Supply Chain Chapter 5 – Purchasing Management

Procurement

The process of selecting suppliers, negotiating contracts, and purchasing goods/services essential for an organization.

Purchasing

The act of obtaining merchandise, capital equipment, raw materials, services, or maintenance, repair, and operations (MRO) supplies from an external third party.

Purchase Requisition

An internal document that defines the need for goods/services but does not create a contractual relationship with an external party.

Purchase Order (PO)

An official offer issued from a buyer to a seller to acquire goods/services which becomes a legally binding contract when accepted by the supplier.

Total Cost of Ownership (TCO)

The overall cost of an item including acquisition cost, quality, service, delivery, and price.

Request for Information (RFI)

A standard business process used to collect written information about the capabilities of various suppliers.

Request for Proposal (RFP)

A detailed document used to determine a supplier’s capability and interest in producing a product or service.

Request for Quote (RFQ)

A document used to solicit bids from interested and qualified suppliers regarding prices and delivery for requested items.

Inventory Turnover Effect

An indicator of how efficiently inventory is sold and replaced over a given period.

Make vs Buy Decision

The strategic choice between producing an item internally or purchasing it from an external supplier.

In-sourcing

The decision to revert to in-house production when external quality, delivery, and services do not meet expectations.

Centralized Purchasing

A purchasing strategy where the purchasing department located at the corporate office makes all purchasing decisions.

Decentralized Purchasing

A purchasing strategy where individual local purchasing departments make their own purchasing decisions.

Bid Bond

A security deposit provided by a bidder to ensure they accept the contract once awarded.

Performance Bond

A security provided by the bidder to guarantee the contract will be completed on time and meet specifications.

Cash Discounts

Discounts offered for prompt payment of invoices, often expressed as a percentage for early payment.

Supplier Confirmation of Purchase Order

The supplier’s acceptance to supply goods/services as per the specifications outlined in the purchase order.

e-Procurement

The use of web-based tools to automate non-strategic and transactional procurement activities.

Reverse Auction

An auction process where suppliers bid to provide goods/services, typically driving prices down.