Purchasing terms

GLOSSARY OF PURCHASING TERMS

The following represents a sample of the unique terms used by buyer before, during and after their supplier selection decision making process You should try to know these and related terms and use them to you advantage for building a buyer’s confidence level in you and your product.

  • ABC Method – inventory management method that categorizes items in terms of importance. Thus, more emphasis is place on higher dollar value items (“A’s”) than on lesser dollar value items (“B’s”), while the least important item (“C’s”) receive the least time and attention.
  • Acceptance Sampling – statistical procedure used in quality control.  Involved with testing a batch of data to determine if the proportion of units having a particular attribute exceeds a given percentage.
  • Ad Valorem – Latin for according to value. An ad valorem tax is assessed on the value of goods (or property); not on the quantity, weight, extent, etc.
  • Agent – is an individual given authority by their organization to act in its behalf.  The organization is bound by the commitments of the agent. Thus the buyer acting in the role of an agent is expected to act in the best interest of the organization (principal) in carrying out the buying responsibility.
  • Bar Coding – a series of machine-readable lines containing information necessary for a particular control operation.
  • Bid Requests – generally, an RFQ/RFI/RFP includes the following:
  • Quoted item description, (part no., definition of service; or equipment) .
  • The quantity to be quoted .
  • A list of applicable drawings, specifications, etc. .
  • Where and when the items are to be shipped or installed, or where and when the services are to be performed
  • The due date of the quotation .
  • The name of the buyer (also a technical contact where appropriate) issuing the quotation, along with a telephone number.
  • Bid Lists – Purchasing Departments often categorize suppliers according to certain preferences for purposes of selection. Suppliers are usually asked to complete an application as a preliminary screening, for location, size, technology, labor status, management, terms, references and related factors to qualify the supplier to business with the buyer.
  • Blanket Order – are generally used when the prices quoted are for “any quantity,” or are based on “estimated annual requirements.”
  • Bonds:
  • Bid – often used by government agencies and in construction bidding, bring a third party into the transaction. lt guarantees that if the order is awarded to a specific bidder, it will accept the purchase contract.  lf the bidder refuses, the extra costs to the buyer of going to an alternative source are borne by the insurer.
  • Performance€ – often used in foreign sourcing and in construction bidding, the buyer can, as a condition of doing business, require the supplier to post a performance bond guaranteeing prompt delivery of goods that meet specifications. ln the case of construction projects, a performance bond guarantees that the work done will be completed according to specification and time requirements.
  • Other types of bonds – Contract Bonds, generally applicable to services, are used when one wants to ensure performance. The cost of the contract bond is usually considered an element of cost in the proposals of the individual bidders.
  • Bid Deposits – may be requested for certain substantial bids as a device to discourage financially unstable suppliers. Bid deposits generally cover the amount in liquidated damages to which the buyer would be entitled should the supplier not perform on the contract.
  • Breach of Contract – if, after a contract is formed, either party fails or refuses to perform as agreed and it is not excused from performance by law, that party is considered to have breached the contract.
  • Capital Budget – covers the acquisition of equipment that is capitalized as a depreciable asset on the buying organization’s balance sheet.
  • Certified Suppliers – is one whose quality control system is integrated with a buyer’s quality control system, through which a larger quality assurance system is established. ln this way, total costs associated with quality are reduced through the reduction of duplicate efforts in inspection and other quality control activities. {Note: The term certified (verified) is also used as the ac1 of certifying a supplie/s ownership status; reports the use of small/women/minority/& disabled veteran business enterprises. )
  • Change Orders – in practice, larger contracts are rarely completed without some type of modification to the original purchase order description. Some modifications are simply administrative changes that do not affect the substance of the contract. Others involve substantial changes to the price, quantity, quality, delivery, or other terms agreed to by the buyer& seller.
  • Competitive Bidding – when the market consists of a large number of sellers, competitive bidding is the preferred course of action taken by buyers. The time available to obtain the product must be sufficient in order to allow for suppliers to obtain and evaluate bids, and time for suppliers to respond to them. Often 30 days is the most commonly used amount of time for the entire process. When the dollar of the item is relatively low, the time and expenses of the competitive bidding process is probably unjustified, for both the buyer and the seller. ln order for competitive bidding to work, the suppliers must be technically qualified and must actively want the contract.
  • Decentralized Purchasing Group – buying decision making and policy formation done at several locations throughout the organization. This gives decision making authority to those directly,responsible for the outcome of those buying decisions, with first-hand knowledge about the item(s) needed.
  • Disadvantaged Suppliers – minority purchasing programs, sometimes called socially and economically disadvantaged supplier programs are undertaken by larger organizations to 1) adhere to government regulations; 2) enhance social responsibility; and/or 3) develop alternative sources of supply. This term is broadly used to identify minority, women and disabled veteran owned business enterprises.
  • Dun and Bradstreet Reports – provide credit information about the suppliers payment history (such as whether the payments were made in full, on time, etc.), history about the company, and the educational level and experience of key management staff. These reports are limited in many cases by the amount of information that a company is willing to provide.
  • Electronic Data Interchange (EDI) – one the most significant new area for the application of computers in purchasing, sometimes known as “ppaper-less purchasing.” lt is a computer-to-computer transfer of documentation and information between organizations. lt allows for data and documentation to be directly processed and acted upon by the receivers. EDI is electronic transfer of common business forms such as releases, purchase orders, invoices and shipping notices. lt is designed to replace more traditional methods of transmission such as mail or telephone.
  • Equal Employment Opportunity Act – established in 1972, works under the Federal Civil Rights Law of 1964 to cover virtually all firms with 15 or more employees to prevent the discrimination against various groups of employees. Purchasing Managers work closely with the personnel department to fit within the framework of the requirements set forth the terms of employment opportunities for the prime and subcontractors.
  • F.O.B. – free on board; . Origin is where the seller bears the risk until it loads the goods onto an appropriate carrier, after which the buyer assumes risk of lose and must claim against the carrier for damage or lose in-transit . Destination is where the seller bears risk until the goods are transported to the buyer’s dock, after which risk will pass to the buyer.
  • Federal Acquisition Regulations (FAR) – is in place for the codification and publication of uniform policies and procedures for acquisition by all federal executive agencies. The FAR system is the primary document prepared, issued and maintained by the Secretary of Defense, Administration of General Services and the Administrator – National Aeronautics and Space Administration, & under several statutory agencies.
  • Federal Register – is a publication issued five days a week which contains orders & regulations of federal agencies. Fixed Costs – are the costs that do not change with variations in volume of goods sold, such as rent and depreciation on equipment.
  • Fixed Price Contracts – are based on a price that will not differ from that agreed upon or understood to apply at the time of ordering. Fixed Price Contracts are generally more desirable to the buyer.
  • Follow-up/Expediting – refers to the tracking of an order to assure that the supplier will be able to meet the promised date of delivery and expediting refers to the application of pressure by buyers on suppliers to have them deliver ahead of schedule.
  • implied Warranties – are legal, whereas a buyer does not have to specifically list them on the face of a contract in order to have them apply. The type of implied warranties are; 1) Warranty of title & authority to sell, 2) implied warranty of merchantability, and 3) Fitness for an intended purpose.
  • JIT (Just-in-Time) – buyer ordering & delivery system to meet demand of getting purchased goods at exactly the time & rate of requirement. JIT views inventories as nonproductive capital & as a means of hiding problems of poor quality, high scrap rates, machine downtime, late deliveries, etc.
  • Letters of Credit – is a legal instrument that obligates the bank issuing it (the buyer’s bank) to pay the supplier upon presentation of the document required by the buyer for the coast of the purchase, plus a service fee. Thus, the letter of credit is used by a purchaser to obtain goods without the necessity of immediate cash.
  • Letters of intent – is a contract which may be used between buyer and seller to confirm certain agreements in connection with a procurement action. lt serves 8s an interim purchase order or contract and provides immediate documentation of the more salient features of an agreement. lt helps to gain time rn e commitment to a supplier, prior to the issuance of a more complete purchase order or contract.
  • Master Production Schedule (MPS) – is a determination of the precise “mit” of finished product, completed during a specified time period.
  • Material Safety Data Sheet – are documents required by occupational Safety Health Act (OSHA) department which tell employees of physical dangers, safety procedures, and emergency response techniques.
  • Negotiations – occurs frequently in post-award supplier selection. But there are times when buyers favor negotiation to competitive bidding; 1) lack of competition, 2) price, quality and service needs, 3) buying production/service capabilities, 4) high buyer/seller uncertainty, 5) urgency, 6) long supplier lead time, 7) necessity for flexible contracting, 8) lack of firm product specifications, and 9) single or sole source supplier.
  • Oral Contracts – is one that is not in writing or that is not signed by the buyer or seller. Oral contracts for most purposes are enforceable, except for where the sale of real estate must be in writing.
  • Overhead Costs – are necessary for the existence & operation of activities; direct production, interest, debt, senior management costs., etc.
  • Preferred Suppliers – is one that provides desirable quality, delivery or prices for a buyer; reacts positively to unforeseen needs such as changes in business volume, changes in specifications, service problems, etc.
  • Pre-qualified Suppliers – have passed a buying organization’s preliminary screening; closely examined such factors as financial strength, facilities, location, size, technology, labor status, management, costs, terms, references & other factors; found suitable for future opportunities.
  • Procurement – acquisition of goods (materials, parts, supplies, equipment) required to carry on a business.
  • Purchase Orders (P.O.’s) – the most common vehicle which legally binds a commitment for materials, facilities or services made between a buyer & seller. Usually a multi-part, pre-printed document which sets forth a company’s terms & conditions. P.O.’s are normally released to suppliers with unique numbering sequence for identification of the order & buyer.
  • Purchase Requisition – the form commonly used by the end-user of large organizations to request that purchasing buy certain items. The requester states the items they want, where and when they want them delivered, and the appropriate accounting and approval information.
  • Quality Assurance – is meeting performance or functional specifications, blueprints, quality specifications and delivery and timing specifications.
  • Quality Control – process of assuring that products are made to consistently high standards of quality. inspection of goods at various points in their manufacturing by either a person or a machine is usually an important part of the quality control process.
  • RFQ/RFI/RFP – are commonly express acronyms meaning:
  • RFQ – Request For Quote (some agencies/municipalities may interchange RFQ to mean Request For Qualifications)
  • RFI – Request For Information
  • RFP – Request For Proposal
  • Single Source – buyers do this when establishing a partnership for just-in- time relationships with a supplier although many sources are available. Some reasons are administrative simplification, joint schedule planning, smooth logistics links and traditional approach of using several suppliers, so that competition can be maintained between and to hedge the risk of one of them failing to meet the business needs of the buyer.
  •  Sole Source – exists when only one source is available, like local telephone and water and power companies. lt might be a special product or a technology that only one firm has available to the market.
  • Solicitations – for bid information can take many forms, including 1) sealed bidding formal advertising 2) competitive proposals, 3) restricted competition, 4) two-step bidding [technical evaluation without pricing and approved suppliers get to submit pricingl 5) informal bids/quotations; and 6) alternative and innovative proposals.
  • Standardization – is the process that all users, consumers, manufactures of a given product develop & agree to use a precise “standard” specification for it, & have it produced exactly as specified by ail sources.
  • Standing Orders – consists of the supplier delivering goods at fixed, agreed-upon prices covering a defined period. This form of ordering is also known as “open-ended ordering.”
  • Subcontractor – one to whom a prime, general contractor or other sublimated level contractor sublets part of a contract.
  • Terms and Conditions – include 1) the quantity, price, delivery and shipping requirements and payment terms, 2) quality specifications, 3) engineering drawings and other related documents, 4) sampling plans and conditions of acceptance, 5) other important factors affecting acceptability of the product, and 6) standard boiler-plate terms and conditions, which are intended to give legal protection to the buyer on matters such as contract acceptance, delivery performance, contract termination, shipment rejections, assignment and subcontracting, patent rights, and payment procedures.
  • Time & Material Contracts – provide payment for tabor & overhead at a given rate per hour, plus the sales price of parts, supplies, & materials.
  • Verbal Bids(telephone quotations) – generally are used only for low value, unplanned purchases. Typically, the request is made by phone, the supplier is given an identifying order number, and is advised that no confirming written document will be forthcoming. under the Uniform Commercial Code (ucc), verbal contracts are enforceable up to a maximum of $500.00.This abbreviated glossary of purchasing terms is extracted from the National Association of Purchasing Management (NAPM) Certification program for Procurement Management Professional. For more information about the NAPM publications and regional chapters write to: NAPM, 20s5 East centennial circle, P.o. Box 22160, Tempe, Arizona 85285.