Procurement terms: E

e-Commerce is commerce that takes place over electronic systems such as the internet and other networks. The term embraces not only raising orders on web-based systems and paying invoices through electronic transfer, but also online marketing, online catalogues, electronic supply chains, electronic data interchange, online transaction processing, email and inventory management processes. See also Electronic Data Interchange and e-Marketplace.

An e-Marketplace is a virtual online market in which business buyers and business sellers can buy and sell goods and services. e-Marketplaces have three main functions: they allow buyers to easily find and sellers to easily promote products; they facilitate e-Commerce such as online ordering and payment and they create a framework for the legal conduct of transactions. Typical elements of an e-Marketplace include the seller’s portal, catalogues of the products, a search engine, a shopping cart and a payment gateway. There is a variety of types of e-Marketplace, with some offering online auctions, some private marketplaces set up for a single organisation and some independent marketplaces run by third parties for multiple sellers and buyers in a particular industry. See also e-Commerce.

e-Procurement involves the online conduct of business-to-business procurement processes using web-based applications. The significance of e-Procurement is that it enables buyers to locate potential suppliers, review product choices, select products and make purchasing transactions directly over the Internet. Typical e-Procurement applications include web-based ERP solutions that automate transactional procurement processes. e-Sourcing can facilitate the location of potential supply sources, e-Tendering can facilitate simplified quotation and tendering processes, e-Auctions may allow reverse auctions and e-Marketplaces bring together multiple sellers in a single environment. The significance of e-Procurement is not simply the automation of workflows such as requisitioning, creating purchase orders, and receiving and paying for goods. e-Procurement solutions change the sourcing process by facilitating the value propositions of multiple suppliers to be accessed in one place and at one time to create a ‘one-stop shop’ for all categories, and reduce the friction involved in traditional commerce. See also e-Marketplace. Masterclass - Operational Excellence for Procurement training is available at Academy of Procurement.

Refer to European Article Number

The practice of securing procurement influence upon procurement projects at an early stage of evolution, typically before the procurement strategy is set or the supply market engaged. Early involvement is regarded as important as, without it, the scope of procurement influence is reduced, for example for negotiating the price. When involved earlier in the process, procurement influence can affect the nature and timing of demand, the specification, the sourcing strategy and the market engagement, as well as the selection of suppliers.

The practice of securing supplier influence at the design or specification stage of a project rather than at the proposal or negotiation stage. Early supplier involvement is appropriate when a project is novel and/or when the level of client expertise is insufficient to make informed choices about developing specifications and/or design. The challenge is that involvement of the supplier prior to any competitive processes reduces competitive tension, and so the selection of the supplier needs to be made carefully. In addition, the parties need to adopt co-operative processes to create and share any value created. This approach is sometimes called 'co-maker ship'. See also Cooperation and Supplier Relationship Management.

An indicator of a company's profitability that expresses company net income as a ratio of the weighted average of the number of shares issued during the period. It influences the price at which the market values the company's shares.

The Economic Order Quantity [EOQ] is a formula used in stock level control to calculate that quantity of stock to be purchased to replenish stock levels that minimises the sum of ordering costs and carrying costs. A number of variables are incorporated in an arithmetic formula that trades off the cost of carrying inventory and the cost of ordering. While some estimates place the cost of raising a purchase order at $100 or more, replenishment of stock items will probably involve raising a transaction on an existing supplier on pre-agreed terms, so the cost of raising an order is likely to be less than for a novel category. Assumptions built into the model include constant demand, fixed lead times and delivery in full, few of which are experienced in most situations. See also Reorder Level and Stock.

An approach to measuring company performance by assessing the value created by the company over and above the cost of the capital used to create that value. A simple formula is the profit earned by the firm, less the cost of financing the capital used. See also Return on Investment and Return on Net Assets.

The benefits that come from having large or very large operations. In economics, the term means the reduction in a producer's average cost per unit that results from having large output compared with that of competitors. Examples of the benefits which arise from economies of scale in production include the ability to price lower in the market than competitors, the ability to negotiate improved supplier pricing in return for greater volumes, the ability to allow managers to specialise, the ability to gain access to loans at lower interest rates etc. Procurement strategies that focus on volume aggregation and leverage rely on the principles of economies of scale. The corollary of the concept is that there is a point where diseconomies of scale begin. In procurement, an example might be that improving the percentage of spend with a preferred supplier arrangement from 80% to 90% of the total category spend might yield savings, but the organisational cost of securing the next 10 per cent of compliance might outweigh the incremental benefits. See also Leverage.

Refer to Efficient Consumer Response

Refer to Electronic Data Interchange

Efficient Consumer Response [ECR] is a label given to customer-facing alignment of supply chains, especially those selling fast-moving consumer goods to consumers. The participants in the same supply chain utilise a variety of approaches such as category management, inventory optimisation and electronic technologies to ensure that all supply chain participants are focused on meeting the ultimate customer’s needs. See also Supply Chain Management and Ultimate Consumer.

The transmission of strictly formatted data between trading partners by electronic means without human intervention. When a buyer sends an electronic purchase order to their supplier and the supplier fulfils the order and generates an invoice, which is paid by the client electronically, the process is enabled by electronic data interchange [EDI]. See also e-Commerce.

Supply chain management describes the flow of goods, money and information between networks of trading partners. As business-to-business transactions have increasingly become enabled electronically, as well as the physical linkages in the supply chain there is an electronic supply chain, sharing documents, designs, transactions, messages and money. The term electronic supply chain describes the infrastructure that enables trading partners to exchange information up and down the supply chain. See also e-Commerce.

The capability to tune into the emotions of others, to understand those emotions, and to use our understanding of both our own and the other person's emotions to enhance our personal effectiveness. In procurement, ‘emotional literacy’ may be more relevant, being the practice of interacting with others in ways that build understanding of our own and other's emotions and using this understanding to build better relationships. The classic ‘Rottweiler’ stereotype of a certain type of procurement practitioner describes someone who does not understand their own feelings, does not realise how their behaviour makes others feel, and cannot manage their own or the other party's feelings. See also Negotiation.

A contract under which the contractor engineers, procures and constructs [EPC] the work, often a building or large-scale facility. In practice, this is a form of outsourcing under which the client does not design the solution, but invites bidders to quote a price for designing the works, procuring the materials and constructing the facility, before handing over the finished project to the client. This transfers the design risk to the contractor and, as EPC contracts are often associated with fixed pricing, the risk of cost overrun is also borne by the contractor. Such projects are sometimes called ‘turnkey contracts’. See also Contract, Turnkey and Design and Construct.

A contract under which the contractor engineers, procures, installs and commissions [EPIC] the work, often an engineering project. In practice, this is a form of outsourcing most common to the oil and gas sector under which the client does not design the solution, but invites bidders to quote a price for designing the solution, procuring the materials, and installing and commissioning the project. This transfers the design risk to the contractor and is only possible where there are large integrated groups that have the capability to design, procure, fabricate and install large capital projects. See also Engineer, Procure, Install, Commission, Operate and Maintain.

A contract under which the contractor engineers, procures, installs, commissions, operates and maintains [EPICOM] the work. For example a manufacturer of a piece of capital plant not only designs and assembles the plant, but also operates the equipment and provides a service instead of simply supplying an asset. The approach is similar to ‘power by the hour’ and allows the client to buy the output of the asset rather than the asset and moves the risk of downtime to the asset manufacturer. See also Engineer, Procure, Install and Commission.

Engineering, Procurement and Construction Management [EPCM] means the client engages a contractor to provide engineering, procurement and construction management services. The EPCM contractor manages the project and the other contractors on behalf of the client.

Market approaches which seek to gather information from potential suppliers. Examples include Request for Information, Expression of Interest, Request for Quotation [RFQ], Request for Proposal [RFP] and Request for Tender. The first two examples are typically used to gather information about potential solutions, market capability and capacity. They are typically the first phase in a multiple-phase procurement process, as they are usually followed by the short-listing of respondents and the issue of commercial enquiries, such as an RFQ, RFP or RFT. These enquiries are typically focused on inviting commercial offers that are capable of acceptance and so they are issued later in the procurement process once the need, specification and potential suppliers have all been identified. See also RFx.

Enterprise Resource Planning [ERP] systems are integrated computer systems that share management information across many departments within an organisation. For example, most systems include finance modules, human resource systems, customer relationship management, procurement and inventory control systems, amongst others. The purpose is to enable the flow of information between managers within the organisation and create a single version of data so that decisions are based on consistent views of common data.

Constraints and obstacles that make entering a market difficult. Examples of barriers to entry might be contracts held by existing market players that make it hard for new entrants to 'break in' to the market and gain economies of scale. Access to customers might be supplemented by problems getting access to raw materials, intellectual property such as trademarks, licenses or patents, as well as customer inertia and switching costs. See also Market Structure.

The surroundings of a central entity or organisation. When undertaking a PESTLE analysis, a number of environments are reviewed in order to understand the trends and factors impacting on the organisation. For example, the second E in PESTLE is usually held to mean ecological and physical environmental factors, such as climate and natural disasters. The idea is that by detecting current environmental trends, organisations will be able to anticipate the impact and take appropriate action. See also PEST Analysis.

Refer to Economic Order Quantity

Refer to Engineer, Procure and Construct

Refer to Engineering, Procurement and Construction Management

Refer to Engineer, Procure, Install and Commission

Refer to Engineer, Procure, Install, Commission, Operate and Maintain

Equipment used by an organisation in the production of goods and services. It is relatively long-lived equipment, machinery or plant that requires significant initial investment and is carried on the organisation’s balance sheet at its installed cost less depreciation.

Client furnished equipment, or sometimes called ‘buyer-furnished equipment’, refers to equipment which may be sourced and paid for by the client, and which is then incorporated into another party’s finished product assembly. For example, in the aerospace industry an airline purchasing a new craft, specifies to supplier A, that it wishes to purchase seats from supplier B, to be incorporated into the mainframe assembly that is coming from supplier A. The provision of client furnished equipment raises issues of risk and liability, and some procurement strategies would instead nominate supplier B as a sub-contractor to supplier A as an alternative, or leave the entire seat specification to supplier A, in order to simplify liability. See also EPIC.

The concept of evaluating and accepting alternative solutions, products, or services that may not exactly match the specified requirements in the contract but are deemed to be equal in terms of performance, quality, and functionality

Refer to Enterprise Resource Planning

Escalation is a means of conflict resolution based on the engagement of more senior managers in the resolution of organisational disagreements. In procurement terms this may involve escalating contractual disputes to more senior managers in order to find a solution. The approach has the advantage that the new participants do not have the ‘baggage’ of the managers who were unable to find a resolution and, the delay associated with briefing each party’s managers may allow the perspective of time to defuse any emotion and assist the search for an equitable solution. See also Alternative Dispute Resolution.

A legal doctrine that may be used in some situations to prevent a company from relying on certain rights or facts that are different from an earlier set of facts. For example, a buyer indicates verbally to a supplier that a tender from the supplier was likely to be approved by managers in the buyer’s organisation, and that a contract would soon be provided. On that basis, being aware that there was a need to supply the works by a specific date, the supplier commences work in advance of receiving a Letter of Intent or any other formal contractual notification. The buyer’s organisation subsequently decides not to enter into a contract with the supplier, but fails to advise them of this decision. The buyer would be ‘estopped’ from declining to pay for the work already completed on the grounds that no contract has ever been agreed by the two parties. The buyer’s organisation had an obligation to let the supplier know that a contract would not be forthcoming as soon as it was aware that one was not likely to be signed. Knowingly allowing another party to act to their detriment based on assumptions that the buyer knows are not valid can cause the buyer’s organisation to be estopped from reneging on the implicit promise made to enter into a contract. See also Letter of Intent.

Ethics involves distinguishing between what is right and wrong behaviour by an individual or organisation. Many organisations and professions have codes of conduct designed to encourage integrity in carrying out duties. Typical principles are that staff must perform their duties impartially, personal interest should not affect professional decisions, information should not be used to gain financial advantage for themselves and staff should maintain the highest standard of integrity in all business relationships. It is especially important that procurement staff display standards of behaviour that evoke trust among stakeholders and confidence in the objectivity of the process. CIPS has a Code of Professional Ethics that addresses common challenges for procurement staff, such as acceptance of gifts and acceptance of hospitality from suppliers. See also Probity.

The European Article Number [EAN], now known as the International Article Number, is a standard classification for bar coding products.

Evaluation is the systematic consideration of the value, quality, importance or worth of something or someone. Procurement processes often require judgements to be made, for example deciding whether to approve a potential supplier, deciding which offer represents best value, or deciding whether to single source or adopt a different strategy. Most procurement decisions are non-programmed which means that they involve unique or novel problems, rather than routine and repeatable situations that are called programmed decisions. This means that the decision-making processes to evaluate alternative options need to be systematic and repeatable, and because of the obligation to demonstrate probity, decision-making also needs to be transparent and recorded. In practice, most procurement processes develop an evaluation plan prior to reaching decisions, and the evaluation process often involves multiple stakeholders, depending upon the value and complexity of the acquisition. See also Evaluation, Tender.

Technical evaluation focuses on the tenderer’s compliance with the requirements of the specification. When acquiring complex categories, the evaluation may separate technical dimensions of the bid from the commercial dimensions of the bid. In some organisations, the two dimensions are separated into separate envelopes, with the technical evaluation preceding the commercial evaluation. See also Evaluation, Tender.

The systematic and structured evaluation of suppliers’ offers. The outcome of tender evaluation is the selection of the successful offers. However the processes through which the offers are evaluated may vary from organisation to organisation. In the public sector, the evaluation strategy will have been developed before tenders are issued and will involve a structured, transparent and defensible process. The complexity of tender evaluation tends to vary with the value of the contract and in some cases a formal evaluation team will evaluate the tenders and recommend who should be successful. See also Evaluation, Technical. Driving Strategic Sourcing Initiatives and Tender Evaluation training is available at Academy of Procurement.

An exchange rate, also known as a foreign-exchange rate, Forex rate or FX rate between two currencies is the rate at which one currency will be exchanged for another. Exchange rates are determined in the foreign exchange market, where the spot exchange rate refers to the current exchange rate, whilst the forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date.

Exclusivity means a single supplier is guaranteed all of the business rather than a share of the total spend. When migrating from a panel contract to a single-source contract, the prospect of exclusivity may represent a negotiation variable that may be used to extract greater value from the arrangement. See also Sourcing.

A process following the issue of a purchase order or contract in which the buying organisation manages the progress of the materials from receipt of order by the supplier, through manufacture or picking, despatch and shipping, and through to delivery. A form of indirect supply chain management, expediting is seen as a failure-related activity, but may be essential when there are multiple intermediaries and multimodal transport involved, such as in international trade. See also Muda and Supply Chain Management.

An expendable is a component that is discarded at the end of its useful life, as the cost to repair or overhaul is more than the cost of buying a replacement. Hoses and switches are examples of expendables, which are usually removed from service during an overhaul, replaced and discarded. See also Consumable.

Capital expenditure [CAPEX] is an amount spent by an organisation to either acquire or upgrade a long-term asset and which is considered a major investment by that organisation, having value to be used over several years. CAPEX may apply to machinery, systems or equivalent infrastructure. See also Asset, Fixed.

Refer to Learning Curve

Refer to Knowledge, Explicit

An expression of interest [EOI] is a formal notice to potential suppliers that a prospective buyer is planning to acquire goods or services and inviting interested suppliers to register their interest. It can be used as a tool to assess the level of competition in the supply market, and is usually part of a multistage procurement process. The first stage involves alerting potential suppliers to the forthcoming acquisition, and shortlisting respondents if there is an adequate response. The next stage involves the invitation of competitive offers from the short-listed respondents. Expressions of interest may be used for novel acquisitions or when the buyer wishes to stimulate competition where a supply market may not currently exist. See also Market Maker.

An Incoterm meaning ‘ex works’ (named place of delivery). The seller makes the goods available on the loading bay of their facility for collection by the buyer. The buyer pays all the transportation costs and also bears the risks for bringing the goods to their final destination. See also Incoterms.