Sourcing, purchasing and stock
Procurement and supply chain staff use a precise vocabulary because small differences in wording, such as between a quote and an order, can have contractual and financial consequences. People elsewhere in a business meet these words whenever they raise a purchase or wait for a delivery.
The definitions below describe common usage and are general information. Contract terms, trade rules and tax treatment differ by country and by agreement, so for anything binding rely on the actual documents and on qualified advice.
Basic terms
Supply chain. The network of organizations, people, activities and information involved in getting a product or service from its original sources to the customer. Supply chain management is the coordination of that network.
Procurement. The broad process of obtaining goods and services, including choosing suppliers, negotiating terms, buying and managing the relationship. It is wider than purchasing.
Purchasing. The transactional part of procurement: raising orders and arranging payment for the items needed.
Sourcing. Finding and choosing suppliers. Strategic sourcing looks at the long-term fit of a supplier relationship instead of the price of one order.
Supplier and vendor. Both mean an organization that provides goods or services. The words are used almost interchangeably, with vendor being more common in software and supplier in manufacturing and retail.
Category. A group of similar items or services bought together, such as office supplies, logistics or software. Managing spending by category helps organizations see patterns.
Spend. The money an organization pays to outside suppliers, often analyzed by supplier or category.
Buying documents and steps
Requisition. An internal request to buy something, usually raised by the person who needs it and sent for approval.
Request for quotation (RFQ). A request asking suppliers to price a clearly defined item or service, typically when the specification is settled and price is the main variable.
Request for proposal (RFP). A request asking suppliers to propose how they would meet a need, used when the solution is not fixed. Responses are often compared using a weighted scoring matrix.
Tender. A formal process of inviting competing bids, often with set rules. Public bodies are often bound by formal tendering rules, which differ by jurisdiction.
Quote. A supplier’s statement of the price and terms it would offer. It is not necessarily binding, and its validity period matters.
Purchase order (PO). A document from the buyer to the supplier that confirms an order and its terms. Once accepted, it commonly forms part of the agreement.
Contract. A legally binding agreement setting out obligations, prices and terms. Organizations often keep a framework or master agreement and place individual orders under it.
Invoice. The supplier’s request for payment.
Goods receipt. A record that the ordered items have arrived and been checked.
Three-way match. A control that compares the purchase order, the goods receipt and the supplier invoice before payment. If the three disagree, the difference is looked into before payment is released. It reduces certain errors but does not catch every kind of problem.
Payment terms. The agreed timing of payment, for example payment due within a set number of days of the invoice.
Managing suppliers
Supplier onboarding. Collecting the information needed to set up a new supplier, such as legal details and payment information, and checking it.
Due diligence. Checking a supplier’s financial health, capability and compliance before committing. Typical vendor due diligence questions cover reliability, security and the ability to continue serving the buyer.
Supplier performance. How well a supplier meets agreed expectations such as quality and delivery.
Approved supplier list. A list of suppliers that have been vetted and may be used. It saves time, but a short list can also limit choice.
Single sourcing and dual sourcing. Single sourcing relies on one supplier for an item, which can simplify the relationship and lower the effort of managing it, but creates dependence. Dual sourcing uses two, which gives resilience but may reduce bargaining volume with each.
Lock-in. A position where changing supplier would be so costly or difficult that the buyer is effectively tied to it. Considering vendor lock-in before signing is usually easier than dealing with it later.
Total cost of ownership. The full cost of an item over its life, including purchase price, delivery, running costs, support and disposal. The lowest purchase price is not always the lowest overall cost.
Centralized procurement. Handling purchasing for several units through one team. It can combine volumes and apply consistent terms, but may feel slow or distant to units with urgent local needs.
Maverick spend. Purchases made outside agreed processes or contracts, which can mean missed terms and weaker oversight.
Inventory and movement of goods
Inventory or stock. Goods held for use or sale. Types include raw materials, work in progress and finished goods.
SKU (stock keeping unit). A unique code identifying a specific item for tracking purposes.
Lead time. The time between placing an order and receiving the goods. Lead times vary, and uncertainty in them is a major reason organizations hold extra stock.
Safety stock. Extra inventory kept to cover unexpected demand or delays. More safety stock reduces the chance of running out but increases holding cost and the risk of unsold goods.
Reorder point. The stock level at which a new order is triggered. In outline, it is set so that stock covers expected demand during the lead time plus any safety stock.
Stockout. Running out of an item when it is needed.
Holding or carrying cost. The cost of keeping inventory, including storage, insurance, handling and the money tied up in stock.
Just in time. An approach that aims to receive goods close to when they are needed, to keep stock low. It works best when supply is reliable and can be fragile when it is not.
Warehouse and distribution center. A warehouse stores goods. A distribution center is typically organized around receiving, sorting and sending goods onward to customers or stores. Where to hold stock is a trade-off between centralization and local access, discussed under inventory location strategy.
Logistics. The planning and movement of goods, including transport, warehousing and delivery.
Visibility. Knowing where goods and orders are at a given moment. Supply chain visibility is often limited by how much data partners share.
Contract and delivery terms
Service level (supply). The share of demand met from stock or on time, as agreed or targeted.
Incoterms. A widely used set of international rules describing who handles delivery, cost and risk in cross-border trade. The detail is technical and best confirmed with a specialist.
Backorder. An order that cannot be filled immediately and is held for later supply.
Returns. Goods sent back to the supplier, often handled under a defined procedure, such as those found in standard operating procedures.
These terms are a starting point for reading purchasing and logistics documents, not a replacement for the specific wording of a contract or advice from a qualified professional.