Understanding procurement begins with an understanding of the terms associated with it. Procurement refers not just to activities done by the purchasing department. The term also includes work done in inventory, shipping, receiving, and a number of other departments, which are in charge of dealing with the goods that come into and go out of a company.
Generally, when a person talks about procurement, they refer to two parties: manufacturers and vendors. A manufacturer is any business that creates a finished product from raw materials. A company that turns wood into furniture would be an example of a manufacturer. On the other hand, vendors are simply sellers of goods and services. Manufacturers purchase those goods and services from them in order to create their finished products. In many cases, vendors are also manufacturers because their finished product is sold to another company which uses that product to create something else.
Two terms related to procurement that are often confused but which have very different meanings are acquisition and requisition. Acquisition refers to the action of getting the goods and services and, in general, means the entire process from selecting vendors to paying for the goods. Requisition is usually one step in the acquisition process. The term applies to in-house requests made to the purchasing department for the goods and services needed to complete a project.
Another term that must be understood is design specifications. Usually this term is used in regards to the RFPs (Request for Proposals) that are sent out to vendors. When a company requires goods that are specifically created to meet their needs, such as a certain shape of tubing, that company includes design specifications in its RFPs. These details give the vendor all of the information they need, so they can determine if they can meet those specifications and, if so, how much it would cost. Design specifications are not always necessary. Some RFPs refer to standards for goods. Standards are simply a set of characteristics that manufacturers and vendors have agreed on for that certain good. These characteristics might include quality, size, shape, or color.
Besides standard and design specification, there are a couple of other terms related to RFPs and vendor selection that are important as well. One of those terms is prequalification of vendors. This refers to the process of evaluating potential vendors on a number of criteria, including reputation, in order to put together a final list of possible suppliers who will be asked to submit RFPs. This step is an important part of the process because it saves the review committee (often the individual who compare the proposals and makes the final vendor selection) time later on. Another term related to RFPs is “no bid.“ “No bid“ is a phrase that vendors can use when they do not wish to submit a proposal for a project. They may already be swamped, or they may simply be unable to provide the necessary goods. By saying “no bid”, instead of simply failing to respond altogether, they leave the door open for future RFPs from that same manufacturer.
Finally, there are three last terms that are related to procurement. First, the term lead time refers to the amount of time it takes after receiving an order for a vendor to deliver the goods to the buyer. Businesses need to know exactly how much lead time there is for all of their materials so they do not run out while waiting for a new shipment. Second, the term life cycle costing refers to all the expenses related to buying, running, and getting rid of a specific item, such as a piece of machinery. Life cycle costing is more accurate for long-term value projections. Last, the phrase blanket order is used to describe an ongoing purchasing agreement with a vendor where goods are sent to the buyer as they are needed.