Glossary

80-20 Rule See the Pareto Principle

Acknowledgement A communication indicating that something has been received or understood. In purchasing it usually refers to a form that is received from a supplier that accepts or sometimes modifies the purchase order.

Amortization a method used to lower the cost value of a product incrementally through scheduled charges to income or amortization is also the paying off of debt with a fixed repayment schedule in regular installments over time.

annus mirabillis a year regarded as pivotal, crucial, etc.; a year notable for disasters or wonders; a fateful year.

APS Abbreviation for the American Purchasing Society, a professional organization of buyers and purchasing managers for business.

ASAP Abbreviation for “as soon as possible.”

Asset Items of value, especially what an organization owns.

ASTM The American Society for Testing and Materials, an organization that develops and publishes standard specifications on various products.

Bartering A type of transaction involving no money or cash where one party provides one type of goods in exchange for another type of goods. Bartering can be carried out domestically or globally.

Bill of Lading A written receipt given by a carrier for goods accepted for transportation.

Bill of Material A list of items used in the manufacturer of a product. The list may show which items are required to make sub-assemblies and which sub-assemblies are required for the complete product being produced. The list may also indicate which components are manufactured and which are purchased from outside sources of supply.

Blanket Order An agreement to purchase or a purchase order for a given quantity of specific goods over a period of time, often one year.

BPM business process management

Capital Equipment Assets listed on an organization’s accounting records that have value and are durable.

Caveat Emptor Latin for let the buyer beware.

Centralized Purchasing An organization’s structure where all buying is conducted and authorized by one department and in one location. This compares with a decentralized system where buying many be accomplished at several locations. A modified structure allows certain items or categories of items to be handled locally and others to be controlled from one central location.

ceteris paribus Everthing else being equal.

CIF Abbreviation for “Cost, Insurance, and Freight.” The supply chain term that indicates that the seller pays for the cost marine insurance and transportation to the buyer's country port of entry.

COD A payment term meaning cash is paid upon delivery.

Contract An agreement between individuals or organizations. For a contract to be legally enforceable, the parties must be capable in a legal sense, there must be an offer, there must be an acceptance, and there must be consideration (something given in return for something else, such as goods or services).

CPI (Consumer Price Index) A numerical figure published by the Bureau of Labor Statistics that represents the prices of selected products and compares them with prices at a different base time.

CPM (Critical Path Method) A management tool that is used to determine the shortest way to accomplish a task or project.

CPP An abbreviation for Certified Purchasing Professional, recognition of purchasing knowledge, business experience, and a reputation for integrity.

CPPM Certified Professional Purchasing Manager. Recognition of purchasing management knowledge. A prerequisite is attaining the CPP award first.

CRM customer relationship management

Cross-Docking Costs are reduced by the process of receiving a product and shipping it out immediately without putting it into storage. The process is referred to as cross-docking.

Direct Purchasing The purchase of material to be used in manufacturing or for resale as opposed to indirect purchasing.

EBITDA Earnings before interest, taxes, depreciation, and amortization, a measure of a company’s operating performance.

ERP enterprise resource planning

Exchange Rate How much it takes of one country's currency to equate to or to buy another country's currency. For example Japanese Yen to U.S. Dollars, British Pounds to U.S. Dollars, etc.

FIFO An abbreviation for “First-in, First-out.” An accounting method of valuing inventory based on the ending inventory cost of the most recent material received and the cost of goods sold as the cost of the oldest purchases including beginning inventory. Compare with LIFO.

FOB An abbreviation for “Free on Board” and indicating the place where the title or ownership passes from the seller to the buyer.

Force Majeure A clause often inserted into a contract about an unexpected high or superior force, such as a flood, earthquake, a natural disaster that could not be avoided by due care and that therefore excuses the parties to the contract of responsibility. Sometimes referred to as an act of God. Same as "vis major".

Gross Lease A lease for property in which the owner or leasor agrees to pay all expenses which are normally associated with ownership, such as utilities, repairs, insurance, and  sometimes taxes. However, each lease contract may include or exclude one or more of these items.

indemnity insurance security, a compensation for loss.

Indirect Purchasing The purchase of material services used internally by the business, such as MRO products for maintenance, repair, or operating supplies.

Inventory Turnover Number of times the average inventory has been sold during the year. Calculated by dividing the cost of goods sold by the average value of inventory.

IPO Initial Public Offering refers to the first public offer of common stock of a particular company.

ISO Guidelines given by an International Organization for Standardization and that establishes standards for quality. A company must meet strict guidelines to qualify and must pay a large fee to go through the qualifying process.

IT Information Technology usually refers to the department that handles computer operations.

JIT An abbreviation for “Just In Time,” and referring to a scheduling system that minimizes inventory by having material arrive just as it is about to be put in use.

LCL Less carload. Often refers to a freight rate that is usually higher than for a full carload.

Lean Processes A method used to reduce unnecessary steps or activities in manufacturing or services and thereby improve efficiency and reduce error.

Letter of Credit A form of payment, used especially in international trade, that transfers funds from the buyer’s bank account to the seller’s bank account. An Irrevocable Letter of Credit cannot be cancelled or revoked by the buyer as long as all documents are proper and approved by the bank and the goods have been delivered to the specified place for shipment to the buyer.

Leverage Where an investor or a company uses debt to finance its operations rather than using equity.

Liability In accounting, it is what a company owes. In law, it is an obligation to do or refrain from doing something; a duty which eventually must be performed; an obligation to pay money.

LIFO An abbreviation for “Last-in, First-out.” An accounting method of valuing inventory based on the assumption that the last items purchased are the first sold. Compare with FIFO.

LTL Less truckload. Often refers to a freight rate that is usually higher than for a full truckload.

Materials Management The management function of an organization that may include all or a portion of the responsibility for purchasing, inventory control, traffic, shipping, receiving, and warehousing.

Mean The arithmetic average.

Mechanics Lien A form of payment protection for parties to an agreement for improvement of real property involving construction material or services. The lien process varies by state and may force a buyer to pay twice for the same work if payments to lower tier sellers are not made by upper tier buyers who have received payment for the work.

Median The mid-point in a list of numbers or occurrences.

Mode The type of average that indicates the most frequent instance of a number or happening.

MOQ Minimum Order Quantity - The amount required to place an order.

MRO Abbreviation for "maintenance, repair, and operating supplies." Often assigned to one or more buyers in a purchasing organizational structure.

Multi-Source See Split Sourcing.

Net Lease A commercial lease that requires the lessee to pay some of the property expenses in addition to the rent, such as, for electricity or heating costs.

nullius in verba Take nobody's word for it, nothing upon anothers word. Literally means on the words of no one. It is the motto of the Royal Society of London, the national academy of science.

OEM An abbreviation for “Original Equipment Manufacturer.” Suppliers usually give lower prices to such buying organizations for purchases of material used in the buying organization’s products being made for resale.

Pareto Principle A management tool based on writings of Vilfredo Pareto, an Italian economist. The principle is that most of the occurrences of any happening are caused by a small percentage of the population. Applied to purchasing management it means that the largest percentage of cost reductions can be obtained from a small percentage of the items purchased or from a small percentage of the number of suppliers used. Erroneously sometimes referred to as the 80-20 rule.

PPI (Producer Price Index) A numerical figure representing a certain producer price compared with a base index at an earlier time.

Price Index Usually refers to any of various numbers representing prices at a particular time for a product or category of products as reported to the Department of Labor, Bureau of Labor Statistics of the U.S. Government. Average price movements can be measured up or down from the monthly reports issued.

Public Company A corporation that issues stock that may be purchased by anyone and as listed on one of the stock exchanges and is controlled by the SEC as compared with private company where stock is only available to certain individuals.

Purchase Order The form that documents the purchase agreement or contract.

Purchasing Agent The person authorized to make purchase agreements for the organization.

Quid pro quo Do one thing in return for another.

Reciprocity The act of buying from or selling to another business in return for sales or purchases from the first organization. Illegal under the antitrust provisions of the Sherman Act.

Replevin An action for the recovery of property. For example, suppose a supplier is in possession of the buying organization’s property, such as tools or inventory and that it is unobtainable because of a strike or other reason. The buyer can obtain a writ of replevin issued by a judge to allow the buyer accompanied by an officer of the jurisdiction to enter the facilities and physically repossess the property.

Requisition A form used by users of goods or services that documents their requirements and is sent to the purchasing department to make the purchase.

RFID An abbreviation standing for Radio Frequency Identification, a system of marking products electronically so they can be located anywhere from a distant point

RFP Abbreviation for Request for Proposal. Another name for an RFQ.

RFQ Abbreviation for Request for Quotation. A form used to obtain bids from suppliers.

Robinson-Patman An antitrust law prohibiting unfair trading practices such as giving a supplier false information about what the buyer is paying another supplier in order to obtain a lower price.

RoHS Acronymn for Restriction of Hazardous Substances. The European Union's directive, effective July 1, 2006, regarding six hazardous materials (lead, cadmium, mercury, hexavalent chromium, ploybrominated biphenyls, and polybrominated diphenyl ethers) used in the manufacture of electronic and electrical equipment.

ROI return on investment, usually expressed as a percentage.

SCM supply chain management

SEO An abbreviation for "Search Engine Optimization".

Single SourceSix Sigma A singe source often refers to where a supplier receives all the business from a buyer for an item even though there are other suppliers who offer the same item with the same specifications. Orders given to a single source obtain the advantages of economics of scale, quanitity discounts, pin-pointing responsibility, and elimininating the need for extra tooling.

Six Sigma A method of using data to eliminate defects or errors in any process by eliminating variation in a process. The term refers to the statistical measurement of standard deviations from the mean of a set of values.

Sole Sourcing A sole source indicates that there are no alternative suppliers that produce exactly the same product with exactly the same specifications. There is often only one source for patented items.

Split Sourcing Where more than one supplier is used to buy the same item.

Supply Chain Management The organizational structure and management function that includes all facets of the acquisition and delivery of material from the supplier to the final customer. The purpose of the structure is to eliminate inefficiencies, facilitate rapid communication, to minimize inventory and to minimize delivery time throughout the structure.

Surety Bonds An instrument of financial guarantee provided by a surety (insurance company or bank) that payments accruing due to liabilities under the contract shall be retired by the contractor or the surety will do so. There are three types of surety bonds, bid bonds, performance bonds, and payment bonds.

Systems Contract A type of agreement with a supplier that requires the supplier to keep in stock all items of a certain type or category that may be needed by the buyer and provide them overall at a lower cost than could be obtained by buying them separately.

Tier 1, 2, or 3 tier 3 suppliers, sell their products or services to tier 2 who sell their products or services to tier 1 organization. Terminology used in the automotive industry, but also may be used for any company that buys.

Tare Weight The weight of the packaging material used to wrap or protect the actual required material being shipped.

Turn and Earn A financial tool that compares the amount of inventory to profit. It helps evaluate Purchasing's decisions that involve quantity discounts. It is calculated by multiplying inventory turnover times the percentage of gross margin.

UCC An abbreviation for Uniform Commercial Code. The UCC is an act passed with slight modifications by each state in the United States that establishes legal guidelines for commercial transactions.

Units of Measure The system that determines how measurements will be conducted. It determines how quantity, weight, volume, price are computed.

Value Analysis A method of looking at incremental cost of a product or service with the objective of reducing the cost by substituting material or changing design, while accomplishing the same function or purpose. Sometimes referred to as Value Engineering.

Vendor Same as supplier or seller.

Vis Major See "Force Majuer".

Win-Win A method of negotiating where each party to the negotiation obtains something he wants and gives the other party something he wants. Everybody wins.