Procurement is a critical aspect of small business operations. It involves the process of selecting vendors, establishing payment terms, strategic vetting, selection, the negotiation of contracts and actual purchasing of goods. It directly impacts a company's profitability and is an essential part of strategic planning.
Understanding procurement terms is crucial for small business owners as it helps them navigate the purchasing process, negotiate better deals, and improve their overall operations. This glossary article will provide a comprehensive explanation of the most important procurement terms related to small business operations.
Vendor Management
Vendor management refers to the activities involved in sourcing and managing suppliers that provide goods or services to a business. This includes researching potential vendors, negotiating contracts, establishing payment terms, and maintaining relationships with these suppliers.
Effective vendor management can lead to improved quality of goods and services, cost savings, and better service levels. It also helps businesses mitigate risks associated with supplier non-compliance and ensures continuity of supply.
Supplier Evaluation
Supplier evaluation is a term used to describe the process of assessing and approving potential suppliers by quantitative and qualitative assessment. It's a critical component of vendor management as it helps businesses identify the best suppliers in terms of value for money, quality, reliability, and service.
The evaluation process may involve analyzing financial stability, production capabilities, delivery schedules, and the supplier's reputation in the market. This information is then used to make informed decisions about which suppliers to work with.
Contract Negotiation
Contract negotiation is a conversation that takes place between two or more parties where compromise is made, and an agreement is formed. In the context of procurement, it involves discussions with suppliers to agree on the terms and conditions of the supply contract.
Effective contract negotiation can lead to significant cost savings, improved service levels, and better risk management. It requires a clear understanding of the business's needs, a thorough knowledge of the market, and strong negotiation skills.
Purchasing Process
The purchasing process, also known as the procurement process, is a series of steps that a business takes to acquire goods and services. This includes identifying the need for a product or service, finding potential suppliers, negotiating contracts, placing orders, receiving goods, and processing payments.
Understanding the purchasing process is crucial for small business owners as it helps them manage their resources effectively, control costs, and ensure the timely delivery of goods and services.
Request for Proposal (RFP)
A Request for Proposal (RFP) is a document that businesses use to solicit proposals from potential suppliers. It outlines the business's needs and asks suppliers to provide a proposal on how they can meet these needs and at what cost.
RFPs are commonly used in the procurement process to ensure that the business gets the best value for money. They allow businesses to compare different suppliers and make an informed decision about which one to choose.
Purchase Order (PO)
A Purchase Order (PO) is a commercial document issued by a buyer to a seller, indicating types, quantities, and agreed prices for products or services. It is used to control the purchasing of products and services from external suppliers.
Issuing a PO ensures that the supplier delivers the correct product, at the agreed price, and within the specified time frame. It also provides a legal framework for the transaction, protecting both the buyer and the seller.
Inventory Management
Inventory management is the process of ordering, storing, and using a company's inventory. This includes the management of raw materials, components, and finished products, as well as warehousing and processing such items.
Effective inventory management can help businesses reduce costs, improve cash flow, and boost their bottom line. It involves a range of tasks, including tracking inventory levels, forecasting demand, and deciding when to reorder products.
Stock Keeping Unit (SKU)
A Stock Keeping Unit (SKU) is a unique identifier for each distinct product and service that can be purchased. SKUs are used to track inventory levels, sales, and deliveries.
Using SKUs can help businesses manage their inventory more effectively, as it allows them to track the movement of individual items. It also provides valuable data that can be used to make informed decisions about purchasing and sales.
Just-in-Time (JIT) Inventory
Just-in-Time (JIT) inventory is a strategy that companies use to increase efficiency and decrease waste by receiving goods only as they are needed in the production process, thereby reducing inventory costs.
This approach requires accurate forecasting and reliable suppliers, but it can lead to significant cost savings. It also helps businesses improve their cash flow and reduce the amount of capital tied up in inventory.
Payment Terms
Payment terms are the conditions under which a seller will complete a sale. They outline the amount of time that a buyer has to pay and may demand cash in advance, cash on delivery, a deferred payment period, or other similar provisions.
Understanding payment terms is crucial for small business owners as it helps them manage their cash flow and negotiate better deals with suppliers. It also affects the business's relationship with its suppliers and can impact its credit rating.
Net 30
Net 30 is a term used in business to signify that the full amount a client owes is payable within 30 days, including weekends and holidays, upon goods shipment or job completion. It is often used to set the terms for payment on an invoice.
This term is beneficial for clients as it allows them to use the product or service for 30 days before payment is due. However, it can lead to cash flow issues for businesses if clients fail to pay on time.
2/10 Net 30
2/10 Net 30 is a term that signifies a form of trade credit which gives the client some discount for paying early. The '2' represents a 2% discount on the invoice amount if paid within 10 days. If the client does not pay within 10 days, the full invoice amount is due within 30 days.
This term encourages clients to pay earlier, improving the seller's cash flow. However, it may also result in a loss of revenue if all clients take advantage of the discount.
Strategic Sourcing
Strategic sourcing is an approach to supply chain management that formalizes the way information is gathered and used so that an organization can leverage its consolidated purchasing power to find the best possible values in the marketplace.
It involves a systematic and fact‐based approach for optimizing an organization's supply base and improving the overall value proposition. Strategic sourcing can lead to significant cost savings and competitive advantages.
Make or Buy Decision
The make or buy decision is the act of choosing between manufacturing a product in-house or purchasing it from an external supplier. In a make-or-buy decision, the most cost-effective option will be chosen.
This decision requires a thorough analysis of all associated costs, including the cost of production, labor, raw materials, and overheads. It also involves considering non-financial factors, such as the business's capacity, expertise, and strategic objectives.
Value Analysis
Value analysis is a methodical approach to sharpening the efficiency and effectiveness of any process. In procurement, value analysis involves evaluating all elements of a purchase to ensure that it delivers the best value for money.
This process may involve comparing different suppliers, negotiating prices, and assessing the quality of goods and services. It helps businesses make informed purchasing decisions and improve their profitability.
Procurement Ethics
Procurement ethics refers to the moral principles and standards that guide behavior in the practice of procurement. It involves maintaining fairness, transparency, and integrity in all procurement activities.
Adhering to procurement ethics helps businesses build trust with their suppliers, mitigate risks, and ensure compliance with laws and regulations. It also contributes to a positive reputation and can lead to better business outcomes.
Conflict of Interest
A conflict of interest in procurement occurs when a person or organization is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other. This could involve personal gain, financial gain, or other forms of benefit.
Managing conflicts of interest is crucial in procurement to ensure fairness and transparency. It involves disclosing any potential conflicts and taking steps to mitigate their impact.
Gifts and Hospitality
In procurement, gifts and hospitality refer to the practice of giving or receiving gifts or hospitality as part of a business relationship. While this can be a normal part of business, it can also lead to conflicts of interest or perceptions of bribery.
Businesses need to manage gifts and hospitality carefully to ensure they do not influence procurement decisions or damage the business's reputation. This often involves setting clear policies and guidelines and providing training to staff.
