Glossary Of Sourcing And Procurement Terms

Welcome to our comprehensive glossary of sourcing and procurement terms. This resource provides clarity and understanding for professionals navigating the complex landscape of global sourcing, procurement, and supply chain management. Whether you're a seasoned expert or new to the industry, this glossary will help you grasp the essential jargon, acronyms, and phrases crucial for effective communication and successful operations in this field.

From key contract terms to technical specifications and from logistics lingo to quality assurance descriptors, this collection serves as your go-to reference. It's meticulously curated to ensure you have a quick and reliable resource at your fingertips, facilitating smoother negotiations, clearer contracts, and a deeper understanding of the intricacies of international sourcing and procurement.

Dive into this glossary to demystify the terminology and empower yourself with the knowledge to engage confidently with manufacturers, suppliers, and stakeholders worldwide.

AQL (Acceptable Quality Limit): A statistical measurement of the maximum number of defective goods considered acceptable in a random sample inspection.

BOM (Bill of Materials): A comprehensive list of raw materials, components, and instructions to construct, manufacture, or repair a product or service.

Compliance: Adherence to laws, regulations, guidelines, and specifications relevant to the business or industry.

Due Diligence: An investigation or audit of a potential investment or product to confirm all facts, such as reviewing financial records, plus anything else deemed material.

Economies of Scale: The cost advantage is achieved when production becomes efficient, as costs can be spread over larger goods.

FOB (Free On Board): An international shipping agreement where the seller assumes responsibility for the goods until loaded on a shipping vessel.

Incoterms: A series of pre-defined international contract terms published by the International Chamber of Commerce relating to international commercial law.

Just-in-Time (JIT): An inventory strategy companies employ to increase efficiency and decrease waste by receiving goods only as they are needed in the production process.

Lead Time is the time that elapses between the start and completion of a process. In sourcing, it refers to the time from placing an order to delivery of the product.

MOQ (Minimum Order Quantity): The smallest set of stock a supplier is willing to sell. If the buyer cannot purchase the MOQ of a specific product, then the supplier will not sell it.

OEM (Original Equipment Manufacturer): A company that produces parts and equipment that another manufacturer may market.

Procurement: The action of obtaining or procuring something. Business often refers to getting goods or services from preparation and processing to final delivery.

Quality Control: A business seeks to ensure that product quality is maintained or improved and manufacturing errors are reduced or eliminated.

RFQ (Request for Quotation): A document that an organization submits to invite suppliers to bid on specific products or services.

SKU (Stock Keeping Unit): A unique code consisting of letters and numbers that identify characteristics of each product, such as manufacturer, brand, style, color, and size.

Supply Chain Management: Managing the flow of goods and services, which includes all processes that transform raw materials into final products.

Total Cost of Ownership (TCO) is the purchase price of an asset plus the costs of operation, assessing the total expenditure over its life.

Vendor Management: Developing, managing, and controlling relationships and agreements with vendors to control costs, drive service excellence, and mitigate risks to gain increased value from vendors throughout the deal lifecycle.

Wholesale: The sale of goods in large quantities at low prices typically to be retailed by others.

Agile Sourcing: A flexible, responsive approach to sourcing that allows for quick adjustments to market changes or business needs.

 Benchmarking: Comparing business processes and performance metrics to industry bests and best practices from other companies.

Capacity Planning: The process of determining the production capacity needed by an organization to meet changing product demands.

Category Management: A strategic approach that organizes procurement resources to focus on specific areas of spending.

CIF (Cost, Insurance, and Freight): A trade term requiring the seller to arrange for the carriage of goods by sea to a destination port and provide the buyer with the documents necessary to obtain the goods from the carrier.

Commodity Sourcing: Strategic procurement process that focuses on key items that involve significant spending and are essential to the company.

Contract Management: Managing contracts with customers, vendors, partners, or employees.

Cost Avoidance: Actions taken to prevent an increase in cost.

Cost Reduction: Actions taken to lower current costs.

Cross-Docking: A logistics procedure where products from a supplier or manufacturing plant are distributed directly to a customer or retail chain with marginal to no handling or storage time.

Demand Forecasting: Estimating the quantity of a product or service consumers purchase.

Direct Procurement: Acquiring raw materials and goods for production.

Disintermediation: Removing intermediaries in the supply chain, typically involving direct sales to consumers.

Distribution Center: A principal part, the order processing element, of the entire order fulfillment process.

Dropshipping: A retail fulfillment method where a store doesn't keep the products it sells in stock.

E-Procurement: The business-to-business purchase and sale of supplies and services over the Internet.

Economies of Scope: Economies that result from the scope of a company's operations rather than the production scale.

EDI (Electronic Data Interchange) is the transfer of data from one computer system to another using standardized message formatting without human intervention.

Ex-Works (EXW): An international trade term that describes when a seller makes a product available at a designated location, and the buyer of the product must cover the transport costs.

Fixed Costs are business expenses that are not dependent on the level of goods or services produced by the business.

Freight Forwarder: A person or company that organizes shipments for individuals or corporations to get goods from the manufacturer or producer to a market, customer, or final distribution point.

Global Sourcing: The practice of sourcing from the global market for goods and services across geopolitical boundaries.

Green Procurement: Procuring products and services that have a reduced impact on human health and the environment compared to competing products or services that serve the same purpose.

Horizontal Integration: A strategy where a company creates or acquires production units for similar outputs- complementary or competitive.

Indirect Procurement: Purchasing services or supplies required to keep the day-to-day business alive.

Inventory Management: Supervising non-capitalized assets (inventory) and stock items.

JIT (Just-In-Time) Inventory: An inventory strategy companies employ to increase efficiency and decrease waste by receiving goods only as they are needed in the production process.

Kaizen: A Japanese business philosophy of continuous improvement of working practices, personal efficiency, etc.

Kanban: An inventory control system used in just-in-time manufacturing.

KPI (Key Performance Indicator): A performance measurement that evaluates an organization's success or a particular activity in which it engages.

Landed Cost: The total price of a product once it has arrived at buyers' hands.

Lean Manufacturing: A systematic method for waste minimization within a manufacturing system without sacrificing productivity.

Logistics: The detailed organization and implementation of a complex operation.

Make or Buy Decision: Choosing between manufacturing a product in-house or purchasing it from an external supplier.

Negotiation: A strategic discussion that resolves an issue that both parties find acceptable.

Non-Disclosure Agreement (NDA): A legal contract between at least two parties that outlines confidential material, knowledge, or information that the parties wish to share for certain purposes but wish to restrict access to.

Offshoring: The relocation of a business process from one country to another—typically an operational process, such as manufacturing, or supporting processes, such as accounting.

Onshoring: Transferring a business operation that was moved overseas back to the country from which it was originally relocated.

Outsourcing: The business practice of hiring a party outside a company to perform services and create goods traditionally performed in-house by the company's employees and staff.

Pareto Principle (80/20 Rule): The law of the vital few, or the principle of factor sparsity, states that, for many events, roughly 80% of the effects come from 20% of the causes.

PO (Purchase Order): A commercial document and first official offer issued by a buyer to a seller, indicating types, quantities, and agreed prices for products or services.

Procurement Cycle: The cycle of steps an organization goes through to acquire goods and services.

Product Lifecycle: The cycle every product goes through from introduction to withdrawal or eventual demise.

Quality Assurance (QA): A way of preventing mistakes or defects in manufactured products and avoiding problems when delivering solutions or services to customers.

RFP (Request for Proposal): A document that solicits a proposal, often made through a bidding process, by an agency or company interested in procurement of a commodity, service, or valuable asset to potential suppliers to submit business proposals.

Risk Management: The identification, evaluation, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability or impact of unfortunate events or to maximize the realization of opportunities.

S&OP (Sales and Operations Planning): An integrated business management process through which the executive/leadership team continually achieves focus, alignment, and synchronization among all functions of the organization. 

SaaS (Software as a Service): A software licensing and delivery model in which software is licensed on a subscription basis and is centrally hosted.

Safety Stock: Extra inventory is kept to prevent stockouts, which are typically caused by incorrect forecasting or unforeseen changes in customer demand.

SCM (Supply Chain Management): Managing the flow of goods and services and including all processes that transform raw materials into final products.

Sourcing Strategy: A company's plan to decide where and how to obtain the necessary resources to produce a product or service.

Spend Analysis: The practice of analyzing procurement spending to decrease costs, increase efficiency, or improve supplier relationships.

Stakeholder Management: The systematic identification, analysis, planning, and implementation of actions designed to engage with stakeholders.

Strategic Sourcing: An institutional procurement process that continuously improves and re-evaluates the purchasing activities of a company.

Supplier Evaluation: The process of assessing and approving potential suppliers by quantitative assessment.

Supplier Relationship Management (SRM): The discipline of strategically planning for and managing all interactions with third-party organizations that supply goods and services to an organization to maximize the value of those interactions.

Takt Time: The average time between the start of production of one unit and the start of production of the next unit when these productions start is set to match the rate of customer demand.

Tariff: A tax imposed on imported goods and services.

Third-Party Logistics (3PL): A company uses third-party businesses to outsource elements of the company's distribution and fulfillment services.

Total Quality Management (TQM): A management approach to long-term success through customer satisfaction.

Trade Credit: An agreement in which a customer can purchase goods on account (without paying cash), paying the supplier later.

Value Engineering: A systematic method to improve the "value" of goods or products and services by examining function.

Value Stream Mapping: A lean-management method for analyzing the current state and designing a future state for the events that take a product or service from its beginning to the customer.

Variable Costs: Costs that vary with the level of output.

Vendor-Managed Inventory (VMI): A family of business models in which the buyer of a product provides certain information to a supplier, and the supplier takes full responsibility for maintaining an agreed inventory of the material, usually at the buyer's consumption location.

Vertical Integration: The combination of two or more stages of production in one company, normally operated by separate companies.

Warehouse Management System (WMS): A software application that supports and optimizes warehouse functionality and distribution center management.

Working Capital: measures a company's efficiency and short-term financial health.

Zero-Based Budgeting (ZBB): A method of budgeting in which all expenses must be justified for each new period.

4PL (Fourth-Party Logistics): A model of logistics that outsources the management of logistics activities and their execution.

5S: A workplace organization method that uses five Japanese words: seiri, seiton, seiso, seiketsu, and shitsuke. These have been translated as "Sort," "Set In order," "Shine," "Standardize," and "Sustain."

ABC Analysis: A method of categorizing inventory into three categories (A, B, and C) in order of importance.

Backorder: An order for a product or service that cannot be filled currently due to a lack of available supply.

Balance Sheet: A financial statement summarizing a company's assets, liabilities, and shareholders' equity at a specific time.

Bill of Lading (BOL): A legal document between a shipper and carrier that details the type, quantity, and destination of the goods being carried.

Break-Even Analysis: Determining how many units of a product must be sold to cover the fixed and variable production costs.

Capacity Utilization: A percentage measure of how well available labor and equipment are being used.

Cash Flow: The net cash and cash equivalents being transferred into and out of business.

Certificate of Origin: A document used in international trade that certifies that goods have been wholly obtained, produced, manufactured, or processed in a particular country.

Change Management: A systematic approach to transitioning or transforming an organization's goals, processes, or technologies.

Consignment: The act of consigning, which is placing a person or thing in the hand of another but retaining ownership until the goods are sold or the person is transferred.

Continuous Improvement: An ongoing effort to improve products, services, or processes.

Contract Manufacturing: A form of outsourcing where a company hires another company to produce its products, handling the design and brand, while the contract manufacturer handles the manufacturing.

Cost of Goods Sold (COGS): The direct costs of producing a company's goods.

Cross-functional team: A group of people with different functional expertise working toward a common goal.

Customs Broker: A professional who assists companies in international trade, helping to ensure that goods comply with customs regulations.

Cycle Count: An inventory auditing procedure where a small subset of inventory in a specific location is counted on a specified day.

Dead Stock: Inventory that has never been sold to or used by a customer.

Demand Planning: The process of forecasting the demand for a product or service so it can be produced and delivered more efficiently and to the satisfaction of customers.

Diversification: A risk management strategy that mixes various investments within a portfolio.

Dock-to-Stock: A term used in inventory management to describe a process where stock is received and immediately placed into storage or ready for sale, skipping the usual quality control steps.

Duty: A kind of tax levied by a state. It is often associated with customs, which are also known as tariffs.

Economic Order Quantity (EOQ): The ideal order quantity a company should purchase to minimize inventory costs, such as holding costs, shortage costs, and order costs.

Efficiency: The comparison of what is produced or performed with what can be achieved with the same consumption of resources (money, time, labor, etc.).

Enterprise Resource Planning (ERP): The integrated management of main business processes, often in real-time and mediated by software and technology.

Excess Inventory: Inventory that has not yet been sold or used exceeds the projected consumer demand for that product.

Fill Rate: The percentage of customer or consumption orders fulfilled from stock at hand.

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