Purchasing glossary: key terms explained

Supplier evaluation is the process of examining the performance of current or potential suppliers in terms of quality, cost, delivery and compliance with company requirements, with the aim of making informed decisions about purchasing relationships.

Supplier base rationalization, or supplier rationalization, is the practice of reducing the number of active suppliers to streamline an organization’s spend. Ideally, intentionally reducing a supplier base will enable the organization to spend more time and focus on creating value from existing supplier relationships.

Supplier panel reduction, or supplier rationalization, is the practice of reducing the number of active suppliers to streamline an organization’s spend. Ideally, intentionally reducing a supplier base will enable the organization to spend more time and focus on creating value from existing supplier relationships.

Supplier-managed inventory is a process in which the supplier of a product takes responsibility for maintaining the inventory of that product for the buyer. The aim of supplier-managed inventory is to create a mutually beneficial relationship in which both buyer and supplier can rationalize the availability of goods.

Supplier TCO (Total Cost of Ownership) is an analysis that takes into account all the costs associated with purchasing, owning and using a supplier’s product or service over its entire lifetime, including initial, operating, maintenance and end-of-life costs.

Supplier panel analysis is the process of reviewing and evaluating current suppliers to determine their performance, reliability and compliance with company requirements, and to identify opportunities for improvement or rationalization.

Supply chain risks take many forms: natural disasters, hackers, strikes, pandemics and even climate change. It’s virtually impossible to eliminate all risks from your supply chain. But supply chain risk management offers a way of determining which risks are of the highest priority – and which risks your company can afford to tolerate.

An open order is an easy way to place orders requiring multiple payments over a period of time. Open orders are long-term contracts with specific suppliers that help a buyer order the same goods or services at regular intervals.

Contract Lifecycle Management (CLM) is defined by Gartner as “the applications used to manage contracts from their initiation through to their ongoing management and eventual renewal or termination.” In simple terms, CLM is the process and tools used to prepare, sign, record and execute your commercial agreements.

The procure-to-pay process, sometimes abbreviated to P2P, is the integration of purchasing and accounts payable tools to become more efficient. Procure-to-pay is a subset of the overall purchasing process.

Requisition-to-pay covers the buy-to-pay (P2P) process, starting with the creation of a purchase requisition. A requisition is a formal document used to purchase something your company needs.

E-procurement involves the purchase of supplies, works and services via the Internet and other information systems and digital networks, such as electronic data interchange and enterprise resource planning. This form of purchasing can take place on a business-to-business, business-to-consumer or business-to-government level.

Smart purchasing refers to the use of technology to make manual, labor-intensive purchasing processes more efficient. Smart purchasing tools can use machine learning, artificial intelligence, the Internet of Things (IoT) and advanced data analytics to make purchasing easier, more accurate and more streamlined.

Sourcing to pay, commonly abbreviated to S2P, is a part of the purchasing process that uses digital solutions to source products and services. While the source-to-pay process includes everything contained in the definitions of P2P, it also involves the sourcing of products and services.

A purchase requisition is a formal document used to purchase something your company needs. The requisition is submitted to the department manager or purchasing team to initiate the process of purchasing the good or service. Finance and accounting teams also use the purchase requisition for reporting and compliance purposes.

Tenders enable companies to find the goods and services they need at the best possible price. Through the tendering process, an organization can solicit bids from contractors, suppliers or vendors for the raw materials, equipment and other products needed to support key business functions and serve internal customers.

A Request For Information (RFI) is a document that announces a project, describes what it entails, and solicits offers from qualified contractors to carry out the project. Essentially, an RFI is a communication document. It tells potential suppliers what you want to buy, and what you expect in terms of delivery, customization or service requirements.

A Request For Quotation (RFQ), sometimes also known as an Invitation To Bid (IFB), is a document that asks suppliers to provide price quotes for the chance to complete a task or project. Some companies send RFQs as stand-alone requests or as part of the Request for Proposal (RFP) process.

Purchasing mapping is a detailed analysis of the entire purchasing process, including workflows, relationships between different stages, and control points, in order to identify opportunities for improvement and optimization.

Purchasing digitalization is the use of digital technologies to automate and optimize purchasing processes. This includes the use of purchasing management systems, e-procurement platforms and data analysis tools to improve efficiency, transparency and decision-making in purchasing activities.

Category management is an approach to purchasing organization that focuses on specific areas of expenditure. This process strategically segments spending into areas with similar or related products.

Centralized purchasing is the practice of consolidating all an organization’s purchasing through a single purchasing team. The centralized purchasing team will work with other departments in the organization to utilize economies of scale by buying in bulk and negotiating more affordable prices. Centralized purchasing is also seen as a way of simplifying and rationalizing purchasing.

Gartner’s definition of cost optimization is: “an ongoing, business-focused discipline to reduce expenses and costs while maximizing business value.” Simply put, cost optimization seeks to find the best price and terms for business purchases, while standardizing, digitizing and automating applications, processes and services to reduce costs.

Direct purchasing is perhaps the most important function of a purchasing team, given its impact on business success. And while many organizations ignore indirect purchasing to their detriment, focusing on direct purchasing in times of crisis is a sound business strategy. If you can’t find ways to reduce the risks and control the costs of your direct spending, there’s a serious flaw in your operations.

Indirect purchases refer to the supplies and services that keep the business running: categories of expenditure such as facilities, utilities, maintenance services, human resources and office supplies.

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 of course, purchasing.

Strategic purchasing, also known as strategic sourcing, is the planning process for ensuring that the goods and services required for business success are obtained on time, as needed and on budget. Strategic purchasing involves carefully optimizing everything from supplier selection, payment terms and conditions, to auditing, contract negotiation and the purchase of goods and services.

Outsourced purchasing involves entrusting an external service provider with the management of some or all of a company’s purchasing functions, enabling it to concentrate on higher value-added activities.

MRO (Maintenance, Repair and Operations) purchasing covers all maintenance parts used for repairs and to support production within an organization. Although vital to operations, MRO is considered an indirect expense.

A central purchasing unit is a centralized organization or service that manages purchasing on behalf of several entities or departments, thereby generating economies of scale and improving purchasing conditions.

Coded purchasing refers to the use of standard codes to classify and identify purchased items, facilitating inventory management, expense tracking and purchasing data analysis.

Non-production purchases involve the purchase of goods and services not directly linked to the production of the company’s end products, such as office supplies and cleaning services.

Class C purchases refer to low-value, high-volume items. Although they often represent a small part of the overall budget, their effective management can result in significant savings.

Innovation in purchasing is a broad term that can encompass many different things. In fact, the experts at the Public Spend Forum have identified at least four different aspects of “innovation in purchasing”, covering technology, strategy, processes and the rest.

Spend analysis is the process of identifying areas where purchasing can reduce costs, improve strategic sourcing and ultimately reduce spend throughout the purchasing process.

Direct purchasing refers to the process of buying raw materials and goods for production, while indirect purchasing concerns the purchase of services or supplies needed for the day-to-day running of the company.

As technology transforms purchasing, organizations are better able to use data to identify and resolve inefficiencies in their sourcing process. Many organizations are focusing this year on tail expenses: unmanaged or off-book purchases that can quickly weigh on a company’s bottom line.

Managed and unmanaged spend naturally require different approaches. Purchasing teams must simultaneously try to optimize managed spend by managing supplier relationships, practicing strategic purchasing and monitoring the purchasing cycle for inefficiencies. At the same time, teams must also identify unmanaged spend and try to reduce its negative impact.

Maverick spending – sometimes referred to as non-compliant spending – refers to any purchase that does not follow the organization’s established purchasing rules and procedures. Maverick spending results either from a deliberate circumvention of purchasing processes, or from a purchasing error that does not correspond to previously negotiated purchasing terms.

Order consolidation is the practice of combining purchase orders from several units in your company. From there, you can submit a single order to a supplier capable of meeting all the requirements of that order. This saves the company time by avoiding the need to send multiple purchase orders to multiple suppliers.

A Center Of Excellence (COE) is a specialized team that provides leadership, training and support to improve purchasing best practices across an organization.

The Kraljic matrix is a strategic tool used in purchasing management to segment purchasing categories according to their impact on profits and procurement risk. It helps companies develop appropriate purchasing strategies by classifying products into four categories: non-critical, leverage, bottleneck and strategic.

An emergency purchase is an unplanned purchase, often referred to as an “emergency” or one-off purchase. As with any other type of expense, it’s important to keep emergency purchases under control.

Tail spend is often defined as the money a company spends on purchases that account for around 80% of total transactions, representing around 20% of the company’s spend by volume.