“Basic Purchasing Terminology” Guide for New Employees—List of Keywords Essential for Smooth Operations

Understanding basic purchasing terminology is essential for anyone entering the procurement or purchasing field.
Having a grasp on key terms helps new employees navigate operations more smoothly and communicate effectively with colleagues and vendors.
Below, we provide an essential guide to basic purchasing terminology, helping to lay a solid foundation for success.

1. Purchase Order (PO)

A purchase order, often abbreviated as PO, is a document sent from a buyer to a vendor or supplier.
It outlines the types, quantities, and agreed prices for products or services.
A purchase order signals the buyer’s intent to purchase and sets the terms of the sale before the transaction is completed.
Understanding how to read and create purchase orders is fundamental in purchasing operations.

2. Invoice

An invoice is a request for payment sent from the seller to the buyer once the goods or services have been delivered.
It details the amount due, along with any other specific terms regarding payment, such as payment methods and deadlines.
Invoices play a critical role in the tracking of accounts payable and in ensuring timely payment of goods or services received.

3. Supplier (or Vendor)

Suppliers or vendors are entities that provide goods or services to a business.
They are a crucial component of the supply chain.
Building productive relationships with reliable suppliers ensures consistency in the supply chain and can contribute to better pricing and terms.
Familiarizing yourself with key suppliers in your industry is a step towards effective purchasing management.

4. Procurement

Procurement encompasses the process of finding, agreeing on terms, and acquiring goods, services, or works from an external source.
While purchasing is often used interchangeably, procurement considers a broader perspective including strategy, negotiation, and supplier relationship management.
A good understanding of procurement helps in aligning purchasing decisions with business strategies.

5. Request for Proposal (RFP)

An RFP is a document issued by a business when it intends to buy a product or service and wants to receive proposals from suppliers.
The RFP outlines the specifications, terms, and conditions required.
Suppliers respond with detailed proposals that summarize how they intend to meet these needs.
The RFP process is key for assessing supplier capabilities and making informed purchasing decisions.

6. Request for Quotation (RFQ)

Similar to an RFP, an RFQ is a document used to request prices and delivery times for a specific quantity of a product.
RFQs are more focused on pricing and less on other terms.
An RFQ is useful for items that are standardized and where the price is a primary concern.
Mastering RFQs can help streamline the purchasing process for commonly bought items.

7. Purchase Requisition

A purchase requisition is an internal document used to request approval for a purchase.
It is usually generated before a purchase order and is used to ensure transparency and budget control within the organization.
Understanding how to prepare and submit purchase requisitions enables smooth internal communication and approval flows.

8. Lead Time

Lead time is the amount of time that elapses between placing an order and receiving the goods or services.
Knowing the lead time for various items helps with planning and ensures that products arrive when needed, avoiding any disruptions in operations.
Proper management of lead time is critical for maintaining efficient inventory levels and satisfying business demands.

9. Terms and Conditions

Terms and conditions define the rules by which transactions are conducted.
They include details like payment terms, delivery dates, warranties, and returns policies.
Familiarity with commonly used terms and conditions is necessary to negotiate effectively and protect your organization’s interests.

10. Inventory Management

Inventory management involves overseeing the flow of goods from manufacturers to warehouses and from these facilities to the final point of sale.
Effective inventory management ensures that the right quantity of goods is available at the right time.
Understanding key inventory concepts can help avoid overstock or stockouts, both of which can negatively impact a business.

11. Just-In-Time (JIT)

Just-In-Time is an inventory strategy companies use to increase efficiency and decrease waste by receiving goods only as they need them for production.
This reduces inventory costs, but requires accurate forecasting, as any hiccup in supply chain can cause issues.
Familiarizing with JIT concepts helps in understanding efficient inventory strategies.

12. Supplier Evaluation

Supplier evaluation is a process of assessing and approving potential suppliers by measuring their ability to meet quality, cost, and delivery requirements.
This process ensures that purchasing decisions lead to the best value solutions for the company.
Learning how to evaluate suppliers enables you to make informed decisions that benefit the company’s supply chain and budget.

Conclusion

Understanding these fundamental purchasing terms will equip new employees with the knowledge needed to operate effectively in procurement roles.
By grasping terms related to documentation, supplier interactions, and inventory strategies, new entrants can contribute to smoother operations and strategic decision-making.
Consistent practice and experience will further hone these skills, paving the way for advancement and specialization in the purchasing field.