Defining Procurement –

Exploring Terminology
Handout
April 2020
Author: Allison Ford-Langstaff

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Defining Procurement
As Procurement is still a rapidly changing function, and has not reached the maturity of some
other disciplines there is a large amount of terminology in the market place which becomes
fashionable one year, and then is left behind for something else the next. The result is that some
terms do stay behind, but the definition can vary. Below is the current preferred definition of the
most popular terms amongst thought leaders. Note: this is not exhaustive and probably will be
amended slightly next year!

Big Data

This term has become big news in procurement circles as the impact of digitisation on the
profession and business in general is debated. Like a lot of new terms, thought leaders and
researchers all seem to have slightly different definitions of what big data is. However, the
fundamentals are that ‘big data’ is a collection of data sets that contain a large volume of
complex information which would be difficult – or impossible – to process using traditional
methods. Big data is especially important to procurement professionals to improve their analysis
of spend data (known as Spend Analytics), so they don’t just deliver metrics but are able to spot
trends, improve performance, inform policies and implement greater fact based decision making.
Similarly this would help Supplier Management for much the same reasons and also Forecasting
& Predictive Analytics (one of the great bains of the procurement professional). The opportunity
for the procurement department is to make better, more informed decisions when it comes to
understanding spend, markets, suppliers and mitigating risks. This is rapidly becoming one of the
top agenda items for the profession.

Buying

Quite an outdated term now. Possibly only used in smaller – or very traditional - Manufacturing
organisations. Usually focussed on the Transaction only, similar to Purchasing.

Categories

The range of products purchased by a business organization is broken down into discrete groups
of similar or related products; these groups are known as product or service categories. For
example: Travel, Creative Agencies, Maintenance Repair Operations (MRO), Warehousing, IT
Software, Transport & Distribution are all ‘category’ examples. This is known in the profession as
“Level 2 categorisation”. Sub-categories are a subset of a Category, and sub-sub categories are a
subset of that. For example, if Travel is a Category, Accommodation could be a sub-category and
Hotels could be a sub-sub category of that. They would all likely sit within the Category Group of
Professional Services. This is all designed to ensure the Procurement/Category Manager can
focus on that key spend, and its particular market, for what drives profitability and value.

Category Groups

This is how a professional procurement function will segment its external spend at “Level 1”. It is
effectively a cluster of Level 2 categories. For example: The Ingredients Category Group for a
Drinks Manufacturer would include categories such as Strawberries, Oranges, Lemons, Sugar,
Xylitol etc. The Marketing category group would include Media, Print, Creative Agencies etc. Also
known as Sourcing Groups.

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Category Group Planning

This is a relatively new, emerging term in the market and is the high level process of considering
all 3rd party expenditure and analysing it for main value opportunities, with the view to prioritise
a pipeline of categories to truly explore for Price, Cost and Value in the next financial Year. Also
known as Pipelining or Pipeline Development.

Category Management

Category management is a retailing and purchasing concept in which the range of products
purchased by a business organization (or sold by a retailer) is broken down into discrete groups
of similar or related products; these groups are known as product or service categories (See
Categories below). Category Management is a systematic, disciplined, cross-functional approach
to understand the demand and understand how the purchase and management can move
beyond Price Attack, through Cost Down/Out towards Value Creation approaches. It requires
discipline, and creativity and is very difficult to do well. Organisations who do it well, have a real
value differentiator.

Contract Administration

This is the process of documenting all contracts formally and physically archiving them in a secure location. It is
also the act of ensuring that all changes to a contract are authorised, documented & communicated to key
stakeholders that manage that specific contract. Finally there is also a role to communicate the current status,
including any recent updates to ensure there is a good general understanding across the company of all
contracts that exist, and where they can be found.

Contract Management

This is the process of managing the contract creation, execution, and necessary administration
such as change control notifications, adhering to scheduled milestones, meetings and so forth in
order to ensure the contract remains closely relevant to the day to day activity of the
organisation, and the paperwork trail is useful in case of a dispute. Additionally this activity
provides a clear and objective approach for how to interact with suppliers and looks to ensure
contractual success (i.e. the supplier delivers the basic outline of the contractual service) and
provides the foundation for excelling beyond basic service levels.

Directs

This generally refers to categories of external spend, that are a core input to the final end
product. Essentially, part of the primary supply chain. For example, Sugar would be a Directs
Category for a Drinks Manufacturer or, in Automotive, Steel would be a Directs category.

eAuctions

The electronic auction (eAuction) is an e-business interaction between auctioneers and bidders,
which takes place on an electronic marketplace. It is an electronic commerce which occurs
business to business (B2B), business to consumer (B2C), or consumer-to-consumer (C2C). There
are several types of Auction available with the Dutch Auction being one of the most typical.

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eProcurement

E-Procurement or electronic procurement (rarely known as supplier exchange) is the B2B

(Business to Business) or B2C (Business to Consume) or B2G (Business to Government) purchase
and sale of supplies, work and services through the Internet as well as other information and
networking systems, such as electronic data interchange.

eRFx

This acronym builds on well-known acronyms like RFI, RFP, RFQ and RFx and simply denotes that
some kind of electronic system is used to enable the activity. Traditionally these documents have
been sent hard copy, or simply by email but over the last 20 years many firms have created
bespoke products to serve the procurement community and make this process more automated,
and transparent. See also Request For Information (RFI), Request For Proposal (RFP), Request For
Quotation (RFQ) and RFx.

eSourcing

E-Sourcing Definition. E-Sourcing refers to internet-enabled applications and decision support

tools that facilitate interactions between buyers and suppliers through the use of online
negotiations, online auctions, reverse auctions and similar tools.

Expressions of Interest (EOI)

This is where an organisation will advertise requests for Expressions of Interest. It would most
typically be seen in the public sector but could be used elsewhere. For instance an organisation
may wish to inform as many consultants as possible about a unique programme of work they are
about to undertake. Information contained in the EOI submitted by the consultant or
consultancy would be used to prepare a shortlist of the most qualified consultancies. It is a key
opportunity for the company or individual submitting the EOI to differentiate themselves from
the competition in the crucial early selection stage of the process.

Indirects

This terms refers to those categories of external spend that are necessary enabling products and
services to the end product, but do not form part of the end product. For example, Travel for
Company personnel would be an Indirects category.

Warehousing and Transport are most usually found within the Indirects categories, but some
organisations may place them within the Directs categories, given their relative importance and
close association to the primary supply chain.

Invitation to Tender (ITT)

This is a terminology most usually found in public sector or in organisations that may have had a
public sector legacy e.g. Steel industry, Privatised rail companies etc. It is simply the terminology
used for the formal document issues by the Buyer and outlines the scope of the project, and
invites the organisations or individuals to submit a formal tender or proposal for the work. It
would typically be issued after any PQQ, and is likely to be more detailed than an RFP, but
perhaps less detailed than an RFQ (although Buyers will use this terminology interchangeably). It
is essentially the procedure for generating competing offers from different bidders.

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Key Performance Indicator (KPI)

Key performance indicators identify and measure the key metrics for the organisation and are
used upstream, downstream and within the organisation itself. By its nature, it takes a broad
view and may be either quite high level, or, if focussing on one area of detail, it will be a vital
success factor for the business. KPIs for a restaurant might include tables filled, income per
night, food costs, labour costs and advertising budget. KPIs for an online store would include
income per category and costs for bandwidth, advertising, goods sold and shipping. KPIs help
your business succeed by keeping you up-do-date on the "vital signs" of the company. This same
principle is applied to the management of suppliers by establishing which measures are the ‘vital
signs’ that the supplier relationship is working as it should be.

Once these are identified, a Service Level Agreement (SLA) usually follows. See Service Level
Agreement.

Official Journal of the European Union (OJEU)

This is the publication in which all tenders from the public sector which are valued above a
certain financial threshold according to EU legislation, must be published. These thresholds vary
based on the category of supply and the legislation covers all organisations and projects that
receive public money e.g. local authorities, NHS Trusts, MOD, Central Government and State
Educational Establishments.

Operational Performance Indicator (OPI)

OPIs are very similar to KPIs but are usually more specific to a function or operation – typically
focussing on would-be bottleneck areas. For example an OPI for a fast food restaurant would
measure the ‘make process’ for meals.

In large outsourcing arrangements which usually have an extensive technical requirement, there
are often a large amount of I.T OPI’s that are monitored closely.

Once these are identified, a Service Level Agreement (SLA) usually follows. See Service Level
Agreement.

Pipelining or Pipeline Development

This is the high level process of considering all 3rd party expenditure and analysing it for main
value opportunities, with the view to prioritise a pipeline of categories or sourcing projects to
truly explore for Price, Cost and Value in the next financial Year. Also known as Category Group or
Sourcing Group Planning.

Pre-qualification questionnaires (PQQ)

A PQQ is unique to the public sector. It is used to help buyers shortlist suppliers to invite to a
tender where a certain standard of technical ability is required. It forms part of the restricted
tendering procedure. It enables buyers to assess an organisation’s commercial, technical and
financial competencies to determine whether the organisation will meet the minimum
requirements. It is similar in principle to an RFI and RFQ but its intent is to clearly shortlist the
suppliers to the next stage (which is not always the case for an RFI and an RFQ although may be a
natural outcome).

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Prior Information Notice (PIN)

This is something unique to the public sector. It is a notice which is published in the OJEU (see
OJEU) and sets out a contracting authority’s procurement intentions. It is not a tender. It is simply
to advise the supply base that some time in the next 12 months a procurement process is
planned. Sometimes the purchaser may use the PIN process to seek market information and from
that perspective may have similarities with an RFI. Primarily however it is used to provide
suppliers with as much information at an early stage. The exact information to be included in a
PIN is prescribed by the Public Sector Procurement Regulations. A PIN is voluntary but can be
useful (and therefore feel necessary) to reduce timescales.

Procurement

This generic term is more widely used for acquiring goods and services in a more strategic
manner. Liked by the market because many feel it’s the best term to show both the acquisition
and post contract management of the goods and services.

Purchasing

This generic term is more widely used when referring to the transactional aspect of Procurement
i.e. the exchange of goods and services for cash. Sometimes known as Transactional
Procurement. S2P (Source to Pay) and P2P (Purchase to Pay) are sensible approaches to consider.

Request For Information (RFI)

This is the formal document often issued whilst a procurement professional is gathering
information from suppliers on the state of the market, and their financial health and business
direction.

Request For Proposal (RFP)

This is the formal document issued by a procurement professional when they have an idea of
what the end state should look like when they have bought the product or service, but don’t
really know how that might be achieved e.g. Training. Usually with training, the business might
know that they want to improve everyone’s ability to lead and influence people, but they will be
interested to explore from expert suppliers how they might go about achieving that as there
would be multiple ways to do it.

Request For Quotation (RFQ)

This is the formal document issued by a procurement professional when they have a clear
specification about their requirements. It would typically contain the estimated volume of the
product to be provided and request a price for the product based on that volume. It may ask for
volume rebates over a certain threshold as well. It generally works best in Directs, where
products are purchased as opposed to services.

RFx

This acronym is used to capture the process of using RFI, RFP or RFQ documentation when
appropriate. See also eRFx.

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Service Level Agreement (SLAs) – external and internal

This is the contract between the company and the vendor/supplier that specifically defines the
deliverables and terms of work the supplier does for the company e.g. a set delivery time for the
good or service to arrive. A complete contract for goods and services may contain multiple
service level agreements, one for each task or item across, say, delivery, cost, quality and service
considerations.

An internal SLA could be set up between functions within an organisation. For example the
procurement department may agree an SLA for its service to Operations, or Marketing etc. e.g. A
plan for how this new item will be sourced will be scoped out within 72 hours of receiving the
requirement.

KPIs and OPIs are usually established and the Service Level Agreement, with clear targets, defined
afterwards. See Key Performance Indicators and Operational Performance Indicators.

Sourcing

This term is more widely used by organisations wishing to express their Procurement function is
more strategic i.e. some time is spent on Market Analysis to find opportunities. The downside of
this term is that it automatically assumes there is no post contract management.

Sourcing Groups

See Category Groups.

Sourcing Group Planning

See Pipelining or Pipeline Development.

Spend Analytics

Understanding spend – who is buying what specifically, for where, and identifying common
trends in crucial to strategic procurement. Spend Analysis is the process of collecting, cleansing,
classifying and analysing expenditure data with the purpose of decreasing procurement costs,
improving efficiency and monitoring compliance. For many years this has had to be gathered via
the use of spreadsheets and requests to numerous people across the organisation to complete
the information on the spreadsheet. Increasingly firms use Spend Analytics system providers that
can obtain this information in real time, from the companies’ own systems which not only
improves the speed at which this information can be accessed but also improves their analysis of
spend data (known as Spend Analytics), as the system contains intense algorithms to churn out
information on the data in a multitude of ways. In essence, it would not just deliver metrics but
also provides the ability to spot trends, improve performance, inform policies and implement
greater fact based decision making.

Strategic Sourcing

This term is used when the Procurement Team are looking at ‘Sourcing’ on a more end-to-end
basis i.e. techniques are used to collate demand, collaborate internally, advertising the
opportunity to the market, Issuing a Request For Proposal (RFP), Managing the process to
conclusion and Contract Award. It is sometime slightly mis-used synonymously with Category
Management. See Category Management.

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Supplier

The name given to an organisation that supplies goods or services to your organisation. See
‘vendor’ also.

Supplier Management

The is the general term used to ensure that external products & services, which are necessary for
the delivery of the end core product(s) or services, are available as requested and as agreed at
the service level. It is the systematic management of post-contract value from relationships with
suppliers over their lifetime.

This is sometimes misused as the term for consolidating requirements for external services and
supplies, scanning the market for providers, negotiation, contracting as well as monitoring the
services. Some software companies offer their services based on this latter description – for
those who may recognise it as this, they are likely to be ‘behind the curve’ in latest thinking.

Supplier Performance Management

Known most usually as SPM, this is the practice of measuring, analysing and managing the
performance of a supplier in an effort to cut cost, alleviate risks and drive continuous
improvement, and innovation where it has been deemed valuable to do so.

Supplier Relationship Management

Known popularly as SRM, this is the discipline of strategically planning for, and managing, all
interactions with third party organisations that supply goods and/or service to an organisation to
maximise the VALUE from those interactions, and relationships. Not to be confused with just
holding meetings, and creating action logs – this is a highly skilled area – starting to deploy Lean
Thinking methodologies into the mix. It requires deep insight into the relationship and levers of
value creation.

Supplier X Management

Known most usually as SXM or SxM, this means exactly the same as Supplier Relationship
Management but is a newly coined phrase to tie back with another known acronym for
implementing and negotiating category strategy via an RFX process. It is not widely used – SRM,
SPM or SM (supplier management) are much more popular and likely to stay so.

Supplies

This is an old fashioned term, and usually only remains in smaller manufacturing or very
traditional firms. It essentially means the act of supplying, providing, satisfying the basic input
needs of the organisation with respect to bought in goods and services.

Supply Management

This is not a term widely used by the Procurement Profession. Its usual definition is as a broad
term describing the activity of identifying, acquiring and managing the products or services,
resources, information needed to run a business.

Vendor

The name given to an organisation that supplies goods or services to your organisation. See
‘supplier’ also.
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