Procurement Terms

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Business Process Outsourcing (BPO): NelsonHall defines BPO as the outsourcing of business functions or processes, such as procurement, to a third party. In these contracts the provider is responsible for performing and managing the outsourced function or process on behalf of the customer. In order to qualify under this definition, BPO contracts must involve the provider taking overall responsibility for the business process and not just supplying IT applications or services to facilitate the process. Thus applications hosting and stand-alone IT outsourcing are not regarded as forms of BPO.

Buying Categories: The different areas of spend are divided into two main categories: indirect (or non-strategic) materials, such as office supplies and IT hardware, that are required for the operation of a business and direct (or strategic) materials, such raw material that are intrinsic to the delivery of a company’s product or service.

Category Management: Continual monitoring of expenditures, compliance, market dynamics and supplier performance in specific buying categories with the intent of driving ongoing cost innovation and supplier performance improvements. Narrower approaches are sometimes referred to as supplier relationship management or commodity management.

Compliance: The degree to which buyers purchase from a company’s preferred, negotiated supplier agreements vs. alternative sources. In order to realize sourcing savings, companies must drive high compliance.

Demand Management: The art or science of controlling economic demand to avoid a expenditure and waste. In natural resources management and environmental policy more generally, it refers to policies to control consumer demand for environmentally sensitive or harmful goods such as water and energy. Within manufacturing firms the term is used to describe the activities of demand forecasting, planning and order fulfillment.

Diversity Sourcing: is a strategy that typically supports broader organizational diversity objectives by encouraging the use of: minority-owned, women owned, veteran owned, LGBT-owned, service-disabled veteran owned, historically underutilized business, and SBA defined small business vendors as suppliers. It is not directly correlated with supply chain diversification, although utilizing more vendors may enhance supply chain diversification.

Leveraging an Extended Enterprise Model refers to taking a specialist activity and giving it to a trusted partner that can invest heavily because they’re spreading the cost across many different clients. This allows the buyer of these services to focus on their core business activities, while getting something that they can’t do on their own (i.e. hiring an advertising agency, a copy writer, a contract manufacturer, specialized legal counsel, or even an indirect procurement optimization partner).

Lean manufacturing, lean enterprise, or lean production, or simply, "Lean": A production practice that considers the expenditure of resources for any goal other than the creation of value for the end customer to be wasteful, and thus a target for elimination. Working from the perspective of the customer who consumes a product or service, "value" is defined as any action or process that a customer would be willing to pay for.

eProcurement – Electronic tools that support and expedite the transactional purchasing process. Through eProcurement, buyers search electronic catalogs (eCatalogs) to find needed items, place requisitions, route for approval, and send to suppliers for fulfillment. Some eProcurement tools (but not all) support the back-end invoicing and payment processing.

eSourcing – Electronic tools that support, expedite and optimize the benefits of the strategic sourcing process. Tools include eRFIs (request for information from buyers to suppliers), eRFQs (request for price quotes), eRFPs (request for a formal proposal); reverse auctions (on-line negotiation tools), and bid optimization (decision support).

Implementation – Once contracting is complete, detailed and category-specific implementation plans are executed to ensure buyers and suppliers are best positioned to conduct business together. Key implementation activities include loading preferred suppliers and pricing into purchasing systems, implementing tailored communication programs, and training relevant suppliers.

Global Sourcing: The practice of sourcing from the global market for goods and services across geopolitical boundaries. Global sourcing often aims to exploit global efficiencies in the delivery of a product or service. These efficiencies include low cost skilled labor, low cost raw material and other economic factors like tax breaks and low trade tariffs

Infrastructure: In the procurement arena, infrastructure describes the integrated set of technologies, processes, information and intelligence, and human expertise that enables efficient and highly effective sourcing and purchasing activities.

Non-recurring Business Critical Spend (NRBC): Larger, one-time, project driven purchases (also called “project spend”). According to The Hackett Group, companies spend hundreds of millions of dollars these purchases each year. Given the complexity, volatility and time-sensitive nature of these purchases, companies are rarely able to apply the combination of category expertise and sourcing rigor required to minimize cost.

Procurement: The process of managing activities associated with a company’s need to procure the goods and services required to either manufacture a product (direct) or to operate the organization (indirect). Specific activities in procurement may involve determining which commodities or services are best, choosing the right suppliers, negotiating the best prices, and awarding contracts to ensure that the correct amount of the product or service is received at the appropriate time. To conduct these tasks successfully, purchasing managers, buyers and purchasing agents study sales records and inventory levels of current stock, identify domestic and foreign suppliers, and keep abreast of changes affecting both the supply of and demand for the products and materials for which they are responsible. The key subsegments that make up the procurement function are spend analysis, sourcing, supplier implementation and enablement, transaction management, category management and supplier performance management.

Procurement BPO: IDC defines procurement BPO as the transfer of management and execution of one or more procurement management activities, entire procurement subsegments, or the entire procurement business function to an external service provider. The procurement BPO vendor is part of the decision-making structure surrounding the outsourced procurement activity, subsegment or function. Performance metrics are primarily tied to customer service and strategic business value. Strategic business value is recognized through such results as increased capability to drive cost savings, increased productivity, business transformation and/or improvement of shareholder’s value.

Procurement Outsourcing: The assignment of managerial responsibility for all or select aspects of the procurement process to a third-party specialist.

Procurement Services Provider: Third-party specialists that focus on helping companies make improvements in different areas of procurement and achieve savings through the use of category and process experts and best-of-breed technologies.

Purchasing: The transactional placement and processing of a purchase order. This activity takes place after a formal sourcing process (if conducted) and begins with the placement of a requisition, which upon approval, becomes a purchase order and is sent to a supplier. Upon fulfillment, the buyer is invoiced and the supplier is paid. This process is also referred to as the “req to check” process.

Realized Savings: Actual reductions in expenses that can drop to the bottom line as improved profits. The Everest Research Institute defines realized savings as, “the difference between the original, i.e., pre-sourcing cost, and the actual price paid based on an analysis of invoices and/or payables.” (Everest Research Institute, “Get More from Your Non-Core Spend,” June 2010). Realized savings are more beneficial to companies than “negotiated savings,” which, while based on past spending or future spending projects, may or may not actually result in a company saving money.

Spend Analysis: A process whereby companies categorize and evaluate historical expenditures (at the commodity/buying category or item level) in order to identify areas of corporate spend that may be ripe for savings opportunities. Spend analysis and on-going visibility also has become increasingly important as a vehicle for ensuring that procurement practices meet Sarbanes-Oxley compliance requirements.

Strategic Sourcing – The process of formally selecting a vendor to supply a particular product or service that is routinely purchased by a company. This process includes the definition of product and service requirements, identification of qualified suppliers, negotiation of pricing, service, delivery and payment terms, and supplier selection. The end result of the Strategic Sourcing process is a negotiated contract with a preferred supplier.

Procurement Savings – Hard-dollar cost reductions that translate to a company’s bottom line. Achievement of significant procurement savings involves a three-phase process: identification of savings during the sourcing phase, realization of savings during the transaction phase, and continuous improvement of savings on an ongoing basis through category management and other activities.

The New Procurement: An innovative approach to procurement that helps companies optimize spend, realize savings and support key strategic imperatives of improving sustainability, enabling agility, managing risk and fostering innovation and growth.