Frequently Used Terms and Definitions

Procurement – Procurement refers to 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.

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.

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.

Aggregation – Combining buying power in specific categories within the various business units within a company or with other companies in order to secure optimal pricing and service agreements from suppliers.

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.

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).

eSourcing Enablement – The process of enabling buyers and suppliers to leverage electronic tools to support the sourcing process. This may involve technology and business process implementation and organizational change management and training.

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.

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.

Buyer & Supplier Enablement – The process of enabling buyers and suppliers to engage in electronic commerce. Includes the development of e-catalogs, electronic integration of buyers and suppliers and supporting training and communication. This often-missing link between eSourcing and eProcurement allows buyers to purchase against negotiated contracts and is key to savings realization.

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 (also known as adoption). Buyer and supplier enablement is key to driving high compliance.

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.

Category Management – Continual monitoring of expenditures and supplier performance in specific buying categories with the intent of driving ongoing cost or supplier performance improvements. Also sometimes referred to as supplier relationship management or commodity management.

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.

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

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.

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.