Procurement terms: M

Maintenance, routine and operating [MRO] categories are low value categories which are not an input to the production process, but which are used in support of operations. The term is a subset of indirect materials and represents a level of classification of categories. Examples of MRO categories would be cleaning materials, lubricants, laboratory supplies, spare parts, gaskets and industrial consumables, and in some procurement organisations these categories would not be aggregated as MRO, but managed individually. The reason that they are grouped together is that they have some common characteristics, such as being relatively low value, and maintaining continuity of availability is a key procurement objective. Sometimes the acronym is used to imply maintenance, repair and overhaul, which describes categories which are used to support plant, equipment and machinery. Scheduled overhauls and maintenance campaigns require provisioning of parts and, in most situations, the cost of downtime is greater than the cost of holding inventory, so MRO often implies matching supply and demand at lowest overall total cost.

The make or buy decision is between making a good or providing a service in-house, or buying the good or contracting for the service from external suppliers. It precedes the procurement process and is a strategic decision that defines the boundary of the organisation. When organisations understand their ‘core competence’ and know in which activities they have a relative competitive advantage over competitors, it makes strategic sense to undertake those activities internally. For example, in running an airline, it is possible to ‘wet lease’ the aircraft and crew, buy-in the ground-handling and check-in services and contract out the sales and customer interface. This is possible because these are mature supply markets, with competition, which might enable the virtual airline to obtain these services at a lower cost than if it sought to engage in these activities with its own resources. In this example, the core competence of the airline would be in planning a network, i.e. deciding where to fly to and from, obtaining the slots from the relevant airports, negotiating with governments, buying aviation fuel, and developing and promoting their brand. In practice not all make or buy decisions or ‘do or contract’ decisions involve systematic cost comparisons, benchmarking external and internal costs, and the shape of some organisations owes as much to the legacy of historical choices as to current strategic opportunities. See also Outsourcing and Transaction Cost Economics.

Make to order [MTO] describes a ‘pull’ manufacturing strategy in which goods are only built or assembled when a customer order is received. The approach is an alternative to ‘make to stock’, in which case goods are produced in anticipation of customer orders. Some online computer companies manufacture components to stock, and then engage in ‘late customisation’ to assemble a combination of components specified by the customer. This is a hybrid strategy with a decoupling point between make to stock - the components - and make to order - the finished computer. See also Agility, Lean Manufacturing and Make to Stock.

Make to stock [MTS] describes a ‘push’ manufacturing strategy in which goods are manufactured in anticipation of a customer order being received. The approach is an alternative to ‘make to order’, in which case goods are produced only when a customer order is received. A visit to a car dealership will reveal that there is lots of unsold metal on the forecourt. This reminds us that automotive supply chains are not completely ‘pull’ supply chains, and when dealerships run ‘end of season’ discounts to shift unsold cars, it shows that stock and overproduction are muda, or waste. See also Agility, Lean Manufacturing, Make to Order and Muda.

A form of contract strategy for large projects, which is a hybrid approach including project management, cost plus and fixed price contracting. The client engages a managing contractor to oversee the construction of the work on behalf of the client, however the managing contractor does not usually undertake the work directly, but sub-contracts the work to others. Typically the client engages the managing contractor at an early stage, and the managing contractor supports the client in scoping the work, managing risk, developing the design, programming the work and obtaining any approvals that are needed. Once the design of the work is agreed, the managing contractor arranges the tender packages; issues tenders and awards work scopes on behalf of the client. The managing contractor also supervises, manages and reports progress on the project to the client. The attraction of this type of contract is the flexibility and speed with which the client can commence work and the opportunity to draw on the capability of the managing contractor in terms of procuring the design, sub-contracting the work packages and supervising the sub-contractors. In addition, there is a single point of accountability and, while the managing contractor may be remunerated on a cost plus basis, there is transparency of the sub-contractors’ costs and flexibility to change approach without the limitation of fixed scope of work needed to agree a fixed price with the managing contractor. See also Engineer, Procure and Construct. Outcome-Based Contract Management training is available at Academy of Procurement.

A manifest is a detailed statement listing the cargo, passengers and crew of a ship, aircraft, or vehicle. The manifest is usually stored securely so that in the event of mishap the exact cargo is known. In addition, customs and other officials may request a copy of the manifest to allow for identification of the cargo that is on-board.

Materials Requirements Planning [MRP] was superseded by Manufacturing Resource Planning [MRP II]. While MRP was mainly concerned with materials, MRP II focuses more broadly on materials, finance and human resources. In that sense, MRP II was another milestone towards today’s enterprise resource planning solutions, or ERP systems. MRP II systems were designed to create a ‘single point of truth’ by sharing common information in a centralised database. MRP II systems output a production schedule addressing both machine and labour capacity, and scheduling the production runs around deliveries of materials. Cost data, such as machine hours, labour hours and materials used, as well as production quantities provide information for pricing and profitability decisions. See also Enterprise Resource Planning and Materials Requirements Planning. Manufacturing e-Learning courses are available at Academy of Procurement.

Refer to Cost, Marginal

When developing a procurement strategy, most procurement processes reconcile analysis of demand for the category with the attributes of the supply market to develop an appropriate strategy. Market analysis is the systematic review of the characteristics, capacity and capability of the supply market in order to understand the extent to which the market meets the needs of the buying organisation. For example, the definition of market requires decisions about two key dimensions: the geographical scope of the market, (is it a local, regional, national or global market?), and the technical scope of the market. Technical scope addresses the range of solutions that meet substantially the same need. Once the market is defined, tools of analysis may be used to profile the market, such as life cycle, trends, technology road map, the relative bargaining power of buyers and sellers, the threat of new entrants etc. See also Five Forces Analysis. Have your Procurement Knowledge evaluated at Skills Gap Analysis. Opportunity & Supply Market Analysis training is available at Academy of Procurement.

Market concentration refers to the extent to which a small number of organisations account for a large proportion of the market. For example, banking, petrol retailing and car manufacture are all dominated by a few large players. In such oligopolies the level of market concentration is high: the combined market share of the top four players may exceed 90% of the total market. See also Market, Structure and Oligopoly.

Monopoly, oligopoly and cartels are examples of market distortion, i.e. supply markets that do not result in free and open competition. Monopoly – a market with a single supplier – and monopsony – a market with a single buyer – are structures that distort the market. Oligopoly – a few large suppliers – and oligopsony – a few large buyers, are market structures with a high degree of concentrated power amongst a small number of participants. These participants exercise power to extract value from other market participants, resulting in higher prices and less productivity than would be the case in a free market structure. Cartels represent collusive market behaviour in favour of the participants and against the interests of the consumer. See also Market Analysis and Market Failure.

In procurement, market engagement describes all those processes involved in contacting and interacting with potential suppliers. There are two broad types of market engagement. The first type includes interactions with the market, as it is that have no impact on the structure of the market or the attitude of the participants towards the buyer. Examples of this type of engagement include requests for information, requests for quotations and requests for proposals. The second type involves market interventions such as conditioning, negotiation, reverse marketing and supplier development which may have a transformative effect on the market, either in terms of the market structure or the orientation of the market players towards the buying organisation. See also Market Maker and Reverse Marketing. Take the Procurement Behavioural Self Assessment at Skills Gap Analysis.

Market failure occurs when the action of the market does not create an optimal outcome. Causes of market failure can be attributed to three main reasons: first, market distortion i.e. monopoly or oligopoly, where market power is concentrated in the hands of a few participants. Second, the market creates an ‘externality’ that is not factored into the cost of production. For example, a paper mill pollutes a nearby water source causing a loss of amenity to the local community, although the costs are not borne by the mill or included in the price of the finished product. Third, is a market failure as a result of the goods or services being a ‘public good’. These are goods or services that are not diminished by being consumed by any one party. For example, a ship using the light source from a lighthouse to navigate safely into harbour does not mean there is a reduction in the ability of others to also use the same lighthouse. Everyone benefits from the lighthouse whether they have contributed to paying for it or not. As a result, few are actually prepared to pay for the cost of the lighthouse. The market is said to have failed, as many want the lighthouse and the light it provides, but few are prepared to pay for it. Thus, the State intervenes to ensure the supply of lighthouses meets demand. See also Market Distortion.

The phrase ‘market maker’ is commonly applied to intermediaries in reverse auctions who facilitate the meeting of buyer and sellers in an online auction. The market is made when the intermediary persuades the sellers to participate and competitive bids are received. In practice, buyers stimulate market making by making it easy for sellers to compete for their business. See also Auction and Marketing, Reverse.

Market sharing occurs when firms who are obvious competitors collude and agree to divide a market so that they are protected from competitive practices. The market may be shared geographically or by customer sector. Market sharing can also involve an agreement not to compete for established customers or to avoid the production of similar goods and services. As an example, bidders may decide to reply to tenders with inflated bids so as to guarantee the incumbent retaining the account, in return for reciprocal behaviour on other subsequent tenders. See also Collusion.

Market structure refers to the different types of structure that may exist in a supply market such as monopoly, oligopoly, duopoly, imperfect competition, and oligopsony and monopsony, each of which has different implications for competitive behaviour. Monopoly occurs when there is only one supplier; however in some markets an effective monopoly exists where the market share of the largest player is above 80% or 90%. If the combined market share of the top four players is more than 80%, then this is an oligopoly and there are likely to be strong barriers that prevent competitors from entering the market. The balance of power in these markets is skewed in favour of the suppliers and competitive processes may not be effective in securing value for money. Monopolistic competition occurs when there is a competitive market with a large number of firms each having a small proportion of the market share and slightly differentiated products. The combined market share of the top four suppliers might be less than 50% in this case. Oligopsony and monopsony occur when the buyers in the market are tightly concentrated, for example suppliers of submarines would have relatively few customers. See also Market Concentration.

Market testing is the invitation of competitive offers from external service providers to validate the competitiveness of the incumbent provider. Public sector services are obliged to be market tested in order to demonstrate that value for money is being received. Competitive tendering allows the comparison of alternative bids against the current service, if there is one. In the early phases of compulsory competitive tendering, the current provider was usually an in-house service provider and such activities as catering, cleaning, facilities management, grounds maintenance etc. needed to be market tested. If external providers represented better value, the service would then be outsourced. See also Outsourcing.

Refer to Life Cycle, Product

Marketing describes both the organisational function and the process concerned with identifying, anticipating and satisfying customer requirements profitably. Sales activities are often described as the mirror image of purchasing, and marketing activities as the mirror image of procurement. Both functions are concerned with identifying opportunities to create, claim and/or share value. Most marketing texts still describe largely passive buyers responding to proactive marketing strategies, and the key change for many business-to-business marketing practitioners is that a procurement process driven by the client has superseded the sales process driven by the seller.

Reverse marketing refers to the situation in which a buyer encourages an organisation to enter a market that they otherwise had not planned to do. The term is based on the idea that marketing involves stimulating demand and satisfying it at a profit. Reverse marketing involves stimulating supply and receiving supply to create a saving. The motives for reverse marketing range from the absence of any supply market, for example in remote areas, to the absence of a competitive market. For example, two airlines operating out of an airport may find that a monopoly supplier of aviation fuel is charging a premium. By agreeing to guarantee a minimum volume to a prospective new entrant, the airlines may create the circumstances for a business case in which the new entrant invests in infrastructure in return for a guaranteed demand for a certain period of time. On the expiry of that period, normal competitive processes would apply. See also Forward Commitment Procurement.

Material requirements planning [MRP] was an early stage in the development of information systems to help manufacturing planning decide what materials were needed, in what quantities, and when. The purpose of the system was to ensure that the bill of material, the ‘explosion’ of the finished product into components and sub-assemblies was translated into a master production schedule and a recommended purchasing schedule for the raw materials needed to produce products. See also Manufacturing Resource Planning. Supply Planning e-Learning courses are available at Academy of Procurement.

A Materials Safety Data Sheet [MSDS] is a printed form containing data about the properties of a substance. It is intended to provide staff using the product with guidance on handling or working safely with the substance, and includes physical characteristics of the substance such as melting point, boiling point and flash point, as well as toxicity, health effects, first aid procedures in the event of spillage or contact, and advice on storage and disposal. Data Sheets should be accessible to all staff that work with the materials. Many organisations use databases to ensure up-to-date information on all dangerous goods, but in particular to ensure that data sheets are up to date so that staff dealing with the products can understand the risks and adopt the most appropriate protective equipment and safe handling procedures. See also Goods, Dangerous and Hazchem.

Materials that are converted or processed to make the finished product. In category management in a manufacturing business, the most basic classification of categories is between direct and indirect materials. As direct materials are usually account for a greater share of total spend, and affect the quality of the final product, direct materials are usually seen as the more demanding of the two groups. Indirect spend includes stationery, printing, office supplies, pest control, telephone costs etc., while direct materials will be whatever is used to create the finished product. See also Materials, Indirect and Maintenance, Routine, Operating Categories.

Goods which are purchased to support the operation and which are not converted into finished products or resold. Many manufacturing organisations separate direct materials, which are raw materials from ‘indirects’ such as cleaning, MRO supplies, travel, catering, printing, stationery etc. which are needed to support the operation. Many indirect acquisitions are low value and low risk and so lend themselves to simple acquisition systems and e-Commerce, such as online ordering through catalogues. See also Materials, Direct.

Matrix structures are alternatives to the centralisation/decentralisation models for organisational structure. In organisations subject to rapid change, traditional hierarchies and functional silos may be unresponsive to the need for change. In a matrix structure, functional staff report to the head of their professional discipline, e.g. procurement, finance or human resources, but work in multifunctional project teams alongside other disciplines and report to another manager. One of the weaknesses of matrix structures is that staff have two sets of objectives and two supervisors. For example, the procurement staff may be functionally accountable to the Chief Procurement Officer [CPO], but work in devolved multifunctional project teams, where they are accountable to the project manager. The procurement focus may be on releasing value, while the project team may be focused on achieving project timescales, and this may create tensions for practitioners working in a matrix structure. See also Structure, Federal.

Maverick purchasing involves the acquisition of categories from suppliers other than the contracted supplier, or using standards other than the agreed specification, or using processes other than the agreed process. Any of these situations cause spend ‘leakage’, or reduction in the value of spend secured by the contracted suppliers. Suppliers of spend analytics solutions and transactional purchasing systems describe the reduction in maverick spend as a benefit of their solutions. In practice, maverick spend erodes the value of forecast benefits from sourcing decisions, and may affect the confidence of contracted suppliers in the buyer’s volume estimates. However, while some maverick spend is driven by ignorance or rogue decision makers, some stakeholders choose not to use the preferred sources for legitimate reasons, and understanding why ‘maverick purchasing’ is taking place can yield valuable feedback on what stakeholders need and why.

Mean time before failure [MTBF] is the average time between system failures during operation. In procurement terms, the shorter the mean time before failure, the more frequently the system will require planned or unplanned downtime. Consequently, a total cost perspective will often value solutions that offer longer mean times before failure as a proxy measure for quality. See also Total Cost of Ownership.

Mean time before unscheduled removal [MTBUR] refers to the premature failure of a part or system that causes the part or system to be removed and replaced prior to its anticipated life expectancy. For example, supposing a supermarket anticipates that the fluorescent tubes in a store have a design life of 5000 hours, and that they will all be replaced at that time. However, some of the tubes fail prematurely, requiring individual replacement. The average time before the parts failed across all of the failed tubes would be the mean time before unscheduled removal. This calculation would aid reliability planning and judgement about the total cost and the life of the tubes. See also Mean Time Before Failure.

There are three broad definitions of potential benefits: cost savings (‘hard dollars’), cost avoidance and added value. For example, in a previous example, we paid $1 and purchased 10,000 units. This time we bought 10,000 and paid $0.90. The saving is 10,000 x $0.10 or $1,000. This would filter directly to the budget holder’s bottom line. Cost avoidance is a less tangible saving, which is not available for redistribution. These savings do not lower the price of products or services, but rather minimise additional costs that would impact upon the budget had the procurement process not intervened. Examples of cost avoidance savings include resisting a supplier’s price increase request, negotiating a saving from a supplier’s quoted price, negotiating services or goods on a non-billable basis that would otherwise have been paid for, and negotiating fixed prices rather than a rise and fall clause [in times of inflation]. See also Benefits, Savings and Benefits Realisation Plan

Measurement of a supplier’s performance involves defining key performance standards, each with a metric of performance, and monitoring performance against the standards. Supplier relationship management involves creating a framework not only to measure performance, but also promote performance improvement. For the supply of tangible products i.e. goods, it is relatively easy to measure supply chain performance such as lead-time. It is harder to measure the quality of service delivery, and if measurement is broadened to include corporate social responsibility issues, such as ethical behaviour, then measurement of supplier performance becomes a significant challenge. See also Benefits Realisation Plan, KPI, Performance Review and Supplier Relationship Management. Supplier Performance Management training is available at Academy of Procurement.

Merchantable quality used to be a standard implied into contracts as part of the Trade Practices Act. However, the Trades Practices Act has been superseded by the Competition and Consumer Act 2010 [CCA], and the merchantable quality provision has been replaced by a requirement for ‘acceptable’ quality. Acceptable quality means that the goods are fit for all the purposes for which they are commonly supplied, acceptable in appearance and finish, free from defects, safe, and durable. What is acceptable quality is determined by the nature of the goods, their price and any statements made on packaging or representation made about the goods by the supplier. The CCA is consumer law, but affects individual transactions with a value less than $40,000. See also Quality, Acceptable.

A metric is a measure usually associated with a performance standard. For example, a key performance measure may be lead-time, but each party needs to agree a common metric to measure what the lead-time is. The buyer may measure the lead-time from the date the purchase order is raised to the date the work is entered into their system as complete. But the supplier may measure the same performance in terms of the date the order is entered into their systems up to the date the good receipt note is signed or the service performed. The parties need to agree a common metric; otherwise they may measure performance differently. See also Key Performance Indicators.

A milestone is a significant event that marks the completion of a work package or phase. When developing a payment profile for a project, it can be helpful to link instalment payments to milestones such as completion of work packages or the fulfilment of a project deliverable. This creates an incentive for the provider to undertake timely performance throughout the project. See also Incentives and Payment Profile.

The minimum acceptable level of performance or service quality that a supplier or contractor must provide to meet the requirements of a contract

A contractual provision that addresses a specific, relatively small, or less significant aspect of the procurement agreement

Misrepresentation is a false statement made by one party that has the effect of inducing another party into an agreement. For example, during negotiation a salesperson claims that their solution will allow users to clock on using any smart phone. The buyer relies upon that statement and selects the system, but in practice the system doesn’t work as it recognises only certain smart phones. The buyer can ask for the contract to be set aside or claim damages. See also Puffery.

In procurement, a monopoly occurs when only one supplier supplies a particular category. Monopolies can occur due to barriers to entry such as patents, or through mergers or government licence. Monopolists have some or all of the following characteristics: they may maximise profit, set the price of the category in the marketplace and restrict the supply of the product or service. Monopolies are a form of market structure, and procurement strategies need to address the monopolist’s behaviour and the fundamental lack of competition. Market regulators may resist potential mergers and acquisitions that may create market dominance, and in some circumstances the planned merger may not be allowed. See also Market Structure.

Refer to Manufacturing Resource Planning or Materials Requirements Planning

Refer to Materials Safety Data Sheet

Refer to Mean Time Before Failure

Refer to Mean Time Before Unscheduled Removal

Refer to Make to Order

Refer to Make to Stock

Muda is a traditional Japanese word for an activity that is wasteful and doesn't add value or is unproductive. It is a key concept in lean manufacturing, and represents one of three types of waste, the others being mura, meaning unevenness of flow, and muri, meaning overburdening the system. See also Lean Manufacturing.

A set of metrics or performance measures that assess various aspects of the procurement process using multiple dimensions or criteria