Confused about procurement terminology! Here is a procurement dictionary or glossary of the main key words you need to be aware of and its meaning. The procurement dictionary focuses on the key terms that are used regularly in the industry!

Account Manager

In the hierarchy of sales positions, an account manager is responsible for managing the relationship with a series of accounts.  Typical responsibilities include diagnosing business opportunities, planning communications, managing relationships, negotiating agreements, reporting and troubleshooting problems.

Acceptance

Unconditional agreement to an offer made by another party, which may lead to a legally enforceable agreement, provided other prerequisites for contract formation are met.  Also, the acceptance of completion or performance of work, or delivery of a good

Acceptance Testing

Buyer specified quality control tests performed to demonstrate that the goods supplied have been manufactured to specification.  Tests are usually performed on a sample and, testing may form the basis for issuing a Certificate of Compliance if the lot falls within acceptable quality levels.

Accounts Payable

Accounts Payable function is the department responsible for ensuring that an organisation pays its invoices appropriately.

Accounts Receivable

Accounts Receivable is the department responsible for ensuring that sums owed by external organisations as a result of the sale of goods or services are paid according to the agreed terms.  Credit controllers may ensure that customer payments occur within the agreed time frame following the issue of an invoice by the seller to the purchaser.

Accrual 

Under accrual accounting, provision is made against budgets at a time when goods or services are received, rather than when the invoice for those goods and services is paid or received.

Added Value

A phrase often used to classify non-cash releasing benefits realised through the procurement process.  The “added value” from the procurement process may include risk reduction, stakeholder training, exclusivity, preferential access to resources etc., all of which would be classified as ‘added value’ benefits.  See also Benefits Realisation Plan, Cost Avoidance and Savings.

Aggregation

A generic term applied to the practice of volume consolidation or leverage. Demand for identical or similar categories is grouped together in order to offer the buyer greater economies of scale when negotiating with potential suppliers

Alternative Dispute Resolution

Alternative dispute resolution [ADR] includes a range of alternatives to litigation for resolving disputes between commercial entities.  The popularity of the practice has grown as the time and cost required to bring cases to court has increased and the probability of a satisfactory outcome has become less predictable

Approved List

A phrase used particularly in public sector organisations to describe a standing list of pre-qualified bidders for a particular scope of work. Instead of issuing public advertisements each time a scope of work is to be tendered, bidders may be selected from within an approved list for that category.

Balanced Scorecard

The concept of the balanced scorecard emerged in the early 1990s and advanced the view that simple financial or economic measures of organisational performance were inadequate to measure an organisation’s success.  Four perspectives were originally proposed, each of which being a separate dimension against which an organisation might measure its ‘performance’.  The perspectives were financial, customer, internal business processes and learning and growth.  The diversity of perspectives reflects the fact that an organisation’s success in realising its strategy cannot be measured solely in terms of shareholders or financial measures of performance.  The ‘balance’ refers to the measurement of an organisation’s success from a number of other perspectives, including staff and customers

Battle of the Forms

The battle of the forms describes the situation that results when parties involved in a commercial transaction exchange documentation with differing terms and conditions.  In the event of a dispute between the parties, the courts have to decide what was agreed between the parties and, in the absence of a contract, the courts in some jurisdictions will seek the last unchallenged counter offer.  In practice this often favours the supplier, as the quotation, order acknowledgement, proof of delivery and invoice all succeed buyer communications

Benchmarking

Benchmarking in procurement terms can have two specific applications.  The first type, price benchmarking involves the determination of whether commercial terms currently offered or enjoyed represent value when compared with terms enjoyed by other customers for a similar category. Price benchmarking is most easily undertaken for homogenous and simple goods, but even so needs to consider other terms of the arrangement such as quantities ordered, frequency of orders, payment terms etc.  The second type of benchmarking, performance benchmarking, also involves comparisons of key metrics against other entities, but typically addresses dimensions of organisational performance rather than price paid.  Examples might include the cost of the procurement function as a percentage of the total spend, the cost of raising and paying a purchase order, the quality of the strategic sourcing process, the quality of staff development processes etc.

Blanket Order

A blanket order is an order raised with a supplier for a specific range or category against which individual requirements will be drawn down over a period.  Typically, the overall quantities are not known precisely at the start of the arrangement, so a commitment is given to fix the terms of the agreement for a specified period, for example, six months or 12 months.

Bond

A bond is a written agreement set up by participants in a relationship in order to guarantee performance, or to provide security against default or non-performance.  Examples include bid bonds, performance bonds and completion bonds.  In each case, a sum of money is deposited as surety that each party will fulfil their obligations, as the bond may be forfeited in defined circumstances.

Business Case

A business case is a structured evaluation of a proposed decision, providing a transparent decision-making trail and evaluating the merits of the choices considered.  Typically business cases are submitted for review to senior managers and seek to distil complex issues and to provide rational choices between competing alternatives.  As an example, business cases are often prepared to consider the investment of money in equipment or new projects and would include a statement of the proposed goals, exploration of alternative options, some form of cost benefit analysis, a risk analysis, recommendations for the preferred options and, an implementation plan.  The procurement contribution to business cases may include validating the ‘do or contract’ decision, ensuring that the proposed benefits are realistic, aligning any contractual arrangements so that risk is shared with the contractors, assessing the commercial risks, ensuring that the total cost of the project is costed, not just the initial purchase price, and of course negotiating terms with any contractor in order to try to maximise the return on investment.

Business Process Outsourcing

Business process outsourcing [BPO] is a phrase used to describe the outsourcing of a specific function or range of services.  Examples might include customer contact centres, information technology support services and procurement services.  The strategic logic is that organisations have some core capabilities by which they enjoy competitive advantage over their competitors, but may undertake some other activities at which they are relatively inefficient.  Where third parties can provide these functions to the same or a higher standard at a lower cost, it can make strategic sense to outsource the provision of these services to specialists.

Category Analysis

A prerequisite to category management is a full understanding of the category in terms of the attributes of demand for the category and the supply market for the category.  Category analysis is broader than spend analysis, as the scope is both external and internal.  It seeks to develop a comprehensive understanding of the stakeholders, demand profile, supply chain, suppliers and supply market characteristics.

Category Management

In the procurement area, the term can be used in two ways: as a description of the procurement process, or as a basis for organising the procurement team.  As a description of the procurement process, category management involves applying the end-to-end procurement process to a specific range of goods or services.  This involves all the pre-award processes such as category analysis and demand management, sourcing and contract negotiation, as well as the post-award processes such as performance management.  As a basis for structuring procurement resources category management usually involves defining the need, sourcing the market, negotiating the contract and managing the providers after the award.  In order to ‘scale the role’ so that different categories represent approximately equal challenge, three key factors are considered: the value of spend in each sub-category, the diversity of the sub-categories and the challenge in the supply markets.

Change Order

A change order is the formal document through which a change is made to a construction contract, for example the scope of work or the completion date or the price of the work.  Both parties agree to the change and the implications in terms of mutual rights and obligations.

Damages

Damages are a form of compensation paid to a claimant for suffering loss, injury or harm as a result of another’s breach of an agreement.  There are several types of damages that may be claimed in the event of a breach of an agreement: damages for economic loss, reliance damages and expectation damages are three examples.  All damages represent an attempt to restore the parties to where they would have been had the breach not occurred.  Damages cannot be punitive.

Damages for economic loss may be liquidated or unliquidated.  Liquidated damages are ‘a genuine pre-estimate of the likely loss’ and represent an attempt by buyers to calculate the economic loss caused by a breach of a contract by a supplier.  Many suppliers seek to cap the scale of damages to limit their liability.  Unliquidated damages are damages assessed by the courts.  Reliance measures seek to compensate the claimant for ‘out of pocket’ expenses incurred due to the other party’s breach.  Expectation damages refer to sums that should have been earned in the future had the breach not occurred, for example lost profit.

Damages, Liquidated

A genuine pre-estimate of likely loss, liquidated damages are a pre-agreed sum of money that the buyer estimates will be lost in the event of a breach of their contractual obligations by the supplier.  The purpose of damages is to restore the parties to where they would have been if the breach had not occurred, so damages may not be punitive, but should relate directly to the buyer’s expected loss.  The implication of liquidated damages is that the buyer needs to communicate to the supplier all the likely consequences of a potential breach, so that the supplier understands the implications of a breach of the contract.  While some suppliers will seek to cap their liability, the buyer may need to make a commercial judgement about the appropriateness of transferring all of the risk to a supplier.

Demand Management

Demand management refers to the analysis and influence of levels of consumption.  It involves understanding what is bought, by whom, when, how and why, and then seeking to change patterns of consumption so that total cost is minimised.  For example, procurement processes may negotiate the rate for electricity so that it is purchased at the best possible tariff, but if usage is cut this will result in the largest saving of all.

e-Procurement

e-Procurement involves the online conduct of business-to-business procurement processes using web-based applications. The significance of e-Procurement is that it enables buyers to locate potential suppliers, review product choices, select products and make purchasing transactions directly over the Internet.  Typical e-Procurement applications include web-based ERP solutions that automate transactional procurement processes.   e-Sourcing can facilitate the location of potential supply sources, e-Tendering can facilitate simplified quotation and tendering processes, e-Auctions may allow reverse auctions and e-Marketplaces bring together multiple sellers in a single environment.

The significance of e-Procurement is not simply the automation of workflows such as requisitioning, creating purchase orders, and receiving and paying for goods.  e-Procurement solutions change the sourcing process by facilitating the value propositions of multiple suppliers to be accessed in one place and at one time to create a ‘one-stop shop’ for all categories, and reduce the friction involved in traditional commerce

Five Forces Analysis

Five forces analysis is an approach to understanding market dynamics using the interaction of five key market forces.  The market forces are the bargaining power of buyers, the bargaining power of suppliers, the threat of new entrants, the threat of substitutes, and the degree of competitive rivalry.  The aim is to understand the profitability of the industry.  The significance for buyers is that, by understanding the trends impacting on the market, the buyer can model what is likely to happen in the market.  Buyers can also exert influence on a number of the forces, most obviously the bargaining power of buyers, but also the threat of new entrants and the threat of substitutes.

Governance

Governance in procurement refers to the overall systems and procedural arrangements to ensure that the procurement process displays appropriate levels of control and probity. The key components of a governance regime are an appropriate procurement policy, procedures defining how the process should be managed, allocation of roles and responsibilities so that roles are separated and appropriately capable staff manage the key processes, and controls and review processes to monitor the conduct of the procurement process.

For example, a procurement policy may define when competitive offers should be obtained, and how higher value acquisitions should be managed. Selected officers may control approvals to award certain categories of spend, so that there are no ‘closed loops’.  Lower value acquisitions may be managed through simplified processes, but otherwise the governance regime may define the role and contribution of procurement staff in managing the organisation’s spend portfolio.

Hire Purchase

A hire purchase contract is an agreement to allow the use of an asset while instalment payments are made, prior to a final payment which allows title in the goods to pass to the buyer.  Hire purchase may be used instead of outright purchase where the buyer wants the benefits of usage but does not want to make the initial outlay for outright acquisition.  Instead, the buyer pays regular payments which act as rental payments, covering the cost of the asset, the interest accrued and the supplier’s profit.  When the total sum has been paid, the buyer may then buy the asset at a nominal sum or return the asset to the supplier.

Indemnity

An indemnity is a promise to compensate another party in the light of certain events occurring which cause that party to incur a loss.  As an example, indemnity provisions may help a buyer cover any costs that they incur as a consequence of their supplier performing poorly.  Indemnities are typically sought against suppliers making mistakes in advice or guidance, negligence, breach of confidentiality or another’s intellectual property rights, or breach of contract.  Conversely, buyers often include a ‘hold harmless’ indemnity clause to prevent the supplier from claiming damages from the buyer for losses incurred by the supplier.  If the clause is drafted using the terms ‘indemnify’ or ‘hold harmless’, then the Courts may interpret the clause as an obligation on the other party to prevent loss.  The use of terms such as ‘make good’ or ‘compensate’ are more likely to be interpreted as obligations to compensate the buyer for actual loss.

Intellectual Property

Intellectual property [IP] refers to ‘creations of the mind’.  There are two broad classes of intellectual property: artistic creations covered by copyright, and industrial property.  Industrial property includes patents to protect inventions, industrial designs, trademarks, service marks, commercial names and trade secrets.  Most sets of terms and conditions have clauses addressing ownership of intellectual property, as many procurement contracts seek to acquire intellectual property as deliverables of the agreement.  For example, terms may seek to clarify that pre-existing IP belongs to the respective owners, but new IP that the parties plan to create as part of a new contract, belongs to the buyer.

Joint Venture

Joint ventures are business agreements where the parties involved agree to develop a new entity with new assets and often, but not necessarily, contribute equity to it.  The parties involved maintain joint control over the new enterprise and subsequently share in any profits, as well as supporting the business initially by paying expenses and funding assets.  The purpose behind a joint venture is to bring together complementary capabilities, to share risk between contracting parties, or to ensure a degree of local ownership.  Joint ventures are part of a continuum of potential relationships between organisations and, while they are one form of strategic alliance, they are unique in the sense that a third legal entity is created.  It is a more formal arrangement than a partnership or an alliance where two or more parties agree to cooperate, generally, but not necessarily, without creating a new legal entity.  See also Partnership and Strategic Alliance.

Key Performance Indicator

A key performance indicator [KPI] is a term for a performance measure that is important to the organisation, business unit or individual who is being measured.  In procurement, KPIs are typically used as measures of supplier performance and may be part of a contract or service level agreement.  For example, in a contract for responsive repairs, the time taken to perform is important, so the time taken to respond to a call-out might be one possible performance indicator.  Choosing the right KPIs requires a good understanding of what is important to the organisation, which in this case is the time taken to make the repair, not just how quickly the engineer took to arrive on site.  Provided there are metrics for each KPI, reviewing performance can give each party an understanding of the level of service being provided.  See also Performance Review and Service Level Agreement.

Letter of Intent

A Letter of Intent [LOI] is a document outlining the status of agreement between two or more parties before a contract has been finalised and which aims to give some comfort to one or both parties that they can anticipate a contractual agreement will be forthcoming.  Whether called a letter of intent, heads of agreement or memorandum of understanding, the parties want to signal that negotiations are proceeding and they need to record the status of their negotiations such as what has been agreed, perhaps to allow one party to commence work before the final contract is agreed.

This can present a number of problems.  First, if the terms are poorly worded, it may be unclear as to whether the parties intend to be bound by the Letter of Intent.  Second, the Letter of Intent may actually become a contract and commit the buyer to something that they did not intend to be legally binding.  Third, contracts can take an inordinate amount of time to emerge from the governance process, and what was implied by the Letter of Intent, i.e. ‘please start work as we will probably enter into a contract with you, but we want you to commence work without a formal legal commitment’ may have to be unwound if the contract is not approved in governance, or the buyer changes plan before the contract emerges from their own governance processes.  See also Representations, Pre-contractual.

Maintenance, Routine, Operating Categories

Maintenance, routine and operating [MRO] categories are low value categories which are not an input to the production process, but which are used in support of operations.  The term is a subset of indirect materials and represents a level of classification of categories.  Examples of MRO categories would be cleaning materials, lubricants, laboratory supplies, spare parts, gaskets and industrial consumables, and in some procurement organisations these categories would not be aggregated as MRO, but managed individually.  The reason that they are grouped together is that they have some common characteristics, such as being relatively low value, and maintaining continuity of availability is a key procurement objective.

Sometimes the acronym is used to imply maintenance, repair and overhaul, which describes categories which are used to support plant, equipment and machinery.  Scheduled overhauls and maintenance campaigns require provisioning of parts and, in most situations, the cost of downtime is greater than the cost of holding inventory, so MRO often implies matching supply and demand at lowest overall total cost.

Negotiation

Negotiation is a process through which each party tries to achieve their goals in the context of the relationship with the other party.  In procurement, the other party may be a long-term supplier or a one-time supplier, and our approach may be different in each case.  However, in every negotiation we need to be clear about our objectives, and decide how we plan to achieve our goals.  For example, ‘win:win’ negotiations may be appropriate in some circumstances, and we may plan to share value with the other party, perhaps through the exchange of concessions or trading negotiable variables.  In other situations we may have no remit for the relationship with the other party and plan to claim value for us, by using facts and reason, without helping the other party ‘win’.  The common elements are clear objectives – the ‘what’ and the ‘how’ – how we plan to persuade the other party, which needs to be consistent with the relationship that we want to create.

Offer

In a legal context an offer is ‘an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed’.  Typically suppliers make offers in the form of bids, quotations or tenders, which may then be accepted by the buyer.  The offer defines the terms upon which the supplier is willing to be bound, which normally include price, date of delivery, payment terms and a description of the category.  One of the essential prerequisites for the formation of a contract is the existence of an offer.

Pareto Principle

The Pareto Principle has expression in many fields of procurement.  One is that a small number of categories represent the majority of the total spend and a small number of suppliers cause a disproportionate number of the problems.  The principle has also evolved into the ’80:20 rule’, which underpins many situations in economics and management where scarce effort needs to be focused to best effect.  For example, if 20% of all purchase transactions account for 80% or more of the total spend, focusing on these acquisitions, so that managerial effort is used to best effect can optimise the return on procurement effort.  Pareto analysis is usually seen as one dimensional, as it does not consider the business impact of the categories, or the market complexity.