Procurement terms: L

Refer to Indicators

In inventory control, last in, first out [LIFO] means that stock is charged out on the basis of the most recent prices paid. When inventory is replenished, the most recent purchase price is used as the next issue price irrespective of the actual price paid for the specific goods used. In times of inflation, this passes on material price changes, immediately leading to a higher cost of goods sold. See also First In, First Out.

Refer to Less than Container Load

Lead-time is the interval between the initiation and completion of a process. For example, the lead-time between the placement of an order and its delivery from the supplier is the most common lead time used in procurement. Reducing lead-time is an integral part of lean thinking and some supply chains have been configured to create rapid setup and small runs so that production can occur quickly in response to an order that pulls materials through the supply chain. See also Demand, Pull and Lean Thinking.

Refer to Indicators

Lean manufacturing is a production philosophy that considers the expenditure of resources for any goal other than the creation of value for the end customer to be wasteful and a target for elimination. Therefore, lean manufacturing aims to minimise the amount of assets, resources and time in the production process. Viewed from the perspective of the customer who consumes the product or service, ‘value’ in this instance is defined as any action or process that a customer is willing to pay for. Lean manufacturing is centred on creating value with less work, less time and less resources. Lean manufacturing utilises a combination of techniques based upon the Toyota Production System [TPS]. See also Agility.

Lean enterprises can only achieve their full potential if the participants in their supply chain share similar behaviours and processes. This means that upstream and downstream suppliers need to adopt similar practices so that supply is ‘pulled’ through the chain and each participant is focused on waste elimination and value creation. Automotive supply chains have been criticised for inventory levels being low at the car assembly stage, while upstream and downstream supply chain participants have as much inventory as other industries. See also Agility.

The adoption of lean principles and behaviours follow from a commitment to a belief that the supply chain can be re-engineered, and to the selection of lean thinking as the most appropriate design. This may involve challenging existing mindsets, as systems that ‘push’ stock into the supply chain require everyone in the supply chain to ‘buy in’ to a new way of thinking. See also Agility.

The term learning curve describes the practical reality that, when labour intensive tasks are repeated, the initial difficulties encountered the first time are progressively solved, and subsequent iterations take less labour and hence cost less. In the absence of hard data, most practitioners start with a 15% learning curve assumption, though the actual value will vary from activity to activity. As an example, if a frame maker made a picture frame and it took 10 hours of labour at $50 per hour, the labour cost would be $500. If the same person was asked to make a second identical frame, we could assume that they would be faster second time around and the second frame would take eight and a half hours labour, costing $425 in labour. As the quantity of items produced doubles, labour costs are assumed to decrease at a predictable rate, in this case 15%.

A way of acquiring the use of assets without incurring the initial purchase cost of the asset. The customer selects the asset they wish to use and engages a finance company to fund the purchase, allowing the customer to use the asset during the period of the lease. The finance company owns the asset and recovers the cost of the asset, the interest and their profit from periodic rental payments by the customer during the term of the agreement. When using a finance lease, the liability has to be included on the balance sheet and the customer can agree to purchase the asset at the end of the leasing period, when ownership of the asset will transfer to the customer. See also Hire Purchase and Lease, Operating.

A way of acquiring the use of assets without ownership or incurring the initial purchase cost of the assets. The customer selects the asset they wish to use which is typically owned by the supplier/leasing company. The leasing company owns the asset and recovers part of the cost of the asset, as well as the interest and their profit, from periodic rental payments made by the customer during the agreement. As the leasing company has an economic interest in the asset at the end of the leasing period, the customer is required to give back the asset to the leasing company at that time. When using an operating lease, the asset is not shown on the balance sheet and rental payments are treated as an operating expense. See also Hire Purchase and Lease, Finance.

Leasing is an alternative to outright purchase in which a buyer can obtain the use of an asset without the upfront cost. Depending upon the type of lease, the buyer may ultimately acquire ownership of the goods. Leasing, rental and hire purchase are alternatives which may suit some buyers when funds are limited, when the parties have different tax rates, or when use of the asset is needed for a short period of time. See also Hire Purchase and Rental.

Less than container load [LCL] is a shipment submitted for freight which does not fill a standard shipping container and which will be consolidated together with similar loads from other customers into a container. LCLs attract a premium freight rate when compared to full container loads. See also Full Container Load.

A Letter of Credit [LC] is a way of funding purchases when the seller is reluctant to despatch the goods unless they have been paid for and the buyer is reluctant to pay unless they have received the goods. To overcome a potential impasse, Letters of Credit allow banks to manage the buyer and supplier’s risk by creating a documentary chain. The buyer’s bank sends a Letter of Credit to the supplier, which triggers despatch of the goods to the carrier. The buyer’s bank also arranges to pay the seller’s bank, on presentation of evidence the goods have been shipped, such as a Bill of Lading. When the supplier presents the Bill of Lading to their own bank, their own bank pays them, if the details match. The Bill of Lading is then presented to the buyer’s bank by the supplier’s bank, and the buyer’s bank debits the amount from the buyer’s account. The buyer uses the Bill of Lading to take delivery of the goods from the carrier. Used primarily in international trade transactions of significant value, Letters of Credit are complex instruments and some transactions fail, as the documents do not match exactly, so parties may prefer to arrange a normal commercial invoice once trust has been created in the relationship. See also Bill of Lading.

A Letter of Intent [LOI] is a document outlining the status of agreement between two or more parties before a contract has been finalised and which aims to give some comfort to one or both parties that they can anticipate a contractual agreement will be forthcoming. Whether called a letter of intent, heads of agreement or memorandum of understanding, the parties want to signal that negotiations are proceeding and they need to record the status of their negotiations such as what has been agreed, perhaps to allow one party to commence work before the final contract is agreed. This can present a number of problems. First, if the terms are poorly worded, it may be unclear as to whether the parties intend to be bound by the Letter of Intent. Second, the Letter of Intent may actually become a contract and commit the buyer to something that they did not intend to be legally binding. Third, contracts can take an inordinate amount of time to emerge from the governance process, and what was implied by the Letter of Intent, i.e. ‘please start work as we will probably enter into a contract with you, but we want you to commence work without a formal legal commitment’ may have to be unwound if the contract is not approved in governance, or the buyer changes plan before the contract emerges from their own governance processes. See also Representations, Pre-contractual.

In procurement terms leverage means the use of economies of scale to secure improved value. For example, aggregation of demand may give the buyer more leverage, as will reducing the variety of solutions to the same need, or reducing the number of contracted suppliers. The economic logic is that the supplier’s fixed costs can be spread over a greater volume and hence result in a lower price. In portfolio analysis, leverage categories are low in value and low in risk and the implied procurement strategy is to aggregate volume and secure competition to seek better terms. See also Economies of Scale and Portfolio Analysis.

Current liabilities are sums due to be paid within 12 months after the reporting period. Most organisations separate liabilities into current and non-current on their balance sheet. Usually, current is within 12 months and non-current is longer than 12 months. As an example, accounts payable invoices from suppliers would be current liabilities, while loans and mortgages that are payable over a term exceeding one year would be non-current or long-term liabilities. The distinction is important as current liabilities are a component of the current ratio, often used to assess the solvency of a company. See also Assets, Current; Balance Sheet, Ratio Analysis and Ratio, Current.

Liability can have a legal meaning and a financial meaning. In law, liability means legal responsibility. Buyers often try to transfer liability to suppliers, and suppliers often seek to limit their liability. For example when engaging an IT supplier to design and implement a firewall to protect sensitive data, the buyer may wish to make the supplier liable if the firewall doesn’t work. However, few suppliers will accept unlimited liability, as they would not wish to accept liability, in the event, for example, of hackers penetrating the firewall. If the buyer insisted on unlimited liability, this would affect the number and type of bidders who would respond. In accounting, a liability is a present obligation that stems from past transactions and which, when settled, will result in expenditure. For example, if the firewall was designed, produced and commissioned for $50,000 plus 10% support per annum, the provider’s invoice would create a liability for the initial supply and commissioning, and the ongoing support would create annual liability for this service.

A licence is permission granted by one party to another party authorising them to use licensed material owned by the first party. The licensed material may be software, intellectual property such as trademarks, or product rights. The licence typically defines the scope of the licence, the term, geographical territory and renewal provisions.

The life cycle of a product comprises different phases usually described as introduction, growth, maturity and decline, with each phase presenting different challenges and opportunities. In practice, it can be difficult to define accurately which stage of the life cycle a category is in as individual product life cycles can be very short. Mobile telephone handsets may collectively be in their growth phase, but individual models may have a life cycle of between 90 and 360 days. When analysing supply markets it can be helpful to understand where the category is in its life cycle, as the marketing strategy may change as the category matures. For example, the supplier’s pricing strategy in the introductory phase may involve premium pricing, while the pricing strategy during the growth period may involve significant discounting.

Refer to Last In, First Out

A predetermined amount of money that one party (usually the contractor or vendor) agrees to pay to the other party (the client or purchaser) in case of a specific breach or failure to meet certain contractual obligations.

Logic is a rationale for presenting and justifying an argument. When seeking to persuade others, the presentation of information, facts and data is a persuasive way to influence the other party. For example, when suppliers apply for a price increase, they may cite cost increases and present charts showing inflation in the price of key raw materials to support their position. Similarly, when buyers ask for ‘justification’, it is a powerful message: ‘if the other party can show evidence to support their point of view, then we will agree’. See also Negotiation.

Logistics is the management of the flow of goods between their origin and the point of use. Logistics includes the transportation, storage, warehousing, handling, packaging and security of goods. Logistics is usually described as having a narrower scope than supply chain management as the focus is primarily on the flow of goods and the integration of processes; in particular, the sharing of information is not as central to logistics as to supply chain management. See also Logistics, Inbound and Logistics, Outbound. Transportation e-Learning courses are available at Academy of Procurement.

Inbound logistics describes that part of the supply or value chain concerned with the purchase and inbound movement of materials from suppliers to conversion or processing within manufacturing facilities. It contrasts with outbound logistics that is focused on the movement of finished goods to customers. The purchasing department, supply chain intermediaries, receiving bays and internal stores all form part of the inbound logistics capability of an organisation. The concept of a value chain includes a number of activities that collectively represent the primary source of value for an organisation, and inbound logistics is one of those activities. Many organisations have outsourced the movement of materials to third parties. See also 3PL, Logistics and Logistics, Outbound.

Outbound logistics describes that part of the supply or value chain concerned with the movement of finished goods to customers. It contrasts with inbound logistics that is focused on the purchase and inbound movement of materials from suppliers to conversion or processing within manufacturing facilities. Storage of finished goods, picking, goods outwards, despatch and transportation or carriers all form part of the outbound logistics capability of an organisation. Many organisations have outsourced the movement of materials to third parties. See also Logistics and Logistics, Inbound.

In pull logistics, goods are pulled by customer demand into the supply chain. For example, a bookshop may have a stack of textbooks with a signal card placed halfway down the stack. When the last book above the signal card is purchased, the bookshop knows that it is time to reorder that title. The trigger for reordering is the level of demand for the book. There will be a decoupling point in most supply chains when the ability to ‘pull’ material through the supply chain meets the requirement to ‘push’ stock into the supply chain. In the case of the textbook, it will be printed in small batches and ‘pushed’ into the supply chain. See also Logistics, Push.

In push logistics; manufacturers push goods into the supply chain, i.e. goods are made to stock rather than to order. For example, prominent UK-based retailer Marks & Spencer decided to switch sourcing of garments from the UK to Asia to secure cost savings. They chose to buy a whole season’s worth of each design, which was then shipped to the UK and pushed into the supply chain. The designs were unpopular and the garments had to be heavily discounted to shift the stock. This contrasts with the strategy adopted by Zara, another prominent Spanish retailer, which pushes a week’s stock into stores and replenishes the stock only if the designs sell well - a mixed strategy. See also Logistics, Pull.

Most supply chains are forward looking and deliver goods to customers. When the customer seeks to return the goods, the challenge is described as reverse logistics, as most supply chains are not configured to allow collection of goods from the customer, unless equipment is designed for refurbishment or planned for offsite repair. Reverse logistics refers to all those tasks associated with a product/service after the point of sale, including planning, implementing and controlling the cost-effective flow of raw materials, finished goods and related information from the point of consumption to the point of origin for the purpose of recapturing value, or proper disposal.

Lot size is the amount of a good produced at the one time. Lot size is an important issue in lean manufacturing, as large lot sizes and high setup costs drive batch production and ‘push’ stock into the supply chain. As an example, supposing a salesperson asks for 250 business cards, being a year’s forecast usage, but is told that the most economic print run is 500 cards. The setup cost causes two years inventory to be held, and most likely the salesperson will change job before the cards run out. Reducing lot size and setup costs allows small batches to be produced and goods to be ‘pulled’ through the supply chain. See also Economic Order Quantity.

Low cost country sourcing [LCCS] is a procurement strategy involving sourcing categories from countries with lower labour and production costs in order to minimise total cost. This links low cost country sourcing with global sourcing strategies. Low cost countries include China, India, Malaysia, Indonesia, Thailand, Vietnam and Brazil. The focus on ‘low cost’ highlights that the strategy is not necessarily low risk. Supply chains are often elongated with greater risk of interruption. If the source of lower cost is lower wages, so-called labour market arbitraging, this may also present issues if the buyer has a corporate social responsibility policy requiring that wages should meet local standards. See also Sourcing.

Low value purchases are transactions where the individual (and order quantity value) of the unit being purchased is of little economic importance. The opportunity to create value lies in streamlining the acquisition process, rather than solely in reducing the purchase price of the goods or service. For example, assume that the cost of raising a requisition, budgetary approval, selection of supplier, purchase order generation, receipt of the goods, reconciliation of the invoice and proof of delivery, and effecting payment all costs $100 in administration time and effort. If the order value is $100 or less, the real cost is in the administration. The definition of what is low value varies from organisation to organisation, with values from $75 to $500 being defined as ‘low value’, depending upon the organisation. Procurement cards and e-commerce are examples of the use of technology to ‘systematise’ and streamline the process.

A contracting strategy that involves the client agreeing a fixed price with a contractor for completion of a defined scope of work. Payment may be made as a lump sum, or a series of progress payments against defined milestones, which is often the case in construction contracts. Clients prefer lump sum pricing as the financial cost of the project is defined in advance, providing the scope of work does not change. If the client changes the scope, this may give rise to variations, but otherwise the risk of costs exceeding the tendered price lie with the contractor, not the client. For this reason, lump sum contracts are most appropriate when the scope of work can be defined with some certainty. If a contractor is asked to provide a lump sum price for a project with high uncertainty or many unknowns, it is likely that the bidders will include contingencies in their offers to cover the risk. See also Contracts and Schedule of Rates.