"Advanced purchasing", "bullwhip effect" and "maverick buying": Language for purchasers gets more and more complex and complicated. The procurement dictionary of Kerkhoff Consulting helps to shed light and to establish terminology for purchasing departments.
Any term missing?
Please leave us a message: email@example.com.
The ABC analysis is a business management analysis method. According to the criteria of value percentage and volume percentage, this method classifies into classes A, B and C a number of objects – such as e.g. sales, profits, purchase price and annual consumption. A-goods have a high value percentage (approx. 70-80 %) and a low volume percentage (approx. 10-20 %). B-goods are characterized by a value percentage of 10 -25 % and a volume percentage of 10 - 40 %. C-goods only have a low value percentage (approx. 5-10 %), but a high volume percentage of 50-70 %. From a purchasing view point, A-goods are to be considered particularly intensively and C-goods need a solution to be found with a simple process. In practice, the ABC analysis is generally supplemented by the XYZ analysis.
Activity-based costing is used to better plan and control the costs of indirect corporate areas and allocate them to the products and services of an enterprise. Activity-based costing here follows the value chain of an enterprise. Within the scope of an activity analysis, the activities of indirect performance areas will be identified and allocated to main and partial processes. Subsequently, the costs of indirect performance areas are allocated to the identified activities depending on so-called cost drivers. Activity-based rates are then ascertained which allow process-related overheads to apply against the company's products. Objectives of activity-based costing are the establishment of cost transparency in indirect performance areas, also the safeguarding of efficient resource consumption, and the offsetting of the company' internal services in accordance with consumption.
Added value plays a very important part in procurement. The step by step manufacture of an end product is called added value process; this is made up, in turn, of various added value steps. With every stage in production, any further processing or addition of a component to the semi-finished product will reach a higher level in the supply chain. In this context, it is crucially important that both the use of resources required for the generation of added value and the costs incurred are kept as low as possible. For that reason, both product cost calculation and the identification of cost drivers in products and services are vitally important tools for defining the corresponding added value at a specific added value stage.
added value stage
advanced planning and scheduling
APS systems are extensions of ERP systems. APS systems are used to synchronize the activities of the entire supply chain. This will include the entire value-added chain, including supplier and customer flows.
agreement on objectives
(management by objectives)
Agreements on objectives are measurable, transparent goals which are mutually agreed upon. Responsibility for the achievement of objectives is delegated to one employee. The degree of goal achievement will be reviewed within a defined period. Such degrees of goal achievement may be integral parts of the compensation regulation under labor law because this instrument can be used to scale a person's achievement potential and willingness to learn by means of an evaluation matrix. This will promote the employees' motivation and results orientation.
agreement on the place of jurisdiction
An agreement on the place of jurisdiction indicates the local and objective competence of a court for a specific agreement or contract. For that reason, such an agreement should be an integral part of any contract. That agreement will be crucially important if one of the parties brings legal action against the other – as illustrated by the following example: If a company buys goods from a Chinese supplier and damage claims result, the company must resort to Chinese courts if China had been agreed upon as the place of jurisdiction. Accordingly, Chinese law will also be applicable – not German law.
maximum production cost
analysis of price structures
The analysis of price structures is an instrument which tries to follow or understand a supplier's price calculation. The price for the item to be examined will be broken down in its cost and profit components. Thus, the supplier's short- and long-term bottom price limit can be analyzed – and thus its bargaining range as well. Accordingly, the analysis of price structures is an auxiliary means in price negotiations. Combined with value analysis and benchmarking, the procuring enterprise will, moreover, gain yet more in-depth insight into the item to be procured, its components and elements, as well as a reasonable price offer by the supplier. Frequently, potentials in the supplier's processes can thus be ascertained which can then be jointly realized to the mutual advantage of supplier and buyer.
analysis of supplier structures
The analysis of supplier structures comprises all functions used for obtaining and processing of information about the past, present and future supplier structure. It largely results from the problem of an excessive number of suppliers and the resulting problem of an adequate supply of information. The analysis of supplier structures particularly includes the classification of suppliers according to different characteristics which are important for the enterprise. This includes the ABC analysis which provides a segmentation of the suppliers' base depending on the procurement volume of every individual supplier. For the analysis of supplier structures, a focal point will be the relationships to a company's suppliers, especially their contribution to the development of external successful performance potentials.
assignment of claims
Auctions bring sellers and buyers together. As opposed to a conventional purchase contract, the price for a product will be determined only within the scope of the auction. It is basically differentiated between a sales-motivated auction and a reverse auction. In the sales-motivated auction, several buyers can place a bid for a product. Depending on the selected auction mode, one of the buyers will be awarded. The advantage of both forms of auctions is that buyers as well as sellers are directly informed about the other's willingness to pay.
The English term audit is a synonym for the German word Revision and accordingly presents a review of areas of responsibility by internal or external persons. However, it must be ensured that these auditing persons will be able to act independently. Audits are performed in various certification procedures, e.g. ISO certification; or in supplier evaluations as well. See also supplier audit.
Auxiliary materials enter into a product; unlike raw materials, however, they only have subordinate functions. One example for auxiliary materials are screws.
average complaints ratio
shows the percentage of deliveries without complaints. High values should be reached. A survey by suppliers will be especially informative.
average deadline faithfulness
shows the percentage of on-time deliveries. High values should be reached. A survey by suppliers will be especially informative.
average inventory level
average purchase volume per supplier
shows the average purchase volume per supplier. An increase of the value is to be targeted.
average replenishment time
average time of order preparation + average delivery period + average inspection and storage time or allocation time, respectively
The average replenishment time indicates the period of time required to make materials available. Changes in this ratio have an effect on the supply readiness and the inventory levels.
The term balanced scorecard may be translated as "ausgewogene Kennzahlentafel“ in German. It arranges ratios into the four categories of finances, customer orientation, internal business processes, as well as learning and development. A special characteristic of the balanced scorecard is its multi-dimensional approach which includes the following factors:
- References to past and future
- Orientation of the enterprise to strategic objectives since (operative) performance drivers are provided side by side with earnings ratios
- Analysis of status quo
- Communication of strategy
- Ratios connected via cause and effect relations
With its cause and effect chain, BSC describes how the development of specialized and expert knowledge of the workforce increases the internal process quality and the throughput times of processes and how e.g. on-time deliveries can, in turn, improve customer satisfaction. Thus, general process improvements have an effect on customer loyalty and last but not least on the return on investment (ROI), the financial result.
In German, BANF stands for Bestellanforderung – requisition in English – and is an internal voucher in the procurement process. BANFs will always be sent by consumers to the purchasing department if the individual consumer has no own authority to order a particular product. The appropriate quantity required, the desired delivery date and the price are then passed on to the purchasing department which normally consents to the BANF and sends it as a purchase order to the supplier.
A machine-readable code printed on products and product packages. The bar code is read by means of a scanner and issuance of the merchandise is booked into a connected IT system. Actual and target inventories can thus be compared and upon reaching the inventory's reorder point, a purchase order can be automatically generated.
Benchmarking comprises systematic comparisons of enterprises, business segments, processes or products with a company's internal or external objects. Optimization potentials can be detected and continuous improvements be realized both by an internal comparison – e.g. among different branch establishments – and by external comparisons. Such benchmarking may be provided on either a non-recurrent or a continuous basis. The unit coming out on top in the benchmarking is called best practice. It is advisable to define best practice as the improvement objective to be aimed at.
Determines the supplier who provided the best bid in terms of quality, due date and cost price.
Billing or invoicing is a process in accounting in which – after completed delivery or, respectively, performance – an invoice about the stipulated purchase price is sent to the customer. According to the Umsatzsteuergesetz [Turnover Tax Law]), an invoice must include defined component parts, such as e.g. the tax number of the party issuing the invoice, the date, as well as gross and net amounts. Otherwise, the recipient of the invoice cannot make any prior tax deductions.
black box suppliers
Suppliers having met the target profile in the performance and the tender specifications will be included in product development early on. Within the scope of requirements realization, black box suppliers are granted great freedom.
Brainstorming is counted among creativity techniques and is useful in coming up with ideas in any subject context. First, a group of participants collects ideas for the solution of a problem without any comments; then, these ideas will be prioritized. It should be noted for the collection of ideas that the quantity, not the quality of contributions is decisive. Moreover, a discussion with subsequent evaluations takes place exclusively in the second step of the process.
branch order picking
The break even point designates the point at which the costs for a product or a service are on an identical level as the income. Accordingly, above that point, profits are realized and below that point, losses are made.
BRIC states are the economically emerging countries Brazil, Russia, India and China.
Supplier following the manufacturer abroad to establish security of supply because of the supplier's closeness in the vicinity.
bulletin board services
(trade boards) A buyer's demands are virtually published on bulletin board services. Suppliers thus have a good insight into the demand situation and can easily make contact.
The bullwhip effect characterizes order fluctuations along the supply chain which become stronger, the further away one is in the supply chain. One characteristic of these order fluctuations are high inventories. For players of the entire supply chain, the problem is that everyone knows only the demands of the customers immediately upstream of that player. The bullwhip effect results from information deficits within the supply chain. This includes information transmitted to the suppliers with a time delay, such as demand forecasts, changing procurement policy of buyers, pooling demands, as well as price variations as a consequence of sales promotion activities and the resulting thrusts in demand.
see single price auction.
business competitiveness index
The business competitiveness index is an assessment which sets the comparison of countries onto a broad foundation and illuminates a multitude of factors. The annual BCI updated by the World Economic Forum shows whether the enterprises of a corresponding country are able to hold their ground with their performance portfolio in the international competitive environment. To this end, the quality of management and the micro-economically given factors are evaluated. The current ranking is found under www.weforum.org. This homepage also shows the growth competitiveness index. This reflects the potential for economic growth of a country.
Business intelligence means all technical informational instruments which comprise recording, analyzing and evaluation of information in terms of quantity and quality and showing possible contexts.
business process outsourcing
As a special form of outsourcing, business process outsourcing designates the removal of parts of the structural organization, i.e. complete organizational units, such as e.g. logistics or accounting including their required infrastructure (for example, IT system). An enterprise should outsource only those areas which are not counted among its core competences. Advantages for an enterprise exist in particular due to the displacement of operating risks and operative activities to the service provider. As a result, the enterprise will be more transparent, leaner and better able to concentrate on its strategic functions and duties.
business process reengineering
Business process reengineering (BPR) presents the counter-model to total quality management (TQM). While TQM introduces an incremental, continuous improvement process, BPR aims at a complete redesign of existing processes in the enterprise. All internal corporate processes are critically scrutinized in terms of their efficacy and efficiency and possibly realigned. BPR comprises the four components of renewing, revitalizing, reframing and restructuring. Renewing aims at the improved training and integration of employees into the processes of the enterprise. Revitalizing presents a redesign of processes. Reframing is designed to a change of attitudes by shedding conventional thought patterns and taking new routes. Finally, restructuring has the objective of revising a company's entire portfolio of activities.
Business-2-business is the communication and business handling between enterprises within a supply chain.
Business-2-consumer is the communication and business handling between manufacturers or professional providers and end consumers.
see collective sourcing.
A buyer's market describes a market situation in which the supply increases but the demand situation remains constant. Alternatively, supply can be on a constant level and demand can decrease. Both scenarios have the consequence of excess supply and of a price reduction being likely. The buyer thus is in a better negotiating position than the seller.
In German, buying center is also called purchasing committee and designates a select group of company representatives who participate in the purchasing decisions of a company with regards to goods, services or capital goods (especially capital goods of large financial volume). Members of this group frequently are representatives of different departments and functions. For example, technical personnel, lawyers, financial experts and buyers may form a joint buying center and each contribute their own specialist knowledge. Since they usually have entirely different purchasing objectives, it is also assumed that a buying center may reflect the general purchasing behavior within an enterprise. When different experiences and the highly diversified knowledge in the purchasing committee are sensibly related and combined, synergies can be used and the result of negotiations optimized. Moreover, it is also very helpful for the seller/supplier to know which of the representatives has how much and what kind of influence on the purchasing decision.
call-off contract order
In case of a call-off contract order, a specific quantity is ordered and taken only at later points in time. Advantages for purchasing are the increased order volume, as well as reduced warehousing costs with simultaneously high security of supply.
capital commitment cost
In logistics, purchasing and procurement, capital commitment refers to the capital tied up in warehouses. Capital commitment cost presents opportunity cost since the capital tied up in inventories is not available for other purposes in the enterprise. The objective is to keep the tied-up capital as low as possible to ensure the company's liquidity and strengthen its internal financing power. Contributors to the reduction of capital commitment cost are not only logistic processes such as efficient replenishment as part of the efficient consumer response concept, but also consignment stock, just-in-time, just-in-sequence, as well as the saleability analysis.
The carbon footprint is closely connected with the subject of the ecological footprint. It refers specifically to the CO2 emission of various means of transportation. For any CO2 emissions caused in connection with a product's manufacture or transport, some companies now already offer their customers the option of making automatic compensation payments for so-called climate neutralization.
In logistics, cartage is considered that part of the freight costs which is incurred for transporting goods from the supplier to the dispatch railroad station / port / airport, as well as from the destination station / port / airport to the buyer.
cash conversion cycle
see cash-to-cash cycle.
Cash flow is the difference of a company's payments in and payments out within a period. In this respect, cash flow presents a parameter for the payments surplus realized from the operational performance-related process.
Cash-to-cash cycle = average receivables turnover (days sales outstanding, DSO) + average warehouse range (days inventory held, DIH) - average accounts payable duration (days payables outstanding, DPO)
(Cash-conversion cycle) The cash-to-cash cycle measures the tie-up period of financial resources included in the working capital. The cash-to-cash cycle is defined as the average period of time which one euro spent for raw materials will need to flow back from the customer. The cash-to-cash cycle is measured in days. A negative cash-to-cash cycle means that a company receives its customers' outstanding accounts before it has settled its payables with suppliers.
Catalog management is the administration of electronic product catalogs. Especially indirect goods can be procured via that medium because they can be easily described in catalogs.
A catalog supplier is a supplier for standard parts which are ordered from a catalog. As a rule, these are C-products with little explanations required, such as screws.
Category management is applied within the scope of the retail business product line policy and aims at the management of individual merchandise groups as strategic business units. A category manager is responsible for a merchandise group and coordinates all trade-related purchasing and marketing activities of his or her merchandise group. The cooperation between trade and manufacturers here plays a particular role. In this context, category management primarily concerns the implementation of the efficient consumer response (ECR) approach on the supply side or the marketing side, respectively. With its IT-supported planning, control, analysis and monitoring of all activities and the electronic data exchange between trade and manufacturers, category management helps prevent the bullwhip effect.
The CE label is applied to various consumer goods and demonstrates that they are in compliance with EU directives. CE stands for Conformité Européenne. The indicated directives define mandatory safety and quality standards.
In connection with changes in the organization, processes, systems or technologies, change management initiates the development and implementation of strategies which expediently influence these changes. Almost any very comprehensive intervention in an enterprise may be supported by change management. It is the objective of this instrument to aim at the acceptance of all parties involved, and at the minimization of resources used in the change process as well as reaching the defined objectives.
see multi-price auction.
Claim management is primarily found in project management or with long-term contracts. It is used to evaluate and monitor deviations or, respectively, changes in contract orders. Any resulting economic consequences for customer and contractor will be evaluated on that basis. Because after placement of an order, there will frequently be changes, supplements, extensions due to inadequate and incomplete specifications of the order, errors and/or change requests in the scope of supply and services, or also due to unforeseeable circumstances.
Until now, the purchasing departments of many enterprises and business operations had no systematic connection of environment-related criteria and procurement. There were no tried and tested patterns or defined opportunities for action. Currently, the situation is clearly changing – due to rising prices for commodities and raw materials, also due to the positive cost and reputation effects of sustainable production, as well as reducing payback periods for environmentally relevant investments. By now, numerous positive examples can be found for environmentally sound procurement: All the way from the use of recycling paper, via low-noise and low-emissions vehicle fleets, to the purchase of environmentally friendly materials used for manufacturing. The climate change will also have the following consequences for purchasing departments: Procurement markets will shift and be displaced because of climatic framework conditions (foodstuffs, for example) or because of the availability of energy. Such shifts must be identified early on and implemented in a purchasing strategy. Also see green procurement.
see carbon footprint.
Cloud computing stands for outsourced information storage and processing in a network. The following advantages are the result:
1. Low investment costs
2. Failure of a network node does not result in a failure of the total system.
3. Software is provided on a virtual computer and can be leased for a period of time.
The great chance and challenge of cloud computing for purchasing consists of intra-company and interdepartmental collaboration and information exchange by means of centrally controlled data processing.
For example, a supply chain can use a joint computer center within the scope of cloud computing. Aside from such positive effects, there is the risk of abuse and theft of data, especially when data are jointly used by different companies.
Trend scouts describe cocooning as a tendency of people to retreat from public life to the privacy of their home. In this context, furnishings of private living areas are gaining special importance (for example, the acquisition of new furniture or electronic home entertainment products). Even in times of the financial crisis, expenditures for that type of goods were constant or showed slight increases. In the original sense of the word, the English cocooning means "wrapping into a cocoon“.
(early supplier involvement) Collaborative engineering stands for the early integration of suitable suppliers into product development. It is the objective of not limiting new developments only to internal resources but of using external know-how already at an early stage. Since costs incurred can be greatly influenced in the initial stage of product developments and since, at that stage, the influence on costs is still the greatest, collaborative engineering may contribute to a massive reduction of future production costs. The management and organizational approach promotes a close collaboration with suppliers so that synergies can be discovered in advance and costs can then be saved as of the production stage and the stage of market introductions.
collaborative planning, forecasting and replenishment
CPFR stands for the readiness of several business partners to jointly manage in close collaboration the planning, forecast and control of inventories. To this end, strategic objectives are coordinated and jointly defined so that operative activities can be adjusted accordingly. This may concern, for example, measures for the optimization of individual product lines which can be realized by a forecast or delivery schedule prepared on a partnership basis, as well as by joint actions and promotions plans. Such close collaboration is especially encouraged through openness with regard to data concerning POS or inventory levels, as well as openly available knowledge about products, product lines or customers. CPFR can be considered as a continuation of the efficient consumer response.
Commercial authority means the power of concluding business transactions for an enterprise and being able to make legally valid declarations for such enterprise. According to § 57 BGB, the holder of the commercial authority must sign such that his or her authority will be immediately evident: "i.V.“ (in Vollmacht).
commodities futures exchange
At the commodities futures exchange, forward deals are concluded for units of natural products. Grain and cotton, for example, are products traded at the commodities futures exchange. Quantity and quality of the traded products are subject to a uniform standard. The German commodities futures exchange is in Hanover.
A commodity index is a ratio at commodity futures exchanges which provides an overview and the development of a selected commodity portfolio over time. A basic period defined beforehand provides the starting point for calculating a commodity index. The subsequent changes of the index over time result from value developments in the past (performance) of the commodities and contracts included in the commodity index. Commodity indices generally are a simple and quickly available means of obtaining developments and trends regarding specific raw materials prices. A commodity index is frequently used in the context of the price escalator clause.
Different methods are available for the valuation of companies. Company value may be calculated by means of the earnings value methods – for example, the discounted cash flow method, the multiplier method, or the net asset value method. The methods for a valuation of companies are used for different purposes so that the choice of method and the company value ascertained thereby will depend on the purpose of valuation. The company value results from the overall valuation of a company and is solely derived from the ability of realizing financial surplus for the company owners or shareholders. The company value is determined by the subjective benefit its owners get from it. Not only the financial benefit, but also not directly financial benefit components play a part in subjective valuation. So that this future value can be determined, the company's financial surplus is to be forecast and capitalized so that the cash value of all income accruing to company owners can be calculated.
competence management in purchasing
The development in purchasing is currently characterized by a number of aspects which will increase in their dynamic effects in coming years and result in a number of key requirements. Among others, these influencing factors also include the following trends: automation, innovations or globalization. Purchasing is characterized today already by the increasing elimination of simple areas of activities because processes are automated and buyers only have a coordinating and monitoring function. In the future, buyers will be moreover expected to have good adaptability and a high willingness to learn because of innovative technologies, changing customer demands and increasing competitive pressures. Furthermore, internationalization will still increase in coming years. This important trend factor demands from the purchasing department and its buyers a broad, varied behavioral repertoire in terms of cultural and language competences.
According to a point of view in business administration, there is competition between two or more companies if they compete for one or several demand side parties. Competitive intensity is influenced by the number of suppliers and the number of parties on the demand side. The better a company is able to position itself in this competitive situation, the more competitive it will be. However, there are limits set by the state or government to prevent unfair competition.
A competitive selection process. It is used to create a transparent procurement market in which several enterprises submit their tenders on a procurement object. That way, suppliers regularly underbid each other so that an enterprise can realize savings.
From the driving forces of competition (five forces), Michael E. Porter derived three generic competitive strategies. These are strategies of cost leadership, of differentiation and concentration. The strategy of cost leadership aims at achieving a lead in costs versus the competition. The enterprise realizes a competitive advantage if it is able to offer products more economically than its competitors. In contrast, the differentiation strategy has its focus on the preparation of a performance offer which excels in its uniqueness. The differentiation characteristic versus the competition is not the price, but rather a product with unique features – which the customer acknowledges with his or her willingness to pay a higher price. The concentration strategy is applicable for both aforementioned strategies. Instead of selecting the strategies of cost leadership or differentiation for the overall market, the enterprise will concentrate on a geographic region, a group of buyers or one part of the product range. According to Porter, a combination of cost leadership strategy and differentiation strategy is to be avoided (stuck-in-the-middle). Instead, an enterprise must decide on one of the two strategies. Critics find fault with it and point out that there are successful hybrid strategies, such as customer-individualized series production (mass customization).
When considering the procurement process from a quality management point of view, complaints management will be an important tool to identify performance deficits and deficiencies with suppliers and to be able to react to it, if necessary. Complaints with the supplier are recorded and entered into the supplier evaluation system.
Complementary goods are products whose use requires at the same time the use of another product. For example, complementary goods of shoes are shoe cleaning items. These two products correlate such that the demand for shoe cleaning items will increase with a rising demand for shoes.
Any enterprise is regularly confronted with complexity in all corporate areas, such as in organization, in processes or the customer and supplier structure. Complexity management aims at detecting and recording this complexity, then controlling and lastingly reducing it. The use of resources in operative units can be minimized thereby and the enterprise's control be simplified.
Compliance management ensures that all binding corporate guidelines are effectively and efficiently fulfilled. Established corporate objectives are pursued in compliance with all internal, external, statutory and voluntary requirements. Safeguarding the efficacy and profitability of corporate management are as much a component part of compliance management as the protection of assets and the prevention and detection of economic losses.
Procurement cooperations between independent subsidiaries of a corporate group are called conglomerate purchasing (group purchasing).
conjoint measurement analysis
Objective of the conjoint measurement analysis is to ascertain the contribution of individual components of a product in relation to its total usefulness. The customer indicates which value he attributes to specific product characteristics. Total usefulness can then be derived from the partial use values thus ascertained. Accordingly, the purchasing department is urged to take care that the purchase price of components is in a reasonable relationship to the value ascertained. The conjoint measurement analysis is used, inter alia, within the scope of target costing.
Connectivity describes the linking of a supply chain taking into account the availability of software interfaces and results in a cross-company exchange of data. An extensive database and appropriate software enable the purchasing department to process the purchase order planning and implementation in even more detail but at the same time in an automated manner. Due to the exchange of data and the creation of a homogeneous database, demands and inventories along the supply chain can be better planned and scheduled. Incoming customer orders can be immediately compared with the availability of the supply chain and thus completely reduced along these inventories. The bullwhip effect will thus be prevented.
In the case of consignment stock, customers do without their own warehouse. Stocks remain in the supplier's possession (consignee) either until a defined period has expired or until the customer (consignor) requisitions goods from the consignment stock. It is suitable as an instrument for reducing the inventory carrying costs with a simultaneously high security of supply.
consumption-oriented demand assessment
Consumption-oriented scheduling is based on empirical values about the consumption of a material specifically considered from the past. The average demand per period – e.g. for a quarter – is calculated for such materials. For simplicity's sake, it is assumed that the demand is uniformly distributed in the period. This demand is then to be transposed to the future – even if its quantities are not precise. Consumption-oriented requirement planning therefore is to be connected only with stock procurement. This form of demand assessment is used especially in case of fluctuations in demand and consumption, in case of trends, seasons or irregularly occurring consumptions. Counterpart to consumption-oriented scheduling is the program-oriented scheduling.
Conclusion of one-year or multi-year delivery contracts for defined products.
A contract dealer is a businessperson who is integrated, by contractual commitment, in the distribution organization of a specific manufacturer; however, that person sells goods on his own account and behalf. Typical examples for contract dealers are automobile showrooms and dealerships as well as gas stations.
contract lifecycle management (CLM)
Contract lifecycle management comprises the efficient organization and administration of all stages of a contract cycle. This includes the contract strategy of an enterprise, contract control or management and optimization, contract negotiations and contract administration, as well as the management of restitutions, rebates and fees. For further information, see contract management.
Contract management formalizes and organizes the relationship between procuring enterprise and supplier with the objective of risk minimization (see risk management). The first stage of contract management is the contract design. It includes the management and support of contract negotiations, as well as the implementation and amendment of contracts. Moreover, active contract management provides for efficient contract maintenance, comprising contract administration and archiving, as well as contract controlling, including risk assessment of contracts. See contract life cycle management.
By means of contract penalties, a contracting party (the supplier, for example) agrees to pay a penalty of a specified amount for a precisely defined breach of the negotiated provisions of the contract (for example, defective, delayed or incomplete delivery) (§§ 339 et seq. BGB). Decisive for the assessment of contract penalties is that they have been contractually negotiated and laid down in writing by both contracting parties.
The term contribution margin originally comes from the controlling area and is a basic ratio reflecting the difference between sales proceeds and variable costs. Contribution margin calculations intend to find out to what extent a product covers fixed costs. Although for a short time an enterprise is able to sell products at an amount which only covers variable costs, it's important to cover all costs long-term to ensure sound economic activities.
Convenience goods encompasses durable consumer goods and consumables, such as e.g. foodstuffs or hygiene articles. Classification criteria for these products is that use or consumption have been simplified, for example by offering ready-to-eat meals.
A company's core competences are considered any special capabilities which it has in a specific area. Core competences are a combination of capabilities, routines and material assets which are difficult to copy or imitate. It is differentiated between tangible and intangible core competences. While tangible core competences, for example machinery, can be imitated by competitors, capabilities or skills are core competences which are intangible and specific to persons; such capabilities form the company's knowledge base and are very difficult to copy by competitors. Routines are also intangible core competences which are, however, independent of persons and thus tied into the enterprise.
corporate social responsibility
Corporate social responsibility follows the entrepreneurial approach of accepting social responsibility over and beyond statutory obligations. Increasing consumer awareness renders this strategic component into an increasingly important factor for the success of a company. Today already, this corporate orientation is an assessment indicator on financial markets.
The cost-benefit analysis is an assessment method and will assist in decision-making if several alternatives exist. In this respect, an overall objective – for example, the procurement of production goods – is facing several alternatives, in this case suppliers. Within the scope of a cost-benefit analysis, this overall objective is to be subdivided in a first step into individual sub-objectives, such as the possibility of delivery in partial loads, the quality of goods at the stipulated quality, etc. In a second step, the individual objectives are to be weighted in terms of their relevance on a scale; it generally comprises the values from 1 to 10. Thus, for example, the sub-objective "quality" can be allocated a ten because it is one of the most important criteria. In a third step, individual alternatives with regard to their achievement of objectives are also to be evaluated by a scale from 1 to 10. In concrete terms, it means that for the sub-objective "quality", supplier A reaches eight and supplier B two points. In a final step, the two evaluations are to be multiplied. With this sub-objective, supplier A thus obtains 80 and supplier B 20 points. After this evaluation has been made for all alternatives and all sub-objectives, the total number of points per alternative is to be ascertained. The alternative with the best number of points presents the best possibility. Supplier A is to be selected in this case.
cost charged back
Complaints of defects of delivered goods are connected with the demand for a refund of costs.
see cost drivers.
In activity-based costing, cost drivers are used as measures for the quantification of repetitive activities in overhead areas. In purchasing, for example, this may be the number of purchase orders or the number of accounting audit activities. Thus, cost drivers determine how often a certain activity is performed in a company's overhead areas or, respectively, how often the service of a cost center was requested. In activity-based costing, cost drivers play a crucial part in the calculation of activity-based rates.
Cost management comprises all control elements which are used to reduce the level of costs and which will influence the cost structure and the behavior of costs. The objective of this approach is to increase corporate performance and improve competitiveness. In this respect, cost management is not to be understood as being merely reactive as a crisis management tool but much rather as proactively providing improved flexibility or more leeway for action.
see landed costs.
credit note procedure
With the credit note procedure, suppliers do not send an invoice to customers in the classical sense. After having recorded the goods receipt, the customer (buyer) instead sends to the supplier an electronic message to the effect that payment will be made at the defined prices for the articles recorded in the goods receipt department. The credit note procedure thus replaces the vendor invoice and can thus be seen as a paradigm shift in the payment of goods.
Cross docking is a logistic process of the efficient consumer response (ECR) and designates an efficient replenishment control by means of which the inventories in the distribution warehouse can be reduced and possibly will be entirely dispensable. With cross docking, the manufacturer no longer delivers the goods directly to the customer but to a central docking station where order picking according to branch establishment is effected and the goods then delivered to the customer. Thus, the original function of the warehouse is given up and replaced by an efficient transshipment location.
Basically, an enterprise is able to safeguard against currency fluctuations by means of three financial instruments. So-called netting provides for the offsetting of debts and outstanding accounts in foreign currencies within an enterprise. Currency fluctuations can thus be internally compensated for. With forward exchange deals, currencies are bought on the understanding of selling them again at a stipulated price and at a stipulated point in time. In addition, it is also possible to engage in currency option transactions. As opposed to the forward deal, this provides the option and not the obligation of selling the derivative as of the deadline. Also see hedging.
see vertical cooperation.
customer order picking
customer requirement specifications
(supplier target specifications)
Customer requirement specifications include the comprehensive indication of a customer's requirements concerning deliveries and performances of a supplier. Based on the customer requirement specifications, the ordering party will invite offers or tenders. Once a supplier obtains the award, it will develop – from the customer requirement specifications – the supplier target specifications in which the supplier explains its advised realization projects. Accordingly, supplier target specifications present the implementation of customer requirement specifications and define how, where and when the requirement will be realized. As a rule, the supplier prepares a structural project plan with derived work packages.
Satisfaction of the customer will be had when a product's expected performance matches its actual performance. An actual/target comparison will thus be made. Accordingly, there are two methods of generating customer satisfaction: Either the customer's expectations are lowered or the product's actual performance increased.
Due to the increasing desire of many consumers for uniqueness and differentiation, many enterprises feel increasingly faced with the challenge of having to produce individualized products. Thus for example, since early 2008, the German Postal Service has been offering its customers the opportunity to freely design the stamp motif as well as part of the envelope – for a markup on the price of its "Plusbrief-Individuell“ product [plus letter, individualized]. Many companies worldwide have meanwhile been successful with this concept of individualized mass production which is known as mass customization.
Fundamentally, there are two bases for a damage claim. There is direct damage due to defects if a defective product had been delivered, a reasonable deadline expired unsuccessfully, and if the supplier acted negligently. Substitute procurement costs can be claimed in such a case. Furthermore, there is a claim for consequential damages (see also stockout cost). They exist if the supplier had culpably caused the material defect, i.e. in gross negligence or with intent. In such a case, physical injury, production downtime or lost profit can be claimed.
A data warehouse designates a database in which all types of corporate information are collected and systematically stored. Optimally, all parts of an enterprise have access to the data warehouse so that a continuous availability of knowledge will prevail.
days in payables
days inventories outstanding
days inventory held (DIH)
(days inventories valued, days inventories outstanding, inventory period, inventory days of supply)
Days inventory held indicate in days how long goods remain in stock on average. It measures the period of time between warehouse receipt and the product's sale to the customer. The lower the DIH, the more economical the underlying company processes of production, inventory management and logistics.
(average liabilities / manufacturing cost of sales) * 365
days payables outstanding (DPO)
(days in payables, payables period; AP accounts payable) Days payables outstanding indicates how many days pass on average until an enterprise pays its liabilities. The higher the DPO, the higher the time interval from receipt of invoice until payment of the invoice and the shorter the cash-to-cash cycle. This in turn reduces the capital tie-up in the enterprise. Purchase of merchandise on credit thus presents a source of financing for the enterprise and reduces its tied up capital.
(average liabilities / manufacturing cost of sales) * 365
days sales outstanding (DSO)
(receivables period, accounts receivables)
Days sales outstanding is a ratio for the average receivables turnover. As a component of the cash-to-cash cycle, it indicates how many days pass on average until customers pay their outstanding sales or, respectively, until sales are tied up as outstanding accounts. Thus, the period of time is measured between the realization of a sale and the actual funds received after the customer's payment of the outstanding accounts. The higher the DSO, the more liquidity is tied up in the outstanding accounts and the fewer funds are available for productive use.
DSO=(average outstanding account / sales revenues * 365)
default of acceptance
Pursuant to § 293 BGB, default of acceptance occurs if the buyer does not accept the goods which had been properly delivered – i.e. at the right time, at the right place and the right quality. For the supplier, that factual situation results in either the right to take back the goods and sell them otherwise or bring action in court for buyer's acceptance of the goods. In any event, the buyer will be liable for the damage incurred.
A defect is defined as the existence of faults or missing characteristics of a matter. It is differentiated between a defect in title and a defect in quality. For the defect in quality, a subjective error concept is concerned – such as discrepancies in stipulated quality (§ 434 I 1 BGB), improper installation (§ 434 II 1 BGB), but also the delivery of a shortfall quantity (§ 434 III 2nd case BGB). Direct follow-up costs regularly result from defects in quality, such as stockout costs. Defects in title are defects in the law, for example trademark or patent rights (rights in rem), or also rights arising from an obligation (rights limiting the buyer in its power of disposal, for example, rental and lease rights) and public law and rights (liability with regard to public-law charges (§ 436 para. 2 BGB)). In addition, it is differentiated between open and hidden defects. An open defect is known already upon surrender of the object. A hidden defect exists upon surrender of the object but is not perceptible. If a seller intentionally withholds the defect, this is considered malicious deception.
see terms of delivery.
delivery failure ratio
In combination with the stockout ratio and the degree of supply readiness, the delivery failure ratio presents an instrument for evaluating suppliers. The idea is to keep the stockout ratio at the lowest possible level.
delivery failure ratio = number of delivery failures / number of deliveries
delivery service level
The delivery service level describes the capability of being able to meet all requisitions at any time. In this respect, the delivery service level indicates the percentage of completely executed purchase orders [deliveries] of total purchase orders [deliveries] for a period. Differentiated are the incoming, the outgoing and the internal delivery service level. The incoming delivery service level is the supplier's delivery service level. The internal delivery service level designates the percentage of completely executed purchase orders [deliveries] of the respectively upstream production stage. The outgoing delivery service level finally is a ratio for the degree of supply readiness which is guaranteed versus the customer.
delivery service level = (number of completely executed purchase orders [deliveries] of a period / number of total purchase orders [deliveries] of a period) * 100
demand chain management
Demand chain management is an extension of the supply chain management. While the SCM deals with the relations to suppliers and customers at the lowest possible costs, the demand chain management extends this network of relations by the aspect of demand. Another interesting aspect is the real-time DCM. In this case, inventory changes (deliveries, sales) are processed in real time. If an article risks to be no longer available, the system will issue a warning. In this respect, also see out-of-stock.
see requirement planning.
design to cost
Design to cost aims at creating new products under optimum cost aspects and thus realizing customer requests at a minimum of costs. Because about 80% of the costs of a product are determined during this early stage of the product life cycle. At a later point in time, major expenditures will be necessary to still influence these costs. One instrument of the design to cost approach is target costing, for example.
desktop purchasing systems
Desktop purchasing systems enable every individual employee to convert, from his or her computer workplace, any demands into purchase orders. This mostly takes place via selections of the articles in electronic product catalogs. Thus, DPS can more efficiently procure C-articles and indirect materials. Aside from the possibility of convenient selections of materials and services from an electronic catalog, known catalog ordering systems enable the display of subsequent functions in the procurement process. They include budget control, release, purchase order transmission, goods receipt posting and invoice posting. It is to be noted that a DPS will always be integrated into an existing ERP system and exchanges the necessary data via interfaces.
Diagonal cooperation is concerned when one enterprise is taken over by another and the products of the two enterprises have nothing to do with each other in terms of production and sales.
This is the abbreviation for the German Institute for Standardization [Deutsches Institut für Normung] which, as a service provider, develops norms and standards. According to its own information, DIN's primary task is "to work closely with its stakeholders to develop consensus-based standards that meet market requirements.“ DIN is now predominantly European in nature.
Materials directly entering into the end product. This includes e.g. housings, components.
see supplier pyramid.
direct supplier development
Buyer's direct influence on the supplier to increase the latter's capabilities. To this end, the buyer will make available capital, technology or personnel.
Discount is a price reduction on an invoiced amount; it is granted if the customer pays the bill in cash or within a specified period of time. The discount rate usually is two to three percent from the amount of the invoice. The advantage for the supplier will be, on the one hand, that there will be no risk of default. On the other hand, the supplier has promptly liquid funds at his disposal. Also see supplier loan.
shows the percentage of discount agreements in the purchase volume. A high ratio is to be targeted. The discount ratio will also be influenced by the accounts payable department.
discounted cash flow (DCF)
The discounted cash flow method is used to determine the corporate value. This is calculated by discounting future cash flows at a discounting interest rate. Different variants are available for the determination of a corporate value by means of the DCF method; these variants are based, in turn, on different valuation-relevant cash flows and discounting interest rates to be applied. It is differentiated among the net method (equity method), the weighted average cost of capital method (WACC method) and the adjusted present value method (APV method).
The dispute management supports enterprises in processing customer complaints and dispute cases relating to the inventory of receivables. To this end, a dispute case is set up in an IT system. This case file contains all data already existing in the bookkeeping system, as well as information newly recorded for the dispute case. Dispute management systems are especially applied within the scope of the financial supply chain management and, by means of electronic process handling, they will help process complaints faster and optimize the receivables management.
Collaboration with predominantly domestic suppliers is the subject matter of domestic sourcing. Reasons for it may be, inter alia, international currency risks, political instability or bad infrastructure.
Part of the purchase price is paid before surrender of the goods. This situation is called advance payment. With the requested down payment, the supplier wants to make sure that the buyer takes delivery of the goods, without any default of acceptance.
drop shipment business
Also known as direct shipment, the drop shipment business is a special form of logistics. The dealer procures goods from his supplier (wholesaler, for example) and directly delivers the goods to his customer without having any physical contact with it. Reasons for the drop shipment business are savings in inventory and logistics costs, as well as simplified communications (for certain products only one partner to contact).
The EAN code is a European-wide standardized interface between the product-specific data processing of the different trading stages.
early supplier involvement
An e-auction is an electronic auction. Within the scope of procurement, the buyer appears as the initiator of the auction. Suppliers are here in direct competition and either underbid or overbid each other in criteria such as price, quality, logistics, service, etc. The objective is to determine the supplier with the best price-benefit ratio in each case. Within the scope of e-procurement, auctions can be handled in real time via an e-business platform, so this is called e-auctions. The advantages of an e-auction are its market transparency and the reduced processes. An e-auction should be conducted at the end of an invitation to tender phase for final decision-making. It is recommended to carry out, in advance, a qualification of suppliers to ensure that only suppliers will participate who meet all corporate standards. However, at least three suppliers should actively participate in an auction and the demand should be clearly specified and in accordance with a reasonable value to justify the expenditures of an e-auction.
eBANF stands for the electronic ordering request and its process is equivalent to the non-electronic BANF (see BANF).
E-business describes the entirety of all automatable business processes which are handled via communications and information technologies. E-business includes all of a company's functional areas, such as procurement, marketing, distribution, service, production, logistics, controlling, financing and personnel. E-business is thus a generic term for all "e-activities“, such as e.g. e-procurement and e-sourcing. Transaction costs can be reduced by integrating business processes and by their automation.
An e-catalog is an electronic catalog and a partial area of e-commerce. More specifically, the supplier makes available to the procuring enterprise an online listing with descriptions of products and services. In the B2B area, supplier catalogs are frequently integrated into the company's own procurement system. In such a case, interfaces are necessary for the appropriate e-procurement systems or ERP systems, respectively. C-parts are frequently procured via e-catalogs. The advantages of e-catalogs are, inter alia, the pooling of volumes, suppliers and contracts, as well as process cost savings due to a standardized workflow.
E-collaboration describes the web-based collaboration among all persons involved in a project. It may reduce the formerly necessary number of talks on location, telephone conversations, as well as fax and e-mail messages. The Internet browser will become the most important communications platform. Any information will be available any time.
The term footprint implies the mark or imprint made by pressure of the foot and, by extension, the "imprint" an enterprise leaves in the manufacture of its products and the provision of its services. Thus, the ecological footprint describes the utilization and consumption of natural resources when they enter into production or will be consumed in connection with services. Many organizations exist today which calculate the ecological footprint of enterprises or end users and consumers. The "size" of the imprint can thus be measured in monetary terms, and customers or enterprises may compensate for their share in the consumption of natural resources by making compensatory payments to organizations which counteract the corresponding environmental destruction or, perhaps more fittingly here, depletion.
E-commerce is a partial area of e-business. In the U.S., e-commerce frequently comprises the electronic processing of all business processes in a network. In German usage, e-commerce describes the trade with goods and services. This includes the exchange of information for a transaction, the transaction and payment processing, as well as services connected with it.
economic value added
EVA (economic value added) is a ratio measuring a company's excess profit. The EVA concept is particularly used in value-oriented management and is aggregated from figures of profit and loss account as well as from the balance sheet. If an enterprise shows a positive EVA, operative results exceed the total financing costs of corporate assets. In contrast, a negative EVA means that financing costs are not covered by the net operating result.
EVA = NOPAT - (capital*WACC)
- NOPAT: net operating profit after taxes
- Capital: total assets tied up in the corporate process
- WACC: Weighted average cost of capital
economies of scale
As a result of increasing output volumes, unit costs will drop since fixed costs are distributed over a larger production volume. Because of substantial manufacturing, procurement or transport volumes, savings or economies of scale can be realized. Cause for it are, for example, the minimization of preproduction costs, the realization of volume-related price rebates or a better capacity utilization of means of transport.
economies of scope
The term economies of scope designates composite effects resulting despite the increasing variety of products and bringing about cost savings. Such synergy effects are realized if common resources can be used for different products; thus, common production plants, distribution channels, etc. Because total costs of production will then be lower than if products were separately manufactured.
Example: A machine is running at 60% capacity with product A. Corporate management then decides to also manufacture product B on that machine. Economies of scope will result since an already existing resource is simply utilized better and no new acquisition will be necessary.
EDIFACT stands for electronic data interchange for administration, commerce and transport and is a worldwide standard for EDI which is not industry-specific.
effects of scale
see economies of scale.
The efficiency ratio describes the relationship of an output to a defined target. Thus, a measure's efficacy is presented in terms of the rate of target achievement. This ratio accordingly answers the question whether a measure is suitable for reaching a target.
According to DIN EN ISO 9000:2000, efficiency describes the "relationship between result achieved and means employed". Efficiency thus describes the effectiveness of structures but does not answer the question as to whether this structure is basically sensible.
efficient consumer response (ECR)
The term efficient consumer response (ECR) describes a connection of logistics and marketing made possible by information technology. Inefficiencies along the supply chain are to be prevented, taking customer demands especially into account. In business practice, ECR designates strategies to increase efficiency which are aimed at inventory management. Logistic components of ECR pursue the objective of optimized goods supply and the minimization of cost and throughput times and are designated as efficient replenishment. The ECR marketing components pursue the objective of maximizing sales. In this respect, also see cross docking, efficient consumer response and vendor managed inventory.
Efficient replenishment is a strategy for goods supply and the flow of communications oriented towards it. Efficient replenishment is the logistic component of the efficient consumer response concept and describes a generic term which, in turn, combines different concepts for improvement. This includes cross docking and vendor managed inventory.
see electronic invoicing.
electronic bill presentment and payment (EBPP)
(Internet bill presentment and payment (IBPP)) Electronic bill presentment and payment (EBPP) comprises electronic invoicing and electronic payment of invoices. Both at the starting point and at the end point of the billing process, data are available in digital form – thus enabling electronic processing throughout. Processes are electronically displayed – from preparation of the invoice until payment comparison at the invoice issuer. In this respect, EBPP includes two partial processes: provision and sending of invoices (electronic bill presentment), and payment of invoices (bill payment). The invoice is electronically served on the recipient (e.g. link or e-mail). Without any breaks between media, the electronic document can be entered into the recipient's ERP system. WebEDI and XML technologies are mostly used.
electronic data exchange
see electronic data interchange (EDI).
electronic data interchange (EDI)
EDI stands for all electronic processes of the asynchronous, fully automatic data exchange between the application systems of two organizations. Thus for example, data of the merchandise information systems of the integrated enterprises can be exchanged. EDI connects two enterprises in each case and, due to the high costs, is primarily used in major enterprises. The advantage lies in the extremely fast, fully automatic transmission of data and maximum streamlining of business processes.
(e-invoicing) Electronic invoicing is the paperless billing by electronic means. Beforehand, the supplier combines all data relevant for invoicing and sends it to the customer. See EBPP.
Electronic marketplace means an electronic platform based on Internet technology which virtually brings together buyers and sellers and also the quantities offered and demanded. The IT-systems of customers and suppliers can be linked to the electronic marketplace beyond corporate boundaries.
The energy efficiency aspect has far-reaching implications for buyers. Because, frequently, savings potentials can be identified and realized – for example, in the areas of lighting, pneumatics and pump systems, refrigeration and cryogenics, air systems engineering, materials handling and conveyor systems. Many companies have already become aware of savings potentials and are searching worldwide for technologies and processes allowing a more efficient and economic use of the required energy. Before this backdrop, it will no longer be a product's acquisition price to tip the scales in the future, but much rather the operating costs, energy used, as well as the actual raw material consumption. In the future, buyers thus need not only concentrate on the bare purchase price but especially take TCO into account.
environmentally friendly packaging
Environmentally friendly packaging materials not only reduce the companies' volume of waste, but they frequently also help to bypass possible requirements, as well as complex and more expensive quality seals for disposal or transport. However, most recycling methods result in a quality loss versus the starting materials. This is especially true for plastics. In contrast, glass, steel, copper or aluminum can be recycled any number of times without any quality loss.
E-procurement describes the electronic handling of operative procurement processes. Examples are purchasing through shop solutions, via marketplaces and reverse auctions. Since the terms of purchasing and procurement cannot always be clearly differentiated, e-procurement is frequently used in connection with the overall procurement management.
An ERP system is an application software for holistically supporting the resource planning in enterprises. The systems are differentiated according to their orientation towards different industrial sectors, their scalability to different sizes of businesses and enterprises (number of necessary users) and also according to their technologies such as databases, programming languages, auxiliary operating systems, etc. Systems may be built up, for example, on Java or other development environments. Proprietary databases are most used, such as MS-Access, MS-SQL, MySQL or Oracle. In a current development, especially SMEs are favoring web-based ERP system solutions in which the system interface is presented in a browser window. See cloud computing.
Electronic sourcing or e-sourcing comprises electronic processing of strategic functions in purchasing. Strategic purchasing areas are, inter alia, supplier management, spend analysis, contract management and risk management. In practice, it is often uncertain how e-sourcing (operative purchasing) and e-procurement (strategic purchasing) are differentiated so that both terms are used for electronic processing and handling of the overall procurement management.
see saleability analysis.
Exchange is the cancellation of a validly concluded purchase contract about a product. A customer is entitled to exchange a product if it is defective. If the product is not defective, the seller is not obligated to exchange it unless this had been explicitly agreed upon beforehand. If a supplier allows an exchange without being obligated to do so, this is called a gesture of goodwill. Also see warranty.
Expendables do not enter into a product. They are used to maintain production capability and are consumed in the course of production. Examples of expendables are lubricants and machine oils.
Distinct separation between supplier and buyer in terms of space.
The Extranet is a corporate network extending to extra-organizational and extra-entrepreneurial entities or institutions. A company's entire supply chain (suppliers, manufacturers, customers) can be networked with the Extranet. For example, interactions with suppliers can be handled via the Extranet – such as development, change, innovation management.
(assignment of claims)
Factoring is a financial service comprising the sale of outstanding accounts. A factor buys the outstanding accounts of his factoring client (also called factoring customer, factoring company, assignor, or user). The purchase price of the outstanding accounts results from their actual value minus the fee and the interest rate which the factor demands for his services. The factor himself now appears as a creditor versus his client's customers. Objective of the factoring client is the realization of immediate payment inflow even if the outstanding accounts are due and payable at a later point in time. Other objectives for the factoring client are minimizing the risk of a loss of receivables outstanding, as well as being relieved of the burden of all duties connected with the receivables management.
fair trade certification
Fair trade conveys the idea of solidarity and partnership with producers in third-world countries. To this end, an extra charge is added to the price of a product. This markup is to ensure, inter alia, that all parts of the supply chain can work under humane and dignified conditions. Although the current percentage of fair trade products on the total market is extremely low, this business segment is receiving increasing attention. Such fair trade products frequently include goods which are subject to dramatic price pressures and/or crumbling prices in the global market – such as, for example, bananas or cocoa. Since the term fair trade is not protected or standardized, a great number of organizations examines the products and provides them with a label; one of the largest is the fair trade labeling organization.
Fifo stands for 'first in, first out' and describes a method of monetary evaluation of consumption volumes. As opposed to the Lifo method, it is here assumed that products first warehoused will also be consumed first. The Fifo method is to be used especially for perishable products.
financial supply chain management (FSCM)
A company's financial supply chain is understood to be the monetary part of the logistics chain running parallel to the company's physical supply chain. The financial supply chain applies already prior to the preparation of business transactions and supports the cross-functional trade – up to and including the processing of payments. The financial supply chain has the objective of enabling cross-company financial processes between suppliers, manufacturers, customers and other service providers.
Finished products are those having passed through the entire supply chain and being ready for sale.
first tier supplier
Direct supplier (systems supplier) of a manufacturer (OEM).
The five forces analysis model goes back to the American economist Michael E. Porter and describes the forces of the market in competition. These market forces are influences on an enterprise by suppliers, customers, new competitors, co-competitors and replacement products (substitutes) and their corresponding bargaining power. Porter's five forces model suggests itself to critically scrutinize the offers of a supplier and analyze his position in the competition.
Fixed price agreements provide that the price during the contract term is determined both for the buyer and the supplier. Accordingly, there are tight constraints regarding any cancellation of contract and/or price changes. The price need not be fixed during the contract term; instead, even an increasing or decreasing price may be agreed upon. Another type of price agreement is the price escalator clause.
fixed reorder cycle system
With the fixed reorder cycle system, a purchase order is triggered at uniform intervals. The ordering quantity varies in the case. The counterpart to the fixed reorder cycle system is the reorder point system.
fourth party logistics provider (4PL)
External logistics service providers are defined as fourth party logistics providers (4PL) whose core competence is to take over transport, transshipment and warehousing for their customers. Such providers do not make available any fixed assets but exclusively their know-how and services (such as e.g. vehicle fleet management).
see framework contract.
A framework contract generally includes a prior defined term which may vary according to the industry, however. Such a contract presents individual agreements with the supplier which go beyond general business conditions. In addition to an agreement regarding the validity of the buyer's general terms and conditions of purchasing, basic contracts may contain, in a general form, the determination of the supplier's article or item; also, the requirement planning for the term of contract, broken down according to product groups; and finally special measures of quality assurance and logistics. With the help of this information, the supplier can make a rough plan of its production capacities and conclude contracts on preliminary markets. In turn, the supplier will price the product groups for the length of the determined contract term. Since basic contracts are generally unlimited, contract termination must also be regulated.
framework contract ratio
see structural ratios.
In the future, tightened regulatory framework conditions will have the consequence that buyers must adjust to considerably more complex supplier selections and evaluations. Buyers must keep themselves continuously informed about the latest legal regulations and must also ensure that this is complied with on the part of suppliers. For example, safety regulations will be tightened in the future, inter alia, for environmental protection, especially emissions control; such regulations will also be tightened with regard to product regulations. Also see green procurement.
general power of attorney
A general power of attorney is a power of attorney empowering a person to represent the grantor of the power of attorney in all business transactions. The authorized person will act in the name of the owner but not in the name of the firm since the power of attorney is not recorded in the Commercial Register.
General Terms and Conditions of Business
The General Terms and Conditions of Business are a pre-formulated contract which may be used for a multitude of transactions. However, it is to be taken into consideration that individual arrangements take precedence over the AGBs. Moreover, AGBs may also be invalid in certain cases according to the law pursuant to §§ 305 to 310 BGB. The basic intention of AGBs is that it is not necessary to draw up an individual contract for every purchasing transaction but that much rather a uniform standard exists instead.
General Terms and Conditions of Purchasing
For the buyer, General Terms and Conditions of Purchasing (AEB) provide the legal framework and the General Terms and Conditions of Business. Important contents are costs for insurance, surrender of documents, taking back packaging, assignment of receivables, place of jurisdiction and the customary place of performance. AGB rules are to be valid as far as no specific agreements have been made in the superior tiers.
The global footprint designates the distribution of individual added value stages of a producing enterprise in a worldwide network.
The global sourcing strategy comprises the orientation of a company's purchasing activities to the worldwide existing procurement markets. This strategic orientation goes hand in hand with systematic, globally-oriented and border-crossing procurement measures. Integrating foreign markets and suppliers has the following advantages, among others: Future developments can be identified early; conditions can be optimized by an extended offer; first contacts may be made in a potentially new sales market. When global sourcing is properly applied, a company will be investing in the sustained competitiveness of its enterprise.
This German term is a malaprop or distortion from the English 'goes into' and describes a simplified graphic presentation of the number of materials and intermediate materials which go into an end product. This graph shows how many units of a material/product are required for the production of a downstream item. Production planning can thus calculate the amount of materials and intermediate materials required for the production of an item.
Producers and suppliers will enjoy clear-cut advantages from procurement with the ecology in mind; this is also called green procurement. Advantages are cost savings due to a low TCO, and the early adjustment to new regulatory framework conditions, as well as good reputations of customers and suppliers. Because companies acting responsibly enjoy high standing with consumers, investors, the political community and with the media. Ecologically-oriented procurement thus contributes significantly to more competitiveness and environmental protection. Also see climate change, carbon footprint.
heavy user concept
In the heavy user concept, purchasing responsibility for a merchandise group will be transferred to a specific organizational unit. Possible in this respect may be, for example, the location ordering the largest quantity of these products. This location or unit will then take over the duties of central purchasing for the entire corporate group. It is the objective of a heavy user concept to provide, within the procurement process, a combination of the specific know-how from the special technical department and the commercial know-how of the purchasing department.
Hedging is a financial operation to secure a transaction against risks, such as e.g. currency rate fluctuations or changes in raw materials prices. Such hedging includes a financial operation as a counter-position, with the risk profile of this financial operation being the mirror image of the transaction to be secured. It is thus ensured that the loss of value of the one position will be compensated by the rate gain of the counter-position and that the overall position is balanced out with regard to the risk. For the purpose of hedging, derivative financial instruments are used – such as options and futures.
higher efficiency supply chains
Due to worldwide networking, trade relations are becoming more efficient if, for example, the credit rating or quality of a supplier had already been confirmed by independent third parties. Due to optimally coordinated planning, the entire supply chain is rendered more efficient. The result: acceleration of international commerce.
In a logistic context, hub describes a central transshipment location for goods which are in the order picking stage and will be subsequently distributed to smaller warehouses. For an enterprise which distributes or produces in different countries in Europe, for example, a hub can thus be established at a central location from where the goods are delivered to the correspondingly smaller warehouses. Hub is also often called central warehouse.
shows the percentage of imports in the purchase volume (EKV). Low ratios may indicate an excessively domestically oriented procurement. Check whether the ratio can be increased and purchase prices thus be reduced.
The incoming goods department records the incoming merchandise within an enterprise, checks the goods for qualitative and quantitative completeness and distributes them to the corresponding inventory and/or application locations. Moreover, the records of the incoming goods department provide the basis for a conclusion of ongoing purchase order processing, and it is additionally used as a basis for the goods-related auditing of accounts.
Incoterms define uniform international rules for the interpretation of standard commercial contract formulations. They are issued by the International Chamber of Commerce (ICC) in Paris and were last revised in the year 2000. Incoterms regulate the passage of risk and the passing on of cost from the place and point in time in which seller surrenders the goods to the buyer. Thus, they also define unambiguous clauses in particular for interstate trade and commerce.
Indirect materials are such goods which do not enter directly into an end product. This includes office supplies, for example. Also see direct materials.
Procurement in case of demand; mostly just-in-time delivery.
Individual sourcing describes independent procurement. The strategic counterpart of individual sourcing is collective sourcing.
Initiation costs are incurred due to the search for contact partners within the pre-contractual phase of a transaction. They are caused, inter alia, by signaling and screening of the market partners. Essentially, initiation costs comprise costs of information which are incurred with the selection of suppliers. In terms of their entirety, initiation costs – in addition to the agreement costs – count among the transaction costs.
Insourcing is the reintegration of a company's performance processes. At an earlier point in time, these performance processes might possibly have been moved outside of the company within the scope of outsourcing.
Generally, an interface defines the point of contact between different circumstances or objects. In procurement, it is important to define and implement interfaces for communication and for the exchange of information of specialized users and the purchasing department. Interfaces in the area of software engineering are essential in procurement for the exchange of data. In this case, software systems are directly connected with each other without an intermediate process. Systems of e-procurement and e-sourcing should be completely integrated via interfaces, and the most direct connection possible to the corresponding ERP system is to be aimed at (ERP-interface). Required are module interfaces, user interfaces (points of contact between end user and software product), and hardware interfaces (points of contact between operating system (OS) and hardware).
Internal sourcing provides direct geographic proximity to the supplier. In practice, customer and supplier are located in an industrial park, for example; thus, suppliers are directly established at the production facilities.
Internet bill presentment and payment (IBPP)
Interviewing means talks which are systematically prepared, held and revised and which are carried out with specific substantive objectives. Basically, any talk can be systematically prepared; however, the intensity correlates with the importance which the interviewer attributes to the talk. Interviewing has the objective of optimizing the time used by all participants, as well as the level of target achievement. Moreover, transcripts make it easier for third parties to subsequently understand and follow structured talks.
The Intranet is a corporate or organizationally internal network enabling centralized data access and exchange of information. As a defined and delimited network, the Intranet is suitable for the exchange of sensible data. Information and applications are made available to the staff via a webserver. Counterpart of the Intranet is the Extranet.
see warehouse ratios.
inventory carrying costs
see warehousing costs.
Inventory controlling is used for planning, steering and monitoring a company's inventories. Inventory controlling uses ratios which reflect condensed information about inventories and help optimize them taking business requirements into account.
inventory days of supply
see days inventory held.
Inventory management has the objective of classification, planning, controlling and monitoring of stocks within the supply chain of an enterprise. Objects of consideration in inventory management include warehousing stocks, transport and processing stocks. Inventory management has two objectives. First to be mentioned is securing the supply not only of internal corporate areas and/or production stages but also the supply of customers with goods to avoid stockout cost. Secondly, inventory costs are to be minimized. However, there is a conflict between these two objectives. Both inventory management objectives should therefore follow the maxim of guaranteeing a company's security of supply with the lowest possible inventories and thereby ensuring a cross-functional optimization approach.
Optimization of inventory levels is used to reduce a company's capital tied up in stocks. Capital will thus be released; a company's working capital will be optimized; its internal financing power is strengthened and the enterprise value increased. Instruments for inventory reduction are consignment stock, logistic components of efficient consumer response (vendor managed inventory, cross docking), saleability analysis, just-in-time and just-in-sequence. Inventory optimization is in conflict with other corporate objectives, such as the company's security of supply.
see days inventory held.
average replenishment time
The ratio shows the period of time required for the provision of materials. Changes will influence supply readiness and the inventory levels. Basic data are taken from the material product file, inventory card index, as well as from scheduling, ordering, and goods received documents.
∅ order preparation time (order triggering and purchase order processing) + ∅ time of delivery + ∅ time of inspection and storage or allocation, respectively
average inventory period
The ratio shows how many consumption periods (days/weeks) an average inventory level will cover. For just-in-time, the average inventory period is one to two days.
∅ inventory level * 365(or 240 days) / annual consumption
The warehouse range is a ratio which indicates the time an inventory level is supposed to last with an average or planned consumption of materials.
∅ inventory level on the cut-off date / (consumption / day)
The turnover frequency indicates how often the inventory is turned over within one period. Changes in inventory turnover frequency have an effect on capital commitment cost and on the working capital.
(consumption / period) / ∅ inventory level
average inventory level
The average inventory level can be calculated (in terms of value and volume) from the following formulas:
(annual opening inventory + annual closing inventory) / 2
inventory average with monthly purchase order
[(opening inventory + 12 monthly closing inventories)/13]/[(1/2 opening inventory + 11 monthly inventories + 1/2 closing inventory)/12]
inventory reorder point
The inventory reorder point is a defined inventory which, when reached, will automatically trigger a purchase order. It is differentiated between a fixed inventory reorder point which is determined over a specific period of time and a variable inventory reorder point which changes over the course of time. The inventory reorder point plays a crucial part in procurement according to the reorder point system.
invitation to tender
An invitation to tender is a document which is sent to potential suppliers to request their terms and conditions for a specific product and its delivery. Even hitherto unknown providers and suppliers may be included in the invitation to tender. Sources are, inter alia, purchasing homepages, company-own Internet buying platforms and virtual marketplaces. Anonymous invitations to tender are not recommended due to their low rate of return.
Invitations to tender should cover at least the following substantive items:
1. Terms and conditions of delivery; delivery intervals, times of delivery, delivery locations
2. Payment terms
4. Additional services
6. Period of demand
After possibly all of the potential suppliers addressed have submitted their bid for the specific request, the buyer will be able to objectively decide which one is the most expedient bid for his or her enterprise.
The International Standardization Organization is an association of national standardization bodies. In Germany, for example, DIN is the standardizing institute.
see order picking.
The just-in-sequence concept is a further development of the just-in-time method. Production is here supplied with raw materials and semi-finished products not only stockless as far as possible and just in time, but also in the sequence in which raw materials and semi-finished products are required in production. For the procedure to work smoothly and without objections, all data relevant for supply and production must be jointly used by manufacturers and suppliers and operating sequences must be adjusted and coordinated to each other.
Just-in-time is a logistic concept which has the objective of supplying production with raw and semi-finished products – stockless as far as possible and synchronous with manufacture. Thus, incoming and production stores are to be reduced and be made entirely redundant, if possible. Another objective of the JIT concept is the optimization of throughput time which goes hand in hand with a reduction of the period of time during which stocks are stored at the enterprise.
Kaizen management means the introduction of a continuous improvement process for a permanent increase in customer benefit. Changes come about gradually, not in leaps and bounds. Kaizen thus addresses the continuing search for causes of problems to constantly improve all activities in the enterprise and permanently increase consumer benefits. Kaizen makes continuous improvement a component part of every individual employee's independent actions.
Kanban designates the just-in-time control of production according to the pull principle. It is a decentralized planning and control method based on a self-regulating control loop. Kanban follows the so-called supermarket principle. According to it, a gap due to the removal of goods from the warehouse is immediately filled up again with the same article. Auxiliary means are boxes stored in a buffer storage and provided with a card. On that card (Kanban) will be noted parts and buyers data, ordering quantities, transport and so on. The process is always triggered by a production stage downstream in the production process; that means the final assembly is the trigger for the entire process in the enterprise.
key account procurement management
The key account procurement management is a special form of procurement organization. Key account procurement management is used for suppliers which are eminently important for the procuring enterprise and due to that status, they have a key position for the corporate business performance. All activities with these suppliers connected with procurement are removed from the standard purchasing organization of the enterprise and will be centrally managed and handled by one office. This is particularly important with regard to modular sourcing with systems suppliers.
key performance indicator (KPI)
Those ratios are called key performance indicators (KPI) which relate to a company's business results, performance, or capacity utilization, or those of its departments or individual machines. As auxiliary means, KPIs help management and the controlling department to monitor and evaluate corporate processes, departments or projects. Different factors can be used as KPIs which are selected according to the perspective taken (for example, purchasing, sales, internal accounting, controlling) or according to their purpose (for example, investment decision, make or buy decision).
Key products belong to the cluster of A-goods within the ABC analysis and are generally fraught with a significant procurement risk. Since key products are counted among the performance- and systems-relevant goods within an enterprise, they are especially of relevant and strategic interest from the point of view of procurement. Aside from cost-effective procurement, the purchasing department's objective especially is to continuously safeguard the supply of materials. A detailed solution of this conflict of objectives requires comprehensive risk management as well as long-term price and availability forecasts. Central elements are in this respect any make-or-buy considerations, exact inventory control systems, early warning systems and emergency plans for risk classifications. The portfolio analysis may be used as an aid for basic definition or delimitation.
The term kick-off has been taken over from American sports events; in connection with project management, it describes the event which determines the beginning of a project. During that event in which normally participate not only the ordering party but also all project participants, the mode of action will be explained, as well as the distribution of duties and activities ensuring that the project will be handled according to schedule.
Landed costs are calculated based on the individual offering price or a published list price. From it are subtracted various price reductions: A rebate depending on the ordering quantity, a bonus depending on the order value or annual turnover and a discount depending on the mode of payment. To this balance will be added the costs of packaging, insurance, transport and customs.
Large enterprises are those exceeding the defined limits for small and medium-sized enterprises (SMEs).
see heavy user concept.
lead logistics provider (LLP)
Logistics service providers are called lead logistics providers (LLP) when they take over – for their customers – the organization of their essential or all of their logistic processes. In this respect, the LLP acts as a strategic partner and is highly integrated into the customer's logistics processes. The LLP takes over not only the execution of transports, transshipment or warehousing services but also the design or structuring, implementation and organization of supply chains, transport and warehousing planning/optimization, as well as suppliers' coordination or other services. Also see third party logistics provider (3PL) and fourth party logistics provider (4PL).
Lean management has its focus on streamlining hierarchies and on the simplification of corporate process flows. That does not mean merely the production of an enterprise; much rather, a company's processes are viewed holistically and scrutinized with regard to their meaningfulness and will be accordingly optimized.
letter of intent
A letter of intent is a written declaration of intent between two contracting parties in the scope of which both contracting partners agree upon joint negotiation objectives or in which one of the contracting partners submits to the other a non-binding offer. Depending on its contents, legal obligations may also be derived from a letter of intent.
level of space utilization
LIFO stands for 'last in, first out' and describes a method of monetary evaluation of consumption volumes. It is here assumed that the product which last came to the warehouse is the first to be used up again. The Lifo method is thus unsuitable for perishable products but is used in the steel industry, for example. Counterpart of the LIFO method is the FIFO method.
linear performance pricing
Suppliers are compared in terms of price and performance by means of the linear performance pricing model. To this end, different prices are displayed as points of coordinates on a linear straight line. The product's price is plotted on the ordinate, and its performance on the abscissa. For quantifying performance, measurable characteristics are especially suitable – such as the torque or fuel consumption for engines.
Procurement in the company's regional environment.
Logistics describes the process of planning, implementation and monitoring the efficient, optimal-cost flow and storage of raw materials, semi-finished products and finished products, as well as the pertinent information from the point of manufacture or availability up to the point of consumption for the purpose of satisfying the customer's demand. Within the scope of logistics, bridging over time and space will provide the foreground.
logistics costs per sales ratio
see quality ratios.
LOHAS is the abbreviation for 'lifestyle of health and sustainability' and describes people who want to combine indulgence or pleasurable consumption and responsibility. This attitude also characterizes their consumer behavior in that they want to promote health and sustainability through specific product selection. Persons choosing this lifestyle usually have an above-average income and are accordingly coveted as a target group e.g. for the trade goods and consumer goods industries. Their demand for sustainability and health e.g. requires, at the buyer's point, special sources for raw materials and packaging.
Lot size is also frequently called batch or ordering quantity and describes a specified quantity of purchase order objects ordered from the supplier by purchase order. Normally, costs are incurred which are fixed ordering costs independent of the scope of the purchase order and variable costs depending on the quantity of the order.
Within the scope of a make-or-buy decision, it is to be examined according to the situation whether an added value step is to be made in own manufacture (make) or by means of external outside procurement (buy). Farming out an added value step is called outsourcing which has the effect of reducing the company's real net output ratio. Advantages of own manufacture are, inter alia, savings in distribution and transport costs or saving the profit margin which the supplier includes in the calculation of its offered price. Moreover, there is a lower dependency situation; direct review or audit of quality standards is possible. On the other hand, third-party manufacture results in advantages due to the low burden on the company's liquidity, short-term as well as medium-term. Other advantages are the improvement of the fixed cost structure and a lower dependency concerning demand fluctuations because the supplier has to bear the risk of poor capacity utilization.
management by objectives
see agreement on operational targets
see lead buying.
Marginal cost designates the cost additionally incurred with another unit of quantity for a product.
Marginal yield indicates to what extent the output volume increases if a production factor is increased by one unit.
Numerous market analyses are made over a defined period of time for an observation of the market. A market analysis includes taking stock of an object of observation at a certain point in time. Subject matter of a market analysis may be, for example, the determination of the price level of a specific industrial sector. Within the scope of market observation, price fluctuations typical for the sector can then be determined. In a final processing step, it will then be important to transpose into the future the developments observed in the sense of a market forecast.
A markup presents the amount which is added to the cost price to calculate the sales price. If a buyer obtains a product through commerce, on the market, it is to be expected that the offered price includes a trade markup. Such a trade markup not only comprises the additional costs which the dealer incurs but also the dealer's profit.
Mass customization is a synonym for mass production of individually customized goods or services. The central concept of this approach is to offer a customer a product custom-tailored to his or her personal needs without significant markups in price. Mass customization is a hybrid competitive strategy which allows the simultaneous realization of cost leadership and differentiation strategies. In the past, the Internet established itself especially as an individualization platform; thus, automobile customers can create online, for example, a list of accessories for their preferred car.
master data management
Master data management designates central master data storage and administration. Central storage ensures consistency across systems and applications.
In a business administration context, the term material describes the entirety of raw materials and supplies as well as semi-finished products which are processed in production. Materials are accordingly elementary production factors.
material requirements planning
MRP or material requirements planning is an instrument which, computer-based, plans and controls production runs taking restrictions into account. In this case, restrictions may be capacity and supply bottlenecks. An MRP system includes all elements of a PPS system.
Ever more companies are following the guideline that efficient handling of commodities and raw materials can significantly increase competitiveness in international comparison and can also secure jobs. On the one hand, essential commodities such as crude oil, metals or minerals become increasingly scarce. On the other hand, innovations provide that, for example, so far artificially produced raw materials or commodities are replaced by renewable materials. Accordingly, numerous possibilities exist to reduce raw materials consumption and increase materials efficiency. Examples are: LED technology, energy-saving lamps, and industrial or white biotechnology. Rapid technological developments in the area of resources and materials efficiency offer companies considerable cost-savings potentials and thus the opportunity of lastingly improving competitiveness.
see merchandise group.
materials group analysis
The materials group analysis deals with the analysis of products and services which can be newly structured, evaluated and procured. Evaluation criteria are, for example, the relationship of weight and value of the products to be considered, the quantities required and their planning predictability, production requirements, required certificates as well as customs tariffs or rates and logistic requirements. In many cases, the materials group analysis additionally goes hand in hand with a product value analysis.
materials group management
see merchandise group management.
Materials management designates the function of an enterprise which deals with the efficient handling of goods. Functions and duties of materials management are inventory management and the company's internal transportation of materials up to production. The term materials management is more narrowly defined than the term supply chain management since the latter also includes external interfaces to customers and suppliers.
The materials master presents the total amount of information about all articles or products which an enterprise procures, produces, warehouses or sells. Within the enterprise, the material master thus is the central source for the retrieval of product-specific data.
Materials scheduling comprises the two elements of requirement planning and purchase order planning. Requirement planning answers the question at which required date which quantity required will be necessary. On the other hand, purchase order planning is concerned with the determination of purchase order dates and the quantity ordered.
Maverick buying is a term from procurement management and means the procurement outside of standardized procurement routes or channels. Thus, the consumer high-handedly procures materials or services without including the purchasing department. Applicable and valid framework agreements accordingly cannot be used.
see maverick buying.
The maximum inventory defines the maximum inventory level, i.e. the materials quantity which may be present in the warehouse at maximum. The objective is to prevent an excessively high inventory level combined with an excessively high capital tie-up.
M-commerce designates the electronic initiation and handling of transactions via mobile end user devices. Mobile end user devices are, for example, mobile phones, pagers, personal digital assistants (PDA) or notebooks / laptops.
Individual articles are combined in one merchandise group. That group is a sub-unit of the company's complete range of products and, in turn, may itself include different merchandise categories. The classification in merchandise groups allows a company to structure, horizontally and vertically, its entire inventory of articles, and provide unique allocations.
merchandise group analysis
merchandise group history
One of the most important instruments in merchandise group analysis is the analysis of merchandise group history. Aside from the demand development, the materials price development will be observed, as well as the raw materials development and the supplier development. Before this backdrop, not only the completed activities of purchasing can be followed up, but current market and company situations can be evaluated as well.
merchandise group strategy
Within the scope of formulating a merchandise group strategy, the question will be of how the objectives of a merchandise group are to be implemented, as well as the functions or duties derived therefrom. It is vital in this case that the selected merchandise group strategy harmonizes with that of the entire enterprise and thus meets a holistic requirement.
A so-called merger (or 'marriage') rebate always comes up when two enterprises merge within the course of a corporate takeover. It is supposed to be a request made to the existing suppliers of both companies for 'subsidizing' the purchase of an enterprise so as to continue to be on the list of suppliers.
mergers and acquisitions
Mergers and acquisitions (M&A) are understood to be all activities which follow the objective of fusing two independent enterprises to an economic unit. Such a connection may be provided on an added value stage which is either horizontal, vertical or, respectively, diagonal (no relationship of the two enterprises). The objective of such a merger is to minimize the risk of business activities, increase profitability, improve synergies, or expand know-how.
A milk run is a special form of direct transport on a defined route. In this case, a hauler stops at several suppliers on a closed route, collects the products to be delivered and takes them to the purchasing party. Specified are in this respect the arrival and departure times at the suppliers as well as at the purchasing party.
Miniaturization is a term for the reduction of components and the consistent combination of processes. Effects on purchasing result from the combination of processes and the wide-spread use of processors. Because multifunctional devices allow networked communications from machine to machine although it is mostly still limited today to communications within an enterprise or for service or maintenance purposes. In the future, such networking should become an important component for controlling supply chains. Because aside from the control of complete production plants by computers, products will be increasingly interconnected and linked in the production process. What is recorded until now by scanners at clearly defined places in the process may be done in the future for example by RFID, independent of inspection points. Due to the greatly increasing number of sources, significantly more information is provided for purchasing. That has its effects not only on controlling the supply chain but also on strategic purchasing. Thanks to optimized systems, information will be visible in the future in real time and also permanently, delays may be calculated and short-term new planning will be possible. On the other hand, buyers must be able to work simultaneously with manifold sources and systems of information to be able to make optimum decisions as far as possible. The multitude of sources of information must be evaluated, monitored and processed as a basis for decisions.
see systems supplier.
MRO products belong to the group of indirect materials. The abbreviation MRO stands for maintenance, repair and operating materials or products. They are used as consumable materials in manufacturing or in manufacturing-related areas, in laboratories for example.
If the offering party allows, goods should be procured from several interchangeable suppliers. Such multiple sourcing should increase the flexibility and ensure the security of supplies. Additionally, it is intended to stimulate competition among suppliers in this way. The use of several suppliers proves to be particularly efficient with A- and B-suppliers.
Due to the success of emerging countries, the original state of balance among nations is changing because the emerging states' political self-confidence is also increasing together with their newly attained economic power. This development will not be limited to the so-called BRIC-states. Additional power centers might develop in the Middle East and in East Asia, for example. Instead of a unipolar world with the U.S.A. as the dominant power center, it is highly probable that, in the future, we will have a multipolar world in which no single region will be vastly superior in might or overpowering, however.
At an auction, several products are simultaneously auctioned.
(cherry picking auction)
At an auction, separate or individual prices are each given for several products. Depending on pricing per product, the award may go to different suppliers.
The multi-supplier catalog forms the functional basis for a desktop purchasing system or a purchasing card. The catalog is made available via the company's own Intranet and visualized with a Web browser. By making it centrally available, the purchasing behavior is internally controlled and the implementation of process- or product-related standards is thus accelerated.
see domestic sourcing.
nano-bio-info-cogno: nanotechnology, biotechnology, information technology, cognitive sciences
NBIC designates the merging of nanotechnology, biotechnology, information technology, cognitive sciences and is to stand as a synonym for the further development of materials. The role of purchasing: It is the interface to suppliers and thus also to innovations on the market. New materials are developed ever faster and the market maturity of products results at ever shorter intervals. Companies which are first to detect these developments very early on and secure them for themselves will always have a competitive advantage in the short run. This is also a function of purchasing: detecting trends in materials and securing them for the enterprise. In this respect, successful purchasing departments are using trend scouts who will search and identify precisely such novel materials or production methods.
shows the ratio of negotiations to subgroups materials. Revealing in terms of the up-to-dateness and quality of prices. Few negotiations indicate excessively high purchase prices.
net current assets
see working capital.
Net requirement is the gross requirement of a period minus the available inventory level, thus the demand which actually must be procured in a period.
The network economy is global, based on intangible concepts and relations and requires comprehensive networking and linking of all participants. By now, there are numerous case studies of successful business models on the Internet: Google replaced Coca-Cola as the most successful brand.
If a supplier delivers a product which does not meet the stipulated product characteristics, non-conformance costs are incurred which may be different in nature or origin – for example, image loss with the customer, processing complaints or rework in production. On the other hand, the term stockout costs is used in case of short deliveries.
see saleability analysis.
Industry-specific electronic data interchange standard for the automotive industry.
Offer screening deals with the systematic evaluation of risks, opportunities and the probability of an order award.
on behalf of
This is an addition (German: im Auftrag, abbreviated 'i.A.') which an undersigned adds to his or her name. It indicates that the person has been given temporary authority to sign on behalf of another.
on time in full
open catalogue system
The open catalogue system is a standardized catalog data department. It is used for exchanging catalog data records between SAP e-procurement systems (for example SAP enterprise buyer) and any other catalogs. The user here accesses the provider's up-to-date catalog data via the Internet.
Operational resources are movable and immovable resources used for performance provision. They belong to the elementary production factors. Except for human work, the production factor of operational resources includes all long-term usable goods – such as machines. Operational resources are not used up by a single application in the production process but provide continuous performance for production during their service life.
Opportunity cost describes the cost of the foregone benefit resulting from a comparison with the best, non-realized activity alternative.
optimum ordering quantity
Xopt. = optimum ordering quantity
M = annual demand
E = cost price per unit of quantity
KB = ordering costs per purchase order
LHS= rate of inventory carrying costs
Optimum ordering quantity is considered that ordering quantity in which the item-specific costs as the sum total of procurement and warehousing costs reach their minimum, taking a specified delivery service level into account.
An option contract is a contingent forward deal. The buyer of the option is provided the optional opportunity to buy (call) or sell (put) – within a specific period (American option) or at a specific future point in time (European option) – an (underlying) asset at a rate agreed upon beforehand (basic price) against payment of an option premium (option price). Against receipt of the option premium, the seller of the option (writer) is obligated to accept or deliver the underlying asset at the stipulated price. The underlying assets of an option contract may be shares, currencies, raw materials or indices.
order management system
The order management system (OMS) is an EDP system which is used for order receipt and further processing. Orders are provided by the customer or consumer.
Order picking describes a compilation of items according to specifically set up purchase orders. Normally, the items are put together according to customer orders (branch or, respectively, customer order picking). For dual-stage order picking, all orders will be collected in the first stage and order picked by items. In the second stage, distribution is provided according to customer orders (item picking).
ordering costs in percentage of procurement cost
see profitability ratios.
ordering process costs
Ordering process costs are costs incurred per ordering process. In this respect, general office expenses include e.g. expenditures for the IT system by means of which the purchase order is sent out.
see lot size.
original equipment manufacturer (OEM)
An original equipment manufacturer (first tier supplier) is a manufacturer of finished components or products. The OEM buys components from other manufacturers and/or its (systems) suppliers and integrates them unchanged into its own product which is then sold as a total package to the end customer. In practice, automobile manufacturers are often called OEMs.
Out-of-stock describes a zero-inventory situation at the sales location. The customer cannot buy an article because it is not available on the shelf. If the customer does not find the desired article on the shelf because it has been sold out, there is the risk that the customer will buy a substitute product or purchase the wanted product in another store. Opportunity costs result for the retailer or the manufacturer. Suitable for preventing out-of-stock situations are the instruments of efficient replenishment as logistic components of the efficient consumer response. This includes cross docking and vendor managed inventory.
Outsourcing is a strategically well-founded decision regarding the third-party purchase of goods or services. Outsourcing plays a role especially in make-or-buy decisions. In this respect, a third party is assigned to carry out value-adding activities. BPO is a special form of outsourcing.
shows the percentage of indirect costs. High values may indicate inefficiencies. Revealing in comparison of industrial sectors or over time.
A package deal is a special form of a compound transaction. Two legally separate processes are concerned between two companies, and they are differently processed in terms of delivery and payment. Each of the two enterprises acts once as a supplier and once as a buyer. Delivery and counter-delivery do not take place in a synchronized manner but at different points in time, i.e. first a delivery is made which is to be applied to a counter-delivery.
percentage of costs in EKV (purchase volume)
shows the ratio of ordering volume to costs of purchasing. Costs should be relatively low. A low value is to be aimed at.
The PEST, PESTLE or PESTEL analysis is used to uncover external factors and influences which act upon an enterprise. They may be of a political (P), economic (E), socio-cultural (S), and technical (T) nature. Moreover, they were subsequently expanded by yet other factors: legal (L) and ecological (E). In purchasing, especially in strategic purchasing, these factors play a major role since they frequently describe long-term developments which must be taken into account for strategic decisions. It should be the objective of an enterprise to find out through an analysis of internal strengths and weaknesses (SWOT analysis) how the mentioned external challenges can be counteracted or, respectively, where the enterprise still has weak points.
point of purchase
The point of purchase (PoP) describes the place of buying from the consumer's viewpoint. Thus, PoP is the counterpart to the PoS which designates the place of sale from the dealer's viewpoint.
point of sale
The point of sale (PoS) designates the place where goods are sold. Accordingly, the point of sale is the place where the customer comes into direct contact with the goods and may be urged by advertising measures to make purchases. From the buyer's point of view, it is called point of purchase (PoP).
Pooled purchasing is a generic term for all types of buyers' cooperatives. Also see collective sourcing in this respect.
Pooling demands stands for the pooled procurement of goods or services from one supplier or few suppliers. A better price can be realized by larger volumes.
Portfolio analysis is an instrument which originally comes from the world of finance and describes the structure or make-up of managed security accounts taking yields and risk factors into account. Later, the portfolio analysis was modified and now counts among the most widespread analysis instruments in strategic management. Portfolio analysis is widely used especially in strategic management consulting (McKinsey portfolio, BCG matrix). However, the portfolio approach can just as well be transferred to purchasing and procurement and, in this context, it is known as procurement portfolio.
A comprehensive potential analysis presents the basis for fundamental restructuring of a procurement department. Intensive detailed work is necessary to record and analyze a host of data to then derive optimization potentials from this pool of information. At the same time, this comprehensive pool provides the basis for identifying a sound and viable mix of instruments for utilizing or exhausting the potentials ascertained. Potential analysis incorporates the following processing steps:
1. Review of sales and procurement markets
2. Analysis of the organizational structure and flow of procurement within the business process
3. Determination of merchandise groups and supplier structures
4. Recording supplier requirements and preferences
On that basis, a cost savings potential is determined relative to the volumes of the analyzed merchandise groups. This analysis which generally takes two to four weeks of time provides the basis for an individual strategy for procurement optimization. Usually, it is rather ineffectual to carry out any potential analysis without external assistance because consultants will react more objectively and because they are, in particular, independent of internal power structures.
PPC is the abbreviation of production planning and control. The objective is to generate short throughput times, compliance with scheduling, optimum carrying of articles in inventory, and the economic utilization of operational resources. A PPC system is a computer program or a system of computer programs supporting the user with the connected data administration. Many PPC systems are integrated components of an ERP system.
see ranking auction.
There is a differentiation in price if an enterprise offers identical products at different prices based on specific criteria. There are different types of price differentiation: space and time specific price differentiation; price differentiation according to order size; price differentiation according to customer groups, price differentiation according to the sales and marketing route, as well as the seasonal price differentiation.
price escalator clause
An agreement between supplier and buyer in the form of a delivery contract allowing the supplier to set the price for goods to be supplied in relation to the development of a basic value; for example, a raw materials or commodities index. Accordingly, the price escalator clause has the objective of the supplier being able to transfer his procurement risks to the buyer if, for example, the contract term extends over a longer period of time and the costs for manufacturing might fluctuate over this time period. But over and beyond that, the buyer can also profit directly from possible changes in the economy or on the markets.
Price risk is the risk that prices of procurement goods will change to the detriment of the procuring enterprise. Reasons for price risks are, for example, the natural or artificial scarcity of goods, or high market growth and the resulting increasing demand for goods, also high capacity utilization with providers, provider agreements, corporate consolidations on the provider side, as well as price volatility for exchange-traded goods (also see sellers' markets). Instruments for safeguarding against price risks may be, for example, option contracts, price escalator clauses, as well as the agreement of fixed prices or long-term contracts.
Price validity defines the period of time and/or the point in time up to which a price agreed upon between supplier and buyer or, respectively, a price offered by the supplier will be bindingly valid for a specific procurement item.
The primary demand describes a company's demand for saleable products. Such products include, aside from the end products, the saleable intermediate products as well. The demand for these products is oriented on customer orders or sales plans, respectively. The secondary demand is derived from the primary demand.
primary market research
Primary market research falls back on information generated at the place of origination. This initial and direct examination of market participants thus collects novel data; for example, by way of interviews or questionnaires, by observation or experiments. Counterpart of primary market research is the secondary market research.
Process analysis is used to obtain the most unambiguously possible view of the processes running in an enterprise and to critically scrutinize them. In this respect, the company's processes are reviewed with regard to the competitive factors of time, quality, costs and flexibility. Weak points and savings potentials are identified by means of benchmarking and activity-based costing.
processed shipments per manpower hour
The objective of process management is the optimization of processes in terms of the factors of efficacy and efficiency – thus establishing higher customer benefit. It is irrelevant in this respect whether an external or an internal customer is concerned. Accordingly, process management includes goal-oriented planning, steering and monitoring of processes. The following ratios are here used, inter alia:
average lead time for a purchase order = sum total (point in time of demand of Banf * 100) / sum total of BANF
The average lead time for a purchase order indicates how long a purchasing department will have on average for inquiries and evaluations of offers. Purchasing should aim at the highest possible value. Ad-hoc purchase orders will have a negative effect on this ratio.
average throughput time of a purchase order = sum total (point in time of demand of BANF * 100) / sum total of requisitions
The average throughput time of a purchase order indicates how long the purchasing department needs for carrying out a purchase order. The shortest possible throughput times are to be aimed at.
average order value = purchase volume / sum total of purchase orders
The average order value shows the ratio of purchase order to order value. Low-value purchase orders are inefficient since they are generally just as time-consuming as high-value purchase orders. High values in time flow or industry comparison are to be aimed at.
purchase volume per buyer = total purchase volume (EKV) / sum total of buyers
The purchase volume per buyer shows the percentage of each buyer in the total purchase volume. High percentages are a sign of the buyer's high performance. The ratio can be used in relation to materials groups, products or purchase orders per buyer.
purchase orders per buyer = sum total of purchase orders / number of buyers
The ratio shows the ordering expenditure per buyer. Can be set in relation to the purchase volume per buyer.
percentage of administrative and scheduling activities = working hours for administrative and scheduling activities / total working hours
Shows the buyer's burden with activities which are not adding value. It is to be aimed at a minimization of these administrative and scheduling activities.
Basis for process optimization is the process-oriented perspective of the entire operational flows and processes. The existing operative and strategic processes in purchasing and at the interfaces are recorded and evaluated. This allows an identification of weak points in the existing process model and brings about necessary changes. Operative duties may be, for example, the preparation of a process model or the use of formalities. Strategic objectives are, for example, the introduction of process organization, redesign and extension of existing processes in strategic purchasing, or the standardization of processes from purchasing to interfaces and suppliers.
Generally, it is the function of procurement to ensure, for the company, the availability and required quality of the procurement objects in collaboration with suppliers – implementation and planning being closely intertwined. In practice, the terms 'purchasing' and 'procurement' are frequently not separated, or only on a level of process execution. However, it is sometimes advocated that the term procurement describes the long-term and future orientation of purchasing.
Many organizations lack any adequate transparency of their purchasing processes and thus their expenditures. But only the transparent organization of purchasing permits an examination of optimization potentials and provides decision-making bases for management. Moreover, ratios systems must be developed on the basis of existing sources of information, as well as reporting structures and supplier evaluation systems to ascertain the most important external influencing factors on buying performance. Thus, for strategic decision making, a hierarchical ratio and reporting system can be elaborated and planning objectives be developed on a merchandise group level or performance measurement guidelines for example in the form of a purchasing balanced scorecard.
procurement cost per purchase order
see profitability ratios.
In business administration, the term procurement logistics designates the process from the manufacturer's acceptance inspection of goods (for example, raw materials and supplies) via transportation all the way to the customer's incoming goods and thus combines the supplier's sales logistics with the customer's incoming logistics.
Procurement management aims at the integrated practice of procuring goods and services as a fundamental activity of an enterprise. Successful procurement management may present an outstanding contribution to the corporate results; for example, through the use of the instruments of total cost of ownership or standardization. In addition to safeguarding the security of supplies and the reduction of procurement costs, successful procurement management can also control procurement complexities. Functions of this management are, inter alia, the merchandise groups management, negotiations management, procurement controlling and supplier management.
procurement market research
Procurement market research is the observation of specific aspects of the procurement market which are relevant for an enterprise. To be able to evaluate market events in detail, all activities on the procurement markets relevant for the enterprise will be reported and analyzed, and their development is followed. Criteria to be examined are, for example: Market potentials, procurement volumes, structure of the procurement market, future market developments in terms of technical, economic, business cycle and political aspects, competitors' behavior, market risks as well as bottlenecks on procurement markets.
Procurement marketing has the purpose of establishing and cultivating long-term supplier relationships and also the sustained protection of sources of supply. This is to be realized by the buyer's offensive positioning during talks with suppliers. The use of marketing instruments aims at specifically influencing the suppliers with the objective of performance motivation. Moreover, procurement activities are to be coordinated according to demand. Procurement market research is of particular importance within the scope of procurement marketing. Market research collects information about relevant procurement markets, potential suppliers, as well as procurement terms and conditions. Such active procedure makes it easier to realize price reductions or other improvements in the structure of conditions.
The term procurement organization describes the structures in a purchasing department, the distribution of competence rights and powers to act, as well as the definition of roles and duties. Materials procurement can be integrated into the overall organization in a centralized, a decentralized or a mixed form. In case of central integration, the procurement department's functions will be taken over by a single organizational unit. Decentralized integration means that procurement functions are taken over by several organizations side by side. A mixed form is provided if functions of the procurement department are taken over in combination by central and decentralized organizational units. The materials procurement structure – by means of which the work units (departments, for example) are organized in procurement – can be provided with an orientation towards activities, objects or regions. Activities orientation means that the units are organized according to procurement activities; for example, scheduling, purchase order, inquiries, warehouse. Classification according to objects comprises the organization following groups of materials, for example: raw materials, auxiliaries and consumables, packaging, DIN parts. A distribution according to regions is oriented on the procurement markets, for example, North/South America, Western/Eastern Europe.
procurement performance analysis
see purchasing cockpit.
The procurement portfolio has the objective of detecting opportunities and risks on procurement markets. To this end, goods to be procured are arranged in a portfolio taking into account the procurement complexity (risk of supply) and the results effect (purchase volume). Four product categories can here be distinguished; standard strategies can be allocated to these four categories:
1. Leveraged goods: use of market power; international procurement, medium-term supplier ties
2. Strategic goods: entering alliances and cooperations; supplier integration; long-term supplier ties; high intensity of ties
3. Uncritical goods: simplification of flows and possible automations; supplier reduction; concepts of procurement service providers
4. Bottleneck goods: materials substitution; supplier substitution; risk minimization; aiming at a shift to one of the other quadrants.
The procurement program is subdivided into direct production materials such as, for example, raw materials or components, and indirect materials. The latter group whose procurement is also called operating resource management includes MRO products, as well as products for administrative areas such as, for example, office materials or cleaning services.
see sourcing strategy.
The term procurement volume describes the total extent of purchase orders in terms of quantities for a specific ordered object in a defined period of time and is used, for example, for the analysis of possible pooling potentials to be able to determine the number of individual purchase orders or to also negotiate long-term contracts for a larger volume.
procure to pay
see purchase to pay.
product cost calculation
Product cost calculation is the process relating to the determination and differentiated consideration of all costs connected with a product's production and sales. Aside from the cost of materials, all those costs will also be taken into account which are connected with the transport of the completed product to the customer. Bills of materials are used as aids for product cost calculation.
Product development comprises the creation of new or, respectively, the improvement of existing products. Product development is generally initiated because an enterprise identifies new customer needs and tries to satisfy them with a new product. The product development process is concluded once a product is ready for series production and marketable.
Productivity ratios establish a relationship between input and output of an object examined.
Example for productivity ratios
number of shipments handled per personnel hour = number of incoming shipments / number of workforce hours
Optimization of handled shipments per personnel hour can be achieved by automation of processes.
capacity utilization of means of transport = actual hours used * 100 / possible hours used by means of transport
The capacity utilization by means of transport indicates how much the existing capacities of transport means are used. The higher the rate of utilization, the lower the opportunity cost of the fleet of vehicles.
rate of space utilization = used shelf space * 100 / total warehouse space
The rate of space utilization can be improved by outsourcing the warehouse, by the just-in-time concept, and by awarding warehouse or inventory activities to external service providers.
product life cycle
The product life cycle is a concept which assumes that the market stage of a product can be subdivided into characteristic stages and will follow a bell-shaped, ideally typical course. A limited life of the product is assumed. Critics therefore frequently emphasize this aspect of the product life cycle. A vast number of products – like the world-famous Coca Cola, for example – does not follow the ideally typical course assumed by the product life cycle concept. Furthermore, trends may extend a product life cycle or they may revive a product which had long since disappeared from the market. Examples for it are the retro-concepts by the sporting goods manufacturers Adidas and Puma or the beverage brand Afri Cola. The product life cycle of a product may be subdivided into four stages as the following graphic shows. During the introductory stage, the enterprise advertises and promotes the product. Due to the marketing activities, sales numbers will increase and thus turnover slowly increases as well. Because of the prior costs of the product's development and because of marketing expenditures, this stage of the product life cycle does not generate any profits as yet. The growth stage is characterized by a strong increase in sales figures. Despite continuously high marketing expenditures, profits are realized for the first time in this stage of the product life cycle. The maturity stage is the longest and most profitable stage of the product life cycle. Towards the end of this stage, profits will be decreasing. Competitors enter the market and increase competition on the market. By means of suitable marketing activities or the introduction of product variations, the product's maturity stage may be extended. During the degeneration stage, the product's market shares will shrink and sales as well as profits will drop. The product is no longer profitable and will be eliminated from the company's product portfolio. Implications for purchasing result from the product life cycle concept in the product development stage which precedes the market stage. In this stage, it will be a function of the purchasing department to actively influence the product's development process. This is vitally important since approx. 80 percent of a product's subsequent costs are determined in the development stage. See design to cost; product life cycle cost accounting.
product life cycle cost accounting
see product life cycle costing.
product life cycle costing
product value analysis
The product value analysis aims at a cost reduction of the products or, respectively, of their component parts with specified functions and properties. The product to be considered will be broken down into its individual component parts and strategically significant elements are separated from strategically irrelevant parts and finally evaluated according to cost criteria. The advantage of a product value analysis is that functions and objects of a product may be holistically presented. Additionally, a higher degree of transparency and information can be realized in the procurement of individual products. The product value analysis is closely related to the cost-benefit analysis.
Profitability is an elementary ratio of performance measurement which provides a relationship between the success of a capital investment and the capital utilized. Thus, the profit of capital used can be calculated for a specific period of time. In corporate practice, the two ratios of total capital return (profit/total capital) and return on equity (profit/equity) are widespread.
Profitability is the ratio between earnings and expenditures. Objective of profitability is to increase this ratio, i.e. to increase earnings or minimize expenditures. In purchasing, for example, the following ratios are used to indicate profitability:
procurement cost per purchase order = ordering costs total / number of purchase orders
optimization by ABC analysis; automation with purchase order system; collective invoice; demand blocking; e-procurement.
ordering costs in % of procurement cost in Euro = ordering costs per period * 100 / procurement cost per period
optimization by a reduction of the number of suppliers, standardization of materials, fewer variants.
Profit centers are organizational units which an enterprise will establish for internal control. Each of these autonomous units aims at maximizing profits. The objective is to establish entrepreneurship in the enterprise and transfer a customer/supplier relationship to internal activities.
program-oriented demand assessment
Demand is assessed by a product's breakdown of the bill of materials. Prerequisite is a foreseeable demand or a firm customer order.
Program-oriented scheduling operates with an orientation toward the future; i.e. the future demand is determined in precise quantities from the advised production program with the aid of bills of materials or formulations, respectively. Inventory control is also future-oriented such that calculated warehouse issues are subtracted from the currently available inventory. It is thus possible to see when exactly warehouse additions are necessary in the future. Analogously, the ordering quantity is always newly optimized on the basis of the current demand situation. Program-oriented procurement will be used not only in stock procurement but also in stockless procurement. Counterpart of program-oriented scheduling is the consumption-oriented scheduling.
Prokura (German) – power of procuration
The German term 'Prokura' is a power of attorney or power of procuration which the owner of an enterprise or his/her legal representative may vest either in an individual person or in a group of persons jointly. This type of power or authority must be entered into the Commercial Register since it authorizes a person for all transactions which a trading company entails. The rights of the holder of Prokura cannot be limited in the external presentation; thus, the holder of Prokura may carry out legal transactions even if that is not in accordance with the owner's intent. The holder of Prokura must disclose his or her power upon signature; this is generally done by adding 'pp' (per procurationem) to the signature.
For public procurement, there is no private ordering party like a company involved in the purchasing process but instead, rather a public institution. Exceptions are private institutions acting on behalf of public organs.
According to the BGB, a purchase contract is a contract under the law of obligations which obligates the seller to surrender and transfer ownership of the agreed-upon subject matter to the buyer. The buyer, in turn, agrees to pay the stipulated purchase price and accept the purchased subject matter. A purchase contract does not require the written form and is not subject to any requirement of form. However, it is advisable to lay down the contract in writing to avoid any misunderstandings.
It includes the development and implementation of customer-specific and product group-specific financing concepts. They protect against currency risks and loss of receivables outstanding. With the utilization of various models, purchasing contributes to the company's increase in liquidity. In operative terms, discounts can be adjusted, for example; payment terms extended, supplier loans refinanced or the supply ensured through credit assessment analyses. In strategic ways, it also means the development of hedging concepts for purchasing, reverse factoring to support global sourcing activities, or the development of financing concepts for the optimization of ordering quantities.
purchase order processing
Purchase order processing comprises the elements of requisition, purchase order, registered goods receipt and subsequent receipt of invoice. Today, purchase order processing is mostly effected electronically and on a standardized basis to optimize the flow of financial resources and goods, i.e. generally the corporate flow of values.
purchase order structure
see structural ratio.
purchase to pay
(procure to pay)
All those activities are allocated to the purchase to pay process which are provided between purchasing and the payment of a product or a service.
The purchase volume can either be calculated at the price of a selected currency or the product's specific unit of measurement. The purchase volume in terms of price can be determined as follows:
cost price x ordering quantity
The ordering quantity presents the purchase volume in the corresponding unit of measurement.
Example: One ton of raw steel costs EUR 600. An enterprise from Germany has a demand of 1,000 tons of this raw steel. The purchase volume in terms of quantities is thus 1,000 tons; in terms of price, it is EUR 600,000.
purchasing balanced scorecard
Application of the balanced scorecard for a company' purchasing area. A sub-scorecard is developed whose purpose is the visualization of purchasing-relevant ratios. The purchasing ratios are allocated to the four perspectives of the company's balanced scorecard (financial perspective, customer's perspective, internal business perspective, as well as learning and development perspective). The purchasing balanced scorecard is thus used as the sub-scorecard of the balanced scorecard for the purpose of operationalizing corporate objectives through the definition of purchase targets. This can ensure a direct connection of effects between purchase targets and corporate objectives; and the purchasing department's contribution to the corporate results will be transparent and measurable. Additionally, the activities of purchasing are stringently oriented to the corporate vision.
The purchasing card is an instrument for controlled, decentralized procurement. An authorized employee is provided with a purchasing card enabling that person – by using the card data – to trigger a purchase order through the e-procurement solution of a supplier. The goods are delivered following the authorization of the card holder with an intermediary purchasing card organization. Payment is made within a few days; in contrast, the invoice recipient receives a monthly invoice and pays once the sum total of all individual invoices. The purchasing card thus guarantees that there will be a divergence between the points in time of purchase and payment and contributes to the optimization of accounts payable management as well as of the working capital.
purchasing cockpit (dashboard)
Within an EDP environment, the purchasing cockpit clearly presents all purchasing-relevant ratios. Calculations run in the background. Ratios are e.g. supplier sales and open purchase orders.
The purchasing organization regulates the structure and responsibilities in a purchasing department. It is differentiated between the organizational forms of central purchasing, decentralized purchasing and lead buying. With regard to central purchasing, there is only one office in the enterprise or group of companies to handle purchasing duties. Volume rebates and simplified production planning can be realized thereby. With regard to decentralized purchasing, individual factories and branch establishments buy goods without consultation. Due to the respectively smaller volumes, no size benefits can be realized; however, the buyers' special know-how can be used. Lead buying is the term used when a leading purchase office exists for a specific group of goods or products. It is the objective to improve the market position due to volume and process pooling. Due to these characteristics, lead buying is considered a compromise between central and decentralized procurement.
In recent years, purchasing services (offered by purchasing service providers) have gained in importance and are used by enterprises not only for individual services but also for entire organizational business units. (see business process outsourcing)
The range of potential applications reaches from transport services all the way to procurement market research.
purchasing service provider
see purchasing services.
qualitative requirements of procurement
see delivery conditions.
Quality describes to what extent a product meets the defined or, respectively, expected requirements of the internal or external customer. The term quality not only includes product-inherent properties, such as length or weight, but it can also relate to other performances, such as on-time delivery. To render such quality assessment transparent and measurable, it is recommended to use defined ratios. For further information, see quality ratios.
Quality management as far as procurement and purchasing are concerned includes all activities in the enterprise which contribute to the review and control of the quality of purchased products and services. This term is also closely connected with compliance management which especially reviews the agreement of external products and services with corporate guidelines.
In the areas of procurement, the quality of deliveries received is often defined. To facilitate the qualitative classification of deliveries, it is recommended to use quality ratios. They present a suitable indicator to measure the average satisfaction with the quality of the deliveries received.
Generally, quality ratios are calculated as follows:
QZ = (v + p - f) / (v + p)
p = number of checked deliveries
v = number of deliveries with checking waiver
f = number of deliveries
The ratio always refers to a supplier in a specified period where the limits of the ratio can be determined individually, for example:
QZ > 95 satisfied with supplier's performance
95 > QZ > 80 supplier's performance is still accepted
QZ 80 inferior performance; no longer acceptable
[QZ – quality satisfaction
rate of complaints = number of faulty deliveries objected to * 100 / total number of deliveries logistics costs per unit of sales = total logistics costs * 100 / output volume
From a business management point of view, quick win describes a strategy which has the objective of quickly realizing visible and measurable results. Within the scope of purchasing, the focus is especially on the realization of short-term cost savings. The success of a quick win situation need not be of short duration. Much rather, its striking character will be a starting point for innovations within an enterprise.
Range describes the period of time in which an inventory level would probably be sufficient without additional materials purchasing to cover planned consumption or sales. To determine the range in days, the inventory must be divided by daily warehouse issues.
The term ranking auction is used in connection with Internet auctions. Within the scope of reverse auctions, the degree of transparency for suppliers can be changed. In the ranking auction, the provider can see its offer's rank, as compared with that of the other bidders. In contrast thereto, the supplier is also provided with the price of anonymized co-bidders in the price auction.
rate of capacity utilization
The rate of capacity utilization indicates the ratio of available capacity (for example, of a machine) to the actually utilized capacity. Indicated will thus be the actual rate of utilization of the object under consideration. Unused capacity generates idle capacity cost or opportunity cost, respectively. Within the scope of production, capacity is to be adjusted (investment, disinvestment) in case of a longer-term over- or under-utilization of the available capacity.
rate of utilization
ratio of complaints
see quality ratios.
ratio of invitation to tender / inquiry ratio
shows the ratio of invitations to tender to subgroups materials. Provides information about the efficiency of purchasing and the time resources for strategic functions. Moreover, it is indicative of the up-to-dateness of prices.
Ratios are used for the permanent monitoring of corporate processes and for benchmarking. On the one hand, ratios are thus used for transparency; on the other hand, they disclose needs for actions. In this respect, ratios depict individual factual situations which simplify complex situations of facts and connections with the help of a measuring variable.
In business management, raw materials include those which directly enter into a product as its main component. Also see raw materials, auxiliaries and operating supplies.
raw materials, auxiliaries and operating supplies
see tertiary demand.
real net output ratio
see vertical integration.
Rebate is a price reduction which a supplier provides on the list price. The rebate thus is an instrument which is to stimulate buying. Such rebate is differently motivated as the following forms show: discount rebate, quantity rebate, loyalty rebate, launch customer rebate, etc.
The rebate ratio indicates the relationship of the value of all realized rebates to the value of goods purchased. A high result indicates that the buyer was able to negotiate comprehensive rebates with the supplier.
relative purchasing performance
shows the earnings contribution of purchasing in relation to the purchase volume. If necessary, elaborate determination ex post.
reorder point system
The reorder point system does not statically fix the point in time of ordering; instead, it is oriented on a defined inventory level – the so-called inventory reorder point; when it is reached, a purchase order is to be triggered. The replenishment cycle thus dynamically adjusts to the inventory level. The reorder point system generally works with a fixed ordering quantity. The counterpart to the reorder point system is the fixed reorder cycle system.
(materials requirement planning) Requirement planning takes place before the point in time of ordering materials, and it specifies the necessary requirements for manufacturing in terms of quantity, type and quality for the planning period. Requirements may be either effected by internal manufacture or procurement from an external provider. Moreover, requirement planning includes monitoring inventories and consumption to especially guarantee supply readiness. Demand forecasting is part of the requirement planning and should be as precise as possible to avoid deficits or excessive capital tie-up in inventories.
A resident engineer is a supplier's employee dispatched to the customer to collaborate in the development of a new product for a defined period of time. Especially systems suppliers dispatch their employees as resident engineers to the customer to become integrated early on in the development process. Already during the development of components to be supplied to the customer, the systems supplier will thus be able to benefit from the knowledge gained through joint development activities. Prerequisite is the close and trusting collaboration between supplier and manufacturer.
restraint of competition
Focal point of the restraint of competition is that market participants are limited in their economic freedom of action. This is applicable if e.g. competitive activities are restricted or entirely prohibited – such as price fixing, fixing of volumes and sales, sales territories, advertisement, or participation in competition.
Retooling costs result for the necessary conversion work on a production plant prior to the beginning of a new lot. They thus comprise any evaluated factor used which is required for changing over the production plant to the requirements of the variety to be newly applied. This includes wage costs, costs of materials, tools and energy costs. Retooling costs do not depend on the output volume.
return on investment
The return on investment (ROI) calculates the yield on capital employed. According to Du-Pont, it is defined as:
ROI = profit / total capital
This way, a periodic reference value is established to evaluate the financial result of the capital tied up in the enterprise. No statements regarding the profitability of individual investments are possible through the presentation. From this critical point resulted a further developed form of ROI.
ROI = profit share / capital employed
It is here assumed that returns on investment are known from a preceding analysis and that the investment is paid back within the service life. Since the capital employed can be reduced by means of optimized purchasing, ROI is an important ratio for purchasing.
Reverse auction is an auction mode in which the lowest possible price is to be realized. The participants in the auction will underbid each other. The award goes to the supplier with the lowest price – differentiations are possible. This type of auction is especially interesting from the point of view of procurement since potential suppliers are in direct competition and thus a potentially highly effective price can be realized. Prerequisite for a reverse auction will be, however, that a sufficient number of suppliers is available which meet the required specifications of the product and are not in collusion.
Reverse factoring is characterized by a reversed flow as compared to traditional factoring. In contrast to the classical process, the factor pre-finances incoming invoices for its factoring client as of the date of maturity. The factoring client can thus realize longer payment terms. For small or medium-sized enterprises especially, reverse factoring is a suitable alternative for more flexible payment terms.
Request for information.
The term RFI is used in connection with electronic invitations to tender. It is a request addressed to suppliers to disclose certain information and own details with regard to a request, such as the size or scope of the machinery or indicating the locations.
RFID is the abbreviation for radio frequency identification. RFID is a transponder transmitting bar code information to another unit. No direct contact is necessary since the exchange is transmitted via radio connection. The field of logistics is the major area of application for RFIDs; yet, their potentials go far beyond: RFIDs are definitely suitable for processes in production, distribution as well as disposal. RFID chips in the industry are integrated in pallets, for example. If a truck loaded with such pallets drives through a scanner system, product information will be automatically transmitted to a control center. Advantages are faster data queries and especially time savings since no manual recording is necessary via bar code scanner. Also see connectivity in this respect.
Request for proposal.
The term RFP is used in connection with electronic inquiries and invitations to tender. Via a formal procurement document, suppliers are here requested to submit their proposal for a queried product or service. As opposed to the RFQ (request for quote), the supplier is able to present for the RFP its individual design to meet, in the best possible way, the customer-defined properties of the product or service, as well as the requested quantity. Proposals within the scope of an RFP are generally binding. RFPs can be used at an early point in time of the procurement to support the buyer's decision-making process and to evaluate benefits and risks of the different designs.
Request for quote.
The term RFQ is used in connection with electronic inquiries and invitations to tender. Via a formal procurement document, suppliers are here requested to submit their proposal for a requested product or service. As opposed to the RFP (request for proposal), the requirements in the RFQ are usually precisely specified and binding for the supplier. The specifications to the supplier are generally not negotiable. For example, the composition of the product or service may be precisely defined and delivery dates already fixed.
Request for x.
This term is mostly used in connection with electronic inquiries and invitations to tender. The "x" represents a placeholder. The following terms are frequently used to replace it: I for information (see RFI), P for proposal (see RFP), Q for quote (see RFQ). These technical terms are similar in usage; however, they have different functions in procurement management. To use the terms properly, precise definitions will be necessary.
Risk management includes managing complex partial processes of which each in itself is subject to a specific risk. A function of risk management is to achieve a reasonable combination of measures for risk hedging. The objective includes the maximum possible corporate security. In the final analysis, it is a matter of identifying, classifying and analyzing potential procurement risks systematically and individually for a company. Based on a specifically developed risk management system, concrete action options are to be derived in the future for the optimization of the risk situation.
For tax law reasons and for the protection of creditors, business and business-related documents must be stored safely for a defined period of time according to § 257 BGB and § 147 AO. A safekeeping period of 10 years applies for business records, balance sheets, management reports and all documents necessary for their understanding. A safekeeping period of 6 years is required for other documents, such as business correspondence. Business enterprises may also safely store such documents on a data carrier if generally accepted accounting principles are complied with.
The safety stock or reserve stock comprises the inventory volume which is necessary to ensure minimum delivery of production or of the customer, respectively. Safety stock should never be fallen short of.
This analysis is an instrument for inventory reduction. Inventories are here classified as saleable, unsaleable and totally unsaleable. Saleable stocks range from fewer than three to three months exactly. Partially saleable stocks (excess stocks) are those with a range of more than three and fewer than twelve months. In contrast, totally unsaleable inventories (obsolete stocks) are characterized by a range of more than twelve months. To maintain the prudent business principle and ensure allocation to the proper periods, unsaleable inventories are devalued by the controlling department. Excess stocks may be devalued by a maximum of 50% and obsolete stocks by a maximum of 95%. Devaluation has the objective of smoothing out the effects on the income statement and cushion the scrapping effect.
Scanning is a system for the acquisition of data. (Paper) documents are recorded, and data input and output is provided from data carriers via bar codes.
scarcity of resources
Coal or uranium, oil or gas, foodstuffs or hydropower: All vitally important resources are prone to risks and susceptible to crises – especially with an assumed perpetual economic growth. Thus, the fight for resources is inevitable and has begun already – as shown, for example, by the discussions about building gas pipelines from Russia to the rest of the world.
Initially, suppliers are subjected to an evaluation. Based on the result, the demanding party supplements the pertinent supplier's pricing by qualitative evaluation characteristics. In a scorecard auction, it is not automatically the lowest bidder who wins the auction.
secondary market research
second tier supplier
From the manufacturer's point of view (OEM), a second tier supplier is a preliminary supplier (sub-supplier) which supplies its own systems supplier.
Those markets may be described as sellers' markets in which negotiable goods are available only to a limited extent or in which demand is higher than supply. Within sellers' markets, various forms of manifestation can be differentiated. One form to be mentioned is that of the supply monopoly or, respectively, the supply cartel in case of direct or indirect agreements among providers. In such cases, the provider can specify the criteria and conditions of the offer. This is generally called extreme power position of the provider with free exchange. Approximation examples or moderate provider positions which are more frequently found on the market may include that benefits of size and/or innovation prevail on the supply side. The general, current market situation (state of the economy) is also crucially decisive for the question of whether there is a sellers' market. Especially in cyclical economic highs, it should be taken into account that procurement markets may develop into sellers' markets.
see unfinished products.
Services procurement describes the purchase of services which are required for the workflow in an enterprise. Such services may occur in entirely different areas of the enterprise and in various depths or stages of integration. Not only individual services but also complete business units (for example, bookkeeping or accounting) can be passed on to external providers. Third-party logistics is also an example for the different types of external services in the area of logistics. Further information is also to be found under business process outsourcing.
A shop system is an Internet-based application allowing the procuring enterprise to search electronic product catalogs of different providers and order goods.
Signaling is a concept in which the better set-up contract party transmits to the more poorly set-up contract party a signal or information, respectively. Translated for the area of procurement, it means that these are generally measures by the provider (supplier) which are to reduce the uncertainty by the requesting party (buyer) regarding the quality (properties of the product) of the goods offered.
The core of this strategy comprises the close cooperation of all affected departments in the development of a product as well as in the planning of the production process. The most crucial characteristic of this strategy is that development steps of individual teams are parallelized. The supplier is an integral part of the product development process. In addition to ensuring quality, the supplier's early integration also ensures compliance with the advised budget.
single position auction
The single position auction is used in connection with the Internet auction. In this case, only one item is auctioned from a multitude of products.
single price auction
In an auction, only one price is given for several products. This price can be calculated from the totality of the individual prices. Only the bundle price finally counts as the evaluation guideline.
Single sourcing is a procurement strategy in which an enterprise obtains the procured merchandise groups in each case from only one supplier. Due to this integration, the procurement of complex systems is facilitated. Because intensive collaboration for one product is generally possible only with one supplier. Today, the trend in procurement goes towards single sourcing where, however, the supplier relationship must be continuously scrutinized. Also see double sourcing and sole sourcing.
small and medium-sized enterprises
SMEs is a collective name for enterprises with fewer than 250 employees and annual sales of EUR 50 million maximum or an annual balance sheet total of EUR 43 million maximum. However, an enterprise will no longer be classified as an SME if it meets the above criteria but 25% or more of its capital and voting shares are held by one or more large companies.
A special form of single sourcing. In this case, only one supplier exists on the market who offers the desired products or services.
A sourcing strategy is the basic alignment of procurement activities. Basically, sourcing strategies can be subdivided into the following four categories: process-specific sourcing, supplier-specific sourcing, parts-specific sourcing and regions-specific sourcing. Efficient procurement generally consists of a target-oriented mixture of the different methods.
spare parts procurement
According to DIN 24420, spare parts are "parts, groups or complete products which are intended to replace damaged, worn or missing parts, groups or products.“ Keeping this in mind with the procurement of operational resources, only those suppliers are to be selected which are able to demonstrate a high level of spare parts supply competence. Because that competence will ensure, among others, that the buyer can minimize expensive downtimes in production. Implementing consignment inventories will frequently ensure security of supply in practice.
Spend analysis describes the systematic processing of expenditures with the objective of reducing costs and increasing efficiency. The core question of this analysis is: What was purchased when, by whom, and at which price? On that basis, it is categorized such that expenditures will be allocated to a supplier, to a merchandise group or a causing party.
In business management, standardization means the uniform rendering of products or flows. Eliminating variants can generally save costs. Thus for example, standardizations within a merchandise group can frequently reduce procurement costs since purchasing quantities can be bundled because variants are removed.
As opposed to retooling costs, start-up costs are incurred during the breaking-in phase for a new grade or variety – thus only after the beginning of production. Start-up costs include extra costs incurred during the start-up phase of a grade or variety – as compared to an experienced, well-coordinated production. Reasons for retooling costs are higher numbers of rejects or a longer production period per unit of quantity.
Stockout costs result due to short deliveries and thus depend on the delivery service level. The higher the delivery service level, the lower the stockout costs. Reasons for incurring stockout costs are, inter alia, a delayed purchase order by the purchasing department; bad quality, defective goods or incorrectly delivered goods. At worst, stockouts may cause production downtimes and in consequence result in contractual penalties.
In combination with the supply failure rate and the degree of supply readiness, the stockout ratio is an instrument for the evaluation of suppliers. The stockout ratio permits conclusions to be drawn regarding the extent of stockout costs: both parameters are proportionate to each other.
stockout ratio = number of deliveries with stockout / number of deliveries
Aside from the inventory adjusted to the actual demand, stock procurement also provides for keeping buffer inventories, speculative stock of inventories and safety or emergency stocks. This form of stockpiling accordingly results in high administrative expenditures, as well as in serious inventory and capital commitment cost. However, this type of stockpiling helps to even out price fluctuations on the procurement market, for example, and guard against supply bottlenecks. Moreover, due to the higher purchase volume, quantity discounts can be realized with the supplier. Sometimes, materials requirements cannot be planned precisely for the day or quantity (frequently C-goods) so that stock procurement is unavoidable. Counterpart to stock procurement is individual procurement.
In stock sourcing, products are purchased for the inventory. High inventory levels are to ensure the security of supply. This method is only advisable for non-perishable C-products since capital commitment costs will otherwise be too high.
strategic procurement management
Strategic procurement management comprises the analysis of all factors which are necessary for detecting, realizing and securing buying potentials. Internal as well as external factors are taken into account here. After such an analysis, it is important to effectively and efficiently design the factors identified. Successful strategic procurement management presents a considerable competitive advantage.
strength-weakness analysis (SWOT)
The SWOT analysis (strengths, weaknesses, opportunities, threats) – often called just strength-weakness analysis – relates to company-internal strengths, weaknesses, opportunities or chances, and dangers (also called threats or risks). The SWOT analysis is a qualitative analysis of a company's existing competitiveness and can also relate to individual organizational units, such as purchasing. It is used as a comprehensive strategy for the further orientation and development of business processes; and especially strengths and chances should be used to balance or fight the weaknesses and risks. A PEST(LE) analysis can be provided, for example, for the analysis of external factors.
Major ratios of a defined area are combined under the generic term of structural ratios. In the field of procurement, the following structural ratios exist for example:
framework contract ratio = materials purchasing volume via framework contracts * 100 / total materials purchasing volume
The ratio indicates the extent of long-term commitment and security of supply. The framework contract ratio may be increased by integrated purchasing (optimum: 80-90%).
purchase order structure = value of purchase order up to €50 * 100 / total value of purchase orders
Purchase orders of a small order value result in disproportionately high ordering costs which must be added to the sales price. A low purchase order structure is to be aimed at. A value of 16.7% means that the ordering costs per purchase order are very high. Remedy may be provided by combining purchase orders, by demand blocking, or by applying materials group management.
Bill of materials: It is a list of raw materials, parts, and components or assemblies which go into a product. Accordingly, it provides information about the quality and quantity structure of a product. It belongs to the most vital data structures in an enterprise and is used as a basis for demand assessment.
(second tier supplier)
Sub-suppliers are suppliers which only indirectly deliver to the manufacturer. Sub-suppliers are direct suppliers of their own (systems) suppliers. The manufacturer has little influence on the sub-supplier.
A substitute product is one which, relative to another product, satisfies similar or even identical demands. For example, margarine is a substitute for butter. From a macroeconomic point of view, the demand for the substitute product increases when the price of the other product increases. Purchasing must identify potential substitute goods of the products to be procured to thus be able to profit from potential differences in prices. However, the required quality of the end product must not suffer thereby.
successive delivery contract
A successive delivery contract provides for a multiple delivery on the basis of one individual contract. With such delivery in installments, a contract will first specify the quantity to be delivered. It is furthermore agreed that the supplier must deliver specific partial quantities – so-called delivery lots (see lot size) – at different times. The supplier will be notified short-term of these times. Such procedure is used in particular for the production-synchronous delivery within the scope of just-in-time or just-in-sequence, e.g. in the automotive industry.
see claim management.
A supplier audit may be carried out as a process audit or as a systems audit. Within the scope of the process audit, the customer's employees will analyze and examine the supplier's processes to ensure that they meet all prerequisites to manufacture and deliver the goods to be procured in the required quality. The systems audit exceeds the process audit and additionally examines the reasonableness of all the supplier's measures; thus, in addition to an audit of the processes, it will also provide a process evaluation. The design and execution of a supplier audit substantially depends on the type and intensity of the customer/supplier relationship, the partners' trust relation, as well as on the procurement object. A supplier audit is especially carried out at suppliers of production materials. Aside from that, however, auditing is also important in the case of suppliers with whom long-term relations are aimed at. The supplier audit should always create a win-win situation for customer and supplier.
Supplier classification is a subsequent step of supplier evaluation and used to classify suppliers into performance classes on the basis of the supplier evaluation, the strategic importance of the supplier, as well as the procurement volume. A classification of suppliers can here be made by ABC analysis. Identifying the strategic importance of individual suppliers serves the development of cooperations and strategic partnerships along the supply chain.
A supplier database lists all potential suppliers of a specific merchandise group in a database. In addition to listing the contact partner, it is recommended to also show the corresponding supplier evaluation. Mentioning the specialization of the supplier facilitates a targeted search for the required service. Supplier databases are always component parts of the data warehouse.
As part of the supplier management, supplier development is used for coming to a decision about the type and intensity of the customer's relationship with a supplier in the future. Based on the results which the customer ascertained within the scope of supplier evaluation and supplier classification, specified goals or objectives as well as measures will be defined which are used for improving the performance potential and the collaboration, especially with strategic suppliers. Starting point of the decision for the development of a supplier may be operative problems, such as delays in delivery and the lack of quality of the goods supplied. Moreover, strategic decisions play a part. The collaboration with system suppliers should be mentioned in this context which may include joint development projects, as well as resident engineering.
The supplier evaluation is used for a qualitative and quantitative assessment of a supplier's performance on the basis of defined criteria. Aside from the price of a product, such criteria include, for example, delivery conditions, delivery service level, quality of goods supplied, credit standing, as well as the willingness to cooperate. Additionally, the supplier's environment will also be evaluated. This includes a differentiated analysis of the social, political and economic environment. That is particularly important for suppliers outside of Europe and/or the European Union, like the BRIC states. Supplier evaluation may be carried out by means of various methods, such as the scoring or grading system, the cost/benefit analysis, or the analysis of strengths and weaknesses.
Supplier integration means the intensity of collaboration and the exchange of information between a supplier and a customer. A high degree of supplier integration generally brings about cost reductions – due to higher transparency, for example. However, any intensive supplier integration will also go hand in hand with high supplier dependency since the costs of changing to another supplier will increase. Instruments of supplier integration are, inter alia, collaborative engineering, vendor managed inventory, consignment stock.
supplier lifetime value
The supplier lifetime value is a procedure by means of which the development of a supplier relationship is evaluated over a certain period of time. The supplier relationship is here regarded as an investment project in which investments must first be made before any future surplus value comes about. The calculation is as follows:
T designates the entire time period in consideration;
t stands for the respective analysis period. e stands for cost reductions/competitive advantages due to the supplier relationship a stands for supplier-related payments out (costs of materials or transactions) i stands for the discounting rate. However, it is a disadvantage that future payments in and out are rather difficult to forecast and that it is rather difficult to quantify competitive advantages.
If a purchasing company is granted the opportunity to pay the goods received some days after receipt only, it is granted a supplier loan by the supplier. The characteristic of the supplier loan for the purchasing company is that of a loan for bridging the period of time between procurement and the sale of the goods. Thus, for the delivering enterprise a supplier loan presents a receivable for supplies and services, and for the purchasing company, it presents a payable for supplies and services. Since suppliers want to make the time frame of such a loan as small as possible, they regularly offer incentives for the prompt payment of goods received. This incentive is called discount.
supplier managed inventory
The supplier management is used for actively fashioning, controlling and developing the collaboration with a supplier. It is important to ensure the operative objectives of purchasing at any time, i.e. obtaining the correct product, of the correct quantity and the required quality, for the right time at the right place and at the best possible price. Aside from these operative objectives, strategic objectives are also important. These include ensuring the company's competitiveness, promoting the power of innovation, avoiding dependencies on suppliers, evaluating the ability of cooperation by suppliers, as well as developing strategies for the collaboration with suppliers. To ensure these operative and strategic objectives, it is necessary to analyze procurement markets, establish criteria for supplier selection, as well as to determine and optimize the intensity of collaboration with suppliers. In this respect, supplier management comprises the following process steps:
1. supplier selection
2. supplier qualification
3. supplier evaluation
4. supplier classification
5. supplier development
supplier management (system)
Objective of the supplier management as a system is the sustained reduction of procurement costs. Existing supplier structures are systematically organized and order values as well as quantities analyzed. That provides transparency. In close collaboration with the customers' staff responsible for purchasing and together with consumers, product specifications are jointly established, invitations to tender prepared and negotiations conducted. Operative functions and objectives in this context may be the optimization of conditions, capital goods procurement, buyers' cooperatives, professional negotiations management, as well as benchmark analyses. Strategic challenges are, for example, make or buy decisions, organization / intensification of strategic partnerships with suppliers, moderation of development processes or the integration of suppliers.
Supplier-related sourcing strategies differentiate between single, dual and multiple sourcing methods. In the final analysis, the question is exclusively discussed from how many suppliers a product is procured.
supplier relationship manager
The supplier relationship manager (SRM) relies on close cooperation in his international supplier network. But this is not limited only to the optimization of the parameters of quality, delivery service level, etc. The SRM is much rather also permanently searching for alternative suppliers and will turn existing suppliers into development partners. He also shows them any potentials for efficiency increases and also includes them, for example, in the company-own product development (see resident engineering). Due to the strategic approach, it is no longer only a matter of negotiating prices – instead, the suppliers' production facilities are also inspected. Prices will be negotiated on the basis of this analysis. Also see collaborative engineering, supplier audit.
The supplier's compliance is based on a defined scope of specific standards, values and criteria of the buyer. The supplier may not deviate with regard to these concepts. Compliance includes, for example: behavioral standards in handling suppliers, contracts, audits, but also the labor situation in the producing country (no child labor, for example).
A supplier selection is used for the identification and preliminary selection of potential suppliers. Suppliers are selected based on predefined criteria. These criteria depend on the product to be procured, on the procurement market, the terms of delivery, the price of a product, as well as the purchasing strategy of the procuring enterprise. The supplier selection is supported by a supplier's questionnaire.
The supplier's qualification is used for reviewing the supplier's questionnaire provided within the scope of supplier selection and a more in-depth active review or audit of the potential supplier. Aside from the supplier's questionnaire, this includes, for example, a credit standing review, the existence of ISO certifications, as well as compliance with social and ethical standards. The supplier's qualification mostly takes the form of auditing the supplier.
supplier's quality management
Quality ratios play an important part in the supplier's quality management. They allow an objective comparison of the quality of products and services used by the enterprise. These conditions are also often combined in compliance with corporate guidelines / standards (see compliance management). The evaluation by means of ratios – also called supplier audit – then enters the supplier evaluation and provides an objective and consistent supplier's quality management.
In a supplier's questionnaire, the buyer will request the supplier to disclose company information. The buyer generally enters such information into its vendor master data. In addition to stating the contact data of the corresponding contact partner, a standardized questionnaire also includes the indication of various ratios or reference customers. Such a supplier questionnaire provides an excellent basis for the buyer to essentially classify and evaluate any so far unknown supplier.
The supplier structure is used for the analysis of regular suppliers and generally designates the number of suppliers by which an enterprise is supplied. Furthermore, the supplier structure provides information about the concentration of suppliers for a group of procurement objects or individual procurement objects.
supplier target specifications
see supply readiness.
supply chain management
The term supply chain management is understood to mean a supply chain or a cross-company supply chain. Since every enterprise is working together with other enterprises, the supply chain presents itself, in practice, as a network of interconnected enterprises ranging from product manufacture to the distribution to end customers. Despite the term's proximity to the corporate function of procurement, the term supply chain is not limited only to the interaction with suppliers but also includes coordinating functions with customers.
Supply management stands for the complex function of providing optimum quantities at the optimum point in time. In this respect, supply management also includes inventory management – in addition to procurement logistics, production and/or company-internal logistics, and distribution logistics. Operative functions of supply management are, inter alia, an analysis of the degree of supplier integration, the transparent presentation of the process chain and the stock points included therein, or the collection of inventory data and the realization of short-term reduction potentials. By means of these instruments, the following benefits can be realized: introduction of interdisciplinary inventory management, utilization of modern supply chains, optimization of procurement logistics in combination with distribution logistics, synchronization of planning and complexity management.
Supply readiness is a term from logistics and designates the supplier's ability to deliver ex warehouse. The level of supply readiness is used to measure supply readiness.
supply readiness level
The situation of the supply side concerning the procurement market depends on the prevailing competitive situation. To determine the competitive situation, the following parameters are to be analyzed: Market shares, market access restrictions, restraints of competition, degree of product differentiation and substitute goods potential. These are explained in detail in the five forces model by Porter.
In the procurement area, sustainability means that ethics guidelines provide an overriding framework for all procurement processes. They define responsible actions at the interface to suppliers and determine how economical activities can be reconciled with moral principles. The triangle of price, quality and service provides a central evaluation factor for suppliers all around the dimension of sustainability. Thus, in the future, ethical conduct and compliance with environmental standards will gain importance in connection with supplier selections. Moreover, purchasing departments have to scrutinize the entire supply chain under sustainability aspects. Buyers must accordingly accept new functions as environmental managers and continuously increase sustainability standards in their companies on the basis of environmental ratios.
There will be synergy if the value of a whole has a higher value than the sum total of its parts. In colloquial terms, there will be synergy when 1+1 proverbially equals 3. Such effect comes about because the individual component parts will be amplified in combination. Synergies may be realized in terms of resources, instruments or tools, labor assignment, etc.
The supplier delivers pre-assembled or factory-assembled modules. This concept helps the procuring company to lower the number of suppliers. In turn, however, enterprises are highly dependent upon their system suppliers since they are integrated already very early in the development process of a new product (see collaborative engineering). Moreover, vertical integration in the company will be reduced. This procurement concept is especially applied in the automotive industry. For example, a manufacturer of safety bumpers does not only supply the safety bumpers for a motor vehicle. As a systems supplier, it also takes over the assembly of headlights and parking sensors which it buys from its suppliers in turn.
As an integral part of the design-to-cost method, the concept of target costing comprises the holistic cost management for planning, controlling and monitoring all cost structures. However, this tool is primarily used to influence the product costs in an early stage of development. Starting point is the question as to which price the customer will pay for the product or the service, respectively. A profit margin can then be deducted from this target price to thus calculate the allowable costs. These maximum production costs can then be broken down to the different functions, components and parts of the analyzed end product. The purchasing department is thus provided with an orientation at which prices it must procure the different materials.
price aimed at
term of payment
The term of payment marks a point in time at which an outstanding liability is to be paid. The supplier often grants the customer such a term of payment and thus provides a supplier loan. However, to keep the period of this loan as low as possible, the supplier generally offers the customer to take the discount option. The term of payment is an integral part of qualitative requirements and referred to in the invoice.
terms of delivery
Terms of delivery are agreements reached between buyer and seller upon conclusion of a purchase contract. In this respect, details of contract handling are stipulated and laid down in writing. This includes the type, point in time and price of the delivery, freight and insurance (see Incoterms), as well as the place of performance. Terms of deliveries can be agreed upon for the individual case; they may be subject to statutory regulations and may be included in the General Terms and Conditions of Business (AGB) or the General Terms and Conditions of Purchasing (AEB).
A test purchase deals with a company's purchase of a sample. If the buyer is satisfied with the product, he will order a larger quantity. He can assume that the ordered goods will have identical properties as the sample because they are considered warranted. If the purchased product does not have these properties, the buyer may lodge a notice of defect.
third party buying
The buyer does not procure directly but uses an independent sales broker (agent).
third party logistics provider
The term third party logistics provider (3PL) means external logistics providers whose core competence includes taking over the transport, transshipment and storage of goods and merchandise for the customer. In parts, entire functional areas are assigned – aside from the actual goods traffic, such as financial and information services – to this third party between the supplier and the customer. Such outsourcing requires a strategic partnership between the ordering party and the logistics provider.
three methods model (Kerkhoff Consulting)
Model for transparent ascertainment and presentation of potentials for the conclusion of a potential analysis, taking the three models into account:
1. Organizational model: supplier management, procurement organization, procurement controlling and global Sourcing
2. Procurement market model: Weighting the changeability of a merchandise group on the basis of the supply risks and the provider's power of supply
3. Empirical value model (benchmark model): Selection of the merchandise group, selection of relevant projects from company database and weighting of the potential
Depending on the weighting of the overall model, the potentials ascertained in the different models enter into the end potential.
total cost of ownership
(product life cycle costing )
This strategic procurement management tool provides for comprehensive understanding and corresponding transparency of all costs, going hand in hand with the procurement of products and services. Aside from direct costs, all indirect costs are also included which are connected with the product's procurement, maintenance, repair, etc. Furthermore, this approach tries to calculate and control all costs via the product life cycle of a product.
total quality management
Total quality management (TQM) pursues the objective of comprehensive and holistic quality assurance (see quality management) of processes, products and services by continuous adjustment and improvement in the entire enterprise. In this respect, all employees are to meet the customers' requirements, and high quality of products and services is to be ensured.
track & trace
Tracking shipments via the Internet in transport logistics.
For any factual situation, the traffic-light method defines three intervention points each connected with the colors green, yellow and red. Green presents an uncritical zone and red a critical zone. Yellow indicates the transition from one to the other zone. This controlling instrument permits a quick overview of a factual situation. Thus, decision-makers can identify a problem area within a very short time. Such a traffic-light method is used in practice e.g. for monitoring inventories or the inventory range.
Transaction costs are all costs in connection with the conclusion of a business transaction. That means in detail that costs are to be recorded here which are caused in the transmission of goods from one economic subject to the other.
transformational management style
The key element of the transformational management style comprises the creation of a binding level of objectives accepted equally by all top performers involved. This level of objectives includes the communication of values, visions and missions. Relevant are business standards, such as clear efficiency and quality orientation or a performance or service culture. This is of special importance for the modern management understanding still in a maturing process for the procurement management of the future. The head of purchasing must interact efficiently with globally acting teams made up of members of very different origins. As a value manager, the head of purchasing can only ensure the efficiency of his or her procurement team by communicating binding business standards and effectively control performance processes. The challenges connected with global procurement teams will push the head of purchasing into a position of having to trust the teams' flexible own control. Communication and interaction of buyer teams in the future might have their own dynamics and their control by the managing person will be more and more reduced: Before this backdrop, the business process presents a coordinated interaction in which the manager, as a motor of the process, will selectively provide impulses and impetus.
Transponders are a radio system for data recording. They comprise microprocessors with electronic memories and transmitters. This communications device can therefore record comprehensive information, as well as answer automatically. For that reason, it is of greater benefit than conventional bar code systems (see bar code) since here only manual data can be read out via a scanner. Information is transmitted via radio signals, and RFID chips are used. See connectivity.
Transport costs are incurred when conveying goods. The amount will depend on a few factors, such as the given infrastructure, the length of the transport routes and the transport offered.
typology of suppliers
According to the prevailing technology claim and the complexity of parts, a typology of suppliers can be provided in a matrix.
Products are called unfinished when they are not ready for sale and so far only passed through one part of the added value and thus incurred costs.
Unit sourcing is the purchase of one-piece procurement objects, such as raw materials or individual parts. They will be further processed by the procuring company and go into an end product.
Value analysis is a systematic procedure which detects the costs of a product or process which do not benefit either the product's quality, use, lifetime, image, or its selling power. The value analysis thus aims at reducing the costs of a product and/or its component parts, nonetheless maintaining the specified functions and properties. Additionally, the value analysis can ascertain product variations which increase the value.
The value chain concept had been developed by the American economist Michael E. Porter which presents company-internal processes as a series of activities. Primary and secondary activities are differentiated. Primary activities provide a direct, value-adding contribution to the creation of a product or service. In contrast, secondary activities have a supporting function and provide the necessary prerequisites for rendering performance. The margin results as the difference from the price which can be obtained by the product on the market, as well as the costs connected with product production along the value chain. A company which is able to complete the value-adding activities more economically than its competitors realizes competitive advantages versus these competitors. The value chain of an individual enterprise is connected with the value chains of suppliers as well as those of the buyers, thus resulting in the value chain for an industrial sector.
see vendor pyramid.
vendor managed inventory
(supplier managed inventory)
Vendor managed inventory supports the continuous replenishment of goods and is characterized as manufacturer-driven inventory management. Suppliers are here assigned control of individual articles; and for individual part numbers, they are provided even complete inventory sovereignty. Inventory optimizations can thus be realized. Prerequisite for it will be that IT systems between vendor and customer will be linked such that the customer's demand figures can be transferred to the manufacturer.
see vendor pyramid.
(vendor network or vendor chain)
Vendor pyramid is the term used for the supply chain between the suppliers all the way to the producer of the end product. The vendor pyramid thus presents all upstream suppliers up to the producer of the end product. It is differentiated between the different tier suppliers. First tier suppliers are those suppliers which process a raw material and sell a finished product directly to the producer. A second tier supplier is a preliminary supplier of the first tier supplier.
(real net output ratio) A company's vertical integration measures the percentage of the services provided in the production of goods by an enterprise in a supply chain. Integration here means the vertical extension within the supply chain, i.e. in the direction of upstream and downstream added value stages. Added value refers to the manufacture of goods through the use of production factors. If an enterprise incorporates all added value stages from raw material extraction or mining all the way to the finished product, the maximum possible vertical integration will exist in this enterprise. Added value stages along the supply chain also include such activities as research and development, transport, customer support and service or quality inspection. A company's vertical integration can be reduced by vertical outsourcing. In this context will be especially important any make or buy decisions as well as strategic decisions in terms of concentrating on a company's core competences.
Vertical integration = material input / (sales +/- inventory changes + own contributions) * 100
Warehousing costs can be differentiated according to volume-independent (fixed) and volume-dependent (variable) costs. Volume-independent costs include warehouse space and equipment costs; for example, rent or personnel costs. Variable costs essentially consist of capital commitment costs.
Aside from damage compensation, liability for damages is possible, even in the form of a warranty. This is not defined by law, however. A warranty case arises if the supplier vouches for a specific characteristic of a product supplied which the supplier had specified in a signed declaration of warranty. In case of such extension of statutory damage claims, the supplier agrees to vouch for these specific characteristics without proof of any fault.
waste management industry
Sometimes, there are products in industrial enterprises which are not needed either by their own production department or by other enterprises. Such products are generally designated as wastes. Planning, implementation and control of waste disposal are essential components of the waste management industry. Due to the depletion of resources and society's ecological demands, the waste management industry has an ever increasing influence on the profitability of an enterprise.
Active digital supplier search and/or procurement market research is possible by means of a Web catalog. While digital search engines enable the search for key words and text fragments, Web catalogs are usually limited to a specific subject area. The advantage of electronic supplier search and product selection by means of a Web catalog is the significantly reduced expenditure in time and cost and the resulting lower transaction costs thanks to a clear presentation and evaluation of search results.
WebEDI describes the electronic data exchange via Internet or Extranet. A 1:1 connection of conventional EDI-interfaces is resolved by an n:m relation. Especially for smaller enterprises, WebEDI allows a low-cost connection to EDI-interfaces of business partners. By means of XML (extensible markup language), documents can be displayed directly in the user's Internet browser.
(net current assets)
The working capital is current assets minus all non-interest-bearing liabilities. Main components of the working capital are outstanding accounts, stocks, and liabilities. Working capital is that part of current assets which must be financed by interest-bearing capital.
working capital management
Working capital management deals with the optimization of the working capital and has the objective of optimizing the balance sheet items of stocks, outstanding accounts, and accounts payable for supplies and services. This is to be realized by keeping the period of time between payment made and payment receipt as low as possible, minimizing the throughput time of the capital tied up in current assets. By reducing the working capital, liquid funds are to be released which result in an increase in the company value.
XML (extensible markup language)
The extensible markup language (XML) is a descriptive language. Structure, display information and layout are separated in the document so that contents in the XML-document can be read out. XML is platform-independent. The descriptive language features simplicity, integration of different data formats, machine readability and low infrastructure costs.
The XYZ analysis pursues the objective of classifying products according to the incidence of their consumption. X-goods are constantly consumed; fluctuations in consumption are rare; the forecasting precision is high. With Y-goods, consumption is subject to higher fluctuation – frequently for reasons of trends or seasons. Its forecasting precision is accordingly average. Z-goods are entirely irregularly consumed. Any precise forecast is thus hardly possible. XYZ and ABC analyses are frequently combined.
zero base budgeting
Zero base budgeting (ZBB) is a method which overcomes the drawbacks of traditional budgeting and is to result in an efficiency increase and cost reduction in the determination of the budget. ZBB's main focus is on mandatory demand assessment. That means, a target-specific review is made in the preparation of budgets in terms of underlying projects and functions. In particular, streamlining or cost-cutting potentials are to be developed in the overhead area. ZBB provides an instrument by means of which the budgeting process extends all the way into the smallest overhead area. As opposed to conventional and traditional budgeting, the amount of the prior year budget is not decision-relevant with ZBB. Much rather, the user is occasioned to come to grips with the company's objective and organization and to newly plan the flow with an orientation towards the future.
German fiscal code
adjusted present value
Boston Consulting Group
German Civil Code [Bürgerliches Gesetzbuch]
cost and freight (Incoterms)
cost, insurance and freight (Incoterms)
carriage and insurance paid to (Incoterms)
carriage paid to (Incoterms)
delivered at frontier (Incoterms)
delivered duty paid (Incoterms)
delivered duty unpaid (Incoterms)
delivered ex ship (Incoterms)
German Institute for Standardization [abbr. of Deutsches Institut für Normung]
electronic data processing
ex works (Incoterms)
free along shipside (Incoterms)
free carrier (Incoterms)
free on board (Incoterms)
by order of
per procuration (commercial power of attorney)
SME (small and medium-sized enterprise);
SMB (small and medium-sized business)
nano-bio-info-cogno – nanotechnology, biotechnology, information technology, cognitive science
net operating profit after taxes
personal digital assistant
production planning system
structured query language
strength, weaknesses, opportunities, threats
weighted average cost of capital