Procurement Glossary

Check out the Bid Ops glossary, your one-stop guide for all things procurement. Bookmark this page as we’ll be updating this resource regularly with new definitions and must-know procurement terms.

A

ABC classification

A system of prioritizing different types of inventory based on their value or importance to the business.

Acceptance criteria

Indicators or measures used to assess whether a product or service meets the standard required.

Activity-based costing (ABC)

An accounting method in which indirect costs are assigned to activities used in the production of a product or delivery of a service. These activities are then used to apportion those costs to products and services in a way that gives a clearer understanding of the total cost of a product or service.

Agile

Agile is a set of principles, behaviors, and approaches to delivering work iteratively. It allows teams to deliver value quickly and often.

Approved supplier list

A list of suppliers whose basic credentials have been checked. This would normally cover financial stability, compliance with any laws or licenses needed to operate, adequate insurance, health and safety policies, and the like. There is no contract with the suppliers, but there is some assurance as to their appropriateness for specified categories. This list may restrict what types of order (by category, value, or geographical location) can be placed with each of them.

App

Short for application, a program that runs inside another service. Many mobile phones allow apps to be downloaded, leading to a burgeoning economy for modestly priced software. Can also refer to a program or tool that can be used within a website. Apps generally are built using software toolkits provided by the underlying service, whether it is iPhone or Facebook.

B

Back order

Customer orders which cannot be immediately fulfilled and are awaiting future stock delivery/manufacture before fulfillment.

Base price

The initial price of something without the added costs such as handling, transport and profit.

Benchmarking

Comparing an element of one business, such as price, quality or service, against another.

Bid

Offer of a price.

Bidder (or tenderer)

A potential supplier who makes an offer (a bid is an offer or tender).

Bill of materials (BOM)

A comprehensive list of components, items, materials and parts to create a product, essentially a recipe for the production of an item.

Blanket order

An order that is placed with the supplier which allows the buyer to call off quantities as they need them over an agreed time period. This works in accordance with a manufacturing organization’s production schedule- A system of prioritizing different types of inventory based on their value or importance to the business.

C

Cost forecasting

Forecasting in accounting refers to the process of using existing and past cost data to predict future costs. It’s essential for planning purposes—forecasting is necessary to estimate and plan for costs that will be gained before actually incurring them.

Cost targets procurement

Target costing is an approach to profit planning. A manufacturing company identifies a target profit margin and calculates the maximum cost of manufacturing—based on the prevailing market price—that will produce the target profit level. This target cost will then affect the product design, materials, specifications, and manufacturing choices. All of which they will then try to ensure that they reach the profit target. Target costing seeks to engineer profitability from the time of the product launch. Since product life cycles have become shorter, value engineering the design during the product’s life cycle has declined.

Cost modeling

Understanding costs helps organizations save money and make more money. Without an appropriate way of understanding costs, businesses can be at a loss. This means they could lose out on important opportunities. Cost modeling is a process that helps companies understand the best cost to create a product. So, it essentially allows businesses to understand the most cost-effective way to produce their goods. Cost modeling helps stakeholders make significant decisions regarding cost, which can help businesses in many ways.

CapEx Procurement KPIs

CapEx procurement oversees capital expenditures that tend to be one time purchases rather than day-to-day costs. OpEx procurement is based on repeatable processes whereas CapEx procurement is typically different each time. CapEx procurement might include large pieces of equipment or even entire facilities.

Category Management

Category Management is a strategic approach to procurement. Organizations segment their spend into areas that contain similar or related products. This allows opportunities for consolidation and efficiency.

D

Dynamic pricing procurement

Dynamic pricing is a pricing strategy that uses variable prices instead of fixed ones. Essentially, the dynamic pricing model’s concept is to sell the same product at different prices to various people.

E

E Auctions

An e-auction (or electronic auction) is a procurement auction that’s done electronically. The most typical type of e-auction is a “reverse auction.” If correctly applied, it can be a very effective procurement tool for businesses and suppliers. This is because the buying organization will benefit from a significant price reduction. At the same time the supplier gains because an e-auction is a transparent competition.

F

Firmographic Data Procurement

Firmographic data procurement means utilizing datasets in procurement that help businesses effectively segment organizations into meaningful categories.

Forecasting

A technique that uses historical data to make informed predictionsthat baseline future trends and can also include managing projects in a pipeline to exceed targets. Forecasting relies on KPIs to measure success.

Fair Market Value

Simply put fair market value is the “fair” cost of assets under normal market conditions. It is largely dependent on the industry, compulsion to buy or sell, internal timing and pressure, and a reasonable knowledge of relevant facts which can be difficult to determine in some industries where disruption is present.

G

Gap Analysis

The comparison of actual performance and potential performance. In procurement gap analysis can be used to measure gaps in performance to determine the current state of business and where an organization would like to be. In can be used in procurement skills to assess teams as well as process and performance to increase business efficiency.

H

Head Contract

A head contract is the contract between the Principal party and the Contactor party for the duration of a project. It is the initial contract with a supplier or vendor and may impact terms and conditions of sub-contracts.

High Performing Teams

A top-tier procurement team that is driving value, sustaining process excellence, and implementing effective and disruptive procurement strategies. High-performing teams deliver more than their cost and assess and prioritize activities that drive value on a consistent basis.

I

Intelligent Supplier Data

Supplier data that has been gathered, analyzed, and transformed by AI and machine learning. Intelligent supplier data allows for more strategy, insight, and dynamics to improve purchasing experiences and can include existing and potential suppliers.

Impact

A strong effect or influence. One procurement process may impact another. Impact sourcing means using a BPO sourcing model (business process outsourcing) to outsource work to disadvantaged areas to help those living there.

Indirect Procurement

Indirect procurement is the sourcing of all goods and services for a business’ day-to-day operations. Typically these items and services are used by internal stakeholders and functions rather than externally.

Inventory Strategy

A collection of processes from end-to-end production to control and manage inventory for projects. An effective inventory strategy maintains inventory, removes bottlenecks, minimizes cost, and minimizes stocking issues.

J

Just in Case

A provision against an event or action that could lead to inefficiencies and problems. In procurement these provisions could be increasing inventory to avoid a shortage.

Just in Time (JIT)

A manufacturing system where components, parts, and materials are delivered immediately before they are needed to reduce inventory costs. In procurement this could be done to reduce storage costs and reduce wasted. JIT is famously used by Toyota and is also known as the Toyota Production System or TPS.

K

Key Stakeholders

The top stakeholders in a project or organization. Key stakeholders have the power to prevent the project from reaching deadlines and achieving its full potential if they withdraw their support. Members of this group tend to be important roles with power such as regulatory bodies and C-suite.

KPI Monitoring

Goals and metrics that are monitored to measure success of an organization. KPI monitoring involves capturing specific data, converting it into trackable metrics, and then monitoring those figures to see if the organization is on target, above target, or below target.

L

Lead Time

Lead time is the amount of time in a process from the start until the end and is a consideration in logistics procurement. Calculating lead time correctly in procurement is essential for a smooth end-to-end process to ensure the process remains steady with no gaps.

Lean Supply Chain Management

Using “lean” techniques on end-to-end supply chain to increase efficiency in any area that is wasteful and utilizes non-value-added time and activity. It can be applied to any part of supply chain management such as operations, purchasing, distribution, or logistics.

Leverage

Using something already owned in your organization to attain something new. In procurement, companies use leverage to secure improved value by using the fixed cost of a supplier and spreading that over a bigger volume, or reducing the amount of vendors for the same need. Leveraging can be applied to most parts of procurement, from best practices to office equipment, to technology solutions.

Line Item

Every item associated with a purchase order being procured, broken out line by line in a spreadsheet. Purchase orders might include thousands of line items and can be categorized into regular line items (the goods and services being purchased), comment line items (where notes can be left regarding regular line items), and miscellaneous line items.

M

Management Contracting

Used in construction procurement primarily. The main contractor of a construction project manages its subcontractors on the client’s behalf. Typically the managing contractor would be an experienced firm with expertise that has ability to manage different groups of subcontractors whereas in traditional procurement the client would divide up and contract the work themselves. Management contracting would typically be used on a large and complicated project and allows risk to be spread out among different contractors. The client only communicates with the management contractor.

Managing by Exception

Identifying and handling anomalies in the procurement process. Managing by Exception means identifying an exception, determining the reasons for it, and handling the deviation before the procurement process is disrupted.

Margin

The difference between selling price and cost of production, or the space in which an organization makes money. Procurement’s cost savings is associated with margin and procurement will often be relied on to vet suppliers and conceptualize a strategic sourcing process to optimize margin.

Market Analysis

Analyzing the supply market to understand competition, key suppliers, and overall direction of the marketing to create an effective strategic sourcing plan. Procurement may conduct interviews with suppliers in the industry and will determine all of the macro factors with potential to impact procurement.

Minimum Order Quantity

MOQ or minimum order quantity means the fewest amount of units a company is required to purchase at a time so the manufacturer can remain profitable. It can show up as a note on a line item and can be a confusing unit of measure for procurement and sourcing teams.

N

Negotiation

A discussion between two or more parties to reach an agreement that is mutually satisfying. In procurement companies may be negotiating price, value, performance, quality, agreement, or a number of other factors that may impact manufacturing or a function’s strategic sourcing plan.

New Purchase

Purchasing something new for a company rather than redistributing owned assets among different locations.

O

Offer

An essential requirement to form a contract by giving the other party the opportunity to accept something or refuse.

Off-the-shelf

An item that is not customized or made to order, but is part of a regular inventory and taken from existing supplies and inventory.

On Time in Full

On time in full, or OTIF, means when a customer receives their order when they wanted it without any missing items. It allows retailers and manufacturers to maintain a smooth supply for consumers and is a metric often used in the CPG industry and the food and beverage industry. OTIF can also be referred to as “perfect order proficiency.”

P

Procurement

The act of pertaining services, goods, and technology for business purposes, sometimes through a bidding process. Procurement covers all of the end-to-end processes of purchasing including compliance, cost analysis, risk analysis, and ESG. Procurement is often associated with purchasing during supply chain disruptions or scarcity and can be a strategic function and department of any organization to apply strategy to achieve greater profitability and value. Procurement also includes relationship management, evaluation of contracts, and negotiation.

Purchasing

Buying goods and services in a straightforward fashion and transactional nature. Purchasing is different from procurement and doesn’t include any of the strategic activities of procurement.

Procurement Performance Management

Procurement Performance Management, or PPM, is a process that is ongoing that measures KPIs like spend, efficiency, or cost savings. It is a method of measuring the performance of a procurement function.

Procurement Analytics

Data that is collected and analyzed to give insights that help create business strategy. Procurement analytics help businesses make effective decisions and help teams become high-performing.

Predictive Procurement Orchestration (PPO)

Using AI to simulate procurement processes ahead of time, such as quotes and purchase requisitions to attain greater visibility into cost savings and strategy. Predictive Procurement Orchestration can spot anomalies, exceptions, and outliers to increase value. Auto detection helps procurement teams maximize their time and prioritize areas where procurement can bring more value.

Procurement KPIs

Key Performance Indicators specifically for procurement teams. KPIs help procurement evaluate its performance and measure effectiveness to optimize decision making and overall strategy. Also referred to as metrics, common procurement KPIs are supplier diversity, purchase price variance (PPV), cost savings, cycle times, and OTIF (on time and in full).

Purchase Price Variance

Purchase Price Variance (PPV) is the difference between that baseline price and the price the organization actually pays for a product or service. PPV can be positive or negative denoting a profit or a loss. It is one of the most important procurement KPIs used in most organizations. It is a crucial factor in determining cost savings and the effectiveness of a procurement function.

Q

Qualitative analysis

All relevant factors of an analysis that cannot be tied to numbers or statistics. Qualitative analysis uses opinions and non-quantifiable information such as supplier relationships to make a decision. It is often used in conjunction with quantitative analysis.

Quantitative analysis

Quantitative analysis uses numbers, modeling, and statistics to understand cost and can be used to measure performance internally or to compare the cost of outsourcing a product or service in manufacturing rather than making it in-house. It is also used to evaluate financial instruments and predict real world changes.

Quote

In procurement a quote is a document given by a potential supplier or vendor that specifies the cost of their product (whether good or services) over a specified period.

R

RFP Automation

RFP automation is the use of technology and AI to complete RFP evaluation tasks. Many procurement teams use strategic sourcing software to automate all or part of the RFP process in a strategic sourcing process.

RFQ Automation

Automating the Request for Quotation process using AI. Automated RFQ solutions are purchase order systems that help standardize the purchasing process to help procurement teams maximize their time and use time for more value-added activities.

S

Spend

An amount assigned to the value of transactions with a supplier specified in a contract, or types of cost management inside an organization. Different types of spend include direct spend, indirect spend, tail spend, and maverick spend.

Supplier Analytics

The analysis of a supplier’s performance or the analysis of the supplier base. Supplier analytics might compare supplier performance, analyze supplier risk, or factors like diversity.

Supplier Master Data Management

A process of ensuring that duplicates in an organization’s data is avoided, the data is current and the same between multiple locations, and that data is accessible for all procurement team members.

Supplier Lifecycle Management

Supplier lifecycle management (SLM) is the process of managing vendors in an organization’s end-to-end procurement process. Companies build relationships with suppliers to drive value and create transparency in the procurement and supply chain.

Supplier Experience Management (SXM)

The process of making the bidding process easier for suppliers. Suppliers are typically required to login to many disparate systems to manage transactions which is frustrating. Supplier Experience Management alleviates those frustrations.

Supplier Master Data

Supplier master data is all relevant data about whatever is being sourced, whether good or services. It can include contact information, contracts, category information, procurement history, and information about inventory.

Supply Base

All suppliers of a company’s products and services. Supply base can include potential suppliers, current suppliers, and former suppliers.

Supplier Data Engineering

Creating supplier data governance and building supplier data pipelines inside of an organization. Data engineering could include storing data, analyzing data, and ensuring data is compliant.

Savings Realization (Realized Savings)

Realized savings are the excess of a budgeted amount that have been saved on a line item. They are impacted by other factors such as if a process impacts and detracts from another area such as a facility. Not all realized savings that are estimated at the beginning of a project become actual cost savings, as they are impacted by many different forces such as rogue spending, manual entry, supplier shortages, discrepancies in units of measure, or any other lack of internal control.

T

Tactical sourcing AI

AI that helps procurement automatically source products to meet immediate needs. Tactical sourcing is typically focused on finding the lowest cost and is a short-term activity and tactical sourcing AI can help the function complete ordering cycles quickly and efficiently.

Tail Spend

Tail spend is an aggregate of small purchases that are typically low value but add up to be a large cost factor. These purchases are made outside of procurement in other departments and locations inside of a company and the data is typically siloed and not easily identified. Tail spend can also be referred to as maverick spend or rogue spend.

Target Cost

A target cost is a cost for a project that is set at the beginning of a project’s life cycle. Overruns of the final project are then shared between parties based on the contract and formula set at the beginning of the project’s life cycle.

Total Cost of Ownership (TCO)

TCO is the purchase price of an asset, whether good or services, plus the costs of its operations over the lifecycle of the asset.

U

Unstructured Data

Data that cannot be processed with regular data tools because it is qualitative in nature. Unstructured data is not predefined and is often stored in its native format. It is hard to use and classify and can make up the majority of a company’s data.

Upstream

Every process a procurement team might undertake from sourcing to awarding the contract. Downstream refers to all the processes after the contract is awarded.

V

Value

The importance, worth, and usefulness of a thing or activity. In procurement, value is the competitive advantage of a company based on procurement’s efforts. Value can be calculated by factoring in cost savings, quality of data, compliance, growth, strategy, and innovation.

Value Analysis

Value analysis is a review process assessing purchasing activities for efficiency and cost reduction. The idea was popularized by Lawrence D. Miles during a period of material shortages and was conceptualized to ensure unnecessary cost was not a factor in production.

W

Weighted Scorecard

Weighted scoring prioritizes different parts of an RFP based on what a business does and the importance of those factors to business. Weighted scoring can assess which suppliers will be more impactful long term and is more complex than simple scoring. If done manually in spreadsheets errors are common.

X

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Y

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Z

Z

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