurement terms: A

Refer to Costing, Absorption

Limiting values used in a specification that define the range of values for a particular dimension of performance that would be acceptable.

Unconditional agreement to an offer made by another party, which may lead to a legally enforceable agreement, provided other prerequisites for contract formation are met. Also, the acceptance of completion or performance of work, or delivery of a good. See also Offer.

A sampling of a proportion of performances or deliveries in order to reach a decision about acceptance of the total. For example, a 50% sampling frequency would involve testing one in two of every performance, or delivery. The sampling frequency would normally be varied in line with the risk.

Buyer specified quality control tests performed to demonstrate that the goods supplied have been manufactured to specification. Tests are usually performed on a sample and, testing may form the basis for issuing a Certificate of Compliance if the lot falls within acceptable quality levels.

In the hierarchy of sales positions, an account manager is responsible for managing the relationship with a series of accounts. Typical responsibilities include diagnosing business opportunities, planning communications, managing relationships, negotiating agreements, reporting and troubleshooting problems. See also Key Account Manager.

The period used by an organisation in which to calculate and report financial results, normally one month or 12 months.

Refer to Average Rate of Return

Department or function responsible for processing and recording payments to vendors, suppliers, and contractors for the goods and services they have provided

Accounts Receivable is the department responsible for ensuring that sums owed by external organisations as a result of the sale of goods or services are paid according to the agreed terms. Credit controllers may ensure that customer payments occur within the agreed time frame following the issue of an invoice by the seller to the purchaser. See also Accounts Payable.

Under accrual accounting, provision is made against budgets at a time when goods or services are received, rather than when the invoice for those goods and services is paid or received.

Historically, suppliers would issue an ‘order acknowledgement’ to advise the buyer that a purchase order had been received. The order acknowledgement can become part of the ‘battle of the forms’. The practice of issuing order acknowledgements has declined in some sectors, as individual transactions occur within a broader business framework, such as an over-arching contractual agreement. See also Battle of the Forms.

The word acquisition is sometimes used as a synonym for ‘purchasing’ in the context of the transactional processes associated with placing an order and arranging payment of the resulting invoice. Some commentators also use the term 'acquisition' as a generic term to subsume purchasing, sourcing, category management and procurement. When another company buys a company, ‘acquisition’ is frequently used to describe this process. See also Procurement.

Refer to Cost, Acquisition

The process of reconciliation of procurement card statements, including the verification of the purpose of the expenditure and the allocation of charges to the appropriate cost centre. This process involves allocating the amount on a statement from the card provider to a cost centre or project code. The cost of the invoice payment process using e-Commerce and a procurement card is estimated to be less than a third of the cost of the equivalent process featuring paper based purchase orders and invoices. See also Procurement Card.

An event that was not only unforeseen but also had catastrophic consequences and, could not have been prevented. Typically a natural disaster that impacted on the ability of parties to fulfil their contractual obligations.

Refer to Costing, Activity Based

An activity that can be eliminated without adversely affecting the process. The term is closely related to muda and lean thinking. Examples of typical non-value adding activities in procurement processes include clarifying unclear documentation or unclear drawings or specifications, changes in scope or design, troubleshooting invoice discrepancies, resolving performance issues etc. See also Lean Thinking and Muda.

A term applied to the practice of applying customs duty to the value of goods rather than any other dimension. A percentage premium is applied to the incoming goods based upon the invoice value.

The extra benefits or advantages that a supplier or vendor brings to a contract or business relationship beyond simply meeting the basic requirements or specifications of the requested goods or services

Refer to Alternative Dispute Resolution

Notification to a customer of despatch of the goods that they have ordered. The advice may be included with the goods, or sent electronically. See also Receipt.

This term refers to the legal relationship between two parties, in which one – ‘the agent’ - is authorised to undertake certain activities on behalf of the other. In some professional services the term ‘agency’ is the generic term for the service provider, for example an advertising agency.

A generic term applied to the practice of volume consolidation or leverage. Demand for identical or similar categories is grouped together in order to offer the buyer greater economies of scale when negotiating with potential suppliers. See also Leverage and Rationalisation.

Agility is a term used to describe the configuration of supply chains designed to service unpredictable demand for a wide variety of variants. It can be contrasted with lean supply chains, which work well when demand is predictable, variety is low and volume is high. Good linkages to actual customer demand characterise agile supply chains, such as through point-of-sales systems, rather than through forecasts. Real-time data is shared with participants in the same supply chain, and the participants may integrate some key processes, such as sharing actual inventory and order/fulfilment processes. In practice many supply chains are hybrids of both lean and agile approaches. As an example, most paint manufacturers adopt a lean approach in manufacturing a small range of base colours. The base colours are then mixed on demand by the retail outlet to produce a wide variety of colours for the ultimate consumer; an example of an agile approach. See also Lean Thinking and Supply Chain.

The word agreement can have both informal and formal meanings. Informally the word may be used to describe a contractual agreement between parties: ‘the agreement has three months to run’. The formal meaning of the word is used in a legal context to describe one of the prerequisites for considering a contract valid. The parties must have ‘a meeting of the minds’, sometimes called ‘consensus ad idem’, meaning that for a contract to exist the parties must share a common understanding, and there must be no mistake as to what is being agreed. See also Contract.

An air waybill is a document used for airfreight that forms a record of what is shipped. It is a vital document in the handover of freight between supply chain participants. The document usually states what is being shipped, shipping instructions and shipping costs.

The amount of time each participant speaks or contributes to the discussion

Refer to Supply Chain Alignment

In the spectrum of business relationships an alliance represents a co-operative but non-controlling relationship between two or more parties, often motivated by shared goals such as cost reduction, or improved customer service. Alliances are similar to partnerships, though the parties in an alliance may co-operate under a formal agreement, perhaps including sharing of risk and/or rewards and, may include dedicated teams or other co-ordinating mechanisms to realise potential benefits. As an example, the airline industry uses alliancing to secure economies of scale and offer a broader network to customers. See also Partnership and Supplier Relationship Management.

Refer to Alliance

Refer to Stock, Allocated

The practice of rationing customer orders at times of supply shortage. For example, all customers may have only part, say 50%, of their original orders delivered so that only, for example, 50% of the original order volume is delivered. To be placed ‘on allocation’ may cause buyers concern about continuity of supply and many buyers seek to position themselves as ‘preferred customers’ so that in times of shortage they get preferential access to scarce resources. See also Customer, Preferred.

A coding scheme which contains combinations of letters and numbers, for example, assigning codes to suppliers where the code may include part of the supplier’s name in letters, as well as some numbers. The UNSPSC scheme for coding goods and services is an example of a numerical coding system, although other numeric coding schemes are also used. See also UNSPSC.

Alternative dispute resolution [ADR] includes a range of alternatives to litigation for resolving disputes between commercial entities. The popularity of the practice has grown as the time and cost required to bring cases to court has increased and the probability of a satisfactory outcome has become less predictable. Examples of alternative dispute resolution include negotiation, mediation, conciliation and arbitration. See also Arbitration and Negotiation.

Analysis involves breaking down a complex whole into its constituent parts for subsequent investigation. Analysis is relevant to procurement in terms of spend analysis, category analysis, market analysis, price or cost analysis and bid analysis. In each case, we are seeking better understanding of the topic by profiling and describing the subject in different ways. Spreadsheets can help in terms of analysing data, and many procurement processes require some analysis of trends and patterns in order to reach a better understanding. The application of technology to procurement has largely focused upon providing better tools to analyse data and produce better information. Good decisions require not only good data and better information, but also the knowledge to interpret the information and the wisdom to make informed choices.

Appraisal cost refers to the expenses incurred by a buyer or an organization to assess and evaluate the quality, suitability, and compliance of goods or services provided by suppliers. These costs are associated with conducting inspections, tests, audits, and other activities aimed at ensuring that the purchased products or services meet the specified requirements and standards.

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 to a reference site, or assessment of providers facilities. See also Vendor Rating. Supplier Evaluation & Selection training is available at Academy of Procurement.

Most governance schemes involve a ‘sign off’ or approval stage when the contents of a prior stage are submitted for review against predetermined criteria. Reducing the number of duplicate or redundant approval stages is a key goal of many initiatives to shrink procurement cycle times. See also Governance.

A phrase used particularly in public sector organisations to describe a standing list of pre-qualified bidders for a particular scope of work. Instead of issuing public advertisements each time a scope of work is to be tendered, bidders may be selected from within an approved list for that category. See also Pre-qualification.

This involves taking advantage of differences in price of the same commodity in different markets. Traders may buy in one market and sell the identical product at a higher price in another market. ‘Labour market arbitraging’ involves sourcing labour intensive goods or services from markets with lower labour costs in order to secure cost advantages. See also Low Cost Country Sourcing.

Arbitration is an alternative to litigation and as such is a form of alternative dispute resolution. Arbitration involves an independent third party who forms a judgement about the issues upon which the original parties cannot agree, and makes a recommendation based on their expert opinion. The arbitrator's judgement may be binding or non-binding depending on what the parties originally agreed. See also Alternative Dispute Resolution.

A label sometimes given to normal commercial relationships between buyer and supplier who either are independent or act independently. The term implies that there is limited goal congruence, there are few mechanisms to promote joint working or collaboration and that interactions are primarily focused on the exchange of purchase orders and invoices, rather than the exchange of designs, future plans or strategies which would be more consistent with a cooperative relationship. See also Supplier Relationship Management.

Refer to Average Rate of Return

This term describes a manufacturing strategy in which subassemblies or components are produced prior to receipt of customer orders and only assembled to produce the finished item upon receipt of a customer order. The concept facilitates ‘late customisation’ which allows for a wide range of products to be offered to customers based on different combinations of components. This allows for the minimisation of inventory of finished goods, shorter lead times and maximum customer choice. See also Agility and Supply Chain.

Assets can include anything that is capable of being owned to produce value. Buildings, equipment and machinery are examples of tangible assets. ‘Know how’, brands and other intellectual property are examples of intangible assets. Assets typically appear on a balance sheet. See also Asset, Current.

A phrase used in buyer and seller relationships to understand the relative balance of power between the parties when one or both parties invest in assets that may be uniquely applied only to the other party. For example, in the days of physical printing plates, the printer would recover the cost of a plate for a client’s letterhead from the client, as the plate could not be reused for another customer. In this case, the asset was specific to that client and the way that the printer managed the risk associated with the client no longer requiring the letterhead was that they recovered the total cost of the plates from that client. If the printer also had a printing machine, which could be used for any of its customers, that asset would have very low asset specificity. The concept is especially relevant in cooperative relationships, where parties may invest in customer specific assets based on longer term commitments. See also Supplier Relationship Management.

A current asset is something that a business can easily convert into cash within 12 months. Examples of current assets include cash, cash equivalents, accounts receivable, inventory, and anything that can be sold or converted into cash promptly. Current assets are important because if a company’s current liabilities exceed its current assets it may struggle to pay its bills. See also Asset, Fixed.

Fixed assets are assets that are not to be sold to customers, cannot be quickly converted to cash and are used to create economic benefit by use in the production or service process in the longer term. Examples of fixed assets include land, buildings, plant and equipment. Many capital-intensive companies measure their performance based on the return achieved on the capital employed in the business, and fixed assets would form a part of the capital employed. See also Asset, Current.

Intangible assets do not have a physical form. Examples include brand names, trademarks, patents, copyright and goodwill. Intangible assets are typically non-current assets, i.e. a brand name can be established over a long period of time, therefore the brand owner will derive value over a period of time greater than 12 months. See also Asset and Asset, Tangible.

Tangible assets can be seen and touched and have a physical form. Examples include buildings, land, inventory and machinery. Tangible assets can be fixed or current assets. See also Asset and Asset, Intangible.

The transfer of a right or title to another party. In shipping a bill of lading may be assigned to another party as part of a commercial transaction. See also Bill of Lading.

An auction is the process of buying and selling goods or services by inviting competing bids from a number of participants. Competing participants in an auction may or may not know the identities or actions of other competitors. Forward auctions involve buyers submitting competing bids, with the price typically increasing during the auction. Reverse auctions involve sellers submitting competing bids, with the bids usually decreasing during the auction. Online reverse auctions are a common tool for procurement practitioners seeking to harness competitive tension for relatively undifferentiated categories. Some platforms allow the buyer to evaluate bids against a variety of criteria as well as price, and bidders may have visibility on the actual prices bid, or simply the ranking of their offer in terms of competitiveness against the other bids received by the buyer. See also Auction, Dutch. E-Auction Management training is available at Academy of Procurement.

In this type of auction the sale commences at a high price and the price is then progressively lowered until a competitor bids and in doing so indicates that they are prepared to buy at that level. That bidder is then said to have won the auction and is required to pay the price that has been agreed. In procurement terms the phrase is sometimes used for the discouraged practice of 'price shopping'. For instance, supplier A quotes a price of $100 and supplier B quotes $105. The buyer then approaches supplier B and invites them to re-quote in the light of the fact that another supplier has quoted a price of $100. If supplier B offers a price of $95, the buyer then approaches supplier A, and so on. This is seen as unprofessional as it involves disclosing confidential information and undermines trust in the relationship. See also Trust.

Audits are typically part of a control process to validate that key activities are being or have been undertaken and to identify weaknesses or opportunities for improvement. Tick and flick audits which may check every 10th purchase order in order to ensure that the approvals and other controls in place are working have largely been superseded by ‘systems audits’ in which the integrity of the approval system as a whole is reviewed. This may involve a broader assessment not just of whether approvals took place, and addressing who undertook the approvals, but also considering whether the level of control was commensurate with the risk and, considering how else the risks may be managed. See also Approval.

Refer to Stock, Available

Average Rate of Return [or Accounting Rate of Return] is one of the ratios sometimes used in investment appraisal. It calculates the returns from an investment over the period of the investment expressed as a percentage of the original sum invested. As an example, a new machine costs $100,000 and generates net cash flow of $50,000 each year over the four years of its expected life. The total return from the machine is $200,000 minus the original investment of $100,000 making a net return of $100,000. To calculate the net return per annum, $100,000 is divided by four (being the expected life of the machine in years) that equates to $25,000 per annum. Expressed as a percentage of the capital cost, the average rate of return is 25%. As it does not take into account the time value of money, Net Present Value [NPV] is more commonly used. See also Net Present Value.