51 Terms Every Procurement Professional Should Know

The topic of procurement is receiving significant attention because companies are constantly attempting to improve the overall effectiveness and efficiency of their supply networks. Every procurement professional should know the meaning of key terminology used throughout procurement documents in order to have better understanding of supply process.

Here are some of the basic terms and a brief definition of each:  

1. ADDENDUM

Addendum is an addition or supplement to a document. It can be item or information added to a procurement document.

 

2. ALTERNATE RESPONSE

Alternate response is substitute response, an intentional substantive variation to a basic provision or clause of a solicitation by a vendor.

 

3. AMENDMENT

Amendment or change order is written modification to a contract or purchase order or other agreements.

 

4. BILL OF LADING

A bill of lading is a written receipt or contract that carrier must give, showing a list of goods delivered to it for transportation. The order bill of lading is negotiable and it enables a shipper to collect for a shipment before it reaches its destination. The original bill of lading should be sent along with a draft drawn on the consignee through a bank. When the consignee receives the lading indicating that payment has been made, the lading will be surrendered to the carrier's agent, the carrier will then ship the goods to the consignee, and the bill of lading will be surrendered to the carrier.

 

5. BLANKET ORDER

The blanket order is a contract under which a vendor agrees to provide goods or services on a purchase-on-demand basis. The prices, terms, conditions and the period covered are often established by contract (no quantities are specified). Shipments will  be made as the purchaser  requires.

 

6. CASH FLOW

Cash flow is the amount of money moving into and out of a business. It can be positive and negative. Positive cash flow indicates that a company's liquid assets are increasing. In that case, company can settle debts, reinvest in its business, return money to shareholders, pay expenses, and provide a buffer against future financial challenges. Negative cash flow indicates that a company's liquid assets are decreasing.

 

7. COST AVOIDANCE

Cost avoidance represents reductions that cause future spending to fall, but not below the level of current spending. It often involves slowing the rate of cost increases. In other words, future spending would have increased even more in the absence of cost avoidance measures.

 

8. COST SAVINGS

Cost savings happen when there is a reduction that causes future spending to fall below the level of current spending. These cost savings may then be removed from budgets, reinvested, or redirected to other spending priorities.

 

9. COOPERATIVE PURCHASING

Cooperative purchasing is basically combining of requirements of two or more governmental units to obtain the benefits of volume purchases and/or to reduce in administrative expenses.

 

10. DEBARMENT

Debarment means the disqualification of a person to receive invitations for bids or requests for proposals. It also includes the award of a contract by a government body, for a specified time proportional with the seriousness of the offense, the failure, or the inadequacy of performance.

 

11. DEFAULT

Default represents  a failure to a contract to comply with contractual requirements by a party.



 

12. DIRECT SPEND

Direct spend represents the purchases of goods and services that are directly incorporated into a product being manufactured, such as raw materials, subcontracted manufacturing services, components, hardware, etc.

 

13. EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization)

EBIDTA is essentially the income that a company has free for interest payments. It's  also income with taxes, depreciation, and amortization added back to it, and can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions.

 

14. e-PROCUREMENT

e-Procurement represents the online conduct of business-to-business procurement processes using web-based applications. It enables buyers to locate potential suppliers, review product choices, select products and make purchasing transactions directly over the Internet.  Typical e-Procurement applications include web-based ERP solutions that automate transactional procurement processes.  

Besides the automation of workflows such as requisitioning, the significance of e-Procurement is also creating purchase orders, and receiving and paying for goods.  e-Procurement solutions change the sourcing process by facilitating the value propositions of multiple suppliers to be accessed in one place and at one time to create a ‘one-stop shop’ for all categories, and reduce the friction involved in traditional commerce.  

 

15. EQUAL OR APPROVED EQUAL

Equal or approved equal indicates that an item may be substituted for a required item but only  if it is equal in quality, performance, and other characteristics.

 

16. ESCALATION CLAUSE

Escalation clause represents a contract provision that permits the adjustment of contract prices by an amount or percent but only if certain specified contingencies occur, such as changes in the vendor's raw material or labor costs.

 

17. FISCAL YEAR

The fiscal year is the 12 months period between two annual settlements of financial accounts it's from October 1 to September 30 when we are talking about the U.S. Government.

18. FIXED ASSETS

Fixed assets represent state property that is in one of four categories:

  • all non-expendable property having a normal life expectancy of more than two years and a value of $2,000 or more.

  • all semi-expendable property established by the owning agency's policy as fixed assets: any item having a normal life expectancy of more than two years and a value of less than $2,000.

  • all firearms, regardless of their value.

  • all sensitive items, as established by the agency policy.                  

 

19. INDIRECT SPEND

Indirect spend represents the purchases of goods and services that are not directly incorporated into a product being manufactured, such as computers, safety goggles, printed forms, office supplies, janitorial services, equipment, furniture, etc.

 

20. INVOICE

Invoice is a list of goods or services sent to a purchaser which is showing information such as  the prices, quantities and shipping charges for payment.

 

21. LIFE CYCLE COSTING

Life cycle costing represents a procurement evaluation technique that designates the total cost of acquisition, operation, maintenance, and disposal of the items acquired.  

 

22. LINE ITEM

The line item is an item of supply or service specified in a solicitation for which the vendor must specify a separate price.

 

23. LIQUIDATED DAMAGES

A specific sum of money, agreed to as part of a contract to be paid by one party to the other in the event of a breach of contract in lieu of actual damages, unless otherwise provided by law.


 

24. MODEL PROCUREMENT CODE (MPC)

MPC is a publication approved by the American Bar Association that sets forth procurement statutory principles and policy guidelines for:

  • managing and controlling the procurement of supplies, services and construction for public purposes;

  • administrative and judicial remedies for the resolution of controversies relating to public contracts;  

  • a set of ethical standards governing public and private participants in the procurement process.   

 

25. NAICS (North America Industry Classification System) CODE

This code is formerly known as SIC (Standard Industrial Classification) code. It represents the classification of business established by type of activity for the purpose of facilitating the collection, tabulation, presentation, and analysis of data collected by various agencies of the United States government, state agencies, trade associations, and private research organizations for promoting uniformity and comparability in the presentation of statistical data relating to those establishments and their fields of endeavor.

 

26. NAPM (National Association of Purchasing Management)

This is a nonprofit educational and technical organization of purchasing and materials management personnel and buying agencies from the public and private sectors.

 

27. NASPO (National Association of State Purchasing Officials)

This represents an organization of state procurement representatives for the purpose of promoting efficient and effective public purchasing policies and procedures at the state level. It's an affiliate of the Control of State Governments (CSG).

 

28. OPTION TO EXTEND

Option to extend/renew is a provision which allows a continuance of the contract for an additional time according to permissible contractual conditions.

29. OSHA

OSHA is shortened from "The Occupational Safety and Health Administration."

 

30. PER DIEM

Per Diem means by the day - a daily allowance for expenses, a specific amount of money an organization gives an individual, often an employee, per day to cover living expenses when traveling for work. In other words, the per diem allowance is a daily payment based on government calculated rates instead of reimbursement for actual expenses.

 

31. PLANT-MATTER BASED OR BIO-BASED PRODUCT

This is a product which renewable resources derivatives, including fiber crops, such as chemical extracts from oilseeds, nuts, fruits and vegetables (corn and soybeans etc.); agricultural residues (wheat straw and corn); stover; and wood wastes generated from processing and manufacturing operations. The bio-based products stand in contrast to those made from fossil fuels (petroleum) and other less renewable resources (virgin timber).

 

32. POINT OF ORIGIN

The point of origin or shipping point is the location where a shipment received by a transportation line from the shipper.

 

33. POST-CONSUMER MATERIAL

The post -consumer material is a finished material that would normally be disposed of as a solid waste after its life cycle as a consumer item is completed. It doesn't include manufacturing or converting wastes. This refers to material collected for recycling from office buildings, homes, retail stores, etc.

 

34. PRE-CONSUMER MATERIAL

The pre-consumer material represents the material or by-products generated after the manufacture of a product but before the product reaches the consumer, such as damaged or obsolete products. It  doesn't include mill and manufacturing trim, scrap, or broken material which is generated at a manufacturing site and commonly reused on-site in the same or another manufacturing process.

 

35. PREQUALIFICATION OF VENDORS

Prequalification of vendors represents the process of screening of potential vendors in which considers factors such as financial capability, reputation, and management when developing a list of qualified vendors.

 

36. PROPRIETARY

Proprietary is the only items which can perform a function and satisfy a need. It shouldn't be confused with "single source" because an item can be proprietary and yet available from more than one source

 

37. QUALIFIED VENDOR

Qualified vendor or responsible vendor is a vendor that buying organization is determined to meet minimum set standards of product quality, financial ability, business competence, and reputation for placement on the vendor list.

 

38. QUALIFIED PRODUCTS LIST (QPL)

QPL is a list of products which are tested in advance of procurement to determine which suppliers comply with the specification requirements, because of the length of time required for test and evaluation. Some procurement professionals also refer it as an "approved brands list."

 

39. REQUISITION

Requisition represents an internal document that a functional department (stores, maintenance, etc.) sends to the purchasing department. This document contains the details of materials to meet its needs, replenish stocks or obtain materials for specific jobs or contracts.

 

40. RESTRICTIVE SPECIFICATIONS

This specification unnecessarily limits competition by eliminating items capable of satisfactorily meeting actual needs.

 

41. REUSED PRODUCT

Reused product is any product made for many times usage for the same or other purpose without additional processing other than specific requirements, such as regular maintenance (cleaning, painting or minor repairs).

 

42. RFP OR RFB CONFERENCE

This represents a meeting arranged to help potential bidders understand the requirements of an RFB or an RFP by a procurement office.

 

43. SOLICITATION

Solicitation is the process that procurement professionals use to communicate their requirements and to request responses from interested vendors.

 

44. SOURCE REDUCTION PRODUCT

This represents a product that results in a net reduction in the generation of waste and includes durable, reusable, and remanufactured products. Source reduction product is also a product with no packaging or reduced packaging.

 

45. SURPLUS PROPERTY

Surplus property is the property in excess of the needs of an organization and not required for its foreseeable use. Surplus can be used or new, but it has some usefulness for the purpose it was intended or for some other purposes.

 

46. SHOULD COST MODEL

A should cost model represents  a documented calculation of an estimated price that you create by researching all material costs, labor costs, overhead costs, and profit margins that would apply to an item. Essentially, you are behaving as if you were responsible for manufacturing the item yourself.

If  you use should cost model in negotiations, accuracy is the key  because you know with 100% certainty that the supplier will challenge your assumptions in attempt to turn the cost discovery negotiation process back to their side. So, you need to use well researched model and that is the only way to have the credibility you need to negotiate successfully. Bottom line, you need to have more knowledge about the supplier's business than the supplier himself does.  

 

47. SPEND ANALYSIS

Spend analysis represents the process of collecting, cleansing, classifying and analyzing expenditure data with the purpose of decreasing procurement costs, improving efficiency, and monitoring compliance. It's very important process for procurement professionals because spend analysis means analyzing the historical purchasing data of a company to provide answers to questions concerning spend visibility, compliance and control.

In other words, the spend analysis aims to inform strategies that realise savings on total spend and better purchasing and supply management outcomes.

 

48. STRATEGIC SOURCING

Strategic sourcing represents an institutional procurement process that continuously improves and re-evaluates the purchasing activities of a company.  Objectives of strategic sourcing are the reduction of cost while maintaining or improving quality.

 

49. TORT

A tort is a wrongful act, o

ther than a breach of contract, such that the law permits compensation of damages.

 

50. UNIFORM COMMERCIAL CODE (UCC)

UCC is a comprehensive modernization of various statutes relating to commercial transactions, including sales, lease, negotiable instruments, bank deposits and collections, funds transfers, letters of credit, bulk sales, documents of title, investment securities, and secured transactions.

 

51. UNSPSC (The United Nations Standard Products and Services Code)

UNSPSC  represents a taxonomy of products and services for use in eCommerce. It has a four-level hierarchy coded as an eight-digit number, with an optional fifth level adding two more digits.

The four primary levels of the code are: Segment, Family, Class and Commodity.

Each level is coded in two decimal digits, with '00' treated specially to give segments, families and classes their own eight-digit codes.

 

Hope that list of these basic terms and a brief definition of each will help you to have the better understanding of supply process. If you want to be the procurement professional, you should know the meaning of key terminology used in the procurement industry. For more topics about procurement, visit Hireo Procurement section