Supply Chain Chapter 5: Purchasing Management Terms

Procurement

The overarching process of selecting and vetting suppliers, negotiating contracts, and the actual purchasing of goods and services.

Purchasing

The specific function or action within procurement focused on acquiring the goods an organization needs.

Request for Proposal (RFP)

A detailed evaluation document used to determine a supplier's capability and interest in producing a customized product.

Request for Quote (RFQ)

A document used to solicit bids from suppliers for routine or repeat items.

Bid

A proposal or quotation submitted by a supplier in response to an RFP or RFQ.

Purchase Requisition (PR)

An internal document used by a user within an organization to define a need for goods or services.

Purchase Order (PO)

The buyer's formal offer to a supplier; it becomes a legally binding contract once the supplier accepts it.

e-Procurement

The automation of non-strategic and transactional purchasing activities using web-enabled tools.

Profit-Leverage Effect

The principle that a decrease in purchasing expenditures directly increases pre-tax profits dollar-for-dollar.

Total Cost of Ownership (TCO)

The sum of all costs associated with every activity in the supply stream, categorized as Quality, Service, Delivery, and Price (QSDP).

Make versus Buy Decision

The strategic act of deciding whether to produce an item internally or purchase it from an external supplier.

In-sourcing (Back sourcing)

Reverting to in-house production when an external supplier fails to meet expectations.

Co-sourcing

Sharing a process or function between internal staff and an external provider.

Backward Vertical Integration

A strategy where a company acquires one or more of its suppliers to take ownership of that part of the supply chain.

Forward Vertical Integration

A strategy where a company acquires one or more of its customers, such as a distributor.

Centralized Purchasing

A system where a single corporate department makes all purchasing decisions for the firm.

Decentralized Purchasing

A system where individual local departments or plants make their own purchasing decisions.

Tariffs

Duties, taxes, or customs imposed by a host country on imported or exported goods.

Countertrade

International trade conducted through the exchange of goods rather than currency.

Benchmarking

The process of measuring what other businesses do best and matching their performance to improve the supply chain.