Procurement glossary
The words behind the price.
The terms buyers, cost engineers and designers use when they talk about what a part costs and why. Short definitions, worked examples, and where each idea tends to break in practice.
- Cost breakdown CBD · Open book costing A supplier's quote split into its parts: material, processing, tooling, overhead, logistics and profit, so each line can be checked on its own.
- Design-to-cost DTC · Target costing Setting a cost target for a product early and designing to meet it, with cost treated as a specification alongside function and weight.
- Direct spend Direct procurement · Direct materials Everything a manufacturer buys that ends up in, or on, the product it sells: raw materials, components, sub-assemblies and their packaging.
- Index-linked pricing Indexation · Raw material price adjustment A pricing clause that ties part of a part's price to a published commodity index, so the price follows the raw material up and down.
- Indirect spend Indirect procurement · Non-production purchasing What a company buys to run itself rather than to build its product: energy, IT, facilities, maintenance supplies, services and travel.
- Minimum order quantity MOQ · Minimum order The smallest quantity a supplier will accept on one order, set by its setup costs, packaging units or production batch size.
- Part rationalization Part rationalisation · Part harmonization Reducing the number of part references a company buys by finding the ones that are the same, or close enough, and keeping one.
- Purchase price variance PPV · Price variance The difference between what a part actually cost and its standard cost for the year, the number most procurement teams are measured on.
- Should-cost Should-cost analysis · Cleansheet costing What a part ought to cost, rebuilt from its material, process, machine time, labour, overhead and margin rather than read off a supplier's quote.
- Single sourcing Mono-sourcing · Single-source supply Buying a part from one supplier by choice, even though others could make it. Not the same as sole sourcing, where only one supplier can.
- Sole sourcing Sole source · Captive supply When only one supplier can provide a part, because of a patent, a proprietary design, a certification or a specification that names them.
- Tooling amortization Tooling amortisation · Tool amortization Spreading the cost of a mold, die or fixture over the parts it produces, as a fixed amount added to the piece price until the tool is paid off.
- Total cost of ownership TCO · Total landed cost The full cost of buying and using a part or supplier: piece price plus transport, duties, quality, inventory, tooling, admin and the cost of failures.
- Value analysis and value engineering VA/VE · Value analysis Reviewing a product part by part to remove cost that does not add function: value analysis on existing products, value engineering on new ones.