Procurement terms: R

RACI is an acronym that stands for Responsible, Accountable, Consulted, and Informed

Radio-frequency identification [RFID] is a technology that allows a reader to capture information from an electronic tag using radio waves. The technology has applications in identifying and tracking inventory, assets and vehicles. It may replace some barcoding applications as multiple RFID tags can be read at once and without the line of sight needed with a barcode. See also International Article Number.

Adjustments or modifications made to the pricing or fees specified in a contract

Ratio analysis is part of the financial analysis of a supplier, and may be undertaken as part of supplier appraisal, as part of a category plan or in negotiation planning. Using data from published financial statements such as the balance sheet and profit and loss statement, ratio analysis allows for comparisons between companies, or between the same company’s results in one year compared with previous years. Solvency ratios measure the ability of the firm to meet its debts; profitability ratios measure the firm's use of its assets and its ability to generate an acceptable rate of return for shareholders, and management ratios measure the quality of management of inventory and control of accounts receivable. The information from ratio analysis rarely answers questions but may highlight where further questions need to be asked. The validity of analysis of published financial accounts has been undermined somewhat by scandals which have revealed how the information presented in published financial accounts may be manipulated. Such information should be seen as one part of a jigsaw, but should not be the only source of information used. See also Ratio, Current and Supplier Appraisal.

The current ratio is a financial ratio that measures if a firm has enough resources to pay its debts over the next 12 months. It is derived by calculating the ratio of current assets to current liabilities. A value of less than 2.0 is usually considered a source of some concern, though the ratio will vary from industry to industry. The current ratio includes inventory, but not all inventory may be liquidated at the same price as the value on the books, so the ratio is often considered together with the liquidity ratio. As with all ratios, the trend is more important than any one value. See also Ratio Analysis and Ratio, Liquidity.

The liquidity ratio is a financial ratio that measures if a firm has enough liquid resources - such as cash and accounts receivable - to pay its debts over the next 12 months. It is derived by calculating the ratio of current assets less inventory to current liabilities. A value of less than 1.0 is usually considered a source of some concern, though the ratio will vary from industry to industry. The liquidity ratio is also called the ‘acid test’ or ‘quick ratio’ because by excluding inventory it provides a realistic guide to a firm’s solvency. As with all ratios, the trend is more important than any one value. See also Ratio Analysis and Ratio, Current.

Management ratios address the efficiency with which the managers are running the business. Ratios include the average collection period, i.e. how long it takes the business to collect money owed to it, average payment period, i.e. how long it takes the business to pay money to creditors, and inventory turnover ratios, i.e. how many weeks stock is on hand. As with all ratios, the trend is more important than any one value. See also Ratio Analysis and Ratio Solvency.

Measures of profitability vary from industry to industry; however, whichever measures are used, profitability ratios assess the business's ability to generate earnings compared to its expenses and other costs incurred during a specific period of time. For example, in capital-intensive businesses, profitability is usually expressed in terms of return on net assets. Examples of profitability ratios include profit margin, return on assets and return on equity. In general, a trend of increasing profitability is a good sign; though because profitability varies from industry to industry, always compare values against the values of other companies in the same industry. See also Ratio Analysis and Ratio, Solvency.

Measures of solvency assess the business's access to cash and liquid assets to pay short-term debts. The current ratio and liquidity ratio are examples of solvency ratios. In practice solvency ratios are a lagging indicator of financial problems, as the published financial accounts are historical documents. Leading indicators of financial issues may include unfilled vacancies, unpaid taxes, especially GST, unpaid creditors, minimal inventory and extended lead times. When considering solvency ratios, remember that they are only one part of a jigsaw, and the trend is more important than any one value. See also Ratio Analysis, Ratio, Current and Ratio, Liquidity.

Rationalisation is a strategy to achieve increased leverage through the reduction in the number of alternative solutions purchased to meet the same need, known as variety reduction, or the number of suppliers used to fulfil those needs, known as supply base reduction. In each case, the strategy needs to consider carefully the impact of the change on the risk profile of the category, as reducing the number of alternatives may increase the likelihood of an interruption to performance. See also Risk and Supply Base Reduction.

When negotiating with suppliers, if the buyer cannot accurately forecast demand, the parties may agree a rebate arrangement. In this case, a rebate is calculated as a sum of money payable back to the buyer by the supplier, based on actual purchase volumes over the previous operating period. The arrangement is attractive to suppliers, as the discount is based on actual rather than estimated volumes, and is payable in arrears. The scale of the discount may be based on a volume price agreement, the greater the volume purchased, the greater the discount. For example, if purchases over the period exceed $100,000, a 1% discount is ‘earned’ payable in arrears. Rebates are sometimes used by procurement agencies as a means of funding their operations. Suppliers agree to charge customers a price that includes a premium due to the procurement agency that negotiated the arrangement as a fee for the service. See also Volume Price Agreement.

A receipt is a document of confirmation that goods have been delivered or services performed. The supplier may present a proof of delivery and the buyer may generate a goods receipt note. The goods receipt note is usually part of a three-way match between the purchase order, the invoice and the goods receipt note, and is needed to confirm that the invoice might be paid. When a two-way match occurs, the invoice is matched either to the purchase order or simply to the goods receipt note. In some organisations without an ERP system it can be difficult to encourage end users to confirm that the services have been performed or the goods delivered, and a two-way match reconciling the invoice with the purchase order triggers payment in defined circumstances, such as below a certain value threshold. See also Procurement Controls, Three Way Match and Two Way Match.

Formalized procedure for receiving and inspecting goods or services that have been ordered and purchased by an organization from suppliers or vendors

Refer to Invoice, Recipient Generated

Reciprocal trading occurs when one of our customers is also a supplier to us. The two arrangements may or may not be formally linked. In principle, reciprocal trade may cement an existing commercial relationship, and may even create mutual dependencies, which may strengthen the relationship. In practice, the termination of one part of a reciprocal trading relationship can sometimes provoke retaliation by the other party, which causes friction in the relationship. Most procurement strategies involving reciprocal trading relationships seek to maximise the contribution of the relationship to profitability taking a ‘whole-of-business’ approach. However, modelling the flows of value between the parties is not straightforward. For example, supposing the value of our purchases from our supplier is $1million and the value of our sales to them is also $1million. We need to calculate the ‘value’ of the account from a sales perspective in terms of profitability as well as gross revenue. It may well be that the profit contribution of the $1million sales is 5%, or $50,000. Supposing the supplier is not competitive, and after switching costs an alternative supplier would save us $75,000 a year. How may the supplier/customer respond to us cancelling our purchases from them? Decoupling the two transactions is an ideal situation, but not always possible. See also Sourcing.

Recycling is the processing of waste materials into new products. Recycling aims to limit the loss of potentially useful materials, reduce the consumption of new materials, lower energy usage, reduce potential air pollution from the incineration of garbage, reduce water pollution produced by landfill by reducing the need for ‘conventional’ waste disposal methods, and lower the emissions of greenhouse gases in comparison to the potential emissions created in the production of new goods. The fourth component of the ‘waste hierarchy’, the others being ‘avoid’, ‘reduce’ and ‘reuse’, recycling is a key component in modern waste reduction. See also Corporate Social Responsibility and Sustainability.

Commercial relationships include the sum of all ways two or more organisations interact to create value. For example, a government department has a different relationship with a technology partner rolling out a department-wide software installation, than it has with the agency that manages it’s subscriptions to journals and periodicals. The number of touch points will be different, and the degree of organisational alignment will be different.The topic of relationships with trading parties has achieved widespread attention and in its current manifestation is referred to as supplier relationship management. The subject first attracted attention in the 1990s following research into how Japanese automotive companies achieved superior results to those of their Western counterparts. The reasons were more complicated than simply cooperation versus competition, although many of the initiatives which sought to change buyer-supplier relationships, such as partnership sourcing, alliancing and the new Engineering and Construction Contract attempted to institute cooperative behaviours in certain situations. Those initiatives were based on evidence that Japanese companies did not demonstrate the same indiscriminate selection of suppliers as their Western counterparts, and instead adopted a longer time horizon in their relationships. The outcome of these relationship choices was a higher level of trust, greater organisational alignment and more consistent supply chain processes.In practice, relationships adopted by Japanese companies outside Japan are perhaps more in line with traditional Western relationships, but the consequence of the explosion of academic research into supplier relationships has led to more organisations displaying a portfolio of supplier relationships and seeking to differentiate some relationships through the use of joint working teams and common cross-boundary processes. See also Cooperation, Lean Supply, Supplier Relationship Management and Trust. Commercial Acumen Essentials and Masterclass - Commercial Acumen training is available at Academy of Procurement.

Remuneration describes how the contractor is rewarded for their services. Remuneration to a contractor for a time and materials contract is straightforward, while a lump sum contract remunerates the contractor based on an agreed amount and in one payment. An incentive based contract remunerates the contractor in two components: first, a base element and second, a bonus element to be paid if defined performance standards are achieved. The adoption of the most appropriate remuneration basis can help motivate the contractor to deliver the desired outcomes. See also Contract. Performance Based and Contract, Time and Materials.

A rental contract is an agreement to allow the use of an asset for a period of time without ownership passing. The terms ‘hire’, ‘rent’ and even ‘lease’ are often used as synonyms, with the differences related to context. Typically equipment is rented on a short-term basis where the nature of demand does not warrant outright purchase. See also Contract, Hire.

In stock control, the reorder point or reorder level is the level of inventory that triggers the generation of an order to replenish the stock. In practice, the reorder point is usually set based on the desired service level planned. The service level is the percentage of requests met first time from stock on hand. The higher the service level, the greater the number of requests which can be met first time from stock, and the higher the safety stock will be. In most stock control situations, demand cannot be easily forecast, as demand patterns vary. Assuming a normal distribution of monthly demand, it is possible to calculate the stockholding that would give a 95% service level, a 97.5% service level and so on. A 1% increase in service level does not imply a 1% increase in stock; stock levels need to increase geometrically. The reorder level is set higher to deliver a higher service level and implies an increased level of safety stock. See also Economic Order Quantity.

In some engineering contexts, a repairable part is a component that can be removed, repaired and returned to service. For example, engines may be repairable parts, in that they can be removed, stripped, repaired or rebuilt, inspected and returned to a working context. See also Rotable Part.

When negotiating with suppliers, statements made pre-contractually upon which the buyer relies - including oral statements - can become terms implied into the contract, even if they are not written down in the contract as express terms. Some comments are mere ‘puffery’ while other representations made before the contract was signed, but not subsequently incorporated into the agreement, may become implied terms. Only promissory statements become terms; other statements may be treated as mere representations. Good practice is to record what was important from the sales and negotiation process, especially those terms upon which the buyer has relied, and make them express terms in the final agreement. See also Contractual Term, Puffery and Term, Promissory.

A Request for Information [RFI] is a market enquiry prepared by the buyer and issued to one or more prospective suppliers. The purpose is to gather information about the category, the supplier’s solutions, capacity and or capability, and key market intelligence. An RFI is used when the buyer lacks understanding of the product or service and/or the category, and wishes to increase that understanding prior to seeking commercial offers through a Request for Quotation, Proposal or Tender. RFIs are usually part of a multi-stage procurement process, with the next step usually involving shortlisting potential respondents based on the RFI replies and inviting commercial offers. The RFI may also be used to stimulate the supply market and to condition prospective suppliers about the potential opportunity that may exist. See also Expression of Interest, Request for Proposal and RFx.

A Request for Proposal [RFP] is a market enquiry prepared by the buyer and issued to prospective suppliers for higher value and/or more complex solutions. The purpose is to invite commercial offers from a number of suppliers in order to secure competition, and to gather information about the supplier’s solutions and capability, and key market intelligence. The selection of a Request for Proposal as opposed to a Request for Tender usually reflects the fact that the specification is not a conformance specification, which requires complete adherence to the buyer’s standards, but rather that bidders are free to submit potential solutions which meet the performance required. The evaluation of the RFP may require the buyer to compare alternative approaches to meet the same need, and most buyers structure their documentation such that some elements are to be read, and some elements are to be completed and returned in the format and with the contents requested. Typically this will include an opportunity for the supplier to confirm acceptance of the buyer’s terms and conditions so that the buyer may win the ‘battle of the forms’.The use of RFPs has increased significantly as more and more categories and projects have become contestable. The corollary is that bidders’ success rates tend to be low, with a 20% success rate being unusually high. Accordingly, some suppliers manage their success rate by only bidding for those RFPs which are clear and demonstrate good governance, and which they believe their company has a reasonable chance of winning. See also Battle of the Forms, Evaluation, Tender, Invitation to Treat and RFx.

A Request for Quotation [RFQ] is a market enquiry prepared by the buyer and issued to prospective suppliers, typically for lower value or simple acquisitions. The purpose is to invite commercial offers from a number of suppliers in order to secure competition, and to gather information about the supplier’s solutions, their lead time, service support and other dimensions of their value proposition. The selection of a Request for Quotation as opposed to a Request for Tender usually reflects the fact that the value of the proposed acquisition is lower, and a less formal approach is required. For example, the offers may be submitted on the supplier’s own stationery, rather than conform to the buyer’s requirements, and the closing time and date for receipt of offers may be less critical. Requests for Quotation may be issued competitively or non-competitively, depending on the buyer’s governance regime, though many governance regimes require a minimum of three quotations. The key requirements of the RFQ are to ensure that the supplier’s response states their price, delivery or performance timescale, the nature of their value proposition or offer and the period of validity of their offer. This allows the evaluator to select the most appropriate response and adopt a simple and streamlined approach to the acquisition. See also Battle of the Forms, Evaluation, Tender, Invitation to Treat and RFx

A Request for Tender [RFT] is a market enquiry prepared by the buyer and issued to prospective suppliers for higher value and/or more complex solutions. The purpose is to invite commercial offers from a number of suppliers in order to secure competition and to gather information about the supplier’s solutions, capability, and key market intelligence. The selection of a Request for Tender as opposed to a Request for Proposal usually reflects the fact that the scope of works is clearly defined and the specification used is a conformance specification, requiring complete adherence to the buyer’s standards, so that the buyer can compare ‘apples with apples’. The evaluation of the RFT may require the buyer to compare qualitative aspects of the supplier’s value proposition, such as quality and service, with quantitative aspects such as price. Most buyers structure their tender documentation so that some elements are to be read, and some elements are to be completed and returned in the format, and with the contents, requested. This is to ease the process of bid evaluation. The use of RFTs is most common in the public sector and for larger projects in mature categories where the scope of works can be clearly defined. While RFPs may be followed by optional negotiation, the use of post-tender negotiation is less common than the incidence of post-tender clarification. The bid packages may be large and complex, and the management of the tender process typically involves formal communications to observe probity obligations, particularly in the public sector. See also Battle of the Forms, Clarification, Evaluation, Tender, Invitation to Treat, and RFx.

A requisition is a formal written request from the end user requesting that a purchase order be raised for goods or services they need. While some organisations do not use formal requisitions, most create a formal system to allow budgetary approval of the proposed expenditure prior to the requisition being processed in to a purchase order. For example, the end user may state what they need, in terms of a description of the good or service, a quantity, the budget or expenditure code, and a required delivery date. Sometimes the user may suggest a supplier, though this depends on the context. Increasingly, end users are empowered to order directly goods and services that are already subject to a procurement arrangement without creating a requisition. Procurement cards may be used for this purpose, reducing non-value adding processes, or in the case of ERP or procurement systems, a software solution creates and manages the workflow automatically. The user’s requisition is routed to the appropriate approver, based on the system rules, and the approver approves or denies the request. For categories that are subject to existing contractual agreements, the system may create a purchase order automatically. This changes the role of procurement practitioners from managing individual transactions to a category-based approach to managing key spend streams. See also e-Procurement.

The level of risk that remains after all planned risk mitigation efforts have been implemented

A responsive supply chain is one that is sensitive to meeting customer requirements. For example, an online computer hardware assembler may update their product range every 90 days, when the new models, which may have increased performance, will be at lower prices than the models they replaced. If the supply chain included component suppliers who produced six months’ inventory in one production run, this would be chronically inefficient. Inventory levels would be many times what was needed, and the stock on hand would be obsolescent, or obsolete, leading to discounting and waste. What is needed instead is small lot manufacturing, minimal inventory, and a quality system that is focused on aligning the technology road map of the supply chain participants. The computer assembler would share their 90-day promotional cycle, and the supply chain participants would align their research, design and production processes around the rhythm of the whole supply chain, to create a more customer responsive supply chain. See also Agility, Bullwhip Effect, Obsolescence and Supply Chain.

Refers to the process of inviting new bids or proposals from suppliers or contractors for a specific project, service, or product after the initial procurement process has been completed

A measure of the profitability of a business, especially a capital-intensive business. Return on capital employed [ROCE] or return on net assets [RONA] calculates the ratio of net profit before interest and tax divided by total assets less current liabilities. This measures two aspects of performance: net profit margin and net asset turnover. If the reason that shareholders invest in a business is to achieve a higher rate of return for their money than they can achieve by placing the money in a bank, it is reasonable to assume that they expect that business will measure the actual return on capital and compare that with the expectation of shareholders. When the return on capital is greater than the weighted average cost of capital the company is creating value. When it is less than the cost of capital, value is being destroyed. See also Economic Value Added, Profit and Ratio, Profitability.

Return on investment [ROI] is a calculation used as part of investment appraisal and in business cases in order to validate the likely outcomes of proposed investments and compare them with required or desired ROIs. Typically, financial techniques such as net present value or payback period are also used to assess the merits of proposed future investments, as they are more accurate assessments of expected returns for long-term investments compared with accounting ROI calculations.The role of procurement in business cases and evaluation of ROIs is to ensure that the processes used to estimate expenditure are robust and to validate that proposed expenditures take into account all likely costs. In considering the likely benefits of the project, it is important to review the extent to which risks associated with the procurement process and supplier performance have been fully identified and managed, and to ensure that the benefit realisation program is realistic. The proposed contractual arrangements with suppliers should ensure that the risks associated with the investment are managed appropriately. See also Discounted Cash Flow, Investment Appraisal and Net Present Value

A measure of the net profitability of a business, especially a capital-intensive business with a high proportion of fixed assets. Return on net assets [RONA] calculates the ratio of net profit before interest and tax divided by total assets less current liabilities. This measures two aspects of performance: net profit margin and net asset turnover. The higher the value, the better, and if the return on capital is greater than the weighted average cost of capital, the company is creating value. Upstream oil companies are an example of a large capital-intensive business that measures of profitability like net profit margin have limited relevance. Investors consider RONA a preferable measure, amongst others, in this scenario, as if RONA is more than the cost of capital, value is being created. See also Economic Value Added, Profit and Ratio, Profitability.

Refer to Logistics, Reverse

Refer to Marketing, Reverse

Refer to Request for Information

Refer to Radio-Frequency Identification

Refer to Request for Proposal

Refer to Request for Quotation

Refer to Request for Tender

The generic name for market enquiries. This reflects the fact that whether the enquiry is for information [RFI], quotation [RFQ], proposal [RFP] or tender [RFT], there are some common characteristics. The most obvious common characteristics are that a common enquiry document is sent to multiple respondents, aspects of the enquiry require a response, and the responses need to be collated, recorded and evaluated in a systematic and transparent way.

Risk is the potential for a chosen course of action or unexpected external or internal events to lead to an undesirable outcome. ISO 31000 defines risk as 'effect of uncertainty on objectives'. This definition mentions uncertainty as the cause of risk, and includes events that may not happen, as well as perceiving risk as creating both negative and positive impacts, rather than simply negative outcomes. Risk and uncertainty are related concepts. If a supplier agrees to fix the price of bananas for 12 months at $10 per kilo, both buyer and supplier have certainty about what the price will be in 11 months time. The risk for each party is different: if the market price of bananas is $5 per kilo in 11 months time, the buyer risks incurring unnecessary cost; if the market price of bananas is $15 per kilo in 11 months’ time the seller risks losing potential profit. Risks in the procurement process can occur in a variety of dimensions: the operational risk of non-performance, the technical risk of poor quality performance, the commercial risk of uncompetitive markets and the reputation risk of unsustainable practices by suppliers are just a selection of potential operational risks. Portfolio Analysis is a key tool used by buyers to develop procurement strategies as the approach incorporates an understanding of the key risks and opportunities in developing these strategies for different categories. The key stages of risk management are risk analysis, risk assessment and risk treatment, and in procurement terms the treatment of risk by transferring risk to suppliers is a key part of the procurement practitioner’s role. The buyer needs to understand the risk, identify which party is best able to manage the risk, and then allocate the risk appropriately and at a cost that secures best value and appropriate behaviour. See also Portfolio Analysis. Risk Analysis & Management – Procurement & Contracts training is available at Academy of Procurement.

Risk and reward, or gainsharing, is a strategy used to motivate providers to deliver superior performance by creating a bonus dependent upon achieving performance standards and a downside risk in the event performance does not meet the required standard. For example, supposing procurement consultants are engaged to make savings in a category, and their usual fee is $3000 per day. They could be engaged on a unit rate contract for 20 man-days at a cost of $60,000. A risk and reward contract might suggest that if they achieve savings less than $300,000 on the category, then their fee rate would be 20 x $2500 per day = $50,000. But if their performance realised savings of more than $300,000, then their daily rate would be $3500 per day, i.e. $70,000. As with all performance-based contracts there are three challenges. First, what is the ‘normal’ level of performance that might be expected? And is the threshold of $300,000 too low or too high? Second, is the upside ‘bonus’ sufficiently attractive to cause the consultants to perform better? Third, are the behaviours being incentivised aligned to the business need, or will the consultants make short-term decisions that benefit them but cause longer-term problems for the buyer? See also Contract, Performance Based and Incentives.

A systematic and structured approach to identify, assess, mitigate, and monitor risks associated with the execution of contracts. It aims to proactively address potential risks and uncertainties that could impact the successful delivery of the contract, financial outcomes, or legal compliance

A road map is a high-level plan of what needs to happen when, in order to aid detailed planning. Road maps are used in planning procurement strategies and in developing technology road maps. A road map can help stakeholders reach consensus about what needs to be done as they can see the program of activities as a coherent whole, rather than a series of unrelated tasks. Road maps also allow prioritisation and allocation of resources and can help communicate plans to others in an accessible and simple way.

Refer to Return on Investment

Root cause is the source of a problem that needs to be addressed if a repetition of the event is to be avoided. In problem solving, when an event occurs it may be caused by a variety of factors, that themselves are the consequences of other factors. Problem solving may probe the initial factors, and then the causes of those factors, which may point to a root cause, which is the ultimate reason for the event. For example, a supplier may have an average lead-time that is longer than the agreed lead-time. Investigation may reveal that the customer’s delivery is scheduled at the end of a van run. This may appear to be the cause of the extended lead-time. However, it may be the reason that the customer is at the end of the van run is that the supplier doesn't have enough vehicles to meet customer demand, which in turn is due to undercapitalisation of their business. Alternatively, the supplier may value other customers more highly than this customer because other customers are more profitable, or because the agreed price is too low to be sustainable.

A systematic process of identifying the underlying reasons or fundamental factors that lead to issues, problems, or failures within the procurement process. It is a problem-solving technique used to investigate and understand the true cause of a specific procurement-related problem or issue rather than just addressing its immediate symptoms

In some engineering contexts a rotable part is a component that can be removed for repair or servicing and then replaced in the customer’s fleet. For example, generators and pumps are rotable parts, in that they will be removed, stripped, serviced, rebuilt, inspected and returned several times during their life. See also Repairable Part.