The ABC's of procurement: a procurement glossary

Glossaries dedicated to procurement terms have proliferated online for years, but most of them are too long and unfocused, or they lack several of the words and phrases that are among the most critical to understanding and deciphering the terminology of modern procurement leaders.

With this in mind, we have developed a procurement glossary of our own, which includes key terms that have crept into use within the world of procurement, and includes familiar words for the purpose of highlighting the distinctions between those procurement terms and others for which they are commonly confused.

Procurement

All of the procedures involved with vendor selection, the establishment of payment terms, strategic vetting, contract negotiation and the purchase of goods and services. Procurement is the process of acquiring the goods, services, and work that is fundamental to the operation of a business. As a result, procurement is a catch-all term that captures all of the elements related to purchasing.

Procure-to-pay (P2P)

A term utilized within the software industry to identify a distinct aspect of the procurement process. Procure-to-pay systems are intended to empower organizations with oversight and visibility throughout the life-cycle of a transaction, allowing full insight into both cash-flow and financial responsibilities. A majority of the organizations using these systems opt to centralize their procurement departments, or to establish a shared services organization with a similar goal in mind.

Source to Pay (S2P)

Within the software industry, this term is used to characterize digital solutions that establish competencies within procurement. While Source to Pay includes everything contained under the definitions of P2P, it also involves the sourcing of products and services. Source to Pay is a calculated step within the basic business processes of procurement because it places the emphasis on behavior, and it encourages more efficient processes and a higher quality of overall spend management.

Enterprise Resource Planning (ERP)

The integrated management of main business processes, commonly performed in real-time and managed through computer software. ERP provides an integrated and continuously updated view of core business processes using common databases maintained by a database management system. ERP systems track business resources like cash, raw materials and production capacity, along with the status of business commitments, including orders, purchase orders, and payroll. The applications that make up the system share data across various departments. ERP facilitates information flow between all business functions and manages connections to outside stakeholders.

Request for Proposal (RFP)  

This is a document that seeks submitted proposals, frequently made through a bidding process, by companies or agencies interested in the procurement of a commodity, service, or valuable asset. It is issued to potential suppliers, and is submitted early in the procurement cycle. An RFP is used where the request requires technical expertise, specialized capability, or where the product or service being requested does not yet exist. In the latter case, the proposal may necessitate research and development to create whatever the item or product is that is being requested.

Tail spend

Pinpoints the software, professional services, and business purchases that fall outside of the typical large, ongoing purchases that organizations make. In most cases, these purchases are too small to go through procurement and are too infrequent to be included in cataloged systems. Following Pareto’s principle, it typically includes the 80 percent of suppliers that represent only 20 percent of an organization’s overall spend. The most difficult aspect of tail spend management is a lack of data visibility. This can happen for a number of reasons such as procurement and contract management running on separate systems, siloed subgroups within the same organization (when they may be using the same vendors and resources), high numbers of vendors and decentralized policies.

Purchasing

As a subset of procurement, purchasing commonly refers to the process of buying goods and services, and the category of purchasing can also encompass the acts of receiving and payment. In addition, it can be further defined as the process by which a company contracts with third parties to obtain the necessary goods and services to meet its business objectives in a timely and cost-effective manner. Within the overarching Procure-To-Pay Cycle, the steps specifically related to purchasing include the following: purchase order acknowledgement, advance shipment notice, goods receipt, invoice recording, 3-way match, and payment to the supplier.

Supply chain

A network between a company and its suppliers to produce and distribute a specific product to the final buyer. This network includes different activities, people, entities, information, and resources. The supply chain also includes the measures required to get the product or service from its original state to the customer. Supply chains are developed by companies for the sake of cost reduction and remaining competitive in their business endeavors.

Cost savings

Identifies the savings produced by carrying out procurement processes. This can be calculated through different means depending on processes utilized by the organization seeking to distinguish its savings. The most reliable methods for achieving cost savings are to reduce consumption, consolidate spend, and improving specifications. A good track record in cost savings improves the credibility of procurement and helps procurement get involved early in new initiatives that will lead to new spending.

eProcurement

Involves the purchase and/or sale of supplies, work, and services through the Internet, and also other information and networking systems, such as electronic data interchange and enterprise resource planning. This form of procurement can take place on a business-to-business, business-to-consumer or business-to-government level. Some features of eProcurement include a request for information, request for proposal, request for quotation, RFx (the previous three together), and eRFx (software for managing RFx projects).

Indirect spend

Involves the purchase of goods and services that are indirectly involved with the manufacturing of a separate product. This category includes such things as safety goggles, printed forms, computers, relevant software, office supplies, janitorial services, furniture or other equipment.

Direct spend

Identifies the purchase of goods and services that connect directly to the creation of a manufactured product. Examples of items that fall into this category include hardware, raw materials, manufacturing services and other components involved with the manufacturing of the finished product.

Hopefully, you will find these terms to be useful, and perhaps they have managed to clarify the distinctions between terms that you or members of your organization have been using erroneously when communicating with your procurement team. Remember, the use of correct procurement terms is essential for the sake of reliable communication between procurement team members and any of the suppliers, vendors or adjunct staff members they interact with on a regular basis.

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