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Logistics Jargon Buster

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Every industry has its jargon. So we’ve put together this helpful guide to the language of logistics.

3PL – Third-party logistics. When a logistics company manages a distribution system on behalf of another firm.

4PL - 3PL is all about physical distribution and logistics: warehousing, clearing and freight forwarding, packaging, safety, etc. 4PL is all about supply chain management, planning, analysis, design and optimization. If 3PL is on the ground, 4PL is in the office.

Activity-based costing (ABC) – An approach to the costing and monitoring of activities that involves tracing resource consumption and costing final outputs.

ABC Management - Application of Pareto’s Law of the 80/20 rule: ABC classifications are determined in ascending rank order of all products according to the product classification as a percentage of the total purchasing spend. Ranking can also be by volume, value, weight etc.

Automatic Clearing House (ACH) - Electronic method of making routine payments, replacing traditional cheques.

Added Value OR Value add The increase in realisable value of a product or service by changing it's form, location or availability, excluding the cost of the purchased materials and services. E.g. picking and packing

Advance Payment - Payment made to a supplier before starting work. Often used as an incentive to reduce cost or enhance any discounts available, or to secure supply of products and services.

Average Cost (AVCO) - The average valuation of stock.

Average Inventory - The average stock level over a given period of time. Usually calculated as follows: average inventory = opening stock + closing stock, divided by 2.

Average Rate of Return (ARR) - An accounting methodology that calculates the average return each year as a percentage of the initial cost of investment.

Blanket Agreement - An agreement between buyer and seller where certain goods will be bought over a period of time at prices worked out according to a formula. Used to reduce the amount of small-volume orders.

Blanket Order Purchase - An order that commits to a volume of one product.

Bonded Goods - Products that are held until any outstanding duties are paid. Usually stored in a bonded store or warehouse.

Capacity Requirements Planning (CRP) - Process of establishing, measuring and adjusting the levels of capacity in an organisation, within the context of manufacturing resource planning.

Carriage Insurance Paid (CIP) - Commonly described and an Incoterm. This term is the same as "carriage paid to", but with the extra requirement that the seller has to get transport insurance against the risk of loss or damage to the goods during the carriage. The seller contracts with the insurer and pays the insurance premium.

Carriage Paid To (CPT) - Commonly described as an Incoterm. This term means the seller pays the freight for the goods to the final destination. The risk of loss or damage to the goods, and any cost increases, transfer from the seller to the buyer when the goods have been delivered to the final carrier, and not at the ship's rail.

Cash On Delivery (COD) - Cash payment for purchases and their transportation. The payment is made when they’re delivered, and before the carrier releases them. A common precaution used by sellers shipping to organisations in bankruptcy or with a doubtful credit rating.

Chartered Institute of Purchasing & Supply (CIPS) - CIPS is an international organisation, based in the UK, serving the purchasing and supply profession.

Cost and Freight (CFR) - Commonly described as an Incoterm. Under this term, the seller pays the costs necessary to bring the goods to the port of shipment. The risk of loss or damage to the goods, as well as any extra expenses, are transferred from the seller to the buyer when the goods pass the ship’s rail. Insurance is the buyer’s responsibility.

Cost Insurance Freight (CIF) - Commonly described as an Incoterm. This is CFR with the extra requirement that the seller has to get transport insurance against the risk of loss or damage to goods. The seller must contract with the insurer and pay the insurance premium. Insurance is important in international shipping because transport companies have restricted liability for loss or damage.

Demurrage - A charge for holding a shipment beyond the time agreed.

Distribution Requirements Planning (DRP) - A system for determining demands for inventory at distribution centres, consolidating the demand information backwards, and acting as input to the production and materials system.

Define, Measure, Analyse, Improve, Control (DMAIC) - The five stages of the 6 Sigma quality improvement and assurance process.

Dead on arrival (DOA) -. Stock that doesn’t work when it’s delivered.

Dry-Lease – A kind of leasing agreement where one party operates an aircraft hired from another party.

Dutch Auction - - Playing one seller off against another to get the lowest price.

Electronic Data interchange (EDI) - The exchange of documents or information between computers using telephone lines.

Economic Order Quantity (EOQ) - A model that defines the best quantity to order, taking into account variables like cost of production, and demand. Also known as the Wilson EOQ Model.

Enterprise Resource Planning (ERP) - Co-ordination of resource planning across a business and between supply-chain links.

eProcurement - The ability to purchase or sell through electronic trading over the Internet.

Escrow - A contract or deed that becomes effective at a specified point in the future.

Forty-foot equivalent unit (FEU) - A unit of measurement equivalent to one standard container used in ocean freight, that is 40 feet long, 8 feet wide, and about 8 feet high.

Firm Price - A contractually agreed price that remains unchanged throughout the contract.

Fixed Price Price - A price that’s fixed at time of placing the contract, but which could change during the contract.

Futures - Usually applies to “soft” commodities, typically foodstuffs, where you enter into a contract to buy or sell next year’s crop. The aim is to insure against price fluctuations or commodity shortages.

General Agreement on Tariffs and Trade (GATT) - A global trade treaty aimed at expanding and liberalising world trade, replaced by the World Trade Organisation in 1995.

Hub Based Exchanges - Companies that tend to supply specific sectors, like the motor or aerospace industries. A consortium of companies will set up and run their own market place, customising existing technology to meet their own e-commerce needs.

Incoterms - International consignment delivery terms. Incoterms embrace many factors including insurance, type of transport mode and associated costs, product costs, package costs etc.

Inventory - Technically, a list of items held in stock or on the asset register of an organisation. But often used to mean the stock itself.

Job - The work done to meet a customer or production order and which, for production control and purchasing purposes, has a unique identification (adapted from The Official Dictionary of Purchasing and Supply by KH Compton and DA Jessop).

Job Lot (Production) - A relatively small number of specific types of products produced at the same time.

Job Lot (Purchasing) - Goods arranged in separate portions for sale by auction.

Jobbing - Manufacturing customer’s orders by the job, usually carried out in small lots or batches and of different product types.

Joint Liability - In contract terms, this means the responsibility for a liability is jointly taken by all parties involved in the contract.

Just In Time (JIT) - Originally a concept imported from Japan, the idea that only sufficient quantities should be manufactured or made available to satisfy customers’ immediate needs. Relies for its success on an efficient supply chain.

Kaizen - A Japanese term, much favoured when Japan was the world leader in cutting-edge industrial practices. Translates into English as “continuous improvement”.

Kanban - Another Japanese term, translates literally as “card”. It is the system of record cards that accompany components through the production process. In other words, a signal that triggers deliveries of specific quantities of supplies in a just-in-time system. So when the box of screws is almost empty, an automatic signal goes to the supplier to deliver some more and refill the box.

Keiretsu - A Japanese phenomenon describing a group of companies linked by cross-shareholdings.

Lead Time - Used in many ways. Can mean, for example, the time between the decision to purchase an item and its arrival in stock. But it can also mean the time between the decision to purchase an item and its availability for despatch from the supplier concerned.

Lean - Usually used to describe an approach in which production only takes place in response to immediate demand.

Lien - The right to retain possession of another’s property until the owner pays a debt.

Liquidation - The winding up of the affairs of a business when it ceases trading and appoints a liquidator to set its affairs in order, realise its assets and pay its shareholders.

Logistics - The process of managing both the movement and storage of goods, materials and people from their source to the point of ultimate consumption, and the associated information flows.

Management Information Systems (MIS) - Are information systems typically computer-based, that are used within an organisation.

Material Requirement Planning (MRP) - A planning process to ensure available stock to satisfy demand within a given period.

Material Resource Planning (MRPII) - A process to plan production and establish lead times based on availability of resources.

Monopoly - Market situation in which one or a small number of sellers dominate.

Monopsony - The reverse of a monopoly: many suppliers but only one purchaser.

Maintenance Repair and Operating (MRO) - Products that repair any sort of mechanical or electrical device OR products purchased that form part of a routine preventative maintenance plan.

Oligopoly - A state of limited competition when the market, or a large part of it, is cornered by a small number of suppliers and manufacturers who are significant players in their particular sector and who do all they can to maintain their cosy lifestyle by excluding newcomers. Not a good situation for buyers to be in.

On-Line Procurement Systems - Systems that have been designed whereby procurement processes are electronically performed using tech.

On-Line Auctions (Not reverse) - Electronically offering goods or services to the highest bidder. Similar to ‘live’ auctions and another means of offering tenders for quotation to a selected market place

Open Tender - Using open advertisement to invite suppliers to quote for a job (Closed Tender is inviting particular specialists to tender for the job)

Operations, Planning & Control (OPC) - The activities undertaken that ensures that all required resources within an organisation are managed effectively to produce products/services right through to the delivery of the product/service to the customer.

Outsourcing Placing - Core and non-core business activities with external specialists.

Pallet Weeks – A unit Stowga use to quantify demand. Thge calculation is simply the number of pallet spaces required multiplied by the number of weeks required.

Poka-Yoke – The process of fool-proofing a manufacturing process, tools or equipment. A Poka-Yoke device or mechanism makes an operation impossible to perform incorrectly.

Procurement Often - used interchangeably with Purchasing. Procurement is the totality of acquisition starting from the identification of a requirement to the disposal of that requirement at the end of its life. It therefore includes pre-contract activities.

Radio Frequency Identification (RFID) - Is an emerging technology enabler for tracking goods and assets around the world. It promises to enable new efficiencies within the supply chain by tracking good and services from point of manufacture through to retail point of sale (RPOS).

Reverse auctions - The opposite of the usual kind of auction. Suppliers bid the price for a contract down.

Reverse Auction System - Customer wanting particular goods or services enters specification/requirements to system and requests bids from market place. The bid that best meets requirements wins. Also possible for an electronic search of supplier product base.

Reverse logistics - Planning the flow of surplus or unwanted material or equipment back through the supply chain after meeting customer demand.

RH&D - Receipt, Handling and Dispatch. - The handling of goods coming into a warehouse, being put away, then getting ready for dispatch. Warehouse operators often quote an RH&D cost, e.g. £2 per pallet per week storage and £2 per pallet RH&D.

Seller’s market - A situation where market forces work to the advantage of the seller, who can dictate price, delivery, quality and so on.

Service Level Agreement - - A document which defines the relationship between two parties: the provider and the recipient. If used properly it should: - identify and define the customer’s needs - reduce areas of conflict - encourage dialogue in the event of disputes - eliminate unrealistic expectations.

Services - Usually coupled with ‘goods’. Services are intangible items like maintenance, marketing or consultancy.

SKU - An identification code for a product or service, often portrayed as a machine-readable barcode that helps track the item for inventory. A stock keeping unit (SKU) does not need to be assigned to physical products in inventory.

Supplier, Input, Process, Output, Supplier (SIPOC) - A 6 Sigma technique that helps you understand the ‘as is’ state. SIPOC demonstrates process flows and makes interdependencies visible.

Sourcing - Activities involving searching markets for goods and services. Strategic sourcing is making sure everything is being sourced as efficiently as possible.

Specific, Measurable, Achievable, Realistic, Time framed (SMART) - A mnemonic used in project management at the project objective setting stage. A checklist for evaluating if objectives that are being set are appropriate for the particular project.

Standard - An agreed generic specification or a specification intended for frequent use.

Supplier Relationship Management (SRM) - The process of managing the interaction between two entities, one of which is supplying goods, works or services to the other entity. SRM is a two-way process that should improve the performance of the buying organisation as well as the supplying organisation.

Supply Management - The purchasing, expediting, inventory management, delivery and receipt of goods, and quality control.

Supply Chain & Networks - The supply chain starts with the extraction of raw material (or origination of raw concepts for services) and extends through to the final sale and delivery to the final customer of a product or service. Each organisation within the supply chain adds value to the product or concept in some way as it passes from one organisation to the other.

Supply Chain (Networks) Management (SC(N)M) - The management of all activities aimed at satisfying the end consumer.

Twenty-foot equivalent unit (TEU) - Half the size of a forty-foot equivalent unit (FEU).

Trading Exchanges - Internet sites that allow direct trading between companies, reducing the need for intermediaries.

Value Added - The increase in realisable value of a product or service by changing its form, location or availability - excluding the cost of the materials and services. For example: picking and packing.

Value Added Network (VAN) - A way of exchanging information electronically between subscribers and their trading partners. The users connect to the private network to transmit messages. The VAN acts as a mailbox and also provides a record for audit purposes.

Vendor Rating - A way of monitoring and measuring aspects of supplier’s contractual performance.

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