Glossary of Sourcing Terms

Term Description
2 in a Box

see Peer-to-Peer Interface Structure

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3-Way Match

A process where the purchase order is compared against the supplier's invoice and the receiving report. A good 3-Way Match compares quantities, price, and terms appearing on the supplier's invoice to the information on the purchase order and to the quantities actually received.

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4th Party Logistics (4PL) or Logistics Outsourcing

Logistics Outsourcing (4PL) can be defined as the strategic use of outside parties (business independency) to perform activities traditionally handled by internal staff and resources. Allyn allocates resources to your company in order to manage your supply chain. We work as an extension of your company, exercising your strategy and driving your initiatives. Our objective is to lead your business to logistics best practices, providing logistics expertise & consultancy support, optimizing your processes and your supply chain.

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ABC Analysis

Applications of Pareto’s Law or the 80/20 rule. ABC analysis, as related to inventory, is simply a determination of the relative ratios between the number of items and the dollar value of items purchased repetitively for stock. Typically 5-10% of the items (“A” items) account for 75-80% of the investment, 20-25% of the items (“B” items) account for 15-20% of the investment, and 70-75% of the items (“C” items) account for 5-10% of the investment. Inventories should be managed accordingly, with more emphasis placed on the strategic management of the “A” items.

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Acceptance

The act of accepting by an authorized representative; an indication of a willingness to pay; the assumption of a legal obligation by a party to the terms and conditions of a contract; An agreement to be bound by the terms of an offer.

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Acceptance Quality Limit (AQL)

In quality assessment, acceptance quality limit (previously referred to as acceptable quality level and also known as assured quality level), describes the maximum number of defects acceptable during the random sampling of an inspection.

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Acceptance Test

A technical test performed at either the supplier's site, the buyer's site, or both, to audit whether the equipment bought by the buyer meets its functional and technical specifications.

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Accessorial Charges

Costs that carriers may charge in addition to standard transportation costs. This may include single shipment charges, additional fees for deliveries made away from a loading dock or central location, and notification, storage and redelivery charges.

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Accounts Payable (A/P)

1) A financial term referring to the amount of transactions which have been accrued but not paid to a vendor; 2) An accounting function.

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Accounts Receivable (A/R)

On a company's balance sheet, accounts receivable is the amount that customers owe to that company. Sometimes called trade receivables, they are classified as current assets assuming that they are due within one year.

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Accrual Accounting

A system of accounting in which revenues and expenses are recorded as they are earned and incurred, not necessarily when cash is received or paid. Accrual accounting also provides a more accurate picture of company's profitability at a particular time. Statement users can make more informed judgments concerning the company's earnings potential. Publicly held businesses are required to use accrual based financial statements.

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Acknowledgement

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

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Acquisition

The act of acquiring goods and services (including construction) for the use of a governmental activity through purchase, rent or lease. Includes the establishment of needs, description of requirements, selection of procurement method, selection of sources, solicitation of procurement, solicitation for offers, award of contract, financing, contraction administration and related functions.

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Acquisition Cost

The acquisition cost includes all costs associated with generating and processing an order and its related paperwork. In a broader management sense, the acquisition cost is the sum of the ordering, transporting, handling and all inventory holding costs associated with the acquisition of a material.

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Activities

Work associated with processes that a person or function performs, i.e., process PO’s, process payments, etc.

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Activity Analysis

The process of identifying and cataloging activities for detailed understanding and documentation of their characteristics. An activity analysis is accomplished by means of interviews, group sessions, questionnaires, observations and reviews of physical records of work.

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Activity Based Budgeting (ABB)

An approach to budgeting where a company uses an understanding of its activities and driver relationships to quantitatively estimate workload and resource requirements as part of an ongoing business plan. Budgets show the types of as well as number of and cost of resources that activities are expected to consume based on forecasted workloads. The budget is part of an organization's activity-based planning process and can be used in evaluating its success in setting and pursuing strategic goals.

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Activity Based Costing (ABC)

A methodology that measures the cost and performance of cost objects, activities and resources. Cost objects consume activities and activities consume resources. Resource costs are assigned to activities based on their use of those resources, and activity costs are reassigned to cost objects (outputs) based on the cost objects proportional use of those activities. Activity-based costing incorporates causal relationships between cost objects and activities and between activities and resources.

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Activity Trap

One of Vested's 10 Ailments (see explanation of Vested below) that refers to an outsourcing paradox typically found in Transaction-Based Sourcing Business Models. The service provider is paid for every transaction.

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Ad Valorem Rate

Ad valorem taxes (mainly real property tax and sales taxes) in the context of Sourcing and Procurement are customs duties charged on the value of goods that are dutiable, irrespective of quality, weight or any other considerations. Ad valorem rates are a fixed percentage based on the value of the goods, as determined by the invoice cost.

Addendum

An addition or supplement to a document; e.g., items or information added to a procurement document.

Advanced Charges

Also known as Freight Forwarding Charges, Advanced Charges are the fees charged on freight for a shipment advanced or transferred from one carrier to another, or to the shipper. These fees are normally collected from the consignee or recipient of the shipment.

Advertise

To make a public announcement of the intention to purchase goods, services or construction with the intention of increasing the response and enlarging the competition. The announcement must conform to the legal requirements imposed by established laws, rules, policies and procedures to inform the public.

Agreement

When two or parties are in consensus. In contracting terms an agreement usually refers to a negotiated and typically legally binding oral or written arrangement between parties. Many use agreement in the same meaning as contract. See also contract.

Air Waybill

A routing document used for air freight shipments stating what the shipment contains, weight, shipping instructions and shipping costs.

Alternate response

A substitute response; an intentional substantive variation to a basic provision or clause of a solicitation by a vendor.

Amendment/change order

A written modification to a contract or purchase order or other agreements.

Antitrust Laws

Federal laws intended to ensure free and fair competition by prohibiting monopolies and contracts or conspiracies in restraint of trade in interstate and foreign commerce. Some states have enacted their own antitrust laws.

APICS

The Educational Society for Resource Management; founded in 1957 as the American Production and Inventory Control Society.

Applications Service Provider

An application service provider (ASP) is a business that provides computer-based services to customers over a network. Software offered using an ASP model is also sometimes called on-demand software or software as a service (SaaS). The most limited sense of this business is that of providing access to a particular application program (such as customer relationship management) using a standard protocol such as HTTP.

Approved Provider

A supplier that meets a predefined set of qualification characteristics, quality standards, prior proven performance or other selection criteria.

Approved Provider List (APL)

see Approved Supplier List

Approved Provider Transaction Model

A model in which goods and services are purchased from pre-qualified suppliers that meet certain performance or other selection criteria. Frequently an organization has a limited number of pre-approved suppliers for various categories from which buyers or business units.

Approved Supplier List (ASL)

A list of the suppliers approved for doing business. The AVL is usually created by procurement or sourcing and engineering personnel using a variety of criteria such as technology, functional fit of the product, financial stability, and past performance of the supplier. Also sometimes referred to as Approved Vendor List or Approved Provider List but more often referred to as Approved Suppliers.

Approved Vendor List (AVL)

see Approved Supplier List

Arbitration

Arbitration, a form of alternative dispute resolution (ADR), is a legal technique for the resolution of disputes outside the courts, wherein the parties to a dispute refer it to one or more persons (the "arbitrators", "arbiters" or "arbitral tribunal"), by whose decision (the "award") they agree to be bound. It is a settlement technique in which a third party reviews the case and imposes a decision that is legally binding for both sides. Other forms of ADR include mediation (a form of settlement negotiation facilitated by a neutral third party) and non-binding resolution by experts. It is more helpful, however, simply to classify arbitration as a form of binding dispute resolution, equivalent to litigation in the courts, and entirely distinct from the other forms of dispute resolution, such as negotiation, mediation, or determinations by experts, which are usually non-binding. Arbitration is most commonly used for the resolution of commercial disputes, particularly in the context of international commercial transactions. It may be binding or non-binding.

Arm's Length Agreements

A transaction in which the buyers and sellers of a product act independently and have no relationship to each other. The concept of an arm's length transaction is to ensure that both parties in the deal are acting in their own self-interest and are not subject to any pressure or duress from the other party.

ARO

After receipt of order. Used in transactional relationships.

Artificial Intelligence

Artificial Intelligence is the study of man-made computational devices and systems which can be made to act in an "intelligent" way.

Asset Specificity

The use of a capital good to a narrow purpose. Asset specificity applies to capital designed to have a single function, or labor trained to perform a single task, and has its limited uses because of some inherent restriction on other possible uses.

Attributes

In the Business Model Mapping template an attribute is defined as a characteristic that is inherent to an organization's business environment. For example, switching cost range from low to high.

Auction

The process of buying and selling through the use of competitive bidding.

Audit

The inspection and examination of something. Can be a process, product, financial result, etc. The purpose of an audit is to ensure compliance to requirements. An audit can apply to an entire organization or may be specific to a function, process or production step.

Automatic Renewal

A component or clause of a contract allows an agreement to continue for a defined period if the existing agreement isn't renegotiated within a specified time measured from the expiration of the current contract. Also known as the silent extension or evergreen clause.

Avoidable Cost

Part of the cost of an activity that could be saved by not performing that activity. These are sometimes also considered "soft savings".

Award Fees

Fees paid at the conclusion of a fixed-duration agreement for achieving a desired goal.

Award Term

An incentive in the form of contract extension. When supplier meets annual goals, the contract is extended for an additional length of time. See also Contract extension.

Back Order

Items ordered but not shipped due to a stockout or some other reason. This is widely used as a measure of supplier performance and customer service (e.g., percent back orders, number of occurrences, number of back order days).

Backsourcing

The process of recapturing and taking responsibility internally for processes that were previously outsourced to a contract manufacturer, fulfillment or other outsourced service provider. Backsourcing typically involves the cancellation or expiration of an outsourcing contract and can be nearly as complex as the original outsourcing process.

Balance Sheet

A financial statement that summarizes a company's assets, liabilities, and shareholders' equity at a specific point in time.

Balanced Exchange

In negotiations, a term used to describe an equitable exchange. When one party takes value from a relationship the other party must replace it with equal benefit. For example, I give you a $1 and therefore in exchange, you give me a widget.

Balanced Scorecard

A balanced scorecard is an effective way to track category performance against targets. A balanced scorecard measures category performance, spans across multiple types of value and across multiple areas in those values, and may use multiple KPIs.

Baseline

A basis for comparison set by monitoring the initial performance of a process. The baseline is used as a reference point to evaluate performance improvement efforts.

Baseline Cost

An essential element of Total Cost Analysis is to establish a baseline cost, as it will provide the foundational understanding of all future cost analysis of the product or service being reviewed. In order to arrive at the baseline, examine all of the key cost elements of a product or service. The baseline identifies the key areas of cost and their relative size and proportion in comparison to all of the other costs of producing a product or delivering a service.

Basic Transaction Model

A Sourcing Business Model that typically has a set price for individual products and services for which there are a wide range of standard market options. These products or services are viewed as readily available, with little differentiation in what is offered.

Basic Transaction Provider

A basic transaction provider is a supplier that operates under a simple buy-sell arrangement where buyers typically pay a set "transaction" price for products or services.

BATNA

“Best Alternative To a Negotiated Agreement” or a fallback position should your minimum positions not be met by the Supplier. BATNA provides a course of action to take if negotiations fail and an agreement cannot be reached, such as awarding to a new supplier or maintaining status quo.

Before-the-Facts Controls

Controls that are put in place before activities are executed. They include budgets, plans, forecasts, and procedures.

Benchmark

A measure, reference or standard for comparison; this performance level is recognized as the standard of excellence or target for a specific business process. Any metric that is being used to compare actual performance against.

Benchmarking

The process of comparing performance against the practices of other leading companies for the purpose of improving performance. Companies also benchmark internally by tracking and comparing current performance with past performance. Benchmarking seeks to improve any given business process by exploiting "best practices" rather than merely measuring the best performance. Best practices are the cause of best performance. Studying best practices provides the greatest opportunity for gaining a strategic, operational, and financial advantage. There are seven types of benchmarking: performance, best-in-class, strategic, process, functional, operational and price/cost.

Best Fit

A sourcing solution that can effectively harmonize dynamic business requirements with evolving market forces.

Best Practices

Best practice is a technique, method, process, activity, incentive or reward that is more effective at delivering a particular outcome than any other technique, method, process, etc. Best practices can also be defined as the most efficient (least amount of effort) and effective (best results) way of accomplishing a task, based on repeatable procedures that have been proven over time in a variety of circumstances. Best practices vary by industry or geography depending on the environment being used. Best practice methodology may be applied with respect to resources, activities, cost object, or process.

Best Value

An assessment that bases pricing decisions on the value associated with the benefits received, not on the actual prices or cost. It uses decision criteria that go beyond costs and include decisions on work scope and pricing based on intangibles such as market risks, social responsibility, responsiveness, and flexibility.

Bid

A bid is an offer by a vendor to sell or an offer from a customer to buy.

Bid Evaluation

Evaluation of the provisions of the bid, usually for the purpose of comparing the strengths and weaknesses of the various bids received. Although some organizations use a bid-analysis form to assist in analyzing bids or proposals, there is no uniform practice.

Bid Opening

In a sealed bid, this is when bids are revealed for the first time. This is a defined and controlled process, as it may be subject to a public process when the bid is issued by government.

Bidder's Long List

Those suppliers that meet the buyer's prequalification criteria and that will be requested to submit a first proposal.

Bidder's Short List

Those suppliers that meet the buyer's prequalification criteria and who will be requested to submit a more detail proposal.

Big Data

Big Data is structured and unstructured data that is so large it is difficult to process using traditional database and software techniques. Four "V's" are commonly used to characterize the different aspects of Big Data. These include: Volume, Velocity, Variety and Veracity.

Bilateral Contract

A contract in which both of the contracting parties make promises to each other. Such a contract is formed when an offer is accepted formally by the offeree (e.g., when a supplier sends a signed acknowledgment of a purchase order to a buyer or enters into a bilaterally executed contract document with the buyer).

Bill of Lading

A written receipt or contract, given by a carrier, showing a list of goods delivered to it for transportation. The straight bill of lading is a contract which provides for direct shipment to a consignee. The order bill of lading is negotiable; it enables a shipper to collect for a shipment before it reaches its destination (this is done by sending the original bill of lading 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, and the carrier will then ship the goods to the consignee, and the bill of lading will be surrendered to the carrier. Note: shippers frequently consign shipments to themselves on order bills of lading so that delivery is made only upon the shipper's order; the person or firm to be notified upon arrival of the shipment at destination must be designated.

Bill of Sale

A document formally transferring ownership from the seller to the purchaser.

Blanket Order

A contract under which a vendor agrees to provide goods or services on a purchase-on-demand basis. The contract generally establishes prices, terms, conditions and the period covered (no quantities are specified); shipments are to be made as required by the purchaser.

Blanket Purchase Order

A blanket order is defined as an order the customer makes with its supplier that contains multiple delivery dates scheduled over a period of time, sometimes at predetermined prices. It is normally used when there is a recurring need for expendable goods. Hence, items are purchased under a single purchase order (P.O.) rather than processing a separate P.O. each time supplies are needed. See also Blanket Order, Standing Order.

Blanket Purchasing Agreement (BPA)

A US Government Service Administration buying schedule for buyers and sellers which denotes not only that prices have already been determined to be fair and reasonable but goes a step further by determining the terms under which goods and services will be provided and possibly establishing a single source to deliver them over a period of time.

Blanket Release

An authorization, similar to a purchase request, which is used to confirm a customer's agreement to produce or deliver products identified in an earlier blanket P.O. agreement or contract.

Bloc

A group of countries acting together for political or economic goals; an alliance (e.g., the eastern bloc, the western bloc, a trading bloc).

Bottleneck Products/Services

One of the four Kraljic Matrix spend category segmentation classifications. Bottleneck products/services are items that represent a relative limited value in terms of money but they are vulnerable with regard to their supply. Often bottleneck products/services can only be obtained from one supplier.

BPO

See Business Process Outsourcing.

Brand name or equal specification

A specification that uses one or more manufacturers’ brand names or catalog numbers to describe the standards of quality, performance and other characteristics needed to meet the requirements of a solicitation and provide for the submission of equivalent products.

Breach of Contract

A failure to perform as required by the terms of the contract.

Breach of Warranty

This occurs when the material or product fails to meet the quality or other specification warranted by the supplier.

Broker

A business that carries no inventory and that has no written ongoing agreement with any manufacturer or manufacturer's authorized distributor to sell the products of the manufacturer.

Budget

A budget serves as a vehicle for delegating activities and responsibilities to lower management levels in the organization.

Business

A contractor, subcontractor, supplier, consultant, or provider of technical, administrative, or physical services organized as a sole proprietorship, partnership, association, corporation, or other entity formed for the purpose of doing business for profit. See also Supplier.

Business Analytics

Refers to the skills, technologies and practices for continuous iterative exploration and investigation of past business performance to gain insight and drive business planning. The use of analytical methods, either manually or automatically, is to derive relationships from data to optimize business performance and decision making.

Business Case

Structured proposal for business improvement that functions as a decision package for decision-making.

Business Case Development

Gathering detailed information, conducting rigorous analysis of the data, benchmarking, and estimating measurable results for a strategic sourcing effort. Strategy recommendations are made based on the business case findings prior to actual implementation taking place.

Business Continuity Plan (BCP)

A defined operational plan that is designed to be implemented in the event of disruption of normal operations. Disruptions may be the result of natural disasters, civil or labor unrest, etc.

Business Metrics

Standards of measurement by which efficiency, performance, progress, or quality of a plan, process, or product can be assessed.

Business Model

The rationale for how an organization creates, delivers and captures value. The model includes the components and functions of the business, as well as the revenues it generates and the expenses it incurs. A Sourcing Business Model is a type of business model that is applied specifically to sourcing.

Business Model Mapping

The plan implemented by a company to generate revenue and make a profit from operations. The model includes the components and functions of the business, as well as the revenues it generates and the expenses it incurs

Business Process Outsourcing (BPO)

The practice of outsourcing non-core internal functions to third parties. Functions typically outsourced include logistics, accounts payable, accounts receivable, payroll and human resources. Other areas can include IT development or complete management of the IT functions of the enterprise.

Business Requirements

The needs of business groups, business units or even stakeholder users who consume the goods or services that are procured.

Business Reviews (BRs)

A periodic assessment of the commercial context of a business, its mission statement, goals and strategic plan. The review cadence varies, but typically is held each quarter of the calendar year and are attended by senior managers of functional areas from both supplier and customer organizations. Often referred to as Quarterly Business Reviews.

Business Unit

A part of an organization that is managed like a separate business with its own profit and loss financial reporting. For example, in the General Motors group Chevrolet is a business unit.

Buyer Initiated Payments (BIP)

Automate push payments to suppliers to help you improve control over the payment process.

Buying

Buying, which is commonly referred to as purchasing, is the process of ordering and receiving goods and services. It describes how they will be ordered, which includes request, approval, payment and purchase order record, or P.O., and the receipt of goods. Buying is a subset of procurement, meaning it is a process within procurement.

Buying Green (Sustainability)

The purchasing of sustainably preferable products and services, i.e. products made from recycled or remanufactured materials. A comprehensive set of green purchasing guidelines might be a focus in certain products or commodities.

Capital Expenditure (Capex)

A business expense incurred to create future benefit, such as an acquisition of assets that will have a useful life beyond the tax year. Capex are usually very big sums.

Capital Market

The market for long-term securities, including the stock market and the bond market.

Capital Procurement

Capital procurement is the process of acquiring and managing capital goods and services necessary to complete a capital project. Capital goods are man-made goods used to produce other products for consumption. Capital goods include factories, machinery, tools and equipment. Capital projects, depending on the industry, are typically large investments.

Captive

An offshore location that is operated and staffed by the company that is having the work done for themselves offshore.

Cash account

Account conducted on a cash basis, no credit.

Cash Flow

The total amount of money being transferred into and out of a business. In accounting it's a revenue or expense stream that changes a cash account over a given period. Cash outflows result from expenses or investments. Cash inflows results from sales, loan proceeds, and the sale of assets.

Category

Refers to a group of products or services that share a common set of characteristics. A single product could belong to multiple categories, for example detergents could be included in 'Household Cleaning', "Non- Grocery" and "Liquid". Categories are typically used to analyze consumer usage or warehouse zoning.

Category Compliance

The process of adhering to procurement policies and guidelines that regulate procurement and sourcing activities. A compliance program policy sets operating controls and parameters for all expense commitments and purchasing activities, requires all employees to comply with policies and guidelines, covers activities that span from requisitioning and requirements gathering, negotiations, supplier selection to contract management and compliance (and every step in between).

Category Management

The process of categorizing goods and services and then managing these categories as "business units" to achieve improved outcomes in the most effective and efficient way. It is about taking a project management approach to buying goods and services which is structured, measurable and drives continuous improvement.

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Category Management Plan

A formal plan that outlines how an organization will deploy their sourcing strategy for a specific spend category.

Category Playbook

Contains the details regarding the management of a category.

Category Profile

The Category Profile is the main document that consolidates all information about the product or service. The Category Profile may be a Microsoft Word or Excel file, or an online template if the organization uses eProcurement software. Reporting on the category is done through this profile, to ensure all stakeholders have visibility to the category information. It includes the requirements, objectives and spend data from our Internal Analysis. It also includes the information that we will gather in future work from our External Analysis, such as the current supply state assessment, and from our Cost Analysis which will allow us to segment the category relative to other categories. In summary it includes four parts: requirements gathering, current state assessment, spend analysis and category segmentation.

Category Team

A category team is a network of cross-functional and global procurement/sourcing category owners and is accountable for driving performance in cost, quality and delivery of a given product or service category. They have local, regional and/or worldwide responsibility for sourcing and supply performance of a common Category group. Other business functions like Operations, Engineering, Finance, R&D, Supply Chain, and Marketing participate as needed.

Centralized

Refers to the bringing together of a functional group. For example, a centralized Shared Service Organization or centralized procurement function.

Certificate of Compliance

A document, often required by an importer or governmental authorities, attesting to the quality or purity of commodities. The origin of the certification may be a chemist or any other authorized body such as an inspection firm retained by the exporter or importer.

Change Control Process

The change control process is the vehicle that the parties use in order to introduce changes in the contract that may affect any part of the contract including the services, the service levels, the pricing, and the governance

Change Management

The process of managing and monitoring all changes to products and processes. Change management is a critical concept for sourcing because it helps structure the approach for enabling the sourcing decision. For example, it is a necessary concept for outsourcing a specific service to a third party provider and covers such critical topics as communication, governance, accountability, performance management, and knowledge transfer.

Change Management

The systematic approach to dealing with change both from the perspective of an organization and the individual. Change is the process by which a business gets to a new, desired state. Change management involves handling the challenges that occur when the organization is trying to transition from A to B, or from the old state to the new state. Techniques for implementing and managing change include planning, instilling belief, motivation, repetition and honesty.  

Change Order

A document or digital record which authorizes and provides notification of a modification to a product or order.

Charter

See “Team Charter”

Chief Procurement Officer (CPO)

Senior executive who is responsible for the management and coordination of key sourcing, purchasing and supply processes through a buying organization. Sometimes reports directly to the CEO, but often to the Chief Finance Officer. Sometimes also referred to as the Chief Sourcing Officer (CSO).

Client

Individual or group of organizations entering into an agreement with a supplier for products and services for their own use. Also sometimes referred to as the "buyer".

COD

Cash on Delivery. A payment term.

Cognitive Computing

The development of computer programs that can teach themselves to grow and change when exposed to new data. Sometimes referred to as "machine learning".

Collateral

A security or guarantee (usually an asset) pledged for the repayment of a loan if one cannot procure enough funds to repay (originally supplied as "accompanying" security).

Commercial Risk

Commercial risk is related to the uncertainty with regard to the price we will pay and the costs that we will incur when having outsourced activities to the supplier.

Commodity

Any physical item that is traded in commerce. The term usually implies an undifferentiated product competing primarily on price and availability. Also referred to as a "good" or "supply item".

Commodity Buying

The practice of grouping like purchased items into common groups which are then managed by a single buyer / agent. This practice assumes that an individual who is more focused on a range of products or services can perform that function better than someone who is a novice.

Competitive Bidding

A common method of selecting sources for contract awards. Suppliers interested in participating in the process are asked to submit information on prices and/or other specified elements. Major public sector purchases commonly are awarded on a sealed bid basis, with the law requiring that the award be made to the lowest responsive and responsible bidder. In private sector purchasing, competitive bids are usually solicited from several suppliers with the stated intention of selecting those organizations with which negotiations subsequently will be conducted to arrive at a final contract award decision.

Competitive Dialogue

Competitive dialogue is a procedure introduced into the European Union public procurement system in 2004 to provide an improved method for awarding complex contracts, such as those for public infrastructure and major IT systems. The intent is to allow buyers and suppliers to collaborate on solutions.

Competitive Differentiator

The ability to communicate what makes the company, product or service unique and to stand out from other companies, products or services within the marketplace.

Competitive Pricing

The price paid for a product is based upon competitive bidding from a number of suppliers.

Competitor

Someone who competes for your customers both in product and in geographical location.

Compliance

The act of being in alignment with guidelines, regulations, and/or legislation. Being in compliance ensures that organizations are abiding by both industry regulations and government legislation, as well as ensuring that the organization is able to manage both compliance risk and pass a compliance audit. A balanced approach includes a study of contract compliance, regulatory (financial, product, trade and environmental) compliance and vendor compliance.

Compliance Checking

The functions of Electronic Data Interchange (EDI) processing software that ensures that all transmissions contain the mandatory information demanded by the EDI standard. Compares information sent by an EDI user against EDI standards and reports exceptions. Does not ensure that documents are complete and fully accurate, but does reject transmissions with missing data elements or syntax errors.

Compliance Monitoring

A check done by the VAN/third party network or the translation software to ensure the data being exchanged is in the correct format for the standard being used.

Compliance Program

A method by which two or more trading partners periodically report conformity to agreed upon standards of control and audit. Management produces statements of compliance, which briefly note any exceptions, as well as corrective action planned or taken, in accordance with operating rules. Auditors produce an independent and objective statement of opinion on management statements.

Component

Material that will contribute to a finished product but is not the finished product itself. Examples would include tires for an automobile, power supply for a personal computer, or a zipper for a ski parka. Note that what is a component to the manufacturer may be considered the finished product of their supplier.

Conflict Minerals

Dodd–Frank Section 1502 defines "conflict minerals" as cassiterite, columbite-tantalite, gold and wolframite, as well as their derivatives and other minerals that the US Secretary of State may designate in the future. The government regulates the use of these minerals so organizations should be aware so they can comply with the regulation. See more information here on the Act: SECURITIES AND EXCHANGE COMMISSION | 17 CFR PARTS 240 and 249b | [Release No. 34-67716; File No. S7-40-10] | RIN 3235-AK84 | CONFLICT MINERALS

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Connected Stakeholders

The groups or individuals that have some indirect involvement in sourcing initiative creation, planning and implementation and are also affected by the outcomes. For example, the company's shareholders, customers, suppliers, advisors, consultants and competitors.

Consideration

Something of value given or done as recompense that is exchanged by two parties; that which binds a contract.

Consignment Inventory

Inventory that is owned by a supplier, either on the supplier’s premises or the customer’s, until it is used by the customer.

Contingency Planning

Preparing to deal with calamities (e.g., floods) and non-calamitous situations (e.g., strikes) before they occur. May include an element such as Disaster Recovery Plan or Business Continuity plan.

Continuous Improvement

The ongoing effort to improve products, services, or processes. These efforts can seek "incremental" improvement over time or "breakthrough" improvement all at once. Some successful continuous improvement implementations use the approach known as kaizen which uses small improvements initially to make a big change.

Contract

Is a legal agreement between two or more parties which is enforceable by law and subject to legal remedy when breached. Contracts have four (4) elements: agreement (mutual assent), consideration (reason, legal value), contractual capacity (mutual legal authority) and lawful object (legal subject). The two authorities that define a contract are Common Law and the Uniform Commercial Code. Also referred to as an Agreement.

Contract Administration

The management of all actions after the award of a contract that must be taken to assure compliance with the contract; e.g., timely delivery, acceptance, payment, closing contract, etc. Also sometimes referred to as Contract Management.

Contract Compliance

The goal of contract compliance is to make sure that the organization is buying on contract, honoring commitments and realizing the negotiated pricing, savings quality and service levels that were agreed to.

Contract Lines Items

A contract line item refers to each of the items on PO. Often purchase orders have more than one product or service on the PO. For example, grocery retail may order apples and oranges. Each would be a different contract line item.

Contract Management

The management of contracts made with customers, suppliers, partners, or employees. Contract management includes negotiating the terms and conditions in contracts, ensuring compliance with the terms and conditions, documenting and agreeing on any changes that may arise during its implementation or execution. Sometimes also referred to as Contract Administration.

Contract Managers

Persons responsible for selecting the right contract, contract negotiation and contract compliance by buyer and seller.

Contract Research Organizations (CROs)

An FDA term meaning a person that assumes, as an independent contractor with the sponsor, one or more of the obligations of a sponsor, e.g., design of a protocol, selection or monitoring of investigations, evaluation of reports, and preparation of materials to be submitted to the Food and Drug Administration.

Contract Type

Normally refers to the pricing term of the agreement between a buyer and a seller. Thus, a contract may be a “fixed-price,” “cost-plus” type or a “cost reimbursement” type.

Contracting

Engaging in contractual relationships with one or more parties.

Contractor

A person who agrees to furnish goods or services for a certain price; may be a prime contractor or subcontractor.

Cooperative purchasing

The combining of requirements of two or more organizations or companies to obtain the benefits of volume purchases and/or reduction in administrative expenses. Most often used in the public sector for governmental or non-profit purchases.

Core Competency

Those activities through which an organization achieves sustainable competitive advantage. Core competencies are seen as processes that are central to the way an organization works. It fulfills three criteria; 1) it provides consumer benefits, 2) it is not easy for competitors to imitate, and 3) it can be leveraged widely to many products and markets. A core competency can take various forms, including technical/subject know-how, a reliable process and/or close relationships with customers and suppliers. It may also include product development or culture, such as employee dedication. (Modified from Council of Supply Chain Management Professionals glossary of terms)

Corporate Governance

Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, management, and the board of directors. Other stakeholders include labor (employees), customers, creditors (e.g., banks, bond holders), suppliers, regulators, and the community at large.

Corporate Hierarchies

A term coined by Oliver Williamson that describes corporate hierarchy structure with high administrative control and a legal system that is "deferential to the management."

Corporate Social Responsibility (CSR)

Efforts to contribute to a better world, a better environment and better labor conditions. The idea is to develop solutions in such a way that requirements of the current world population are met without doing harm to the needs of future generations. Organizations need to balance the interests of customers, employees, the environment, and its shareholders (e.g. serving the needs of people, planet and profit).

Cost Analysis

In cost accounting, the examination, quantification, and explanation of the effects of cost drivers. The results are often used for continuous improvement programs to reduce throughput times, improve quality, and reduce cost.

Cost Avoidance

An important type of soft benefit. A cost reduction opportunity that results from an intentional action, negotiation or intervention. The practice of avoiding of costs that could otherwise have been incurred. For example, a project that automates a manual process could allow the company to increase the number of transactions processed without adding incremental headcount. You haven't reduced the operating budget, but you have enabled more productivity without additional cost.

Cost Bar

The Cost Bar is a graphic illustration that highlights all the key elements of cost for producing a product or delivering a service.

Cost Bar

The start of a cost analysis that breaks down the cost of the good or service into its individual costs drivers.

Cost Based Pricing

See cost reimbursement.

Cost Driver

In accounting, any situation or event that causes a change in the consumption of a resource, or influences quality or cycle time. An activity may have multiple cost drivers. Cost drivers do not necessarily need to be quantified; however, they strongly influence the selection and magnitude of resource drivers and activity drivers.

Cost Model

A tool used during the strategic sourcing process to identify all supply chain costs of the good or service. It is best used in beginning stages of the sourcing effort and works to justify the efforts through the opportunities uncovered. See also Activity Based Costing.

Cost Models

Detailed financial models that capture input costs (such as materials, labor and overhead) and use a formula (based on previous yields, Bills of Material, total capacity) to calculate the total cost.

Cost Plus Award Contract

The contractor is paid a higher fee if he meets certain performance metrics or benchmarks for successful performance.

Cost Plus Fixed Fee Contract

The contractor will get back costs plus a predetermined designated amount. This amount does not change regardless of how much is spent on materials.

Cost Plus Incentive Contract

The contractor receives a larger fee if he or she meets certain goals such as keeping costs down or completing the project in a designated time.

Cost Plus Percentage of Cost Contract

A contractor's fee rises as the actual costs rise. This is disfavored because there is no incentive for cost control on the part of the contractor, and the federal government is prohibited from entering into this type of contract for work performed.

Cost Reductions

Purchasing cost reductions are sustainable in character. These may be the result from a change of specification, a change of supplier, or omitting any unnecessary product quality requirements.

Cost Reimbursement

A compensation model fully reimburses a supplier for their actual cost plus an additional markup. The markup can either be variable or a fixed fee. By definition, cost reimbursement is a variable price agreement. A cost-reimbursement approach is appropriate when it is too difficult to estimate a fixed price with sufficient accuracy and when the supplier will not agree to assume the risks associated with unknowns. A cost-reimbursement compensation is commonly used to develop a new product or service or for research and development activities. For example, the U.S. government has agreed to a cost-reimbursement compensation model with military defense companies that are developing new technologies for national defense.

Cost Reimbursement Contract

Also known as a cost plus contract, cost reimbursement contracts are used by governments, private individuals and businesses that are embarking on building or construction projects, on research projects or on other endeavors where a certain amount of materials will need to be purchased. A family of pricing arrangements or contract types that provide for payment of allowable, allocable, and reasonable costs incurred in the performance of a contract, to the extent that such costs are prescribed or permitted by the contract. These contracts establish an estimate of total cost for the purpose of obligating funds and establishing a ceiling that the contractor may not exceed without the approval of the buyer. Types of cost-reimbursement contracts include: (a) cost without fee, (b) cost-sharing, (c) cost-plus-incentive fee, (d) cost-plus ward fee, and (e) cost-plus fixed fee.

Cost Savings

This is the amount the company saved through the process of sourcing the goods or services. Cost Savings can be difficult to define. In the simplest form, it can be defined by identifying the difference between what was previously paid or expected costs for a good or service. For example, in 2010 Item A cost the company $19 each. After bidding the product through a competitive sourcing process, the company now pays $14 each. That is a cost savings of $5. More complicated formulas may factor in total costs, or soft costs. This resource in the SIG Resource Center provides an overview of cost savings calculation methods: http://www.sig.org/src.php?id=6913

Cost Savings Incentive

See Gainsharing.

Costs

Costs shall be quantifiable and may include, without limitation, the price of the given good or service being purchased; the administrative, training, storage, maintenance or other overhead associated with a given good or service; the value of warranties, delivery schedules, financing costs and foregone opportunity costs associated with a given good or service; and the life span and associated life cycle costs of the given good or service being purchased. Life cycle costs may include, but shall not be limited to, costs or savings associated with construction, energy use, maintenance, operation, and salvage or disposal.

Creative Value Allocation

A process outlined in the book "Getting to We-Negotiating Agreement for Highly Collaborative Relationships" which uses a systematic process for fairly allocating value.

Credit Agency

A credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves. In some cases, the servicers of the underlying debt are also given ratings.

Critical Products / Services

Also referred to as strategic products/service. Critical products and services fall under one of the four Kraljic Matrix quadrants. In general these are products or services that are high-tech and high volume, which are often supplied at the customer specification.

Cross Docking:

A practice in the logistics of unloading materials from an incoming semi-trailer truck or railroad car and loading these materials directly into outbound trucks, trailers, or rail cars, with little or no storage in between. This may be done to change the type of conveyance, to sort material intended for different destinations, or to combine material from different origins into transport vehicles (or containers) with the same destination or similar destinations. Advantages of retail cross-docking include:

·        Streamlines the supply chain, from point of origin to point of sale
·        Reduces labor costs through less inventory handling
·        Reduces inventory holding costs by reducing storage times and potentially eliminating the need to retain safety stock
·        Products reach the distributor, and consequently the customer, faster
·        Reduces or eliminates warehousing costs
·        May increase available retail sales space
·        Less risk of inventory handling

Cross-Functional Team

A cross functional team is made up of individuals that come from different departments or functions within an organization. When managed properly, the cross-functional sourcing team approach can provide flexibility, multifunctional knowledge and control/coordination mechanisms for fast responses to new competitive demands that traditional structures/approaches usually cannot achieve.

Crowdsourcing

According to Jeff Howe, "Wired" journalist and author of "Crowdsourcing", crowdsourcing is the act of taking a job or service traditionally performed by a designated person or team and sourcing it to a large group of people in the form of an open call.

Customer Analytics

These analytics can look at the data about an enterprise's customers and present it so that better and quicker business decisions can be made. For example, customer relationship analytics provide customer segmentation groupings, dividing customers into those most and least likely to repurchase a product. It also provides profitability analysis, meaning a list of customers that lead to the most profit over time.

Customer of Choice

An organization that suppliers are willing to prioritize over other organizations. Typical suppliers will make investments and provide better quality, service or overall value for their best customers.

Customer Relationship Management (CRM)

The principles, practices, and guidelines that an organization follows when interacting with its customers. From the organization's point of view, this entire relationship not only encompasses the direct interaction aspect, such as sales and/or service related processes, but also in the forecasting and analysis of customer trends and behaviors, which ultimately serve to enhance the customer's overall experience.

Cycle Counting

The counting of a certain number of items every workday with each item counted at a prescribed frequency.

Cycle Stock

The active portion of an inventory – i.e., that part of inventory, which is depleted through regular withdrawals or use, and is replenished through repetitive orders.

Cycle Time

In a purchasing context, the replenishment cycle represents the period of time required to order and make available for required stock (e.g., the time between receipt of the requisition and delivery of the material to the requisitioner).

Decision Tree

A decision support tool that uses a tree-like graph or model of decisions and their possible consequences.

Delivery

The formal handing over of property; the transfer of possession, such as by carrier to purchaser.

Delivery Clause

Sets the specific items to be delivered and the due date(s) for delivery, often detailed in a separate schedule or exhibit. Delivery clauses may be very specific, including exact catalog IDs or manufacturer part numbers, quantities and delivery locations. Delivery clauses may represent a significant portion of the contract.

Demand

What customers or users actually want. Typically associated with the consumption of products or services as opposed to a prediction or forecast.

Demand Management

Demand management is a unified method of controlling and tracking business unit requirements and internal purchasing operations. It helps organizations remain engaged in their supplier relationships and related advantages. Organizations use demand management systems to address external spending factors, arrange purchase orders and eradicate waste. Demand management focuses on the volume of products that are purchased from providers, rather than individual product pricing, in contrast to conventional sourcing initiatives. Demand management is also known as consumption management or strategic spend management. Sometimes demand management is tracked in a cost savings report. It is considered an important component in helping the sourcing organization create and deliver value to the organization. Search the SIG Resource Center for the terms "demand management" and discover some examples of its usage and how organizations factor it into cost savings.

Demurrage

The detention of a ship, railroad, car or truck beyond a specified time for loading/unloading; the payment required and made for the delay.

Design of experiments (DOE)

A systematic method to determine the relationship between factors affecting a process and the output of that process. In other words, it is used to find cause-and-effect relationships. 

Design specification

A specification setting forth the required characteristics to be considered for award of contract, including sufficient detail to show how the product is to be manufactured. It is typically part of the Scope of Work, Workscope, Statement of Work, or Requirements in an RFx document. Most often used in Request for Proposals (RFPs).

Design Thinking

Design thinking is a formal method for practical, creative resolution of problems and creation of solutions, with the intent of an improved future result. In this regard it is a form of solution-based, or solution-focused thinking.

Desired Outcomes

A term that defines collaboratively negotiated strategic business outcomes expressed in terms of a limited set (ideally no more than 5) of high level success measures.

Destination

The place to which a shipment is consigned.

Developing

In reference to a poor agricultural country that is seeking to become more advanced economically and socially.

Direct Cost

see Direct Spend

Direct Cost

Those costs, which are assignable to a specific product, primarily classified as direct labor cost, direct material cost, or purchased cost. These costs usually are treated as variable and do not include general overhead or common allocations.

Direct Materials

All purchased materials and services that become part of an organization's value proposition, such as components used in the manufacturing of an organization's end product.

Direct Procurement

Direct procurement is the act of acquiring raw materials and goods that are used for production. Purchases are typically made in large quantities from a pool of suppliers. Direct procurement represents a large percentage of total spend. Sometimes referred to as Direct Spend.

Directed Solution

The process of selecting a supplier or solution through a pre-determined outcome, often dictated by a Business Unit. This effort forgoes the benefits and value generated through Strategic Sourcing.

Discount 1% 10 Net 30

A payment term that is frequently used and means 1% discount if payment is received within 10 days, otherwise full payment within 30 days of invoice date.

Down-Select

To narrow the field of supplier choices by systematically considering desired criteria.

Driving Blind Disease

One of Vested's 10 Ailments. This ailment affects many business relationships; the lack of a formal governance process to monitor relationship performance and measure success.

Drop shipment

Merchandise which is shipped by a manufacturer directly to a customer in response to the seller who collects orders but does not maintain an inventory.

Due Diligence

Detailed assessment of one or more business processes or production lines, culture, assets, liabilities, intellectual property, judicial and financial situations in order to make outsourcing decisions.

Dutch Windmill

A combination of buyer's purchasing portfolio and supplier's customer portfolio, leading to 16 different business-to-business relationships, each of which call for a different sourcing strategy.

E-Auction

A process in which a purchaser pre-qualifies multiple suppliers and invites them to participate in a fixed-duration Web-based bidding or sourcing event.

E-Catalogues

On-line resources used for more efficient order handling, improved logistics, and improved and better payment processing. May be integrated with an organization's Enterprise Resource Planning (ERP) system.

E-procurement

Electronic procurement that occurs when the transactional activities of the purchasing process are conducted electronically, typically over the Internet, to shorten the cycle time and lower the transaction costs of the acquisition process.

E-Procurement solutions

Any number of solutions providing e-procurement activities. These solutions are also sometimes referred to as Source-to-Pay suites, or Procure-to-Pay suites, or "Req to Check" solutions.

E-Sourcing

See e-Procurement.

e-Tendering

An electronic document that describes a business transaction to be performed; a bid or offer.

Early Supplier Involvement (ESI)

The suppler management strategy which involves suppliers during the beginning of the product design process to draw on their experience and knowledge in an effort to better designs and illicit higher quality results.

Economic Life

A method of costing out all of the various costs that will affect a commodity throughout its own life cycle. The tracking of costs is individual to each commodity one by one, rather than to the commodity population on an annual basis.

Economic Model

The concept of economic models has evolved over time as modern businesses shifted their thinking away from "transactional" economic models (you pay 218 Yuan to print more business cards at your Shanghai hotel), to output and outcome-based approaches (the supplier is paid when a certain output or strategic business objective is achieved).

Economic Order Quantity

Economic order quantity is the level of inventory that minimizes the total inventory holding costs and ordering costs. The framework used to determine this order quantity is also known as Wilson EOQ Model.

Economically Disadvantaged Area Business

Small business eligible for certification as socially disadvantaged business or economically disadvantaged area business: a small business entity organized for profit, including an individual, partnership, corporation, joint venture, association, or cooperative that is a certain percentage owned and is operationally controlled on a day-to-day basis by citizens of the United States. The areas of economic disadvantage are determined by the US Department of Labor.

Electronic catalogs

See e-catalogs.

Electronic Data Interchange (EDI)

The direct computer-to-computer exchange of business in standard format. Transaction documents, such as purchase orders, invoices, and shipping notices, are transmitted electronically and entered directly into a supplier’s (or buyer’s) computer or into a third-party network for processing. Electronic funds transfer is a form of EDI whereby funds (or payments) are electronically exchanged from one party to another.

Electronic Marketplace

A marketplace on the internet where transactions between business partners can be made. Electronic marketplaces can include the business-to-business, business-to-consumer, or business-to-government purchase and sale of goods or services through the Internet. Typically processes include e-Tendering, e-Auctioning, vendor management, catalogue management, Purchase Order Integration, Order Status, Ship Notice, e-Invoicing, e-Payment, and contract management. See also Electronic Procurement Solution; Supplier Exchange.

Electronic sourcing

See e-sourcing.

Environmentally Preferable Product (EPP)

A product or service that has a lesser or reduced impact on human health and the environment when compared with competing products or services that serve the same purpose. Such products or services may include, but are not limited to those which contain recycled content, minimize waste, conserve energy or water, and reduce the amount of toxins either disposed of or consumed. Usually used within the context of green purchasing or sustainable purchasing or corporate responsibility.

Equal or approved equal

Used to indicate that an item may be substituted for a required item if it is equal in quality, performance and other characteristics.

Equity Partnerships

A legally binding entity. Equity Partnerships take different legal forms, from buying a supplier (an acquisition), to creating a subsidiary, to an equity-sharing joint venture or entering into a co-op arrangement. Equity Partnerships are best used when an organization does not have adequate internal capabilities and they do not want to outsource.

ERP (Enterprise Resource Planning) System

A company-side information system for managing an organization's operational, support, administrative, human resources and financial resources. Electronic sourcing or procurement solutions often integrate with ERP systems.

Escalation clause

A contract provision which permits the adjustment of contract prices by an amount or percent if certain specified contingencies occur, such as changes in the vendor's raw material or labor costs.

Escalation Process

A detailed process that describes how issues and conflicts move through management levels for resolution. It is an important factor for third party relationships and should be documented in RFPs and other bid documents, as well as in the contract, performance management and change management plans.

Euro

The currency unit/symbol of the European Monetary Union.

European Union

A supranational organization created in the 1950s to bring the nations of Europe into closer economic and political connection. At the beginning of 2012, the 28 member nations were Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom.

Evaluation of responses

The process of analyzing the responses to a Request for Information, Request for Proposal or Request for Quote. The responsiveness and fitness for business is included along with a pricing analysis. The process usually results in an analysis and recommendation that impacts the contract negotiations, creation and management.

Evergreen Contract

An automatic contract extension. Vested agreements often create an Evergreen Contract where the supplier earns a contract extension at the end of each year. For example, at the end of year one the supplier can earn a 6th year. At the end of year two the supplier can earn a 7th year. This in essence creates an Evergreen Contract with a rolling five-year contract duration that highly motivates the supplier to keep making investments in order to earn the contract extension.

Exchange Rate Risk

The risk that the value of an asset or liability will change because of a change in exchange rates.

Exclusion Clause

A component or clause of a contract that seeks to restrict the rights of the parties to the contract. Also sometimes known as the Exemption Clause.

Exit Management Plan

A plan that facilitates a smooth, effective transition of services delivery, minimum disruption of ongoing delivery, and efficient completion of all agreement obligations. The plan is invoked with the issuance of a formal termination notice under the agreement, specifying: (1) the portion of services included in the scope of termination; (2) the estimated exit transition period and vendor delivery centers affected; and (3) the period of time following a termination notice that the parties will have to agree on the specific scope of transition services provided by the vendor.

Expedite

When you have ordered a product and you contact the shipper to attempt to receive the product at an earlier time than originally planned, or when you place an order with a request to rush delivery.

External Analysis

Involves acquiring knowledge about factors that affect the supply industry of a given spend category in order to formulate the category sourcing strategy.

External Cost Drivers

Costs that are not internal to the corporation, but may be impacted in the following areas:

Product Cost - Product manufacturing complexity, suppliers sourcing strategies, exchange rates, etc.
Manufacturing Process - Labor type and rate, capacity and utilization rate, fixed or variable order costs, supplier capabilities, etc.
Freight - Freight rates, mode of transportation, distance, interchange points, handling, rating costs, etc.

External factors

Those factors which determine the degree of availability of a certain good or service and which cannot be influenced by individual organizations. Also sometimes referred to as uncontrollable factors.

External Stakeholders

The groups or individuals who are not directly involved in the affairs of sourcing initiatives, but are affected by the outcomes. For example, the government, local community, pressure groups, etc.

Fair Market Value

The value of an item as determined by negotiation between purchasers and suppliers, which would be acceptable as a basis for a purchase and sale.

FAO

Finance and Accounting Outsourcing is a form of outsourcing that involves the contracting of the operations and responsibilities for finance and accounting functions (or processes) to a third-party service provider. Accounts Payable, Accounts Receivable, Management reporting and Fixed Asset Management are commonly outsourced functions.

Fill Rate

The proportion of all stock requisitions that are filled from stock that is present on the shelf. The inverse of this is “stock-out rate,” which is the percentage of orders for which there is no stock on the shelves and therefore the order cannot be filled (resulting in a “back order”). These measurements can be calculated for any time period; in some retail or distribution firms it might be computed daily or weekly.

Financial Risk Tolerance

The degree to which an organization is willing to take on risks.

Financial Statements

Present the results of operations and the financial position of the company. A financial statement (or a financial report) is a formal record of the financial activities of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form that is easy to understand. It presents the results of operations and the financial position of the company. Four commonly used statements are: Balance sheet, Income Statement, Cash Flow Statement and Statement of retained earnings.

First Cost

This is the initial price paid for an item. It does not take into account any costs beyond receipt and installation.

Fiscal Year

The 12 months between one annual settlement of financial accounts and the next; a term used for budgeting, etc.

Fishbone Diagram

An analysis tool used to provide a systematic way of understanding cause and effect. The design of the diagram looks like the skeleton of a Fishbone, hence, the name fishbone diagram. The Fishbone diagram assists teams in categorizing the many potential causes of problems or issues in a systematic way and helps identify root causes.

Fit-For-Purpose

A concept usually applied to quality or technical specifications, which denotes the use of levels of quality or specifications, which are of an adequate level, but not more than is necessary.

Fixed Cost

A cost that is primarily related to a given time period and does not change due to production volume. Examples include rent, depreciation, and property taxes.

Fixed Price

A type of pricing clause included in a contract where a specified amount is paid for a specific product, service, or goal. In a fixed-price compensation method the buyer and supplier agree in advance to a "price." The fixed price may relate to an individual transaction (e.g., price per call, per minute, per FTE, per unit, per shipment, per square foot, etc.) or to a bundled set of transactions together (e.g., fixed monthly management fee to manage IT maintenance.) See also Firm Fixed Price.

Fixed-Price Contract or Agreement

A fixed price contract is a contract wherein a specified amount of money is promised in order to pay for the completion of a project or task. Fixed price contracts are commonly used in building/construction situations. The contract may either have a firm fixed price or, in certain cases, an adjustable fixed price where a maximum price and/or a target price are specified.

FOB DESTINATION, Freight Prepaid and Added

Freight term in which the buyer pays freight charges. Seller is responsible for goods in transit.

FOB DESTINATION, Freight Prepaid and Allowed

Freight term in which the seller pays freight charges. Seller is responsible for goods in transit.

FOB ORIGIN, Freight Prepaid and Added

Freight term in which the buyer pays freight charges. Buyer is responsible for goods in transit.

FOB ORIGIN, Freight Prepaid and Allowed

Freight term in which the seller pays freight charges. Buyer is responsible for goods in transit.

Force Majeure

Force Majeure (French for "superior force") is a common clause in contracts which essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, or act of God (e.g., flooding, earthquake, volcano), prevents one or both parties from fulfilling their obligations under the contract.

Free Rider Problem

Based on an article written on the effects of unregulated grazing on common land, a free rider problem occurs when those who benefit from resources, goods, or services do not pay for them, which then results in either an under-provision of those goods or services, or an overuse or degradation of the service.

Free Trade

International trade free from government interference, especially trade free from tariffs or duties on imports.

Functional Aggregator (FA)

An associate who specialize buying the same material or service across multiple business units, and are generally assigned to manage the spend for a specific commodity or service across multiple business units.

Gainshare/Cost Savings Incentive

A monetary incentive where a buyer and supplier share in costs savings. The focus is on driving out costs that are of limited value and sharing the costs savings. The concept provides an incentive to both the buyer and supplier organizations to focus on continually re-evaluating, re-energizing, and enhancing their business relationship. All aspects of value delivery are scrutinized, including specification design, order processing, inbound transportation, inventory management, obsolescence programs, material yield, forecasting and inventory planning, product performance and reverse logistics. The focus is on driving out limited value cost while protecting profit margins.

Game Theory

A branch of applied mathematics that is used in the social sciences, most notably in economics, as well as in biology, engineering, political science, international relations, computer science, and philosophy. Game theory attempts to mathematically capture behavior in strategic situations, in which an individual's success in making choices depends on the choices of others, a sort of "Win-Win" strategy. Game theory attempts to look at the relationships between participants in a particular model and predict their optimal decisions. This is also sometimes referred to as Gamification.

Gap Model

The Service Quality Model, also known as the Gap Model, was developed in 1985. It highlights the main requirements for delivering a high level of service quality by identifying five ‘gaps' that can lead to unsuccessful delivery of service. The first four gaps are referred to as; Knowledge gap, Design gap, Delivery/Performance gap, and Communications gap. The fifth gap is the total accumulation of variation in gaps 1 through 4 and represents the difference between expectations and perceived service,

Glidepath

Refers to a formula that defines the asset allocation mix of a target date fund, based on the number of years to the target date. The Glidepath creates an asset allocation that becomes more conservative (i.e., includes more fixed-income assets and fewer equities) the closer a fund gets to the target date. The term is derived from an aircraft's line of descent to land.

Global Business Services (GBS)

GBS is an evolution of the shared services model that goes beyond transactional functions to deliver higher-value work. GBS leverages global opportunities across multiple locations and manages them accordingly to provide services. GBS is an integrated and mature evolution of the shared services model. Its services and objectives are similar to those as of any global multi-functional shared services organization. However, GBS runs activities as a business and operates as a partner rather than service provider.

Global Sourcing

Global sourcing is the process of sourcing goods and services from the international market across geopolitical boundaries. It aims to exploit global efficiencies in the delivery of a product or service. These efficiencies include low cost skilled labor, cheaper raw materials and other economic factors like tax breaks and low trade tariffs.

Goods

All types of personal property including commodities, materials, supplies, and equipment.

Governance

The management framework within which project and supply program decisions are made. Governance includes: a formal structural framework, written policies, a decision making structure and a process for managing business activities of a commodity strategy.

Governance (as related to buyer-supplier relationships)

The management of cohesive policies, processes, and decision rights that enable parties to work together effectively manage a spend category. In short, governance involves the development of processes that bring together the appropriate people, processes and technology to keep your sourcing solution running as a well-run system. The Governance Academy suggests that good governance includes five key functions that serve to manage a virtual of key stakeholders that are involved directly or indirectly in executing the sourcing solution. These functions are contract compliance, financial management, managing issues and risks, managing performance, and managing relationships.

Governance Structure (as related to buyer-supplier relationships)

The organizational framework by which an organization governs.

Gresham's law

An economic principle that states "Bad money drives out good". 

Guarantee

To assume responsibility for a debt.

Guardrails

Agreement boundaries or structured parameters that can block the parties from developing a formalized agreement to frame their Vested business relationship. Guardrails provide the team that is drafting the agreement with the authority to develop a deal within the clearly stated boundaries. If the parties establish an agreement within the guardrails, no last minute surprises will occur because, by design, the agreement is within boundaries already established.

Hard Savings

Implementable savings that will result in a budget reduction.

HRO

Human Resources Outsourcing is a form of outsourcing that involves the contracting of the operations and responsibilities for human resources functions or processes to a third-party service provider. The most common forms of HRO are outsourcing transactional functions such as Payroll or Employee Services / Benefits Administration.

Human Resource Analytics

Used to make decisions based on the parameters such as recruitment cost per hire, new hire failure factor, employee turnaround rate, and bonus compensation rate. Larger enterprises are hiring data scientists to work in, and sometimes head, human resources.

IDIQ Contract

IDIQ contract is a U.S. federal government contracting acronym meaning indefinite delivery/indefinite quantity. This type of contract provides for an indefinite quantity of supplies or services during a fixed period of time.

IFP

Invitation for Proposal (IFP), also known as Request for Quote (RFQ).

Implementation Strategy

The specific plan of action to pursue in order to achieve the cost savings opportunities identified in the business case, specific strategies include incumbent supplier(s) strategy, Request for Proposal, preferred supplier relationship, etc.

Inbound Freight and Duties

Freight costs associated with the movement of material from a vendor to the buyer and the associated administrative tasks. Duties are those fees and taxes levied by government for moving purchased material across international borders. Customs broker fees should also be considered in this category.

Incentive

A type of award for the company or the service provider. Incentives can be monetary or nonmonetary. Incentives motivate service providers to make decisions that ultimately will meet the company's desired outcomes. In a Vested pricing model, incentives should be based on achievement of incremental performance of the Desired Outcome.

Incentive Framework

A mechanism to measure performance and trigger incentive awards or payments.

Income Statement

A financial statement that measures a company's financial performance over a specific accounting period. Income statements are divided into two parts: an operating section and a non-operating section.

Incumbent Supplier

The current state supplier with whom a buyer has the preferred status, highest spend and / or longest relationship in a particular commodity area. An incumbent supplier implementation strategy involves negotiating directly with the current incumbent supplier in an effort to improve pricing, service terms, etc.

Index Pricing & Price Indices

Pricing tied to a published index. Link may be in absolute terms (e.g. $.10 below index) or % terms (e.g. 10% below index). Frequency of updates to contracted price should occur based on need (e.g. every 6 months, quarterly, daily).

Indirect Materials

All purchased materials and services that do not become part of the company's value proposition. May be classified into MRO suppliers, investment goods, and services.

Indirect Purchasing

Purchasing of all goods and services that are used to support an organization's infrastructure and back-office activities. Many organizations also include the purchase of capital investments as an indirect purchasing activity.

Indirect Spend

The cost of resources or activities such as operation costs and overhead that cannot be directly traced to a final cost object since no direct or repeatable cause-and-effect relationship exists. An indirect cost uses an assignment or allocation to transfer cost. These are goods and services typically handled through the Sourcing organization and cover everything from pens and paper to snow removal services to training services to employee benefits. After an organization classifies the money they spend into direct or indirect spend, they then further classify into spend categories. Although there is no formal taxonomy for classifying spend, many organizations will use the UNSPSC to help classify spend. It is also sometimes referred to as Indirect Costs. See Spend Category below.

Industry

All organizations that provide similar services or products in any location.

Inherent Perverse Incentives

Undesirable outcomes of well-intentioned incentives.

Innovation

Supplier innovation focuses on identifying new and creative ways to drive value with your supply base. Innovation is a consolidation of new ideas that create actions and value outcomes that are: desirable, viable and possible.

Innovation and Transformation Committee

Joint management team that governs the process of managing innovation and transformation in the outsourced processes in order to enhance delivered value.

Insourcing

The opposite of outsourcing, that is, a service performed in-house.

Insurance

A contract between an insurance company and a person or group which provides for a money payment in case of covered loss, accident or death. Certificates of Insurance are typically a necessary component to a bid response in an RFx strategic sourcing process.

Intellectual Property (IP)

Intellectual property refers to creations of the mind: inventions, literary and artistic works and symbols, as well as names and images used in commerce. Intellectual property is divided into two categories. Industrial Property includes patents for inventions, trademarks, industrial designs and geographical indications. Copyrights cover literary works (such as novels, poems and plays), films, music, artistic works (e.g., drawings, paintings, photographs and sculptures) and architectural design. Rights related to copyright include those of performing artists in their performances, producers of phonograms in their recordings, and broadcasters in their radio and television programs.

Internal Cost Drivers

Costs internal to the organization controllable by internal actions, including in part:

Inventory - Lead times, service level requirements, planning accuracy, location, special storage needs, etc.
Materials - Specifications, standardization practices, bidding practices, purchasing leverage, etc.
Maintenance - Task time, task frequency, cost of failure, etc.

Internal Rate of Return (IRR)

A financial metric for cash flow analysis, often used for evaluating investments, capital acquisitions, project and program proposals, and business case scenarios. IRR is sometimes referred to as "economic rate of return" (ERR).

Internal Stakeholders

The groups or individuals who are directly involved in the creation, planning and implementation of sourcing initiatives. For example, the company's employees.

International Standard Organization (ISO)

An organization within the United Nations to which all national and other standard setting bodies (should) defer. Develops and monitors international standards. There are many ISO standards covering many different types of processes.

Inventory

Material that is maintained or held by a company to sustain operational requirements.

Inventory Accuracy

When either a physical or cycle count is performed. For example, if the percentage of SKU’s are counted and nine of 10 match the recorded volumes, then the accuracy is 90%.

Inventory Holding (Carrying) Cost

The cost of keeping inventory on hand, including the opportunity cost of invested funds storage and handling costs, taxes, insurance, shrinkage, and obsolescence-risk costs. Firms usually state an item’s holding cost per time period as a percentage of the item’s value, typically between 20-40 percent per year.

Investment Based Model

An equity partnership in which the parties form a single balance sheet entity, also known as a merged in-source solution. This model can take different legal forms, from buying a service provider, to becoming a subsidiary, to equity-sharing joint ventures. Equity-based partnerships often are born out of a company's need to acquire mission-critical goods and services. Also, these partnerships often require the strategic interweaving of infrastructure and heavy co-investment. Most equity partnerships are in place on a continuing basis and often conflict with the desires of many organizations to create more variable and flexible cost structures on a company's balance sheet.

Invisible Hand Theory

A concept introduced by Adam Smith in 1776 that says society benefits as a whole from a multiplicity of trading transactions as competition drives fairness and honesty.

Invitation for Proposal

See Request for Proposal.

Invoice

A list of goods or services sent to a purchaser showing information including prices, quantities and shipping charges for payment.

ISO (International Organization for Standardization)

Mostly known as ISO 9001. It is an international standard that gives requirements for an organization's quality management system (QMS). It is the family of standards published by the International Organization for Standardization (ISO) often referred to collectively as the "ISO 9000 series " or ” ISO 9000 family ". These standards help to improve quality and minimize problems with products and services, reduce waste, improve customer service and implement continuous improvement in operations.

ISO 9000

A comprehensive set of process and procedure quality management standards developed by the international Standards Organization. Suppliers selling to firms that have adopted ISO 9000 standards must produce their products using processes and methodologies that employ the quality management standards specified by ISO 9000.

ITO

Information Technology Outsourcing or ITO is a company's outsourcing of technology based work to other companies. The most common forms of ITO are programming, software development and maintenance.

Joint Venture

A Joint Venture (JV) covers a wide range of collaborative arrangements in which two or more businesses decide to share costs, management, and profits with a common goal. A JV is a legally binding business arrangement where each party contributes capital, intellectual property, personnel and other resources to design and implement a new business.

Junkyard Dog Syndrome

One of Vested's 10 Ailments describing when the decision to outsource usually means jobs are lost as the work and jobs transition to the outsource provider. Employees hunker down and stake territorial claims to processes that "absolutely must" stay in house.

Just-In-Time (JIT) System

The basic JIT concept is an operations management philosophy whose dual objectives are to reduce waste and to increase productivity. Operationally, JIT minimizes inventory at all levels; materials are purchased, transported, and processed “just in time” for their use in a subsequent stage of the manufacturing process.

Key Man Provision

A contract clause that spells out requirements for the supplier and/or buyer to name key positions or even individuals in the contract as "key" (or essential) to the success of the relationship. Often a key man contract clause states certain individuals should stay in a role ranging from 18 month to 48 months.

Key Performance Indicator (KPI)

A measure that is of strategic importance to a company or department. For example, a supply chain flexibility metric is Supplier On-time Delivery Performance that indicates the percentage of orders that are fulfilled on or before the original requested date.

Kitting

When a warehouse is required to combine multiple products into new product kits, the act of pulling these pieces together is called kitting. This process results in faster field processes by having the exact number of “pieces” available for installation, reduces loss and inventory and can be bundled into kits by manufactures as a value added service.

Knowledge Acquisition

Process of locating, collecting, and refining knowledge and converting it into a form that can be further processed by a knowledge-based system.

Knowledge Assessment and Development

An ongoing process by which employees assess how knowledgeable they are on a series of category management related topics.

Knowledge Transfer

Structured process of imparting pre-existing or acquired information to a team or a person, to help them attain a required level of proficiency in skill.

KPO

Knowledge process outsourcing (KPO) is when complex expert services are performed by workers in a different company which may be in the same country or in an offshore location to save cost. Unlike the outsourcing of manufacturing, this typically involves high-value work carried out by highly skilled staff. KPO firms, in addition to providing expertise in the processes themselves, often make many low level business decisions—typically those that are easily undone if they conflict with the objectives or policies of their customer, the outsourcing company.

Kraljic Matrix

Born out of Peter Kraljic's pioneering "Harvard Business Review" article. An easy, logical way to segment suppliers in a 2 x 2 matrix based on risk and profit impact.

Kraljic Purchasing Portfolio

A four-box matrix that reflects the segmentation of spend based on an assessment of the value of the spend (X-axis) relative to the market risk to acquire (Y-axis). The matrix typically includes four quadrants: acquisition or non-critical.

Lead time

The time that it would take a supplier to deliver goods after receipt of order.

Lease

A contract conveying from one entity to another the use of real or personal property for a designated period of time in return for payment or other consideration.

Lease-or-Buy Decision

The decision concerning whether to contract for the possession and use of an asset owned by another party for a period of time, in return for lease payments, as opposed to purchasing the asset.

Least Acceptable Agreement (LAA)

The minimum the team is willing to accept on any negotiating parameter.

Legacy Services

A term that used to describe that state when the vendor is only providing the services in the same manner that the customer provided them. Along with legacy services is the term legacy service levels. This is saying that the vendor is going to provide the services at basically the same level of service that the customer was providing prior to the outsourcing. This makes sense because the vendor is not going to be able to provide a higher level of services if it's really only doing the same thing the customer was doing prior to the outsourcing.

Less-than-Truckload (LTL)

A quantity of freight less than the amount necessary to constitute a truckload.

Lessee

One to whom a lease is granted.

Lessor

One who grants a lease.

Letter of credit

A document of credit confirmed by a bank; this is often used for export.

Leverage Products

One of the four Kraljic Matrix quadrants. In general, these are the products that can be obtained from various suppliers at standard quality grades. They represent a relatively large share of costs and are bought in large volumes.

Liability

A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow of cash from the obligated company.

Life Cycle Costs

Life Cycle Costs are defined as the sum of the fees and indirect costs in the purchase of a commodity, service or technology. Life Cycle Costing is used for procurements that involve the expenditure of funds for both the fees associated with the services to be procured (price) and costs associated with the introduction of the services into the environment (indirect costs). An example of the application of the Life Cycle Cost evaluation is the sum cost of the acquisition of a new computer environment (offer price) and the cost of a systems conversion necessitated by the installation of a new computer environment (indirect costs). These are also sometimes referred to as Total Cost of Ownership.

Life Cycle Costs

The sum of all costs incurred during the lifetime of the product or service contract, including: design, storage, maintenance, transportation, material handling, purchase cost, operational performance, disposal, distribution, obsolescence and damage.

Line item

An item of supply or service specified in a solicitation for which the vendor must specify a separate price.

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.

List Price

The price of an article published in a catalog, advertisement or printed list from which discounts, if any, may be subtracted.

Loan

A sum of money or other valuables or consideration that an individual, group, or other legal entity borrows from another individual, group, or legal entity (later often being a financial institution) with the condition that it be returned or repaid at a later date (sometimes with interest).

Lock-in

A business situation in which organizations are obliged to deal only with a specific company. This is sometimes also referred to as "sole-sourced".

Locked in

A situation where an investor is unwilling or unable to exit a position because of the regulations, taxes or penalties associated with doing so. This may be an investment vehicle, such as a retirement plan, which cannot be accessed until a specified retirement date.

Logistics

The management of business operations, such as the acquisition, storage, transportation, and delivery of goods along the supply chain.

Low Bid

This generally means an award that was given to the supplier who bid at the lowest price, without taking into account any of the other costs that may be incurred as the result of making the decision based on price.

LPO

Legal Process Outsourcing refers to the practice of a law firm obtaining legal support services from an outside law firm or company that provides processes supporting legal services, such as discovery, case management, transcription services, etc.

Maintenance, Repair, and Operating supplies (MRO)

Products that are necessary for keeping the organization running in general, and for support activities in particular. Classified by most organizations as an indirect spend category, MRO typically refers to any activity.

Make-or-buy decision

Business decision that compares the costs and benefits of manufacturing a product or product component against purchasing it. If the purchase price is higher than what it would cost the manufacturer to make it, or if the manufacturer has excess capacity that could be used for that product, or the manufacturer's suppliers are unreliable, then the manufacturer may choose to make the product. This assumes the manufacturer has the necessary skills and equipment necessary, access to raw materials, and the ability to meet its own product standards. A company who chooses to make rather than buy is at risk of losing alternative sources, design flexibility, and access to technological innovations.

Malice Payment

See penalty or service credit.

Margin Matching

A technique used to fairly adjust actual prices to be paid based on movements in the defined underlying pricing model assumptions and avoids having one party "win" at the other party's expense. Margin matching includes establishing a trigger point that activates to reset prices when the point is met. For example, the inflation rate might be a trigger point for resetting inventory carrying cost charges. The goal of using a margin-matching technique is to establish pricing fairness, which ultimately builds trust and a better working environment.

Market

The aggregate forces (including economics) at work in trade and commerce in a specific service or commodity. To sell, analyze, advertise, package, etc.

Market Analytics

This kind of business analytics helps the overall optimization of marketing activities for example, to monitor campaign performance, make intelligent resource allocations based on effectiveness of tactics and improve cross-selling by determining which products and customer segments generate the most revenue and how to effectively cross-sell and up-sell.

Market Based Pricing

The price of the product is determined on the market, and is generated exclusively by market circumstances such as demand, supply, stock positions and the economic situation and political factors.

Market Share

Of all the products that flow into a specific area, the percentage that goes through a specific function. For example, if central purchasing places orders for 80% of the items purchased in the strategic business unit, then their market share is 80%. If 50% of all items being delivered to a region go through the warehouse responsible for that region, then the warehouse market share is 50%.

Master Agreement (MA)

A legally binding contract entered into by two or more parties. The agreement goes into great detail regarding all its components. Because the parties intend to enter into future agreements with one another, they document terms that will govern future agreements in one place, the MA. The same terms need not be negotiated again. Thus, the parties are freed up to negotiate deal-specific terms.

Master Services Agreement (MSA)

The MSA is the main contract along with the schedules. It contains overarching, constitutional or guiding language with ore specific, complete language located in the Schedules. A MSA sets the tone of the relationship as it may be used for multiple engagements between parties, establishes risk allocation between parties, and addresses relationship aspects that will be applicable across multiple engagements and geographies, etc.

Material Acquisition Costs

One of the elements comprising a company's total supply-chain management costs. These costs consist of the following -
• Materials (Commodity) Management and Planning - All costs associated with supplier sourcing, contract negotiation and qualification, and the preparation, placement, and tracking of a purchase order, including all costs related to buyer/planners.
• Supplier Quality Engineering - The costs associated with the determination, development/certification, and monitoring of suppliers' capabilities to fully satisfy the applicable quality and regulatory requirements.
• Inbound Freight and Duties - Freight costs associated with the movement of material from a vendor to the buyer and the associated administrative tasks. Duties are those fees and taxes levied by government for moving purchased material across international borders. Customs broker fees should also be considered in this category.
• Receiving and Put Away - All costs associated with taking possession of material and storing it. Note that carrying costs are not a part of acquisition, and inspection is handled separately.
• Incoming Inspection - All costs associated with the inspection and testing of received materials to verify compliance with specifications.
• Material Process and Component Engineering - Those tasks required to document and communicate component specifications, as well as reviews to improve the manufacturability of the purchased item.
• Tooling - Those costs associated with the design, development, and depreciation of the tooling required to produce a purchased item. A tooling cost would be incurred by a company if they actually paid for equipment and/or maintenance for a contract manufacturer that makes their product. Sometimes, there isn't enough incentive for a contract manufacturer to upgrade plant equipment to a level of quality that a company requires, so the company will pay for the upgrades and maintenance to ensure high quality. May not be common in some industries such as the Chemicals.

Material Variance/Material Deviation

A variance or deviation in a response from specifications of conditions that allows a responder a substantial advantage or benefit not enjoyed by all other responders or that gives the organization something significantly different from what the organization requested in the solicitation document.

Materials Management

Embraces all functions of acquisition, standards, quality control and surplus property management.

Materials Management Systems

A managerial and organizational approach used to integrate the supply management functions in an organization. It involves planning, acquisition, flow, and distribution of production materials from the raw material state to the finished product state. Activities included typically are procurement, inventory management, receiving, stores and warehousing, in-plant materials handling, production planning and control, traffic, and surplus and salvage.

Maverick Buying / Spend

Purchases by employees that occur outside of the organization's guidelines, negotiated agreements and contracts.

Measurement Minutia

One of Vested 10 Ailments that states, "With the intention of ensuring accountability, the contract requires measuring everything.

Moral Hazard

The prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk.

Most Desirable Outcome (MDO)

The best possible outcome for the negotiating team.

MRO

See Maintenance, Repair and Operating supplies.

Multi-Sourcing

The division of activities or services involved in the execution of an essential business function among a combination of providers, both internal and external.

Multi-step Strategic Sourcing Process

The Sourcing Industry Group (SIG) defines the multi-step process as: 1) Assess-study the environment; 2) Analyze-select the approach; 3) Execute-chart the course; and 3) Evaluate-benchmark and refine. Step 1 includes performing internal and external analysis, and building a total cost model. Critical components include gathering requirements, aligning with business objectives, assessing the market, gathering best practices and benchmarks, and performing cost analysis. Step 2 includes such practices as: building the bid-sourcing strategy, rationalizing the supply market and suppliers, and understanding total costs. Critical components include the segmenting of suppliers, spend and market; assessing and balancing value; and assessing risk. Step 3 includes such practices as: conducting the bid (collecting pricing and proposals), performing negotiations and prioritizing and planning for risk. Critical components include selection drivers, bid documents, and resulting contracts. Step 4 includes such practices as: improving on value creation and processes, managing supplier risk and governing the contract performance. Critical components include plans for continuous improvement, supplier innovation, risk tracking & reporting, and relationship and governance. An illustration of this process can be found in the SIG Resource Center at: http://www.sig.org/src.php?id=9690 or by searching for "SIG Sourcing Wheel".

Multi-Year Contract

A multi-year contract means a contract for the purchase of supplies or services for more than 1, but usually no more than 5, program years. A multi-year contract may provide that performance under the contract during the second and subsequent years of the contract is contingent upon the appropriation of funds, and (if it does so provide) may provide for a cancellation payment to be made to the contractor if appropriations are not made. The key distinguishing difference between multi-year contracts and multiple year contracts is that multi-year contracts buy more than 1 year's requirement (of a product or service) without establishing and having to exercise an option for each program year after the first.

Multilateral

Involving more than one party (often used in politics to refer to negotiations, talks, or proceedings involving several nations).

Multiple Award

A Multiple Award is an award of a contract to more than one supplier who meets the requirements of a specification, where the multiple award is made on the grounds set forth in the bid document in order to satisfy multiple factors and needs of authorized users. Those factors may include complexity of items, various manufacturers, differences in performance required to accomplish or produce required end results, production and distribution facilities, price, compliance with delivery requirements, geographic location or other pertinent factors.

MWBE

Minority and Women Business Enterprise. Various organizations certify MWBE suppliers. This designation is an important consideration to and a component of a supplier diversity program.

NAICS (North American Industry Classification System) code

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.

Nash Equilibrium

A concept of game theory where the optimal outcome of a game is one where no player has an incentive to deviate from his or her chosen strategy after considering an opponent's choice. Overall, an individual can receive no incremental benefit from changing actions, assuming other players remain constant in their strategies. A game may have multiple Nash equilibrium or none at all.

Nearshoring

The process of outsourcing to countries that are in close geographical proximity to the company.

Negotiation

An exploratory and communication process meant to reach a mutually satisfactory agreement. In the purchasing context, negotiation is an exploratory and a bargaining process (planning, reviewing, analyzing, compromising) involving a buyer and seller, each with their own viewpoints and objectives seeking to reach a mutually satisfactory agreement on all phases of a procurement transaction – including price, service, specification, technical and quality requirements, payment terms, etc.

Negotiation Team

A team constituted for the purpose of conducting a specific negotiation. Team members typically represent the functional areas to be addressed in the negotiation process; the purchasing member usually chairs the team.

Net Landed Cost

The basic price inclusive of taxes, levies, transportation, all material & labor charges plus government or vendor service taxes as applicable.

Net Price

Price after all discounts, rebates, etc., have been allowed.

Net Present Value

The sum of present values (PVs) of incoming and outgoing cash flows over a period of time.

Non-Core Competencies

Activities that are conducted within an organization that do not contribute to sustainable competitive advantage.

Non-critical Products/Services (also referred to as Routine Products/Services)

One of the four Kraljic Matrix quadrants. In general these are products or services with relatively low value and there are many suppliers. These products/services give buyers very few commercial problems from a purchasing point of view.

Non-Monetary Incentives

Incentives such as public recognition, endorsements in the form of public case studies, willingness to provide references, sharing processes and techniques, sharing knowledge and other goodwill gestures can be powerful, intangible incentives that increase visibility and market worth of the supplier. However, buyers and suppliers must be realistic in evaluating the true worth of such incentives. A poorly positioned customer may not be able to provide valuable non-monetary incentives to a well-positioned supplier. On the other hand, a customer that is relatively small, but well regarded in its industry may be very well positioned, particularly if its industry is one that the supplier considers strategic.

Non-Zero Sum Games

A term used with Game Theory. The size of the pie is not fixed, therefore everyone can do better, or much worse.

OECD Anti-Bribery Convention

Establishes legally binding standards to criminalize bribery of foreign public officials in international business transactions and provides for a host of related measures that make this effective. OECD and ISO 37001 are international standards used to support the elimination of bribery.

OEM (Original Equipment Manufacturer)

The rebranding of equipment and selling it under another name, or as a component of another product. OEM refers to the company that made the products (the "original" manufacturer), but with the growth of outsourcing, it eventually became widely used to refer to the organization that buys the products and resells them. This term has two generally acceptable definitions which are actually opposites of each other and may vary by industry: 1) The OEM reseller is often the designer of the equipment (which is made to order). An example would be a computer manufacturer OEM which includes components built by other manufacturers; 2) Companies that make products for others to repackage and sell, or to incorporate into a final assembly. An example would be an OEM manufacturing tires for use on automobiles.

Off ramp

A term used to describe exit management clauses in a contract. Off ramp clauses provide the buyer flexibility. The most common off ramp clauses are termination for convenience and termination for cause. Performance-Based and Vested Sourcing Business models should have more comprehensive exit management plans than these two simple off ramp clauses.

Offshoring

The practice of moving domestic operations such as manufacturing to another country as a way to lower costs, avoid taxes, etc. It may or may not involve transferring employees. In many cases, organizations outsource to a supplier who then offshores the work. Offshoring is particularly common in outsourced IT and Business Process Outsourcing (BPO) workscopes.

OLAs (Operational Level Agreements)

Internal "back to back" agreements that define how the buyer and supplier will work together. An OLA often includes hours of operation, responsibilities, authorities, response times, supported systems, etc. OLAs tend to be more technical than SLAs since they define IT supporting IT. Not every SLA requires unique OLAs, and just a few key OLAs can help resolve the silo problem.  However, it can be difficult to implement OLAs

Onboarding

Refers to the mechanism through which new employees acquire the necessary knowledge, skills, and behaviors to become effective organizational members. Tactics used in this process include formal meetings, lectures, videos, printed materials, or computer-based orientations to introduce newcomers to their new jobs and organizations. Research has demonstrated that good socialization techniques lead to positive outcomes for new employees such as higher job satisfaction, better job performance, greater organizational commitment, and reduction in occupational stress and intent to quit. Onboarding techniques can and should be applied to ramp up new suppliers.

Open Book

An agreement in which the buyer has the right to see exactly what the suppliers expenses are. In a Vested Sourcing Business Model often the buyer and supplier both use an open book approach in order to best calculate a true Total Cost of Ownership.

Operating Expenditures (OpEx)

Expenditures required for the day-to-day functioning of the business, such as wages, utilities, maintenance and repairs. These expenses also include depreciation of plants and machinery which are used in the production process.

Operational Level Agreements 

See OLAs.

Operational Measurements

The set of performance measures (metrics) used to monitor activity in the operational area of the business. These include those related to employee and machine productivity.

Option to Extend/Renew

A provision (or exercise of a provision) which allows a continuance of the contract for an additional time according to permissible contractual conditions.

Order-to-Pay Solutions

Systems that are used to manage the ordering process, ranging from requisition, to ordering, supplier delivery and payment

Organizational alignment

The creation of relationship and communication mechanisms that enable a company and the service provider to work together effectively to achieve the mutually defined desired outcomes.

Outcome

Achievement of economic or strategic value as the result of doing something. Often an outcome can only be achieved when multiple parties work together collaboratively. As such, outcome-based thinking incorporates an end-to-end perspective.

Outcome-Based Economic Model

An economic model in which a supplier is paid for the realization of a defined set of business outcomes, business results, or agreed-on key performance indicators. An outcome-based model typically shifts risk to the supplier for achieving the outcome, but requires both a buyer and supplier to work together to achieve the outcome. A well-structured agreement compensates a supplier's higher risk with a higher reward. See also Outcome or Outcome-Based Metric.

Outcome-Based Metric

A measure typically defined by a formal Service Level Agreement to measure the success of a buyer and a supplier’s ability to achieve an outcome. Example: Machine Reliability or Spare Parts and Consumables Inventory Optimization.

Output

Achievement of a well-defined and easily measured event or a deliverable that is typically finite in nature. An output typically relates to the purpose/functionality of the good or service instead of the activities or inputs needed to create the good or service. Outputs can be achieved by a supplier without help from a buyer. However, often a buyer has inputs to a supplier. As such, output-based metrics/service level agreements should only be based on what is in a supplier's control.

Output-Based Economic Model

An economic model in which a supplier is paid for achieving a pre-specified output-based metric. An output-based model shifts risk to the supplier for achieving the output, but requires both a buyer and a supplier to work together to achieve the outcome. A well-structured agreement compensates a supplier's higher risk with a higher reward. See also Output or Output-Based Metric.

Output-Based Metric

A measure typically defined by a formal Service Level Agreement to measure the success of a supplier's ability to achieve an output. Example: Unplanned Machine Downtime.

Outsource/Outsourcing

A sourcing strategy, outsourcing is the transferring of a process or function to an external provider. Organizations can outsource any workscope. Popular workscopes to outsource includes non-core competencies such as warehouse and logistics, facilities management, call center/customer support and IT as well as back office functions such as finance administration, claims processing, benefits management.

Outsourcing Arrangement

Contractual arrangement between two or more organizations for the provision of specific services where one organization (the buyer) is the client for services and another organization (the supplier) is the provider of the service.

Outsourcing Governance

A joint set of structures and processes that are implemented to ensure effective leadership and management, which enables an outsourcing agreement to achieve its joint objectives within the framework of agreed values.

Outsourcing Governance Framework

Outline of guidelines and processes that enables continual monitoring and management of outsourcing arrangements to sustain value delivery between client and provider.

Outsourcing Model

Formalized concept of the scope of an outsourcing arrangement and how it is structured and carried out. Organizations can use any of the seven sourcing business models to procure outsourced services.

Overspecifying

A situation in which technical requirements are imposed on suppliers that are not necessary for the functionality of the product or the delivery of the service. Overspecification is usually caused by Junkyard Dogs.

P-Cards (Purchase Cards)

A form of company credit card that allows goods and services to be procured. P-card purchases are usually made against existing contracts and pricing schedules. Buying organizations implement p-cards to help control spend as certain limitations and approvals can be configured for their use. Sometimes also referred to as procurement cards or a buying card.

P3

See Public Private Partnerships.

Packing list

A document which itemizes in detail the contents of a particular package or shipment.

Partial payment

The payment authorized in a contract upon delivery of one or more units called for under the contract or upon completion of one or more distinct items of service called for thereunder.

Parts Number

A code assigned to a product to identify it as an article coding system.

Pay for Performance Incentive

An incentive that is tied to specific performance requirements. The desired performance is typically stated in terms of a quantitative SLA. The incentive fee can be fixed or variable, but always corresponds to specific, agreed upon targets. Performance incentives can be an effective way to encourage performance provided that the incentive is worth more than the effort to achieve it.

Payment Terms

The what, how and when the buyer will pay for the products and services delivered by the supplier.

Payment terms EOM

Payment is due by end of month.

Payment terms Net 10

Payment is due ten days after invoice date.

Payment terms Net 30

Payment is due 30 days after invoice date. This is one of the most widely used payment term.

Payment terms Net 60

Payment is due 60 days after invoice date.

Payment terms Net 7

Payment is due seven days after invoice date.

Payment terms PIA

Payment is due in advance.

PBL

See Performance Based Logistics.

Peer-to-Peer Interface Structure

A decentralized communications model where peers are "mapped". In a buyer-supplier relationship each have "peer roles" for joint accountability and problem solving. For example, a commercial manager for the buyer would have a commercial manager she would work directly with at the supplier. Roles are clearly delineated and do not overlap in order to avoid duplication of effort and/or micromanagement from the supplier. The buyer and supplier work to support each other where they "win together" and "lose together". The concept greatly improves collaboration between a buyer and supplier. Also sometimes referred to as "2 in a Box" and “Reverse Bow Tie”.

Penalty Provision

Provision in a contract that imposes a specified sum on the defaulting contracting party for a specified default. Penalty clauses are most often associated with Performance-Based agreements where a supplier gives the buyer a refund when they do not meet an SLA. Sometimes also referred to as service credits or malice payments.

Performance Based Logistics (PBL)

Originally a U.S. Government program term primarily in the aerospace and defense sector, PBL describes the purchase of assets with a complete package of services and support as an integrated, affordable, performance package designed to optimize system readiness and meet performance goals for a weapon system through long-term support arrangements with clear lines of authority and responsibility. PBLs are designed to optimize system readiness and meet performance goals for a weapon system through long-term support arrangements with clear lines of authority and responsibility. PBLs typically use a Performance-Based Sourcing Business Model. They can be structured as a Vested model.

Performance Based/Managed Services Model

A formal longer-term supplier agreement that combines a relational contracting model with an Output-Based Economic Model. A Performance-Based model drives supplier accountability for output based service level agreements (SLAs) and/or cost reduction targets. A Performance-Based agreement typically creates incentives (or penalties) for hitting (or missing) performance targets.

Performance Bond

A contract of guarantee, executed subsequent to award by a successful vendor to protect the buyer from loss due to the vendor's inability to complete the contract as agreed.

Performance Goals

Goals and objectives against which employees (PPA) or suppliers (SPP) are measured.

Performance Guarantees

Supplier guarantees the actual output or outcome of the work to be delivered. Most often associated with Performance-Based and Vested Sourcing Business Models.

Performance Measurement

A management technique for evaluating the performance of a particular function or person.

Performance Measurement Program

A performance measurement program goes beyond just having performance metrics in place. Many companies do not realize the full benefit of their performance metrics because they often do not have all of the necessary elements in place that support their metrics. (Modified from Council of Supply Chain Management Professionals glossary of terms)

Performance Measures

Indicators of the work performed and the results achieved in an activity, process, or organizational unit. Performance measures can be financial, operational or relational. Performance measures enable periodic comparisons and benchmarking. Performance measures can measure activities, outputs or outcomes.

Performance Specification

A specification setting forth performance requirements determined necessary for the item involved to both perform and last as required. See also OLAs and SLAs.

Performance standards

Represents the level at which the parties expect the provider to perform the services, are broader than service levels and relate to costs.

Performance Work Statement (PWS)

A document that resides between a statement of objectives and a statement of work in terms of specificity. The buyer defines the expected results in the statement of objectives and solicits solutions from suppliers. The supplier then develops a performance work statement. A PWS still expects the supplier to drive continuous improvement/transformation/innovation to fulfill the company's statement of objectives.

Performance-Based Contract/Agreement

A results-oriented contracting method that focuses on the outputs, quality, or outcomes that may tie at least a portion of a contractor's payment, contract extensions, or contract renewals to the achievement of specific, measurable performance standards and requirements.

Perpetual-Inventory System

An inventory control record system, which requires immediate recording of transactions (receipts and withdrawals) for each item carried in inventory. If posted accurately, the inventory records should be up to date and agree with the actual stock count in the warehouse.

Perverse Incentive

A direct negative or unconscious behavior that drives unintended consequences.

Physical Asset Specificity

The use of a capital good to a narrow purpose. Asset specificity applies to capital designed to have a single function, or labor trained to perform a single task, and has its limited uses because of some inherent restriction on other possible uses. The more specific an asset, the lower its potential resale value or redeployability. Companies may be reluctant to invest in such assets in a poor or uncertain economy. When a company purchases a highly specific asset, this purchase is considered a sunk cost, since the asset will likely not be saleable or useable for purposes other than its intended purchase.

Pieces

The item that is being handled. This is usually the lowest unit of issue in the delivery process and it may be case lots in the unloading and receiving processes. However, it is not unusual for some items to still be in case lots while others are listed as “each” at certain points in the handling process, such as replenishment.

Pivot Table

The PivotTable function in Microsoft Excel is an organization and analysis tool that displays fields and records. It's an interactive worksheet that allows you to summarize large amounts of information. Pivot tables allow you to transform a set of data into an easy-to-arrange and organized summary grid. The grid of information it produces helps you quickly find patterns, trends and outliers. In fact, when you hear the words "slice and dice," you should instantly think pivot tables. Most commonly used in spend analytics and response evaluations.

PMs

See Program Managers. Also, Project Managers.

Point of Origin (shipping point)

The location where a shipment is received by a transportation line from the shipper.

Pony

In Vested Outsourcing, the difference between the value of the current solution and the potential optimized solution. It represents something the outsourcing company wants but was not able to get on its own or with existing service providers.

Porter's Five Forces

Michael Porter, legendary Harvard Business School professor, created a framework for understanding the dynamics of an industry based on five competitive forces. The category sourcing manager can use this model, called Porter's Five Forces, to better understand the context of a relevant supply market for their category. The five forces are: Threat of New Entrants, Bargaining Power of Buyers, Bargaining Power of Suppliers and Threat of New Substitutes. These four forces combine to determine the 5th force, which is the Rivalry Among Existing Competitors.

Portfolio Segmentation

In strategic sourcing, portfolio segmentation refers to the overall classification of either spend categories or suppliers. The classical approach to classify spend categories is to use the Kraljic Purchasing Portfolio which classifies spend categories into four buckets based on risk and profit potential. Sourcing Business Model theory classifies spend categories into seven Sourcing Business Models based on 25 attributes.

PPP

See Public Private Partnerships.

Practice

The operation that is performed.

Preferred Provider Model

Is a Transaction-Based Economic Model. A key difference between a Preferred Provider and the other Transaction-Based models is that the buyer has made the strategic choice to move to a more strategic relational model. As such, contracts with specifically chosen supplier(s) assume a more collaborative relationship. Repeat business and longer term and/or renewable contracts are the norm.

Preferred Provider Sourcing Model

Uses a transaction-based approach, but the buyer chooses a more strategic relational model with specifically chosen supplier(s) in order to gain access to value-added capabilities at best value or volume discounts through a longer-term contract.

Preferred Supplier

A type of supplier relationship where the majority of spend in a particular commodity area is consolidated through one vendor in order to obtain the most competitive pricing and services terms through spend leverage. The buyer and supplier then collaborate to market and promote these products and/or services to the campus users in an effort to drive further spend through the preferred supplier. Preferred supplier does not mean a mandate relationship. End users still have the freedom to purchase through the vendor of their choice but are highly encouraged to utilize the Preferred Supplier for reasons of better pricing and services.

Prepaid

A term denoting that transportation charges have been or are to be paid at the point of shipment.

Prequalification

The screening of potential suppliers in which factors such as financial capability, reputation and management are considered when developing a list of qualified vendors. This is part of the market assessment and sometimes included in an RFI.

Price

A price is how much you pay for something. You pay $3.25 for your Starbucks Grande two pump vanilla latte. A call center supplier may have a price of $0.50 per minute every time company's customer service representative picks up the phone. Is not limited to, when applicable and when specified in the solicitation delivery charges, installation charges and other costs.

Price Agreement

A contractual agreement in which a purchaser contracts with a vendor to provide the purchaser's requirements at a predetermined price. Usually involves a minimum number of units, orders placed directly with the vendor by the purchase, and limited duration of the contract. Sometimes also referred to as Blanket Order or Master Services Agreement (MSA).

Price Creep

Refers to increased costs associated from changes that occur when a good or service has not been properly specified. It is generally considered harmful. See also Scope Creep or Requirements Creep.

Price Fixing

Agreement among competing vendors to sell at the same price.

Price Indexing

A component or clause of a contract that allows for the use of price indexing to establish costs. Often used by businesses and government to adjust payments and/or charges to take account of changes in categories of prices. Also known as Indexation Clauses. Some examples include: Consumer Price Index, Producer Price Index, Construction Price Index, Employment Cost Index, Import/Export Price Indexes, Manufacturing Production Index, Metal Price Index and Commodity Fuel Index.

Pricing Model

The mechanism companies use to establish the price(s) between a company and its supplier. A pricing model is different from price as it includes mechanisms to determine optimum monetary exchange between and buyer and supplier.

Process

How an operation is performed.

Process Maps

Business process mapping refers to activities involved in defining what a business entity does, who is responsible, to what standard a business process should be completed, and how the success of a business process can be determined. The main purpose behind business process mapping is to assist organizations in becoming more efficient. A clear and detailed business process map or diagram allows individuals to determine whether or not improvements can be made to the current process.

Process Metric

Measurement of the success of a process. Output-based metrics are typically process metrics.

Procure-to-Pay

Entails the process of purchasing a good or service and managing all steps through delivery and payment and is designed to support an end-to-end process that begins with requisitioning and ends with ready-to-pay files for upload into an accounts payable system.

Procurement

Procurement is the acquisition of goods, services or works from an external force that are vital to an organization's operations. The procurement process requires establishing the fundamental requirements necessary to meet the needs of the acquirer in terms of quality, quantity, time and location, for the best cost. The process includes sourcing activities, such as market research and vendor selection, contract negotiation, and purchasing activities required to order and receive goods. The combined functions of purchasing, inventory control, traffic and transportation, receiving, inspection, store keeping, and salvage and disposal operations.

Procurement

The process of contracting and buying business requirements. Duties include specifications development, value analysis, supplier market research, negotiation, buying activities, contract administration, and perhaps inventory control, traffic, receiving and stores.

Procurement Card

See P-Card.

Procurement Outsourcing

The process of turning over responsibility for functions related to purchasing, buying or procuring. Typically adopted for a company's indirect spend. Also referred to as "procurement transformation".

Product

The service or product you provide your internal or external customers.

Product Family

A set of products that are considered as a single group when creating forecasts for planning purposes. Sometimes also referred to as a category or spend category.

Program Manager

A program manager is a leader whose main leadership duty is to turn chaos into clarity for the team. People need clear direction and circumstances that allow them to be successful. The program manager establishes clear direction both within and outside the organization through a variety of means. The program manager is responsible for creating the business environment culture within which the project manager works. The program manager, through direct authority or organizational influence, is responsible for establishing the framework in which the project manager operates.

Project Manager

A project manager helps define the goals and objectives of the project, determines the timeline for completion of various project components and by whom, and creates quality control checks to ensure that completed components meet a certain standard. The project manager is judged on the triple constraint of time, cost and scope of the project. In sourcing, this role may sometimes be referred to as the category manager or contract manager.

Proprietary

Proprietary information is information for which the company holds sole legal rights. In common use, it refers to confidential company information that is not generally available in the public domain.

Provider

Organization that offers a product or service to a client. Also known as supplier, contractor, vendor, advisor or consultant.

Public Private Partnership

A business relationship between a private-sector company and a government agency for the purpose of completing a project that will serve the public. Public-private partnerships can be used to finance, build and operate projects such as public transportation networks, parks and convention centers. Financing a project through a public-private partnership can allow a project to be completed sooner or just make it a possibility in the first place. 

Public Procurement Law

The law is designed to open up the EU's public procurement market to competition, to prevent "buy national" policies and to promote the free movement of goods and services.

Purchase Card

See P-Card.

Purchase Order (PO)

A legal document from a buyer to a supplier requesting delivery of a good or service. It typically includes the following components: a contract number, an order number, concise description of product/service, unit price/number of units required, expected delivery time or date, delivery address and invoicing address. A purchase order may contain multiple contract line items that describe different products that must be delivered.

Purchase Order Requisition (Req)

Description of internal customer requirements for goods/services needed to be obtained from suppliers, which will serve as the basis for the Purchase Order.

Purchase Order Specification

All specifications needed to select the right supplier including quality specifications, logistics specifications, maintenance specifications, legal and environmental requirements and target budget.

Purchasing

The management of the company's external resources in such a way that the supply of all goods/services, capabilities and knowledge necessary for running/maintaining and managing the company's primary and support activities are secured under the most favorable conditions.

Purchasing Co-operatives (Co-op)

A legal entity in which a group of buyers with a common interest pool their purchasing power to negotiate more favorable pricing on goods and services.

Purchasing Portfolio Approach

See Kraljic Portfolio.

Quality Assurance

A management function that includes establishing specifications that can be met by suppliers; utilizing suppliers that have the capability to provide adequate quality within those specifications; utilizing control processes that assure high-quality products and services; and developing the means for measuring the products, service and cost performance of suppliers and comparing it with requirements.

Quality Control

The segment of the quality assurance activity that measures quality performance and compares it with specification requirements, as a basis for controlling output quality levels.

Quantity Discount

A reduction in the unit price offered for large volume contracts. Sometimes also referred to as a Volume Discount.

RACI

RACI is a good tool to use to assign roles to members for tasks and are identified as: Responsible, Accountable, Consulted or Informed.

Rate Card

A document containing negotiated prices for goods and services. For example, a buyer may negotiate a rate card that has hourly rates for software developers and/or project managers.

Rebate Spot Market

A financial reward a supplier gives a buyer for purchasing their goods or services. Typically, a rebate is provided when suppliers hit certain volume targets.

Rebate/Volume Discount

The situation when a supplier reduces their price in exchange for directing more work to the supplier. Prices remain constant within a pre-specified band of volume. If volumes increase, so can the discount. If volumes decrease, the supplier agrees to pay a higher price for each unit.

Regulatory Compliance

It is the process of ensuring that you are in compliance with financial reporting regulations, product restrictions, trade requirements and environmental compliance. Examples of regulatory compliance laws and regulations include the Dodd-Frank Act, Payment Card Industry Data Security Standard (PCI DSS) , Health Insurance Portability and Accountability Act (HIPAA), the Federal Information Security Management Act (FISMA) and the Sarbanes-Oxley Act (SOX).

Relationship Management

The practice of establishing joint policies and processes that emphasize the importance of building collaborative working relationships, attitudes and behaviors. The structure, by necessity, is flexible and provides top-to-bottom insights about what is happening with the Desired Outcomes and, just as important, the relationship between the parties. Relationship management is a comprehensive approach to managing an enterprise's interactions with the organizations that supply the goods and services it uses. The goal of relationship management is to streamline and make more effective the processes between an enterprise and its suppliers. This is most definitely not a whose-throat-to-choke exercise; rather, it is the establishment of processes for communication, reporting, and improvement.

Relationship Model

The concept of relationship models stems from Dr. Oliver Williamson's pioneering work that classifies an organization's sourcing needs into three categories: "Market" (transactional Sourcing Business Models), "Hybrid" (relational/hybrid Sourcing Business Models) and "Hierarchical" (investment based Sourcing Business Models).

Reliability

The ability of a system to perform as designated in an operational environment over time without failures. A common performance metric for reliability is Mean Time Between Failures. A carrier selection criterion that considers the variation in carrier transit time; the consistency of the transit time provided.

Remanufactured Product

Any product diverted from the supply of discarded materials by refurbishing and marketing said product without substantial change to its original form.

Remedial Clauses

The relief (as damages, restitution, specific performance or an injunction) that may be given or ordered by a court or other tribunal for a wrong.

Request for Information (RFI)

Used to obtain general information about products, services or suppliers. An RFI is sometimes used to gather benchmark information and general market data from the marketplace. Buyers rarely if ever select a supplier based on RFI information, but rather use the information to help them further refine the RFx approach. As such, a RFI typically precedes other RFx processes found below and often used to help a buyer to down-select the number of potential suppliers they will evaluate. An RFI can be used with any of the RFx processes.

Request for Partner

A highly collaborative process used when a buyer is actively seeking not just a solution from a supplier, but also a partner.

Request for Price

Used to obtain price offers for a specified product or service. Buyers using a Request for Price must ensure they properly define the specifications so there is no ambiguity for the supplier. An RFP is often a follow-up to an earlier request for information (RFI). The law may or may not treat a quotation as a binding offer. Sometimes also referred to as a Request for Quote.

Request for Proposal (RFP)

Used to obtain pricing as well as a detailed description of services, methodologies, program management, cost and other support provided by the supplier. Known as the RFP, this document initiates the acquisition process soliciting valuable information regarding a third party provider's products, solutions, pricing and capabilities in the form of a pricing proposal. To this end, the RFP includes the guidelines, instructions and forms necessary for the applicant to submit a proposal.

Request for Proposed Solution

A collaborative process used where an organization has a dialogue with potential down-selected suppliers. A Request for Proposed Solution is different than a Request for Proposal because the buyer does not know the solution; rather they are asking suppliers for propose the most appropriate solution. Also referred to Competitive Dialogue process.

Request for Qualification

See Request for Information.

Request for Quote (RFQ)

See Request for Price.

Request for Tender

See Request for Quote.

Requirement

The needs and wants of business groups, business units or users who consume the goods or services that are procured. Requirements may cover such areas as discrete specifications, quality conditions, regulatory compliance, special handling, shelf life, volumes or any other attributes that define the needs and wants of the business.

Requirements Creep

Refers to uncontrolled changes or continuous growth associated workscope. Very common when buying services such as construction or software development. Scope creep can occur because the buyer adds on additional specification or when the scope is not properly defined, documented or controlled. It is generally considered harmful. See also Scope Creep.

Requisition

A request for goods or services that documents a requestor's requirements and is sent to the purchasing department to make the purchase.

Responder

One who submits a response to a solicitation document. Also referred to as Bidder, Respondent, Supplier or Contractor.

Response

The offer received from a vendor in response to a solicitation. A response includes submissions commonly referred to as "offers," "bids," "quotes," or "proposals."

Responsibility Matrix

Chart that describes the participation by various roles in completing tasks or deliverables for an outsourcing arrangement.

Retained Organization

Organizational units and/or employee roles, retained within the client organization, providing the client interface for the provider.

Return on Net Assets (RONA)

The return on net assets (RONA) compares net profits to net assets to see how well a company is able to utilize its asset base to create profits. To calculate the Return of Net Assets you divide your net profit by your fixed assets plus your net working capital. Fixed assets are property, equipment, etc. Net working capital is figured out by subtracting your current liabilities from your current assets.

Reverse Auction

A type of auction in which sellers bid for the prices at which they are willing to sell their goods or services. In a forward auction, which is opposite of a reverse auction, a seller puts up an item and buyers place bids until the close of the auction, at which time the item goes to the highest bidder.

Reverse Bow Tie

See Peer-to-Peer Interface Structure.

RFX

The term "RFX" or "RFx" is used generically to refer to the sourcing practice of issuing a request from supplier providers. The "X" can stand for "I" for "Information" or "Q" for "Quote" or "P" for "Proposal" or "Pricing". It is a term most often used in the beginning stage of the sourcing process, before the exact strategy is determined, as well as in solution provider lingo as a means to define their capabilities.

Risk

A risk is the possibility that something negative will happen. Download a document describing the different types of risk from the SIG Resource Center at http://www.sig.org/src.php?id=8904.

Risk Management Plan

Strategies and a plan of action for managing any identified risks in the sourcing solution. The goal is to identify actions that enable the buyer and/or supplier to better manage risk.

Risk Mitigation

The active practice of avoiding predicted events that could cause harm to a business and its operation.

Risk Premium

The value (typically in term of a fee) paid to a party that knowingly and willingly bears a risk and is rewarded for doing so in some form or another.

Risk, Matrix

A summary view of risks, typically classified on two dimensions.

Risk, Performance

Risks related to the change that the supplier is not capable of doing the job it was hired for.

Risk, Technical

Risks related to the extent to which the supplier is able to provide the desired functionality and performance.

Robotic Process Automation (RPA)

Refers to software platforms that use virtual robots to manipulate existing application software in the same way that a person processes a transaction or completes a request. It uses the existing desktop interface to access other applications and handles complex business processes with near-zero error rate. It is also sometimes referred to as "Autonomics".

ROI (Return on Investment)

A profitability measure that evaluates the performance of a business by dividing net profit by net worth. For example: if the company's net profit is $100,000 and your total assets are $300,000, your ROI would be .33 or 33 percent.

Root Cause Analysis (RCA)

An in-depth process or technique for identifying the most basic factors underlying a variation in performance or problem. The main focus of RCA is on systems and processes and not on individuals. It is essentially a method or series of actions taken to determine why a particular failure or problem exists and to establish a means of correcting the causes. RCA Frameworks include: Five Whys, Pareto Analysis, Cause and Effect Diagrams, Tree Diagram and Brainstorming/Interviewing.

Routine Buy

The acquisition of known product from a known supplier.

Routine Product/Service

Also referred to as Non-Critical Products/Services.

Sarbanes-Oxley Public Accounting and Investor Protection Act; SOX

A U.S. federal law enacted on July 30, 2002, to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes. The law is divided into 11 sections ranging from additional corporate board responsibilities to criminal penalties.

Savings, Hard

A reduction in any expense category that is tracked in the financial statements of the company. A reduced additional volume in an asset account as the result of an innovation or new product specification.

Savings, Soft

Soft savings are intangible savings. They are realized from not spending money, or by saving time or other resources. For example: When a company is able to purchase a higher quality product (perhaps based on changing specifications or finding new sources of supply), it is assumed in the sourcing decision that there will be fewer calls to customer service. While one might assume it, this cannot be quantified at the time of awarding the agreement. Therefore, it is a soft savings, with an intangible benefit for the company.

Scope Creep

Refers to uncontrolled changes or continuous growth associated workscope. Very common when buying services such as construction or software development. Scope creep can occur because the buyer adds on additional specification or when the scope is not properly defined, documented or controlled. It is generally considered harmful. Sometimes also referred to as Requirements Creep.

Scope of Work

A detailed definition of the services and/or materials that a supplier is expected to provide.

Scope Sweep Clause

A contractual clause where a supplier is asked to include (or "sweep") additional services under a defined Statement of Work document. These additional services are usually intended to be incidental and minor, but all too often the additional scope creates scope creep for a supplier which creates pressure on the supplier's profit.

Scorecard

A performance scorecard is a graphic or an application that depicts the progress over time of some entity, such as an enterprise, an employee or a business unit, toward some type of goal. Several examples of scorecards can be accessed via the SIG Resource Center by starting here: http://www.sig.org/src.php?id=4446

Screens and Weightings

Criteria used to select suppliers and the assigned relative importance of each item.

Service Catalog

List of services that an organization provides to its clients or employees.

Service Credit

A mechanism by which amounts are deducted from the amounts to be paid under the contract to the supplier if actual supplier performance fails to meet the performance standards set in the service levels. Sometimes also referred to as penalty or malice payment.

Service Level Agreements (SLAs)

Specific metrics that a service provider must meet. Often there are incentives for exceeding SLA targets or penalties associated with missing SLA targets. Several examples of SLAs can be accessed via the SIG Resource Center by starting here: http://www.sig.org/src.php?id=4446

Service Provider

An external supplier that provides service to a client. A term typically used to describe a supplier of outsourced services.

Services

Unless otherwise indicated, both professional or technical services and service performed under a service contract. Pricing is usually collected via a Request for Proposal and includes a Scope of Work, Statement of Work or other documentation to explain the services needed and how delivery will be measured.

Services Procurement

The buying and managing of strategic outsourcing and consultancy (procurement of services from a third-party supplier). Contingent labor makes up a large portion of services spend for many companies. Typically a SOW is used to define the services required for purchase.

Seven Step Strategic Sourcing Process

An organized approach or method that allows a supply chain function to systematically work on spend areas or processes that can result in cost saving benefits. Many organizations have adopted strategic sourcing processes that typically span from 5 to 8 steps. Also referred to as the Sourcing Cycle.

Shared Services Sourcing Model

A Shared Services model is one of two investment-based categories; it is constructed as an internal organization typically based on an arm's-length outsourcing arrangement. A shared services model creates an internal functional business unit or a stand-alone entity that provides goods or services to an overall broader organization. Think of a shared services model as an entity that creates its own internal supplier and outsources to itself.

Shared Value

A mutual commitment to establish economic benefits for all parties. In essence, shared value thinking involves entities working together to bring innovations that benefit them through a conscious effort to gain (or share) in the rewards. This shared value thinking is what the University of Tennessee researchers have named "what's in it for we" (WIIFWe).

Shared Vision Statement

The statement that sets forth the larger, guiding principles for the business relationship and the purposes for relationship. A shared vision statement is an essential element of a Vested Sourcing Business Model.

Should Cost Model

A tool used to determine what a product is expected to cost. When completing a should-cost model, the sourcing organization is assessing the costs of the necessary labor and materials, as well as any expected labor rates and profit margins.

Single Source

An acquisition where, after a search, only one supplier is determined to be reasonably available for the required product, service or construction item.

Six Sigma

Six Sigma is a management practice developed by Motorola that is in widespread use today. Six Sigma is a structured process that identifies and eliminates the causes of defects and errors. Originally used in manufacturing, "lean" Six Sigma is the elimination of unnecessary steps in business processes as well as quality improvement.

SKU Velocity

(Turnover) The number of times a process occurs to each SKU in a given time period. For example, if two SKU’s are purchased (one 12 times per year and one 24 times per year) then the annual purchasing SKU velocity is 36 SKU’s per year (sometimes equivalent to line items).

Smoothing

Using an average for volume to eliminate peaks and valleys in demand.

Soft Savings

Identified savings attributable to internal process improvements, partial FTE reductions, or “hard” savings that will not be implemented; savings that will not affect any budgets.

Sole Sourcing

Purchasing goods/services from one supplier with no other options.

Solicitation

The process used to communicate procurement requirements and to request responses from interested vendors. A solicitation may be, but is not limited to a request for bid and request for proposal.

Solution Concept

The combination of two critical concepts.

Source To Pay

The integrated processes to identify needs, develop a strategy, go to market, contract, procure and pay for goods and services.

Sourcing

Sourcing refers to the practices involved with finding, evaluating and engaging suppliers of goods and services. Sourcing helps procurement fulfill a key role in the corporate request for value growth. Companies should follow a rigorous methodology to achieve sourcing excellence.

Sourcing Business Model Theory

A theory that suggests sourcing should be thought of as a business model between two parties with the goal to optimize the exchange.

Sourcing Cycle

A continuous process for evaluating and managing a spend category requirement. Typically organizations have adopted a multi-step process with a seven step process being the most popular. See Multi-step Strategic Sourcing Process above.

Sourcing Optimization

Use of algorithms to evaluate extensive data inputs and scenario constraints to determine the "optimal" decision on which supplier should be used.

Sourcing Solution

The final selected approach to fulfill a spend category requirement; a sourcing solution is structured based on one of the seven Sourcing Business Models.

Sourcing Strategy

The approach an organization will use to buy and manage goods and services in a spend category. Typically a sourcing strategy focuses on the highest spend categories an organization purchases and consumes.

Specification

A concise statement of a set of requirements to be satisfied by a product, material or process that indicates whenever appropriate the procedures to determine whether the requirements are satisfied. As far as practicable, it is desirable that the requirements are expressed numerically in terms of appropriate units, together with their limits. A specification may be a standard, a part of a standard, or independent of a standard. .

Spend Analytics/Analysis

The process of consolidating, cleansing and connecting organization-wide spend and supplier data, tackling complex spend categories, proactively mitigating supplier risks, effectively monitoring the performance of suppliers and providing greater visibility, and unlocking insights and opportunities. This information is critical to the strategic sourcing process. This process is also sometimes referred to as supplier classification. It can also be leveraged in other areas of supply chain management such as inventory management, budgeting, planning and product development.

Spend Category

Goods or services with similar characteristics that are grouped together for planning and management purposes. For instance, furniture could be a spend category for a business, and have sub categories consisting of the desks, chairs, tables and cabinets purchased by the company during the year. Some organizations classify spend using their own unique categories, others rely on more standard taxonomies like the United Nations Standard Products and Services Code® (UNSPSC®) or the North American Industry Classification System (NAICS). A discussion of various methods for creating spend categories and classifying spend and suppliers according to those categories can be found in this SIG Member Peer2Peer Discussion here: http://www.sig.org/p2p-specific.php?id=144

SRM

See Supplier Relationship Management.

Stakeholder

A stakeholder to a sourcing initiative includes, but is not limited to anyone who may be impacted or have influence on the sourcing outcomes. This typically includes users, engineers, budget holders and the procurement team.

Stakeholder Analysis

A Stakeholder Analysis shows how to interface with those having influence on or a vested interest in category management.

Stakeholder Management

An important aspect of running a successful sourcing initiative. It is the process of forming, monitoring and maintaining constructive relationships with stakeholders. Stakeholder management involves identifying the supportive stakeholders who will advocate to move forward with initiatives. This can be done by engaging stakeholders in procurement projects and encouraging buy-in. This involves a stakeholder accepting an idea or proposition, and agreeing to commit to the plan. There are three types of stakeholders: internal, connected, and external.

Stakeholder Ranking

A stakeholder ranking helps identify potential project or decision risks as well as who will be supportive of projects or decisions. In order to manage stakeholders and create a strategy, it is important to identify stakeholders and rank them based on different characteristics. It is useful to determine these rankings before implementing a decision or planning a project. This way, companies can see who will be most helpful and interested in their business operations, and who may get in the way or are not interested. Rankings can be established by stakeholder analysis or creating a stakeholder matrix.

Stakeholder Theory

A common theory of business operation. This theory states that leadership must take into account the values of all individuals it impacts, not just the shareholders. Shareholders are those who own stock in the business. The stakeholder theory holds that in order for a sourcing initiative to be successful, it must recognize that all stakeholders are important and then manage their needs equally.

Standard

An item's characteristic or set of characteristics generally accepted by the manufacturers and users of the item as a required characteristic for all such items. For example, a power chord is a standard item when included with the purchase of a computer.

Standard Operating Procedure (SOP)

Authorized, documented procedure or set of procedures, work instructions and test instructions for production and control.

Standardization

The process of defining and applying the conditions necessary to ensure that a given range of requirements can normally be met, with a minimum of variety, in a reproducible and economic manner based on the best current techniques.

Standardization

A formal process used to identify standard products or services that will be used universally across an organization.

Standing Neutral

A trusted neutral expert selected by the parties at the beginning of their relationship who is readily available throughout the life of the relationship assists in the prompt resolution of any disputes.

Statement of Intent

Within a relational contract, the buyer and supplier commitment to constructive working relationships, attitudes and behaviors. A Statement of Intent is a formal document that buyers and suppliers co-create with intended behaviors.

Statement of Retained Earnings

Explains the changes in a company's retained earnings over the reporting period. The statement of retained earnings breaks down any changes in the owners' interest in the organization. It also breaks down any changes in the application of retained profit or surplus from one accounting period to the next.

Statement of Work (SOW)

A Statement of Work is a part of an overall agreement. Other parts of the agreement will describe the terms, the pricing, the service levels, and other metrics for how well the services are provided, but the SOW describes WHAT services the supplier will perform. The purpose of a Statement of Work, or SOW, is to describe the services that a supplier will perform beginning on the commencement date.

Statistical Process Control (SPC)

A method for monitoring, controlling and, ideally, improving a process through statistical analysis. SPC can be applied to any process where the "conforming product" (product meeting specifications) output can be measured.

Steering Council

The corporate Steering Council is comprised of key executives from the Business Units, which utilize the products or services of the Strategic Sourcing Teams and/or have a management or financial interest. The Steering Council is the approving body, which authorized initial sourcing recommendations and subsequent changes (i.e., significant pricing changes, renewal, suspension, termination). The Steering Council generally meets quarterly or on an as-needed basis.

Stock Keeping Unit (SKU)

A product with a particular set of characteristics (such as size, color, number bundled, package type, etc.).

Stockless Purchasing

A general practice whereby the buyer negotiates a purchasing arrangement, including price, for a group of items for a predetermined time period, and the supplier holds the inventory until the buyer places orders for specific items. Blanket orders, open-end orders and systems contracts can be used as a stockless-purchasing technique.

Strategic Products / Services

Also referred to as critical products/service. One of the four Kraljic Matrix quadrants. In general these are products or services that are high-tech and high volume, which are often supplied per customer specification.

Strategic Sourcing

Strategic Sourcing is a method of managing a company's procurement process. It involves continuously improving purchasing activities by reviewing and re-evaluating current activities against new purchasing opportunities in the market; a systematic approach to optimize value to the organization. Strategic sourcing, which is a key aspect of supply chain management, involves examining purchasing budgets, the landscape of the supply market, negotiation with suppliers and periodic assessments of supply transactions. The goal is to save money, improve acquisition, improve supplier performance and minimize risk.

Strategic Sourcing

The acquisition of goods and services with a focus on developing ways to improve the overall price or quality for those goods and services. This may involve a new bid process for specific goods or services, or categories, especially in those areas where significant dollars are spent. The intent is to develop vendor alliances that maximize the total value equation (quality, service, and price).

Sub-Contracting

AKA Sub-supplying, Second-Tier purchasing. The processes of a primary supplier or contractor utilizing other suppliers or contractors to complement their products or services in order to meet all of a customer’s requirements. This is typically done in a manner that is transparent to the customer, at least administratively.

Subsidiaries

A company whose voting stock is more than 50% controlled by another company, usually referred to as the parent company or holding company. A subsidiary is a company that is partly or completely owned by another company that holds a controlling interest in the subsidiary company.

Supplier Development

The process of developing a supplier relationship to continue generating value after the implementation of a Strategic Sourcing effort.

Supplier Diversity Program

An organization's documented intent and program to provide economic development opportunities for small, diverse business enterprises, which include, but are not limited to, small enterprises, minority, women and disabled veteran-owned suppliers.

Supplier Market Analysis

A technique which enables a contracting authority to understand how a market works, the direction in which a market is heading, the competitiveness of a market, the key suppliers and the value that suppliers place on the contracting authority as a customer. This can help inform, improve and shape the tendering process leading to improved procurement outcomes such as better value for money or service, reduced prices or achieving whole of government outcomes.

Supplier Performance Management (SPM)

A comprehensive system for monitoring, managing, controlling and influencing a supplier's provision of a product or service to meet a company's business needs and goals. SPM can also include considerations to orchestrate the buying side of the relationship by providing a mechanism to receive supplier feedback. SPM serves as a continual communication protocol to provide insight into a company's buying behavior, transactional processes, and overall relationship management techniques.

Supplier Performance Program (SPP) and SPP Reports

A program through which the performance of sourced suppliers is measured. Performance is monitored and reported monthly. Suppliers achieve performance levels according to their performance (Gold, Silver or Bronze) and are notified quarterly.

Supplier Relationship Management

The practice of creating mechanisms to increase the efficiency and effectiveness of how a company works with its service providers. The goal of SRM is to create effective processes for working together, which in turn yields lower costs of doing business. Some SRM efforts are designed to build deeper relationships that foster improved collaboration efforts and innovation. A benefit of SRM is to develop a common frame of reference for companies and services providers, thus establishing unified business practices and terminology for how the organizations work together.

Supplier Relationship Management (SRM)

A process that enables both parties (buyer and supplier) to monitor the effectiveness of communication and ensure continued engagement of all parties.

Supplier Screening Survey

An informal questionnaire sent out to suppliers for the purpose of determining those that have the potential to meet the sourcing team’s objectives. It is typically short, simple and structured around screening criteria - those characteristics or capabilities that the supplier should have to meet sourcing objectives. This will typically reduce the number of suppliers to be further investigated through RFI’s or RFP's.

Supplier Segmentation

The process of classifying a supplier's relationship to the company. Classifications include commodity, strategic, standard or key.

Supply Base

The designated suppliers that provide goods or services in a spend category. Also referred to as providers, solution providers, vendors, contractors or potential bidders.

Supply Base Strategy

A systematic and analytical approach for identifying the proper mix of suppliers in a specific spend category. A supply base strategy is one component of an organization's overall sourcing strategy.

Supply Chain

One of the major business functions of any organization. The function typically is responsible for acquisition of required materials, services and equipment used in the organization. The entire supply chain consists of the steps from identification of a need, design of a specification of a product or service, procuring the object, receipt, inventory, warehouse, distribute, install, use, end of life process, disposal, to payment of the invoice. The Supply Chain encompasses the following: Identification of Customer Needs; Design and Engineering; Planning ; Procurement; Supplier Time; Inbound Transport; Warehouse; Delivery; Payment; Maintenance, Utilization, Repair; and Installation and Disposal.

Supply Chain Analytics

In this type of analytics the first thing is to capture useful data in information systems such as ERP. Based on that, various processes are prepared such as forecasting, demand planning, sourcing, production and distribution. Finally, KPIs are determined to create supply chain specific dashboard and supplier scorecards.

Supply Chain Cost Model

A numerical representation of the costs associated with a particular supply chain process.

Supply Chain Management

Focuses on reducing costs associated with manufacture and delivery of materials and services.

Supply Market

The combined supply of everyone willing and able to sell a good or service in a market.

Surplus Property

Property in excess of the needs of an organization and not required for its foreseeable use. Surplus may be used or new, but it possesses some usefulness for the purpose it was intended or for some other purpose.

Swim Lanes (process mapping)

These are the horizontal process lanes when completing a process map that show when a process enters and exits a particular business area.

SWOT Analysis

An analysis of the strategic environment of any business or problem. Environmental factors include those that are: Internal to the firm which usually can be classified as either strengths (S) or weaknesses (W), and External to the firm which can be classified as either opportunities (O) or threats (T). A SWOT analysis identifies your strengths, weaknesses, opportunities and threats to assist you in making strategic plans and decisions.

Systems thinking

An interconnected set of elements, sub-elements and components that are structured in a way that achieves a defined purpose.

Tactical Procurement (i.e. Transactional Procurement)

Required for all supplier relationships, and can describe the transactional aspect associated with managing a supplier relationship - includes change orders, expediting, etc.; Non strategic (no sourcing team) relationship management.

Tariff

A system of government-imposed duties levied on imported or exported goods; a list of such duties, or the duties themselves.

Tasks

Steps taken to perform an activity or activities (open mail, data entry, etc.). For example: a warehouse person “My job is warehouse Foreman. I spend about 20% of my time on X commodity in question. My major activities are receiving, stocking, picking orders, processing returns, and handling customer complaints. My tasks include, inputting receivers into systems, driving a forklift, packing statements, addressing boxes, etc.”

TCE

See Transaction Cost Economics.

TCO

See Total Cost of Ownership.

Team Charter

A team charter is created by the category team to outline and align objectives, roles and expectations. The team charter drives accountability and ensures action plans are defined and tracked.

Technical specification

The technical properties and characteristics of a good or service as well as the activities to be performed by the supplier.

Tender

A document that describes a business transaction to be performed; a bid or offer.

Termination for Cause

A type of contract termination that occurs when a party breaches the agreement.

Termination for Convenience

A type of contract termination that occurs when a party terminates the agreement without a corresponding breach by the other party.

Terms and Conditions

A phrase generally applied to the rules under which all bids must be submitted and the stipulations included in most contracts. Contains terms and clauses for delivering the contracted goods or services, managing the contract performance and exiting the contract. Often referred to as "Ts and Cs".

The Innovators Dilemma

From Clayton Christensen's book of the same name.

Tiered Governance structure

A formalized mechanism for decision making (both escalations and approvals). A three-tier approach is often used in more complex and strategic relationships with an "operational", a "management" and an "executive" level. A process that provides an opportunity to assess multiple providers' cultures, mindsets, and willingness to engage in a collaborative Performance-Based or Vested relationship.

Tiers, Number of

The number of locations or times a product is handled.

Time and Material Contract

See Cost Reimbursable Contract.

Title

The instrument or document whereby ownership of property is established.

Tort

A wrongful act, other than a breach of contract, such that the law permits compensation of damages.

Total Cost

Sometimes called “all-in costs.” In purchasing, total cost generally includes the price of the purchase and transportation cost, plus indirect handling, inspection, quality, rework, maintenance, incremental operations, and all other “follow-up” costs associated with the purchase.

Total Cost Analysis

The use of a standard process for breaking down, examining and evaluating the cost structure of a purchased product or service; it is also an evaluation of actual or anticipated cost data (material, labor, overhead, general and administrative, and profit) of a certain product or service against expectations for those costs, and finally it is the utilization of relevant experience, knowledge and judgment to financial data to project reasonable estimated delivered costs for comparison against actual, supplier-provided costs.

Total Quality Management (TQM)

The integration of management techniques, improvement efforts, and technical tools which focuses on continuous process improvement activities involving everyone in both the buying and supplying firms. An integrated effort toward improving quality performance at every level.

Total-Production Cycle Time

Total activity time required to produce one unit of product.

Trade Bloc

A trade bloc is a type of intergovernmental agreement, often part of a regional intergovernmental organization, where regional barriers to trade, (tariffs and non-tariff barriers) are reduced or eliminated among the participating states.

Tragedy of the Commons

An economic theory by Garrett Hardin, which states that individuals acting independently and rationally according to each one's self-interest behave contrary to the best interests of the whole group by depleting some common resource.

Transaction

A unit of business exchange typically associated with performing an activity. For example, answering a call, working an hour, producing a widget.

Transaction Cost Economics (TCE)

Transaction cost economics adopts a contractual approach to the study of economic organizations. TCE is best thought of as accounting for all the costs of a deal or contract, both the obvious and hidden costs. Oliver Williamson is a pioneer is the study of TCE and won a Nobel Prize in 2009 for his research and thought leadership of TCE.

Transaction Costs

Transaction costs are the costs that occur when participating in a market. The level of transaction costs depends upon three important factors: the frequency of the transaction, the level of transaction specific investment, and the external and internal uncertainty. To use a very simple example, when buying a book, there is not only the purchase price of the book but also the costs you incur in purchasing the book, these could include your energy and effort in selecting the book, the costs of traveling to the store or using the internet, the time waiting, the effort and costs of making the payment. The costs that go beyond the books price are the transaction costs. Transaction costs include actual monetary costs, expertise, flexibility, risk, asset specificity, the cost of managing the relationship, and supplier set up and switching costs to name only a few that must be considered.

Transaction-Based Economic Model

An economic model that links a supplier's payment to a specific activity or level of effort.

Transactional Metric

A measure associated with performing a transaction. Typically measures the activity. Example: Preventive Maintenance Actions Performed on Time.

Transactional Procurement

See Tactical procurement.

Transformation

Transformation is the act of performing re-engineering, process improvement and innovation activities to transform services to a state that will achieve long-term objectives and benefits for both parties. Transformation usually results in steady state service levels becoming effective, pricing model being validated and provider achieving process leverage.

Transition

The tasks that are necessary to migrate the service performance from the customer's operating environment to the supplier's operating environment. The transition will almost always involve significant knowledge transfer activities to help the vendor get up to speed on the customer's environment. There may also be some initial infrastructure improvements but usually there's only marginal improvements during the transition.

Transparency

Open, public; having the property that theories and practices are publicly visible, thereby reducing the chance of corruption.

Truckload (TL)

A quantity of freight to which truckload rates apply or a shipment tendered as a truckload; A highway truck or trailer loaded to its carrying capacity. See less-than-truckload.

Underlying financial and operational assumptions

A mechanism that allows companies to address market events and fluctuations. In any supply solution there is a value placed on the business relationship. This is a different view than Best Value. The focus of Best Value is from the buyer's perspective. Value Balance is a two-way perspective, a buyer/supplier value proposition. In every sourcing model a buyer should evaluate this balance as "business happens."

Uniform Commercial Code (UCC)

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.

Unit price

The price of a selected unit of a good or service (e.g., pound, labor hours, etc.).

Value

Value is the worth in usefulness or importance to the processor; value extends beyond cost. Profitability, cost optimization and market growth are value elements common to both buyers and suppliers.

Value Add

Value Add can be used to refer to the success of a sourcing strategy or the sourcing organization. It is used to describe how much value the sourcing team has added to the company's overall competitiveness and bottom line.

Value Added Services

Services that are provided by a supplier in the total package that they are supplying. For example, for given materials/services, it may be that the supplier is offering to add job site deliveries, training meetings with your company’s employees, consignment inventories, contribute research and development efforts to your company, put an on-site representative to work on expediting and order placing, etc. These additional services are outside the normal scope of service that is usually given when purchasing the commodity in the past, and may or may not have an additional cost associated with them.

Value Analysis

An organized effort directed at analyzing the function of systems, products, specifications, standards, practices, and procedures for the purpose of satisfying the required function at the lowest total cost of effective ownership consistent with the requirements for performance, reliability, quality and maintainability.

Value Balancing

A process of creating a balanced exchange between a buyer and supplier with the goal to create economic equilibrium. Typically, buyers think of value as one direction. However, to create equilibrium, buyers must think in terms of a two-way exchange of value.

Value Based Pricing

A pricing strategy suppliers use which sets prices primarily, but not exclusively, on the value, perceived or estimated, to the customer rather than on the cost of the product or historical prices. Value-based pricing is predicated upon an understanding of customer value. The approach is most successful when products are sold based on emotions (fashion), in niche markets, in shortages (e.g. drinks at open air festival at a hot summer day) or for indispensable add-ons (e.g. printer cartridges, headsets for cell phones).

Value Based Purchasing

Purchasing goods or services based on value received, not tied to the actual costs.

Value Proposition

What a supply chain member offers to other members. To be truly effective, the value proposition has to be two-sided; a benefit to both buyers and sellers.

Value-Added Activities

See Value-Added Services.

Value-Added Services

The process in which several steps in the production and/or distribution of a product or service are controlled by a single company or entity, in order to increase that company's or entity's power in the marketplace. A formalized mechanism for decision making (both escalations and approvals). A three-tier approach is often used in more complex and strategic relationships with an "operational", a "management" and an "executive" level.

Value-Driven

The process of making choices which are based on achieving the greatest value. This can be interpreted as the opposite of a process-driven approach, which merely follows the tracks as laid forth in a methodology without critically evaluating the best solution for each category. A value-driven approach reviews the subject’s dynamics and decides the best approach to extract the greatest value from the available choices.

Variable Cost

A cost that fluctuates with the volume of production of goods or the performance of services. Major variable costs are material and labor costs.

Variety

Refers to the different forms of (big) data. In the past, all data created was "structured" data, which has a high degree of organization and generally comes in the form of relational enterprise databases. Structured data is easily searchable.

Velocity

The speed at which (big) data is created, stored, analyzed and visualized, which is almost unimaginable.

Vendor

Someone who sells something; a "seller." Also known as a bidder, supplier, contractor or provider.

Vendor Compliance

Vendor Compliance usually refers to the process of ensuring that the company's suppliers have the requisite certifications, insurance, and authorizations to provide goods or services. Specifically for sourcing, it might also refer to the process of ensuring that vendors are complying with contractually agreed upon terms.

Vendor-Managed Inventory

A continuous replenishment program that uses the exchange of information between a buyer and supplier to allow the supplier to manage and replenish product at the buyer's location. Typically the goal is to reduce inventory levels by streamlining demand management and just in time deliveries.

Vendors list

A list of names and addresses of suppliers from whom bids, proposals and quotations might be expected. Created during the first stage of the Strategic Sourcing Process. It is also sometimes called the Supplier List or Potential Supplier List.

Veracity

The accuracy or certainty of the (big) data.

Vertical Integration

A hybrid relationship that combines an Outcome-Based economic model with a relational model incorporating the Nobel award-winning concept of behavioral economics and the principle of shared value. Using these concepts, companies enter into highly collaborative arrangement designed to create and share value for the buyer and supplier above and beyond conventional buy-sell economics of a transaction-based agreement. In short, the parties are equally committed (Vested) to each other's success.

Vested 10 Elements

Research from the University of Tennessee has identified 10 essential "elements" that follow Five Rules. Buyer and supplier relationships that structure their agreement based on the 10 elements were found to have a high degree of collaboration and success in driving transformation and innovation.

Vested® Business Model

Vested is a hybrid business model, movement and methodology that enables true win-win relationships in which parties are invested in each other's success. Vested combined a relational contract with an outcome-based economic model. When applied, a Vested approach fosters a highly collaborative environment that sparks innovation, resulting in transformation, improved service and reduced costs. Vested is a progressive approach that takes business relationships to the next level, sparking innovation, improving service and reducing costs.

Volume

The scale of the (big) data.

Volume Banding

A technique where a buyer and supplier agree on a fixed price at various volume thresholds. Prices remain constant within a pre-specified band of purchasing commitment. If volumes increase above the band, price per transaction typically goes down. If volumes decrease, the buyer agrees to pay a higher price for each unit/transaction. Volume banding is an especially important concept when there is a great deal of variability in volume and is used to maintain fair profits for suppliers in the event of volume changes.

Volume Discounts

A price reduction associated with purchase of a larger quantity of goods or services. Volume discounts can be based on specific order volume, total dollar value of an order or total dollars spent over a specified period of time.

Warranty

The representation, either expressed or implied, that a certain fact regarding the subject matter of a contract is presently true or will be true. Not to be confused with "guarantee," which means a contract or promise by one person to answer for the performance of another person.

Watermelon Scorecard

A term coined by University of Tennessee researchers to explain the concept that a supplier can be meeting a buyer's required specification, but are not proactively collaborating to drive innovative value over the long term for the buyer. In essence, the scorecard is green on the outside, but red on the inside.

Waves

In picking, the grouping of ship-to destinations that are picked at the same time.

What's In It For We ("WIIFWe")

A collaborative approach to negotiation that ensures all parties share risk and benefit. It is a "there's enough for all" mindset.

WMBE

Minority, Women, and Service Disabled Veteran Business Enterprises. A program to encourage purchasing opportunities for vendors classified as WMBE businesses.

Workload Allocation

A Vested term that describes maximum integration (management and visibility) of the entire business process effectiveness. The organization and service provider work together to optimize the end-to-end process rather than focusing on process effectiveness specific to the internal company.

Workscope

A generic term used to define the work that a supplier will perform under a contract. Workscope is often defined as a combination of type of work (activities, output, outcomes) and breadth of work (geography, business units). Organizations typically define workscope in a formal Statement of Work or a Performance Work Statement.

World Bank

A group of five financial organizations whose purpose is economic development and the elimination of poverty.

Zero-Sum Games

Associated with Game Theory. A situation in which one person's gain is equivalent to another's loss, so the net change in wealth or benefit is zero. A zero-sum game may have as few as two players, or millions of participants.