Procurement terms: V

The term ‘validity’ has two meanings for procurement. Validity may refer to the state of being valid or able to be substantiated; on quotations validity can indicate the period of time for which a supplier’s quotation is valid and available for acceptance. For example, a supplier may state that an offer is valid for 30 days from the date of the original offer. Validity can also refer to the sustainability in law of an agreement between two parties. The Courts apply a series of tests to establish whether exchanges between the parties have fulfilled the requirements to create a valid contract. These requirements include offer, acceptance, consideration and the intention to create a legal relationship. See also Request for Quotation.

Value is an umbrella term, describing the range of benefits or utility derived, either by the user, a stakeholder, the supplier or the buyer. Procurement practitioners have typically used three broad areas to measure value. The first is cash-releasing benefits, which broadly equate to ‘savings’. The second is value released through the procurement process that does not translate into bankable savings, (‘hard dollars’), in the budgets of buying organisations. This is known as cost avoidance. Third, the procurement process may release value through reducing risk, reducing cycle time, affording the buying organisation competitive advantage or other ‘value adds’. These definitions reflect the fact that it is often easier to describe value than to measure it and the challenge of the procurement process is to bring to light what represents value for each category and ensure that the solution selected represents best value. See also Value Added.

The value added to a product or service at each phase of the supply chain, based on the difference between the input value and the output value. A diamond cutter may buy a rough diamond, but once he cuts and polishes the diamond, the resale price will be many times the original cost of the rough diamond. This represents the value added by the diamond cutter. See also Savings.

Value-adds address all those other benefits that may not be cash releasing but represent a business benefit, for example improved value from quality, service or delivery. When the procurement process is aligned with the strategic goals of the organisation, it is reasonable to expect that the impact on the business will include more value-adds. As an example, a franchise fuel retailer negotiates with a dry-cleaner a kiosk arrangement allowing customers a drop-off and collection service for their dry-cleaning at any of the member outlets. Via the procurement function, negotiations achieve an enhanced margin for the retailer, point of sale marketing material at no cost to the retailer and an exclusive ‘same day service’ guarantee. The last two are benefits adding important value to the retailer, but not through cost-savings or increased margins, they are value-adds that will result in an increase in frequency of customer visits and more sales of higher-margin products.

The systematic review of specifications, materials and processes, and systems, in order to optimise fitness for purpose at lowest overall cost. The process, also called ‘value engineering’, involves challenging designs, standards and processes and exploring whether the cost could be reduced without reducing quality.

A value chain can be conceived at two levels: first, at the level of the firm, the value chain is a series of primary and support activities that acquire and process inputs I order to create value. Second, at an industry level, the value chain describes the linkages between the different firms operating in the same supply chain. Its significance for procurement and supply chain management is not limited to the fact that it proposes that participants in the same supply chain are united in a common value stream. The value chain also identifies inbound and outbound logistics as primary activities in creating value for the enterprise. Value chain analysis implies a review of the organisation’s key activities to identify opportunities to increase margins through a focus on a range of cost drivers. See also Costing, Activity Based.

There are three activities associated with value: creation, sharing and claiming. Suppliers’ solutions may help create value for the buying organisation, so when pricing their offering, suppliers will seek to charge a price for their solution which reflects the value created for the buyer. In doing so, they are seeking to claim some or all of the value created for the buyer. In cooperative relationships, the parties may agree that rather than seeking to claim value from the other, they will share the value between them. As an example, if a supplier provided a solution which reduced their client’s electricity consumption by 10% and the client saved $100,000 as a consequence, the supplier has created the value and the relationship between the parties will determine whether the buyer claims the value, whether the supplier claims the value, or whether the parties decide to share the value between them. See also Muda.

Refer to Value Analysis

Together with lowest total cost of ownership, value for money is one of the most common goals for the procurement process, especially in the public sector. The term is used to highlight that ‘lowest price’ does not always represent the best outcome for the organisation when evaluating alternative offers. However, the definition of what is value for money is often situational and depends on a variety of factors. Defining value for money involves evaluating the extent to which the proposed solutions will achieve the desired outcomes and also reconciling those benefits with the total lifetime cost of realising those benefits. Typical factors that are taken into account in defining value for money include fitness for purpose, quality, total lifetime costs, risk, environmental and sustainability issues, and a variety of other factors relating to the contribution of the proposed solutions to the organisation’s overall goals. As corporate social responsibility is translated into congruent procurement processes, the definition of value for money will need to take into account a broader range of criteria. See also Value. Finance for Procurement training is available at Academy of Procurement.

Any issue that is subject to negotiation may be described as a variable. Price, delivery, packaging, service, payment terms are all examples of variables.

Refer to Cost, Variable

Variance describes the difference between an expected value and the actual value. As an example, a cost variance would be calculated by subtracting the actual cost from the budgeted cost; a cost overrun would result in a negative variance. In inventory control, when undertaking a stock count, if the physical stock differs from the ledger stock this will be a variance and the output of the stock check will be a variance report highlighting the scale and direction of the stock check variance. See also Stock Control.

When two parties have entered into a contract, one party cannot unilaterally change the terms of the agreement. However, it is common during an agreement for parties to agree to a variation to the terms of the original agreement. A variation must fulfil the requirements governing the formation of a contract in order to be legally enforceable and a variation can only be made in respect of obligations of one of the parties which are as yet unperformed. See also Claim.

Variety reduction involves reducing the number of different solutions used to fulfil the same need. When considering developing a procurement strategy for a new category, it is common to find that there is a variety of different standards and solutions employed across an organisation to fulfil broadly the same need. Similarly, when looking at the range of items held in stock, it may be that there is more than one line held in stock to meet the same need. Variety reduction involves engaging with stakeholders and identifying whether it is possible to reduce the number of different solutions. If one solution can apply across the organisation this would involve standardisation. See also Rationalisation.

The term ‘vendor’ is a generic label applied to suppliers. It is usually used to describe first tier suppliers and may embrace manufacturers, distributors or agents. When developing a classification of supplier relationships, the term ‘vendor’ is often applied to normal commercial relationships where there is limited cooperation, alignment or joint projects. This contrasts with the label ‘partner’ which is attributed to suppliers with whom there is a greater degree of cooperation. See also Supplier Relationship Management.

Refer to Inventory, Vendor Managed

A central repository that contains essential information and details about vendors or suppliers with whom an organization conducts business. This data serves as a foundation for effectively managing the procurement process and establishing a smooth relationship with vendors

The capture, review and interpretation of data describing a supplier’s contractual performance. Vendor rating is a building block of supplier relationship management. Suppliers are rated against a series of dimensions, allowing performance to be compared against that of other suppliers, or tracked through time to identify trends. Dimensions of performance that may be measured include delivery performance, quality performance, service, pricing performance etc. Capturing the data is easier for goods than for services and it is also easier to capture information where there are fewer delivery points. ERP systems often incorporate supplier relationship management modules that allow the systematic capture of data. See also Performance Regime.

Refer to Integration, Vertical

An agreement between two parties can be void for a variety of reasons, particularly where any of the prerequisites of a valid contract are absent.

A discount given by a seller to a buyer based upon the economies of scale of a larger order. Leverage and aggregation are predicated on the assumption that as the volume purchased increases, the price will fall. See also Price.

A pricing agreement between buyer and seller that defines different prices based on the actual volume purchased by the buyer over a given period. The technique allows buyers to leverage their aggregate spend even if they cannot accurately forecast precise volumes. From a sales point of view, a volume price agreement can pre-empt negotiations, as the seller can demonstrate that discounts are available to the buyer, but only if linked directly to increases in volume. The setting of the thresholds to trigger a discount and the scale of the discount are usually determined by the seller. See also Logic.

Risk and vulnerability are often used interchangeably: however, in some contexts, the terms have related but separate meanings.  While risk is often used to describe the likelihood of an event happening, vulnerability may refer to, for instance, the quality of controls in a system that affect the ability of the system to withstand an event or to the economic significance of the impact of the event.  As an example, there may be a risk in the supply chain if the sole manufacturer experiences an interruption to production.  If the pipeline stock in the supply chain is insufficient to cover requirements until the manufacturer can resume production, then the whole supply chain is vulnerable.  See also Risk and Uncertainty.