Glossary of Procurement Terms

Accounts Payable (or Purchase Ledger)

The money owed by a business to its suppliers shown as a liability on a company’s balance sheet.

Annual Cost of Purchasing Function

The total yearly cost of running a purchasing function. This includes salaries, employment costs, training, systems costs etc.

Balanced Scorecard (BSC)

To understand the true value procurement contributes to the business, it is necessary to be able to measure more than just savings. A Balanced Scorecard (BSC) measures procurement performance against a set of key metrics, in different areas that are important to the business. For example:

  • Productivity
  • Process and Innovation
  • Quality
  • People

BATNA

Best Alternative To a Negotiated Agreement. When entering a negotiation you should always have a BATNA at the back of your mind, so that you know not only where your limit for a negotiated settlement lies, but also what action you will take if you fail to reach agreement.

Bitcoin

Bitcoin is a “cryptocurrency” and worldwide payment system. It is the world’s first effective digital currency and is based on blockchain technology. A significant advantage of the system is that there is no role for banks to hold records of transactions in ledgers. Instead ledgers are distributed across the bitcoin system and transactions between buyers and sellers do not require the intervention of any third party. In addition Bitcoin is very secure; by its nature it is immune to fraud or theft. Bitcoin is by no means the only cryptocurrency, but it was the first (created in 2009) and is currently (end 2017) the largest.

Blockchain

Blockchain technology is a way of storing information in a secure “distributed ledger”. A blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography. Transactions add blocks to the chain and the chains are managed by distributed computers in a network – there is no single database of all transactions in a blockchain. Once new blocks are validated by the network it is impossible to change data in the records and so once information is entered it cannot be altered – the data is secure. Although the technology was first conceptualised as a core component of bitcoin, a digital currency, it has many other applications where “a single version of the truth”, transaction traceability and data security are key.

Business Alignment

Business alignment is the process by which the various stakeholders in the business and the purchasing function work together to buy goods and services. It ensures that the needs of the business are met while at the same time the principles of strategic procurement management are applied.

CAPEX/ Capital Expenditure

The amount spent to acquire or upgrade productive assets (such as buildings, machinery and equipment or vehicles) in order to increase the capacity or efficiency of a company.

CAPEX (or Engineering) Efficiency

See under Savings.

Catalogue Management

A function, usually implemented as part of an organisation’s P2P system, which enables ordering direct from internal or supplier catalogues with pre-negotiated prices.

Category Management

The process by which the range of bought-in goods/services purchased by an organisation is broken down into discrete groups of similar goods/services. These groups are known as categories, and are managed separately in a systematic and disciplined way by means of a cross-functional category-management team. Included are:

  • Stakeholder analysis
  • Formation of category management team
  • Category analysis
  • Category planning
  • Implementation of category plan, including (strategic) sourcing, contract management and supplier management

Cloud Computing

Cloud Computing is an IT solution that enables users to access computing services over the internet (usually via their internet browser), instead of those services being provided by in-house hardware and software. This allows access to shared pools of configurable system resources and higher-level services with minimal management effort. Cloud computing relies on this sharing of resources to achieve standardisation and economies of scale, but comes in all kinds of “flavours” including private cloud models where there is no sharing at all. Rigid standardisation can be a consequence, which of course has both advantages and disadvantages.

Compliance

A measure of how much of the spend under management has actually been bought from preferred/approved suppliers according to procurement policy.

Contract Management

This is the process of managing an organisation’s contracts in a structured and disciplined way. Contracts are managed from signature and throughout their active life, until their termination and/or renewal. Contract management also extends to ensuring that contracts are safely stored in a secure but readily accessible way.

Contract Management System

A searchable database of all contracts, which includes expiry-date tracking and version control, and can be accessed easily by any authorised person. Implementation can range from simple spreadsheets to proprietary software-based contract-management systems that include collaborative contract-drafting facilities and approval workflow.

COGS (Cost of Goods Sold)

The direct costs attributable to the production of the goods sold by a company. This amount includes the cost of the materials used in creating the goods together with the direct labour costs and production overheads used to produce the goods. It excludes indirect expenses such as distribution costs and sales force costs. COGS can also be referred to as “cost of sales”.

Cost Avoidance

See under Savings.

Delivery Note

Once goods/services have been ordered and have been safely delivered by the supplier, a delivery note is raised to confirm receipt. This is matched to the purchase order.

Direct Spend (or Direct Goods/Services)

Purchases of goods/services that are directly incorporated into a product being manufactured or a service provided to the end customer. Examples include raw materials, packaging materials, sub-contracted (manufacturing) services, components, hardware, and – in the case of the public sector – may include waste management, road maintenance, adult social care etc.

DPO (Days Payable Outstanding)

An indicator of how long a company is taking to pay its creditors. It is usually calculated as the total value of accounts payable at a certain point in time divided by the Cost of Goods Sold (COGS) per day.

DPS

Dynamic Purchasing System is a special kind of framework agreement whereby suppliers can leave enter of leave the framework during its lifetime. They are popular in the public sector and are particularly useful when buying goods or services from SMEs where the market can be volatile. For example a supplier with a new innovative solution could be admitted to the framework as soon as the solution were available. Or in the case of the notoriously changeable market for taxi services, defunct companies can be let go and new ones qualified without having to tender for a new framework.

E-Auctions

Auctions that are carried out electronically to enable the buying of goods. The auctions are usually facilitated via an online software tool, which once set up allows easy participation from invited suppliers. The form of the auction is usually a reverse auction, where suppliers compete by submitting progressively lower bids for the goods/services to be supplied. However, other types of auctions are usually supported by the tool used.

EOI (Expression of Interest)

An EOI is a term used to invite potential bidders to express an interest in a future ITT (Invitation to Tender), so that early discussions can take place. These discussions might be used to shape the form of the ITT itself.

E-Procurement

Electronic Procurement, carried out by automating the various procurement processes using appropriate E-Procurement software. There exist a large number of proprietary software suites, which usually include one or more of the following functions:

  • Spend management
  • Savings management
  • Contract management
  • E-Auctions
  • E-P2P
  • E-RFx

E-Purchase to Pay (or E-P2P)

A software tool that presents the user with an easy-to-use means of handling requisitioning, ordering, delivery receipt and invoice payment. This often includes the catalogue management, which enable ordering direct from internal or supplier catalogues with pre-negotiated prices. E-P2P is often implemented as a front-end to the organisation’s financial systems.

E-RFx

A software tool that automates the RFx- or tendering- process, and which once set up allows pre-qualified suppliers to submit bids electronically for sourcing events.

Framework Agreements

Framework Agreements are set up when an organisation knows that it will buy certain goods or services over a period of time but not exactly how much or when. It is usual to select several suppliers to be on the framework but single-supplier frameworks are also possible. When goods or services are actually required there is a call-off under the terms of the framework. With multi-supplier frameworks the terms under which work is allocated to suppliers under each call off must be explained at the outset. In public sector procurement the length of a framework agreement is normally restricted to four years and there are strict rules surrounding how call-offs are handled.

G-Cloud

G-Cloud is a series of framework agreements with a variety of suppliers from which public-sector organisations can buy cloud-computing services without having to run their own tender processes. The frameworks have been set up by CCS (Crown Commercial Services), the government’s procurement arm.

G-Cloud services are divided into 3 categories, or “lots’:

  • cloud hosting, ranging from simple hardware space to content delivery networks or load balancing services
  • cloud software, for example accounting tools or customer service management software
  • cloud support, for example migration services or ongoing support

Pricing is fixed for “units of service”, and the aim is to standardise what is on offer. G-Cloud is unusual in that the terms and conditions under the framework are set individually by each supplier, instead of the framework having general terms and conditions that apply to all suppliers.

GDPR

General Data Protection Regulation – is an EU regulation that comes into force on 25 May 2018 and applies to any organisation that controls or processes personal data. It is intended to ensure that personal data is kept secure and is only used for lawful purposes (often when consent to use it has been explicitly obtained). Under GDPR an organisation that controls the use of personal data remains accountable for that data even if it uses third party organisations to process the data on its behalf. Procurement will play key role here in managing data risk in the supply chain.

Incoterms

Incoterms are a series of pre-defined trading terms published by the International Chamber of Commerce (ICC). They are intended primarily to clearly communicate the tasks, costs, and risks associated with the international transportation and delivery of goods. They make it clear just who is doing what, and range from EXW (the seller delivers the goods Ex Works – the buyer has full responsibility to get them to their own site) to DDP (the goods are Delivered Duty Paid – the seller has full responsibility to get them to the buyer’s site).

Indirect Spend (or Indirect Goods/Services)

Purchases of goods/services that are not directly incorporated into a product being manufactured or a service being provided to the end customer. Examples include computers, utilities, marketing services, office supplies, office cleaning, furniture, etc.

Invoice

A formal commercial request for payment by a supplier for specified goods/ services. An invoice includes quantities and prices, and defines payment date and payment terms. This is matched to the purchase order and delivery note.

Invoice Matching

The process whereby invoices are matched to purchase orders and delivery notes to ensure conformance and allow payment. This is often carried out automatically by an organisation’s finance or P2P systems.

Invoices Right First Time

A possible measure of Procurement Performance, this is the number of invoices that are paid on time without any corrections or manual interventions.

ITT (Invitation to Tender)

A formal means of inviting potential suppliers to engage in competitive bidding for a contract.

KPIs (Key Performance Indicators)

These state, in measurable terms, what is expected of goods/services purchased in terms of their performance. They are often part of an SLA (Service Level Agreement), which although a separate document, is usually incorporated as part of the Supply Agreement.

Letter Agreement

A contract between 2 parties in the form of a letter, usually from the buyer to the supplier. The letter is simple, setting out the main commercial terms such as a brief description of the goods/services, price, delivery etc; and usually incorporates the buying organisation’s Standard Terms and Conditions of Purchase. It is signed by both parties to signify agreement.

Maverick Spend

Spend due to purchasing activity in an organisation that is outside of procurement policy. Examples are where a budget-holder buys from a new supplier or non-preferred supplier without first involving the Purchasing function; or where a contract exists with a preferred supplier for the purchase of specific goods/services but this is not used, and an order is placed with another supplier instead.

Novation (of a contract)

If you want to transfer the obligations of a contract as well as the benefits under it, you have to novate. Like assignment, novation transfers the benefits under a contract but unlike assignment, novation transfers the obligations under a contract as well. In a novation the original contract is extinguished and is replaced by a new one in which a third party takes up rights and obligations which duplicate those of one of the original parties to the contract. Novation does not cancel past rights and obligations under the original contract, although the parties can agree to novate these as well. Novation is only possible with the consent of the original contracting parties as well as the new party.

Payment Terms

The length of time (in days) between the delivery of goods/services and the payment for them. This amounts to credit extended by an organisation to its suppliers.

  • Standard Payment – Terms The standard payment terms of an organisation, usually included in its Standard Terms and Conditions of Purchase.
  • Contracted Payment – Terms The payment terms that are contractually agreed upon between an organisation and its supplier for the purchase of specific goods/services.

Performance Management

See under Savings Management.

PESTLE

Stands for Political, Economic, Sociological, Technical, Legal and Environmental. By considering each aspect in turn, PESTLE analysis can help you understand the environment in which you are purchasing in a structured way.

PQQ (Pre-Qualification Questionnaire)

A questionnaire sent to potential suppliers as part of the bidding process. It is used to assess the supplier and not the bid itself. On the basis of the supplier’s response, a decision is made as to whether to invite the supplier to formally submit a bid.

Preferred Suppliers

Suppliers that have been qualified according to procurement policy and approved for use by the organisation.

Procurement Model

The rationale of how a Purchasing function creates, delivers, and captures value. The following are the most common alternatives:

  • Centralised Model – A procurement operating model where all purchasing is conducted through a single central organisation that fully leverages the organisation’s total spend, formalises standardised processes and shares best practices.
  • Centre-led Model – A procurement operating model that forms a centre of excellence focused on corporate purchasing strategy, strategic commodities, best practices and knowledge sharing, while leaving individual purchases and tactical execution to the business units.
  • Decentralised Model – A procurement operating model where each business, function or geographic unit within an organisation is responsible for its own purchasing.
  • Outsourced Model – A procurement operating model where specified key procurement activities relating to sourcing, supplier management etc. are transferred to a third party.

Procurement Policy

A document setting out just how procurement takes place within an organisation and what the roles and responsibilities of the various Stakeholders are. For example, it lays down some rules to control purchase-ordering according to what goods/services are being ordered and the anticipated spend; and it sets out when and how the Purchasing function must be involved.

Purchasing Function

The function within an organisation that is recognised as having formal responsibility for procurement both at the strategic and operational levels. The scope of activity will typically include commercial strategy, managing the RFx/tender process, contracting, negotiation and supplier management.

Purchase Ledger

See Accounts Payable.

Purchase Order

A commercial document used to request the supply of goods/services from a supplier in return for payment. It generally provides specifications and quantities, defines delivery times and payment terms. It often incorporates the standard terms and conditions of purchase of an organisation.

Purchase-to-Pay Cycle Time

The time required to complete one procurement cycle from point of order (or requisition) to payment of the supplier.

Purchase to Pay Process (P2P Process)

A process that ensures that goods/services are formally requisitioned and ordered/called-off from contracts, and that orders/call-offs are correctly approved. Then once the goods/services have been delivered and invoiced, it ensures that they are paid for according to the contracted payment terms.

RAQSCI

A model that helps to define and structure business requirements. RAQSCI stands for:

  • Regulatory
  • Assurance of supply
  • Quality
  • Service
  • Cost (or commercial)
  • Innovation

And these headings are in order of importance. It is also useful to demonstrate that purchasing professionals do not just think of the commercial aspects of a deal.

Rescission (of a contract)

Rescission (from the word to rescind) is a legal remedy where the parties’ positions are restored to what they were before the contract was entered. To do so, the parties return money, property and other interests so arrive at their pre-contractual positions. The legal effect of rescission is to terminate the contract and restore matters to the pre-contractual positions. The remedy arises in cases of misrepresentation and when a contract has be executed by one party but not the other. For example, where a purchaser pays money for services, and those services are not provided within the terms of the contract, the paying party is entitled to “rescind” or cancel the contract and return to the original status quo.

Requisition

A request from an internal customer to place an order for certain goods/services.

RFx

A means of supporting competitive bidding by use of standardised RFI (Request for Information), RFQ (Request for Quotation) or RFP (Request for Proposal) documents. Implementation can be manual or via an e-RFx software tool.

Reverse Auction

An auction between suppliers for the sale of goods/services, where the one who bids the lowest price wins the right to supply.

Risk Management

The identification, assessment, and prioritisation of risks in the supply base that threaten to disrupt the supply of critical goods/services. Risk management has become increasingly important due to tighter supply chain integration, the general reduction of stock (which acts as a buffer against supply shortages), and financial instability in the supply markets.

SaaS

Software as a Service –This is a software licensing and delivery model in which software is licensed on a subscription basis. The software is usually centrally hosted, as part of a cloud based solution, and made available to the user via their internet browser. As this normally uses “pay-as-you-go” pricing it is necessary for buyers to clearly understand the pricing model and what it really costs in the longer term.

Savings

A measure of the benefits delivered by the procurement to the organisation. The benefits have historically concentrated on achieving lower prices paid for goods/services but more recently there has been a move to broaden the measure of savings to include other value adding activities. These can include: value engineering, specification management, demand management, process improvements, service improvements, supplier contribution to innovation and/or speed to market etc.

  • Annualised savings – The savings achieved in the year starting with the date on which a new price for goods/services comes into effect.
  • Budget-year savings – The savings achieved in the current (or a future) budget year, irrespective of when a new price for goods/services comes into effect.
  • CAPEX (or Engineering) Efficiency – A means of calculating saving applicable to CAPEX spend, where goods/services are bought on a one-off basis. CAPEX Efficiency can be calculated as the difference between the final (negotiated) price for the goods/services and the lowest of all the bids received for the same goods/services; or (where post-bid negotiation is not allowed) as the difference between the final price paid and the historical price for the same goods/services.
  • Cashable Profit and Loss – Hard savings that actually fall through to the bottom line and reduce real expenditure by impacting directly on budgets and/or profit and loss accounts.
  • Hard Savings – Hard savings are savings that would result in a measurable reduction in the expenditure of an organisation. In practice they often do not result in such a reduction because (for example) greater volumes are purchased, or the money saved is spent elsewhere. Hard Savings are often calculated as the volume of goods/services in the measurement year multiplied by (old price minus new price).
  • Soft Savings – Soft savings are savings that, although a measure of procurement performance, would not result in a measurable reduction in the expenditure of an organisation. These include cost avoidance and CAPEX efficiency.
  • Cost Avoidance – Additional cost that is avoided as the result of negotiation with a supplier. Cost avoidance can be calculated as the cost avoided by reducing the amount of a price increase demanded by a supplier; or (where goods/services are bought for the first time) as the cost avoided by negotiating the price below that of the best price obtained from competitive bidding.

Savings Management (Value Management, Performance Management)

The systematic and structured approach to finding, getting and keeping savings within an organisation. This also includes the formal estimation, reporting and approving of savings by means of tools that can range from a simple spreadsheet to a proprietary software-based savings-management system, including full planning facilities for savings projects. The terms value management or performance management are increasingly replacing that of savings management as the definition of savings is broadened to include other value-adding activities.

SKU (Stock Keeping Unit)

A distinct item for sale, such as a product or service, and all attributes associated with the item that distinguish it from other items. For a product, these attributes include, but are not limited to, manufacturer, product description, material, size, colour, packaging, and warranty terms. When a business takes an inventory, it counts the quantity of each SKU. For example, a 12-pack of bottled beer (as shipped to a shop for sale) is an SKU. It consists of several items: beer, bottles, bottle-closures, labels, printed cardboard packaging, all of which may have been purchased separately.

SLA (Service Level Agreement)

A document that sets out in measurable terms what is expected of goods/services purchased in terms of the level of service provided. They usually contain specific KPIs which apply to different aspects of performance, such as delivery times, quality levels, response times etc. The SLA (although a separate document) is usually incorporated as part of the supply agreement.

SMART

A mnemonic that sets out the important attributes of KPIs. These should be:

  • Simple
  • Measurable
  • Attainable
  • Relevant
  • Time-related

Spend Analysis

The analysis of what goods/services are being bought by the organisation and how much is being spent on each. Tools to enable this range from a simple extract from the purchase ledger into a spreadsheet to a proprietary spend-management system, with full support for supplier identification.

Spend under Contract

The amount of the spend of an organisation which is for goods/services that are covered by active supply agreements.

Spend under Management (or Spend Coverage)

The amount of the spend of an organisation that is under the control of the purchasing function – in terms of purchases made directly by the purchasing function, purchases made directly by end users in accordance with procurement policy or purchases made by the wider organisation where the purchasing function has been engaged early enough to have an impact.

Stakeholders (or Internal Stakeholders)

All the parties in an organisation who are involved in, impacted by or have influence on the procurement process. This will almost certainly include the budget-holder (or end-user) as the primary stakeholder, but can also include representatives from the finance, legal, logistics, engineering and projects functions. Good working relationships, built on clear communication and active cooperation between the purchasing function and the various stakeholders, are essential.

Standard Terms and Conditions of Purchase

A document that sets out the legal terms and conditions that apply to all purchases made by an organisation. They are often referred to by purchase orders or letter agreements in the following manner: “The goods/services detailed above are purchased in accordance with organisation X’s Standard Terms and Conditions of Purchase, as attached”.

(Strategic) Sourcing

The process that is used to source the various goods/services required, through the choice of appropriate suppliers. Included are:

  • Gathering requirements
  • Specification writing
  • Market analysis
  • Sourcing planning
  • Supplier selection
  • Bid evaluation
  • Negotiation
  • Recommendation, decision and approval

The process is variously called strategic sourcing or more simply sourcing.

Supply Agreement

A contract between the buying organisation and the supplier for the supply of goods/services in accordance with the terms and conditions set out in the supply agreement itself.

Supplier Management

The process of managing an organisation’s suppliers in a structured and disciplined way. Included are:

  • Supplier qualification
  • Supplier segmentation
  • Supplier relationship management (or SRM)
  • Supplier development
  • Performance management
  • Supplier consolidation
  • Risk management
  • Supplier database management

New suppliers are formally qualified/approved and then divided into groups via the process of supplier segmentation. Typical groups are:

  • Strategic Suppliers – a small number of suppliers that are managed intensively, often via collaborative relationships, in order to reduce costs and harvest innovation. They are treated as valuable assets of the organisation.
  • Key Suppliers – typically 10-100 suppliers of important goods/services. They receive less management attention than Strategic Suppliers but are still managed on an individual basis.
  • Core Suppliers – a larger number of suppliers of goods/services that are essential to the organisation. These suppliers can often be substituted and merit individual management only on an exceptional basis.
  • Basic Suppliers – a large number of suppliers that have low spends and can very easily be substituted. They receive almost no management attention.

Sustainable Procurement

This deals with the management of environmental, social and economic impacts throughout the lifecycle of goods/services, and with the encouragement of good governance practices. It is increasingly recognised as a key component of corporate social responsibility, and makes good business sense, as well as being the right moral and ethical thing to do.

Value Management

See under Savings Management.

VMI (Vendor Managed Inventory)

A business model in which the supplier of a product takes full responsibility for maintaining an agreed stock of the material, usually at the buyer’s location, which could be a factory, a warehouse or a retail outlet, depending on the nature of the product and of the VMI agreement. A third-party logistics provider can also be involved to make sure that the buyer has the required level of inventory. In order for this to function well, the buying organisation must share information with the supplier and/or the logistics provider about minimum stock levels, demand forecasts etc.

Walk Away Price (WAP)

The price at which you will walk away in a commercial negotiation. As a salesperson this will be the lowest price at which you are prepared to sell; as a buyer it will be the highest price at which you are prepared to buy.

Working Capital Reduction

A possible measure of Procurement performance, this is measured in terms of either a) an extension in payment terms or b) a reduction in stock due to actions by suppliers.