Procurement terms: O

Objectives are the specific goals that you wish to achieve. Most authorities advocate setting a range of objectives, from the very best that you believe you might achieve through to the poorest deal that you just accept. Objectives should be defined in measurable terms: ‘to improve on the supplier’s tendered offer’ is a weak objective; ‘to achieve no less than 5% reduction in the bid price’ is a better objective. See also Negotiation. Negotiating Outcomes and Masterclass - Negotiation training is available at Academy of Procurement.

Obsolete goods are goods that are no longer wanted. In inventory control, obsolescent goods are those that are not yet obsolete, but are becoming obsolete in the future. For example, an organisation has a ‘brand refresh’ scheduled for three months time, and stocks of the current uniform are being run down. These uniforms are obsolescent; currently still in use, but soon to become obsolete. The cause of some slow moving or non-moving stock in warehouses is that they have become obsolete or obsolescent goods. Demand levels have changed due to technical change or user preference. Good practice is to give end-users advance warning of potential changes in usage so that inventory levels can be adjusted accordingly.

In a legal context an offer is ‘an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed’. Typically suppliers make offers in the form of bids, quotations or tenders, which may then be accepted by the buyer. The offer defines the terms upon which the supplier is willing to be bound, which normally include price, date of delivery, payment terms and a description of the category. One of the essential prerequisites for the formation of a contract is the existence of an offer. See also Contract and Counter Offer.

Offset is a form of countertrade, involving an agreement to purchase a specified amount of product from a particular country. For example, a government may award a tender to a contractor to make tanks for their armed forces, with an offset obligation to place 20% of the contract’s value with suppliers in that country. In order to meet the offset obligation, the contractor must source local suppliers or may need to develop a local supply base. See also Countertrade.

When sourcing globally, it is likely that at least some of the successful suppliers will be located in a country other than the buyer’s country. Offshoring is used most specifically in the context of outsourcing business processes or services, often to low cost countries. Successive rounds of trade liberalisation have promoted international free trade by reducing tariff barriers, and free trade agreements between nation states have also encouraged global sourcing, as opposed to nationalistic ‘buy national’ strategies. The emergence of strong service sectors in some low cost countries, especially India, has led to key business processes being ‘offshored’. From the perspective of the buying company, the service provider is offshore. See also Low Cost Country Sourcing and Outsourcing.

Oligopoly describes a particular market structure in which there are only a few suppliers. For classification as an oligopoly, one measure used by market regulators is to calculate the combined market share of the top four players in a particular market. If the figure is between 60% and 80%, it is classified as a loose oligopoly. These oligopolists will have some market power, as they will be the biggest players and may be able to set the market price, or be ‘price makers’. If the combined market share of the top four players is more than 80%, this is classified as a tight oligopoly, and there may be strong barriers to entry that prevent competitors from entering the market. Banking, petrol retailing and car manufacturing are all examples of oligopoly, and present problems for individual buyers as there is an imbalance of power and competitive processes may not be effective in securing value for money. See also Market Concentration, Market Failure and Market Structure.

An online catalogue is a listing of items or products available for purchase presented on the Internet. In e-Commerce, the ability to browse through products online and select from amongst alternatives is key to enabling simplified transactions. The supplier can control and update the description, unit of purchase/unit of sale, and price, and prospective buyers can access the information prior to selecting the product that they want. Catalogues can either be maintained by the buyer’s organisation or by the supplier, and can link the master data about the product into both the seller’s systems and the buyer’s systems. Simplifying the transactional purchasing process, so that end users can ‘self-serve’ and choose what they want from selected suppliers at pre-agreed terms can help change the role of procurement from processing individual transactions to managing the overall category or contract. See also e-Commerce and e-Marketplace.

Refer to Contract, Open Book

Opportunism describes the behaviour of one party in a commercial relationship that acts in its own interests when circumstances allow, without necessarily considering the longer-term consequences. For example, a buyer persuades an existing supplier to share a costing breakdown, and subsequently declines to pay the current price for the good being supplied, arguing that the supplier is making a 20% profit, double that that the buyer’s company is making. The cooperation displayed by the supplier in sharing their cost structure has been abused by the buyer’s organisation in behaving opportunistically, and as result it is likely that the relationship between supplier and buyer will change. See also Cooperation and Partnership.

Opportunity analysis refers to the process of assessing and evaluating potential opportunities for sourcing goods, services, or materials from external suppliers or vendors.

Refer to Cost, Opportunity

Historically, suppliers would issue an order acknowledgment to advise the buyer that a purchase order had been received; however, the order acknowledgment has become part of the ‘battle of the forms’. The practice of issuing order acknowledgments has declined in some sectors, as individual transactions now occur within a broader business framework, such as an overarching contractual agreement. See also Battle of the Forms.

The cost of raising a purchase order is the sum of all those costs associated with the user raising a requisition, budgetary approval, choosing the source, raising the physical purchase order, communicating it to the supplier, receiving the goods or services, reconciling the purchase order and invoice, approving the invoice for payment, paying the invoice and archiving the documents. The true dollar cost varies with the methods used to create the purchase order, process the purchase order and effect payment. For example, a completely manual system with hard-copy documents and a cheque payment will cost more than an online transaction or the use of a procurement card. The ‘order to receipt’ part of the process will cost between $10 and $25 depending upon the degree of automation. The ‘invoice to payment’ process will cost anywhere between $10 and $30, again depending upon the processes employed. See also e-Commerce and Card, Procurement.

A purchase order [PO] is a document issued by a buyer to their supplier that defines what is needed, in what quantity, when performance is required, and on what terms, including price and payment terms. The issue of a purchase order is increasingly a prerequisite in many payment systems for the payment of invoices, so as the practice of paying invoices without a matching PO declines, the proportion of transactions made by raising a PO is increasing, except for low value transactions. Procurement cards, as the lowest cost acquisition method, are often used for low value acquisitions. Legally, purchase orders can become part of the ‘battle of the forms’ between buyer and supplier, when each party exchanges documents with slightly different terms, making it hard to define when offer and acceptance were made on unambiguous and agreed terms. To avoid this, many recurring purchases are made subject to an overarching agreement with the supplier, so that each PO ‘calls off’ against a formal agreement which defines the terms and conditions of the arrangement. See also Battle of the Forms. Order Management e-Learning courses are available at Academy of Procurement.

Refer to Logistics, Outbound

Refer to Specification

Outsourcing is the process of changing the provider of a service or good from an internal division to an external source. The make or buy decision precedes outsourcing, which only occurs if the analysis concludes that the better value is possible from sourcing externally.

While direct materials and direct labour can be allocated to the product or service that represents the output of these inputs, deciding how the organisation’s overheads should be allocated is more challenging. Overhead allocation and absorption is the process of distributing the fixed costs that are not product-related to the goods or services produced by the business. For example, supposing the business has a legal team that protects intellectual property: how should their cost be allocated across the range of products the business produces? Overhead allocation in businesses with high fixed costs can significantly affect product pricing, and buyers should always try to understand the basis on which their suppliers have allocated costs. See also Costing, Activity Based.

Refer to Overhead Allocation.