Procurement terms: T

Refer to Knowledge, Tacit

Tactics are the planned and unplanned operational activities adopted in order to carry out overall strategy. Tactics are different from strategy, in that strategy embraces both the ‘what’ and the ‘how’ over the longer term and across the whole organisation, or indeed the whole supply chain, while tactics are about the ‘how’ and are short term in character. As an example, a strategy might be to procure a category at the lowest overall cost and a tactic might involve sequencing the incumbent supplier last in the negotiations. Take the Negotiation Profile assessment at Skills Gap Analysis.

A take or pay contract is an agreement between two parties under which the buyer agrees to pay for the supplier’s output whether or not the buyer needs the output at that time. This reduces the supplier’s risk, as they have guaranteed sales revenue irrespective of the buyer’s demand. Such an arrangement would occur where there is significant investment required by the supplier and the supplier has sufficient market power to persuade the buyer to share in the commercial risk. Such contracts are most commonplace in the supply of gas, electricity and some commodities.

The count of items. For example, in a logistics context a warehouse may monitor the number of daily vehicle movements by using a tally counter and recording the total number of vehicles visiting the facility over a given period.

In negotiations a target represents an objective or range of objectives for a specific negotiable issue. For example, if a buyer has a budget of $100 and the lowest supplier offer is $105, the buyer may set a target for the purchase price below $100. Some commentators believe that negotiators should set a range of objectives, such as an ‘ideal’ target, a ‘realistic’ target and a ‘walk away’ target. See also Target, Ideal and Target, Realistic.

Target costing is an approach to profit planning in which a manufacturing company identifies a target profit margin and, based on the prevailing market price, calculates the maximum cost of manufacturing which will yield the target profit level. As an example, if widgets sell for a market price of $100 and the company wants to make a profit of $10 on each unit sold, then the target cost is $90. This target cost will then affect the product design, materials, specifications and manufacturing choices, which will be focused on ensuring that the profit target is realised. Target costing is an alternative to cost plus pricing in which a company would bring a product to market, for example at a cost of $95, and then have to accept a margin of $5 in order to remain competitive. As product life cycles have become shorter, the ability to value engineer the design during the life cycle of the product has reduced and so target costing seeks to engineer profitability from the time of the product launch.

The maximum quantity of stock that is planned to be held at any time. Once the reorder level has been set and the reorder quantity received, the quantity held in stock will be the target inventory level.

The desired or specified level of performance that a supplier or vendor is expected to meet while delivering goods or services under a contract

An ideal target is the best possible outcome that you might achieve, and thus the most difficult to realise. The rationale is that if you do not try to achieve this outcome, then you never will, and you will be a victim of lack of ambition. Accordingly, as part of negotiation preparation, negotiators are encouraged to define a range of targets, including the best possible outcome and use that as part of their objective setting. See also Planning, Negotiation and Target, Realistic

The poorest outcome and the least demanding target is one that you can just accept. Beyond this level you will have to walk away. Accordingly, as part of negotiation preparation, negotiators are encouraged to define a range of objectives, including the poorest outcome that you can accept, and use that as part of their objective setting. See also Planning, Negotiation and Target, Ideal.

A realistic target refers to the most likely outcome of a negotiation; it is neither the most demanding nor the least demanding but one somewhere in between. Accordingly, as part of negotiation planning, negotiators are encouraged to define a range of targets, including the most realistic outcome, and use that as part of their objective setting. See also Planning, Negotiation and Target, Ideal.

A list of all the goods on which duties are levied and the rate at which duty is charged. A tariff may also refer more generally to a schedule of the rates applicable to transportation and associated services.

A team is a group of people focused upon a particular task or goal. Typically team members have complementary expertise, co-operate with each other, and are collectively accountable for results. Many procurement projects involve cross-functional teamwork, in which a group of stakeholders with different functional backgrounds cooperate on a project to achieve a common goal.  In some organisations procurement the procurement practitioner leads projects, while in others the procurement practitioner is one of the stakeholders, and a key business owner or budget holder leads the project. In each case, the capabilities needed by the procurement practitioner include influencing and facilitation skills in order to build consensus and stakeholder support.  See also Facilitation and Negotiation. Tale the Commercial Leadership Assessment at Skills Gap Analysis.

When assembling a cross-functional or other type of team, the team formation process can be helped by the collective development of a team charter. The team charter may define the team’s mission, objectives, processes, roles, responsibilities and values. Teams are believed to evolve through defined phases, and developing and agreeing a charter can help the team form and establish some operating norms. See also Facilitation.

A team of stakeholders from different functions who are brought together to achieve a common goal. In procurement projects, cross-functional teams engage stakeholders and allow consultation and decision-making. Facilitating cross-functional teams is a key procurement capability. See also Facilitation.

Refer to Evaluation, Technical

Refer to Specification, Technical

A formal offer from a supplier, typically in response to a Request for Tender [RFT]. Tenders are commonly used where there is a defined scope of work and there are multiple suppliers capable of bidding for the contract. In the public sector, tenders may be open to all potential bidders, or restricted to selected bidders. In some cases there may be a single tenderer. The tender document is usually structured such that the supplier’s offer may be accepted unconditionally, usually under the buyer’s terms and conditions.

A buyer may sometimes require a tender bond when a supplier is tendering for large projects. The tenderers are required to submit a tender or bid bond as surety that, should their bid be accepted, they will honour the commercial terms in that offer. The bond will be forfeited if the bidder wins the work but declines to complete the project.

Refer to Evaluation, Tender

Implied terms are terms that the law implies into a contract even though they are not stated in the contract. Implied terms may arise from two sources, common law and statute law. In common law, terms are implied when it is necessary to give full effect to the intention of the parties. For example, a term that is so fundamental that the contract could not be performed without the term may be implied into the contract. Australian Consumer Law now provides statutory guarantees that are very similar to the terms previously implied into contracts. Because these terms are not implied into a contract they do not give rise to contractual remedies; instead, remedies are incorporated in the Australian Consumer Law. See also Representations, Pre-contractual and Puffery.

A promissory term is a statement that a reasonable bystander, aware of the circumstances of the case, might regard as being so important to the parties that it should become an implied term of the contract. The tests that decide if a statement is a promissory term include: Was the representation included in a written document? When in the negotiation was the representation made? How important was the representation to the whole deal? If the statement was included in the negotiation record of discussion between the parties, then this may be evidence that the parties regarded the statement as so important that it should be considered a term of the contract.

A contractual term that offers the right to unilaterally terminate a contract whether or not the other party is in breach of their contractual obligations. A buyer may find that part way through an agreement the circumstances have changed and it is economically advantageous for the buyer to terminate the contract. Alternatively, the buyer may perceive that the contractor has defaulted on their obligations under the contract, but is reluctant to seek to terminate the contract due to default. It may be easier to terminate the agreement for convenience, rather than engage in a protracted dispute as to whether the breach of contract was sufficiently serious to warrant termination.

Refer to Contract, Termination of

Contractual terms include all the provisions, rights and obligations relevant to a particular agreement. They include express terms, which are written down and included in the contract and, implied terms, which may not be written down, but which will be implied into the contract by the courts. Some clauses go to the root of the contract and a breach of these clauses will grant the right to seek damages as well as termination. Such clauses are called conditions. Clauses that are less important to the performance of the contract are called warranties and breach of these clauses may give the right to seek damages though not to seek termination.

When parties agree commercial terms in a contract, one of the terms will include the interval between the buyer receiving a correct invoice and the buyer making payment of the agreed sum. The actual terms agreed will reflect the balance of power between the parties and the degree of trust in the relationship. In some international transactions, the seller may insist upon a Letter of Credit, while if the buyer is in a powerful position they may insist that payment occur 30 or 45 days after receipt of the invoice.

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When approving a supplier’s invoice for payment, a three-way match reconciles the purchase order; the goods receipt note and the supplier’s invoice, in order to determine whether the invoice should be paid in its entirety. See also Invoice, Receipt, and Two Way Match.

Refer to Supplier, Tiering

Refer to Contract, Time and Materials

Reducing cycle time is a key goal in many processes, but is especially relevant to supply chain management. Waiting for upstream processes is an example of waste, while reducing time to market can contribute to competitive advantage. Many stakeholders perceive that the procurement process takes too long, so the procurement process itself should be accelerated, for example by maintaining up-to-date market reviews so that, when an acquisition is initiated, information on the supply market is already available.

In law, title refers to the right of ownership. Suppliers will often seek to retain title until the buyer has fulfilled their obligations, such as paying for the goods in full.

Total absorption costing is an approach to dealing with allocation of overhead costs in which all the overhead costs such as rent, rates, premises, head office administration etc., are fully recovered by being incorporated into the costs of products created. This approach contrasts with marginal costing, in which only variable costs are allocated to products. See also Costing, Absorption.

Analytical approaches used to evaluate and compare the overall costs associated with acquiring goods or services from different suppliers over the entire lifecycle of a product or service

A concept that takes into account not only the direct costs of acquiring goods or services but also the broader costs and benefits associated with different procurement choices

Total Cost of Ownership (TCO) refers to the comprehensive and all-encompassing assessment of all costs associated with acquiring, owning, and maintaining a product or service over its entire lifecycle. It goes beyond the initial purchase price and takes into account various direct and indirect costs incurred throughout the product or service's operational life.

In some industries the advertised price is routinely discounted for sales to target market segments such as trade buyers. For example, individual customers may pay the gross price for paint, but intermediaries like commercial painters would pay the gross price less a discount of 40%. This allows the commercial painter to ‘mark up’ the price they pay for the paint to make a margin on the paint cost to them.

A distinctive mark, device, brand, label, name or signature used by a company to distinguish their offering from that of their competitors. Registering a trademark may give rights to the exclusive use of the trademark.

Refer to Competition and Consumer Act 2010

When contracting with new suppliers, it is important that all parties share a common understanding of the basis of quotations and the roles and responsibilities of the parties. Trade terms seek to define particular abbreviations, phrases and customs so that the parties in a transaction can negotiate on a common basis.

Refer to Contracting, Traditional

A traditional risk matrix in procurement is a visual tool used to assess and prioritize risks associated with procuring goods or services from suppliers. It provides a structured approach to understanding the likelihood and potential impact of various risks and helps procurement professionals make informed decisions about risk mitigation and management.

The design and delivery of interventions focused on improving the performance of the employee in their current job role. This contrasts with development interventions, which support the staff member in their future career.

In understanding why chaebol and keiretsu may be appropriate in some situations, and vertical integration in other situations we need to understand the costs of doing business within the corporation and between business units within the corporation.  These costs of doing business are called transaction costs and include search and information costs, bargaining costs and contract management costs. In a vertically integrated corporation these costs exist in the form of internal transfer pricing discussions and possibly service level agreements. But while the transaction costs are low, the lack of specialisation may cause individual business unit costs to be higher than the same service provided by equivalent external providers. Specialisation by single purpose companies allows lower operating costs, but buyers incur higher transaction costs to engage these providers. There is the cost of sourcing and evaluating the external service providers, negotiating terms and contractual agreements, and supervising and managing their performance.  The buyer might be better off if it could access the lower operating costs of specialist contractors, were it not for the additional transaction costs associated with dealing with third parties. If the search for a suitable contractor was narrowed down to one source, and the negotiation was simple and straightforward, and the pricing was based on open-book or transparent arrangements and the contract management was based on trust and co-operation, the transaction costs would be minimised.  In this case, the system as a whole would be better off.

Transaction costs are the costs of ‘doing business’ and may be classified in terms of internal and external transaction costs. Time spent developing service level agreements and discussions about internal transfer pricing are examples of internal transaction costs. Market reviews, supplier appraisal, negotiations and the costs of drawing up and managing contracts between two separate entities are examples of external transaction costs. The concept was popularised through transaction cost economics and part of the rationale behind cooperative supplier relationships is the reduction in external transaction costs.

A label given to a change program that seeks to align the procurement process in an organisation more closely with the organisation’s overarching strategy through a range of initiatives including people, process and technology.

While the adoption of corporate social responsibility implies a broad commitment to address objectives other than narrow economic goals, the triple bottom line concept seeks to measure the organisation’s performance in terms of its impact on ‘people, planet and profits’. Reporting frameworks that previously focused on financial measures of performance are expanded to include ecological and social performance.

Trust is the expectation that the other party will behave in a predictable and mutually acceptable way. In inter-firm relationships, the presence or absence of trust can affect the level of cost in a relationship. The existence of trust is thought to lower the transaction costs in a relationship. For example, if a buyer inspects incoming goods to check that the goods supplied correspond to the goods ordered, this adds a layer of cost. This in turn reflects an absence of contractual trust. Some of the benefits of cooperative sourcing strategies are based on reducing system costs by substituting cooperation for opportunism.

For rotable components turn around time is the time between the removal of a repairable component from use and completion of its repair and availability for use.

Refer to Contract, Turnkey

Refer to Bidding, Two Stage

When approving supplier’s invoices for payment, a two-way match reconciles the purchase order and the supplier’s invoice, in order to determine whether the invoice should be paid. This is essential where there is no receipt, for example for rental or other ongoing payments without physical performance, but may be extended to lower value categories. Most organisations seek a three-way match in most situations to confirm that the work has been done. See also Invoice, Recipient Generated.