Welcome to the Fairmarkit glossary, your one-stop guide for all things procurement and spend management. Bookmark this page as we'll be updating this knowledge base regularly with new definitions, guides, and resources.
Agile procurement is a procurement methodology that borrows elements of the agile approach to software development. The core concepts of any agile methodology are to work in small, fast increments that build flexibility into the process. As such, agile procurement is an approach that is open, collaborative, and less strict than other procurement methodologies.
Autonomous sourcing is a next-generation e-sourcing application that adds AI capabilities to increase event automation and provide embedded decision support. Autonomous procurement is a data-driven model that works with both historical data derived from past experiences and real-time data that is synchronized with market trends. It leverages technology to enable procurement teams to automate the entire source-to-pay process while reducing the need for human intervention.
Best Practices for Vendor Management
Vendor management requires great communication, the right technology, and regular risk assessments to build long-term profitable relationships.
Blanket Purchase Order
A blanket purchase order is an easy way to place orders that will require multiple payments over a period of time. Blanket purchase orders are long-term contracts with specific suppliers that help a buyer order the same goods or services at regular intervals.
Budget management refers to managing the revenue and expenses of a company or internal department over a specified, future period. For instance, the finance team may set forth a quarterly budget that internal teams need to abide by; as a result, the team manager will control expenses, grow sales, and find cost savings according to that budget.
Business Process Outsourcing (BPO)
Business process outsourcing (BPO) allows companies to tap into third-party resources to take on important business processes, freeing up internal resources for high-value activities. Many companies outsource strategically important activities, like manufacturing or R&D. BPO in procurement and sourcing, however, is becoming more common.
Category management is an approach to organizing procurement to focus on specific areas of spend. This process strategically segments spend into areas with similar or related products.
Centralized purchasing is the practice of consolidating all purchasing for an organization through one team responsible for procurement. The central purchasing team will work with other departments across the organization to make use of economies of scale by buying in bulk and negotiating for more affordable prices. Likewise, centralized purchasing is seen as a way to simplify and streamline procurement.
Competitive bidding allows companies to find the goods and services they need for the best possible price. Through the competitive bidding process, an organization can solicit bids from contractors, suppliers, or vendors to get the raw materials, equipment, and other products needed to support key business functions and serve customers.
Contract Lifecycle Management (CLM)
Contract lifecycle management (CLM) is defined by Gartner as the “applications used for managing contracts from initiation through ongoing management and eventual renewal or termination.” Put simply, CLM is the process and tools used to prepare, sign, record, and execute your business agreements.
Gartner’s definition of cost optimization is, “a business-focused, continuous discipline to drive spending and cost reduction, while maximizing business value.” Put simply, cost optimization seeks to find the best price and terms for business purchases, while standardizing, digitizing, and automating applications, processes, and services to save costs.
Direct And Indirect Spend
Direct procurement refers to the process of buying raw materials and goods for production, while indirect procurement relates to purchasing services or supplies required to keep the day-to-day business running.
Direct procurement is perhaps the most important function of a procurement team, given its impact on the business’ success. And while many organizations ignore indirect procurement to their detriment, focusing on direct procurement in times of crisis is a sound business strategy. If you can’t find ways to reduce risk and control costs for your direct spending, there’s a serious flaw in your operations.
E-procurement involves the purchase and/or sale of supplies, work, and services through the Internet as well as other digital 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.
Expense management is related to spend management, in that it refers to the processes and tools a business uses to authorize payment for employee-initiated expenses. Travel, business lunches, and other types of indirect procurement require an expense management approach that minimizes waste and optimizes resources.
Indirect procurement refers to supplies and services that keep the business running: Spending categories such as facilities, utilities, maintenance services, HR, and office supplies.
Invoice management is an internal process that covers all activities related to managing and processing invoices received from vendors and suppliers. The simple version of the invoice management process includes receiving an invoice from a vendor, validating it, paying the vendor, and recording the payment.
You may have heard of lean project management or lean software development. Lean is an approach or philosophy that seeks to maximize customer value by minimizing waste. The lean approach has been applied to everything from executive coaching to product development — and naturally, to procurement.
MRO (Maintenance, Repair, and Operations)
MRO is a category of spending that covers all maintenance parts used for repairs and to support production at an organization. MRO, despite being vital to operations, is considered part of indirect spending. MRO procurement includes things like office and cleaning supplies, computers, and items related to maintaining tools needed for production.
Managed vs Unmanaged Spend
Managed and unmanaged spend, naturally, require different approaches. Procurement teams simultaneously must try to optimize managed spend by managing supplier relationships, practicing strategic procurement, and monitoring the procurement cycle for inefficiencies. Meanwhile, teams must also identify unmanaged spend and try to reduce its negative impacts.
Manufacturing contributes more than $8 trillion to the global economy and forms a vital link in the supply chain. As such, smart procurement leaders understand the practice of materials management and how it can impact their company’s bottom line further down the supply chain.
Maverick spend — sometimes called rogue spend — refers to any purchases that don’t follow the organization’s established procurement rules and procedures. Maverick spending is the result of either deliberately ignoring procurement processes or of a purchasing mistake that doesn’t align with previously negotiated purchasing terms.
Order consolidation is the practice of combining purchase orders from multiple units of your business. From there, you can submit a single purchase order to a vendor that is able to fulfill all the requirements of that order. This saves the company from the time-consuming process of sending several purchase orders to multiple vendors.
Procure to pay, sometimes abbreviated as p2p procurement, is the integration of purchasing and accounts payable tools to become more efficient. Procure-to-pay is a subset of the overall procurement process.
Procurement analytics offer the key to long-term, sustainable growth, according to research by a number of consulting firms. EY found that with the right metrics, organizations can transform procurement from a traditional cost-management activity to a competitive advantage. Likewise, Deloitte’s 2021 survey of chief procurement officers found that most view analytics as the technological activity with the most impact on business.
Procurement Center of Excellence
A procurement center of excellence (COE) is a specialized team that provides leadership, training, and support to improve procurement best practices across an organization.
Procurement is cyclical, meaning it follows a set process of steps from start to finish. The procurement process is typically made up of six steps, starting with the identification of a business need.
Procurement innovation is a broad term that can encompass many different things. In fact, experts at the Public Spend Forum have identified at least four different aspects of “procurement innovation,” covering technology, strategy, processes and more.
A purchase requisition is a formal document used to purchase something needed at your company. The purchase requisition is filed with the department manager or procurement team to kick off the process of purchasing the good or service. The finance and accounting teams also use the purchase requisition for reporting and compliance purposes.
Purchase to Pay
Purchase to pay is defined as an integrated system that fully automates the process of purchasing goods and services for a company. Often abbreviated as P2P, purchase-to-pay systems handle everything from the purchase of goods to the payment of the vendor.
The term reputational risk is broad: it includes any potential for a direct or indirect threat to an organization’s reputation to have an eventual negative influence on that company’s financial bottom line. Any event or factor with the potential to cause an existing or potential customer to see your brand or company in a negative light is considered a reputational risk.
Request for Proposal (RFP)
A request for proposal (RFP) is a document that announces a project, describes what it entails, and solicits bids from qualified contractors to complete the project. Essentially, an RFP is a communication document. It tells prospective suppliers what you want to purchase and your expectations for delivery, customizations, or service needs.
Request for Quote (RFQ)
A request for quote (RFQ), sometimes also known as an invitation for bid (IFB), is a document that asks suppliers to provide price quotes for the chance to fulfill a task or project. Some companies send RFQs as standalone requests, or as part of the request for proposal (RFP) process.
Request for Tender (RFT)
A tender is an invitation to bid for a project or to accept a formal offer. Tendering is a process commonly used by governments and financial institutions, as well as the public sector more broadly. “Tendering” is the term used to describe the process where vendors or suppliers submit bids for large projects by a specified deadline.
Request for X (RFX)
RFX is a term that’s used to denote Request For X (where the X stands for a specific desire). The three most common requests include Request for Information (RFI), Request for Quote (RFQ), and Request for Proposal (RFP).
Requisition to pay covers the purchase to pay (P2P) process starting with the creation of a purchase requisition. A purchase requisition is a formal document used to purchase something needed at your company.
Shadow IT is an IT system (device, application, or software) that was bought or built without approval from the IT department. In some instances, shadow IT is relatively innocuous: for instance, an employee bringing in a USB drive to work from home. Shadow IT is often deployed to increase productivity, solve a workflow issue, or to provide education and training.
Should-cost analysis, also known as cost breakdown analysis, is the process of breaking down why a product or service costs what it does. This process considers factors such as the cost of materials, production and labor costs, profit margin, and market conditions such as demand and competition.
Smart procurement refers to the use of technology to make manual, labor-intensive procurement processes more efficient. Smart procurement tools may use machine learning, artificial intelligence, IoT, and advanced data analytics to make procurement easier, more accurate, and more streamlined.
Source-to-award, or source-to-contract, is a group of procurement activities that can be optimized virtually overnight — with the right tools. Digital platforms that allow for automated bidding, virtual purchase orders, and online payments, as well as collaboration with suppliers, make the source-to-contract process more manageable, transparent, and compliant.
Source to pay, commonly abbreviated as S2P, is a piece of the procurement process that uses digital solutions to source products and services. While Source to Pay includes everything contained under the definitions of P2P, it also involves the sourcing of products and services.
Spend analytics or spend analysis is the process of identifying areas where you can cut costs, improve strategic sourcing, and ultimately reduce expenses throughout the procurement process.
Spend management can help procurement teams reduce costs, drive growth, and improve the business’ profit margin. Spend management involves overseeing supplier relationships to build long-term value, as well as tracking the procurement budget to make sure each dollar spent is used for maximum value.
A spot buy is a purchase that is unplanned, often considered an “emergency” or a one-time buy. Just like with any other type of spend, it is important to keep spot buys in check.
Strategic procurement, also known as strategic sourcing, is the process of planning to ensure that the goods and services needed to do business successfully are obtained on time as needed — and on budget. Strategic procurement involves carefully optimizing everything from vendor selection, payment terms, vetting, contract negotiation, and the purchase of goods and services.
Supplier diversity is, quite simply, a commitment by your company to work with diverse groups in its supply chain. Improving supplier diversity can be achieved by proactively seeking out business relationships with all types of suppliers: large and small businesses, businesses owned by minorities, women, veterans, persons with disabilities, LGBTQ, or socio-economically disadvantaged groups.
Supplier Relationship Management (SRM)
Supplier relationship management (SRM) provides a strategic way for a company to invest in strategic sourcing, find efficiencies in the supply chain, and reduce costs.
Supply Base Rationalization
Supply base rationalization, or supplier rationalization, is the practice of reducing the number of active suppliers to streamline an organization’s spend. Ideally, intentionally shrinking a supply base will allow the organization to spend more time and focus on building value from existing supplier relationships.
Supply Chain Risk Management
Supply chain risks come in many forms: natural disasters, hackers, labor strikes, pandemics, and even climate change. It’s virtually impossible to eliminate all risk from your supply chain. But, supply chain risk management offers a way to determine which risks are the highest priority — and which risks your business can afford to live with.
Sustainable procurement is defined by the United Nations Procurement Practitioner’s Handbook as the process of procurement while taking social and environmental factors into consideration, as well as financial factors.
As technology transforms procurement, organizations are better able to use data to unearth and resolve inefficiencies in their sourcing process. Many organizations are spending this year focusing on tail spend: unmanaged or off-book purchasing that can quickly drag down a company’s bottom line.
Tail spend is often defined as the money a company spends on purchases that account for roughly 80% of total transactions, which makes up about 20% of the company's spend by volume.
Third-Party Risk in Procurement
Third-party risk is broadly defined as the risk of doing business with people outside of your organization. The supply chain and sales channels are two major sources of third-party risk: Because these two business operations involve working with lots of partners, suppliers, vendors and independent sales representatives, the organization takes on a lot of risk in these functions.
Unmanaged spend, tail spend, rogue spend, maverick spend: no matter what you call it, it’s all a type of spending that puts an organization’s bottom line at risk. Unmanaged spend is the result of procurement processes that are too complex, too archaic, or too inefficient. This type of spending opens an organization to all kinds of problems, from wasted resources to compliance risk and even a competitive disadvantage.
Vendor Managed Inventory
Vendor managed inventory is a process in which the vendor of a product takes responsibility for maintaining the buyer’s inventory of that product. The goal of vendor managed inventory is to create a mutually beneficial relationship in which both the buyer and the vendor are able to streamline the availability of goods.
Vendor Master Data
In Deloitte’s 2021 global survey of Chief Procurement Officers, some surprising trends emerged. The procurement landscape has changed as a result of the pandemic, but high performers who have been able to adapt share one key feature: agility.