RFx, PMP, OTIF, OTD, CAPEX, DDP, FOB… calm down! Before you feel lost, Cafe Procurement Hub is here to help you.
See below for a small dictionary with the main acronyms and technical terms used in the Purchasing area.
B2B - Means “Business to Business.” This term is used by some companies to designate that they do not provide services or sell products to individuals, only to other companies.
B2C - Means “Business to Customer.” Used to indicate companies that sell directly to the end customer. For example, a supermarket may be B2B at times, but it is a B2C business most of the time.
Benchmarking - Means a "Comparative assessment". This is the process in which products, services or corporate practices are compared.
Bid - Used to indicate a purchasing process that will require quotes from more than one supplier.
BPO - Acronym for “Business Process Outsourcing.” For example, some companies have outsourced payroll management as a BPO.
Breakdown - Usually used in relation to cost. The cost breakdown is the opening up of the company’s records of expenses and processes. This is used when we ask the supplier to send the cost of each process — including its profit margin, so that we can analyze of all operations and costs involved in the total cost.
Budget - Result of the company's planning process in relation to future expenses.
CAPEX - Abbreviation for “Capital Expenditure.” A term normally used to designate large expenses, such as purchasing a new machine for production purposes or buying a property for a new office or factory.
CIF * - Acronym for “Cost, Insurance, Freight.” An Incoterm that defines that the supplier is responsible for the cost, insurance and transportation of the goods until they are delivered to the negotiated point.
CLM - Acronym for “Contract Lifecycle Management.” Used to designate the contract management process used with suppliers.
Cost Avoidance - One of the main purchasing indicators. Avoided cost is the result of a buyer's negotiation that avoids a cost increase that had been foreseen in the contract or budget.
CPT * - Acronym for "Carriage paid to.” Another type of Incoterm used for when the supplier is responsible for the transportation and hiring costs until the delivery of the goods in the location requested by the customer. There is no insurance included in this modality, and the buyer should bear the cost of insurance if necessary.
CRM - Acronym for "Customer Relationship Management." This is similar to SRM; however, it is used to regulate customer relations.
ABC curve - Also known as Pareto's Law or 80/20. It is the tool used to determine which items deserve more attention from the buyer. Usually, the cost and impact of the items are listed and classified as “A,” “B,” or “C.” In regard to the 80/20 law, it is generally the simplest classification possible — 20% of the items purchased are responsible for 80% of the company's results. There are dozens of other strategic classifications but understanding the 80/20 law or ABC curve will give you a good direction for your focus.
DDP * - Acronym for “Delivery, Duty, Paid.” An Incoterm used in international purchases and a more complex delivery method for the supplier. In this case, the supplier is responsible for contracting, loading, insurance, costs, import, clearance and delivery to the point negotiated with the customer.
Direct - A term normally used to designate materials that reach the consumer. In the case of an industry, the raw material and product packaging are part of the direct materials.
EOQ - Acronym for “Economic Order Quantity,” or economic order of purchase. A term used to designate the quantity of material in which fixed costs are more advantageous for a unit cost.
ERP - Acronym for “Enterprise Resources Planning,” or the planning of company resources. Used to designate the system that integrates all the company’s activities, including production, HR, Sales and Purchasing.
EXW * - Means “Ex-Works.” A type of Incoterm that is simpler for the supplier, who usually transfers the goods to the customer in his own factory. The customer is responsible for loading, cost, insuring and transporting the supplier's product to the agreed upon location.
e-Procurement - A purchasing system that involves the internet.
FCA * - Means “Free Carrier.” An Incoterm where the supplier is responsible for freight (usually to the port) and export clearance.
FIFO - Acronym for “First in first out.” Widely used in Logistics to designate the stock turnover process.
FOB * - Acronym for “Free on Board.” In addition to being responsible for freight to port and export clearance, the supplier makes sure that the goods have been correctly loaded on the ship and are on board to be transported.
ICC - Acronym for “International Commerce Chamber.” This is the organization that regulates and publishes Incoterms.
Incoterms - A shortened version of “International Commercial Terms”. These are the types of freight negotiated with the supplier.
Indirect - All materials that are not received by the consumer, but whose cost impacts the cost of the final product. In an industry the cost of building maintenance and electricity are indirect costs. You can also designate indirect “materials,” such as training, marketing, advertising, etc.
JIT - Acronym for “Just in Time”. A methodology that preaches production to meet demand, thus avoiding stock production.
Kanban - Visual methodology created to support Toyota's production system, which uses the concept of cards to signal production or stock flows. Production and stock usually use the Kanban methodology; however, other areas can also use it.
Kaizen - Concept of continuous improvement through reducing waste, improving quality, and improving efficiency while reducing downtime and unnecessary activities, among others processes.
KPI - Acronym for “Key Performance Indicator.” These are indicators used both to measure the performance of the purchasing area and the suppliers.
LT - Meaning “Lead Time,” or “service time.” Normally used to designate the time that the supplier takes to know the need (purchase order for example) until the delivery of what was requested.
LTA - Acronym for “Long Term Agreement.” A term generally used in reference to the contract signed with the supplier.
MOQ - Acronym for “Minimum Order Quantity,” or “minimum purchase.” This is the minimum lot that the supplier is willing to sell.
MRO - Acronym for "Maintenance, Repair and Operations." Used to designate all items purchased to meet maintenance, repair and operations needs. For example: uniforms, PPE, replacement parts, etc.
MRP - Acronym for “Material Resources Planning.” This is the methodology for planning the materials needed for the company's production.
OTD - Acronym for “On Time Delivery.” This is an indicator of supplier efficiency. Used to calculate how many of the supplier's deliveries were made “on time.” That is, according to what was requested and scheduled.
OTIF - Acronym for "On Time In Full,” or “delivery on time and complete.” Similar to OTD, it is an indicator used to calculate how many supplier deliveries were made on time and completed.
Outsourcing - Indicates activities that can or were done internally and are now done by third parties. Examples: Cleaning services or the production of a piece that demands a very high level of quality but with little added value.
PMP - Acrynom for “Average Payment Term.” This is the average time (usually in days) between purchase and payment. An extremely important indicator for controlling the company’s cash flow.
PO - Acronym for “Purchase Order.”
PPE - Acronym for "Personal Protective Equipment.” Equipment such as helmets, goggles, hearing protectors, safety boots, aprons, uniforms, among others.
Procurement - An expression normally used to designate the entire purchasing process. It encompasses everything from prospecting suppliers and developing strategies, to the operational act of purchasing.
Purchasing - Although there is no consensus and different authors use their own expressions, Purchasing is normally used to designate the most operational purchasing activity, that is, the issuing of the purchase order.
PR - Acronym for “Purchase Requisition,”, the document with the internal request that initiates the purchasing process.
RFx - “Request For x” where “x” can be replaced by “P,” (Request for Proposal), “Q,” (Request for Quotation) or “I,” (Request for Information). These are communication documents with the supplier, and the use of each one depends on which stage of the process you are in.
Saving - Perhaps the main performance indicator in the purchasing area: This is any amount (monetary or not) that was spent and started to be saved due to an initiative in the purchasing area — switching suppliers, substitute material, and better negotiation, among others.
SLA - Acronym for “Service Level Agreement.” Normally used when hiring a service. The SLA defines which parameters should be used by the supplier to perform the service (example: how long will the service be performed, what is the order of execution, what will be the deliveries, etc.).
Sourcing - Meaning “Supply.” Just like the expression “Purchasing,” although there is no consensus and authors may use different expressions, Sourcing is normally used to designate the most strategic purchasing activity, that is, prospecting for suppliers, negotiations and contract development.
SRM - Acronym for “Supplier Relationship Management.” It is a methodology used by companies to regulate relations with suppliers.
Supply Chain - An expression used to designate the entire process involved in the transformation of raw materials into a final product.
TCO - Acronym for “Total Cost of Ownership.” This is the sum of all costs involved in owning an item, considering not only the cost of the item, but the cost of training, logistics, warranty, replacement, depreciation, etc.
VMI - Acronym for "Vendor Managed Inventory." It is a modal in which the supplier generates deliveries based on the demand received from its client's customers.
These are just some of the most common acronyms and technical terms used in the purchasing area. New expressions are created and developed every day, which we differentiated buyers must keep ourselves updated on. A simple tip is to type in these expressions, accompanied by keywords such as "purchasing" "procurement," or "business," in any of the search engines on the internet
Good luck and see you next time!
* Only the most frequently used Incoterms were included in this dictionary. The complete list of Incoterms, with their acronyms and definitions, can be easily found on the ICC website.