A business professional who oversees the ongoing management of the purchase order (PO) or contract, confirming that both the organization and suppliers adhere to the contract’s terms and conditions.
Successful procurement administrators review supplier performance, process change orders, and make price adjustments on a daily basis in order to maintain an intimate knowledge of contract requirements. They also maintain strong business relationships, communicating good advice and procurement authority to suppliers.
A submission from a supplier or vendor containing a cost estimate for goods or services, usually in response to a business’ invitation to bid. Successful bids often contain the supplier’s past relevant projects as a proven track record of success and a detailed plan to deliver the product in a timely manner.
Also known as a contract award, this is the final phase of the bidding process, in which the buyer chooses a winning bidder and enters into a contract with their organization. These awards are legally binding source documents containing terms, conditions, and pricing of the goods or services.
The procurement administrator’s process of comparing supplier offers in order to choose the best offer for goods or services. Evaluation criteria include compliance with technical requirements, price, and quality.
Contract negotiated bid
In contrast to sealed bidding, this procurement method promotes negotiation between buyer and supplier, and allows suppliers to alter pricing and some terms as a result of these negotiations.
Procurement method used primarily by the government in which all bids remain sealed, or unreviewed, until after the submission deadline has passed in order to ensure fairness and transparency in the bidding process. Sealed bids are used most often when the determining criteria is lowest price.
An official source document making an alteration to a previously signed purchase order or contract for work. A change order should include a detailed description of the change, the new terms, and the new price.
The adherence to contract guidelines set up by the procurement department. It is crucial to spending control and protects organizations from fraud. Successful compliance is a result of many intentional measures, including defined metrics, well-developed policies, and continued efforts to refine the compliance strategy on an ongoing basis.
Procurement professionals have an obligation to maintain a working knowledge of laws and regulations throughout the procurement process and how they affect contracts.
Conflict of interest
An impropriety which occurs at businesses when a purchase of goods or services may personally benefit an employee, their friends, or their family. Procurement processes must be objective and fair; suspicions of conflicts of interest can leave a business exposed to accusations of favoritism and collusion, tarnishing its reputation and decreasing its revenue. The procurement process is designed to safeguard against such improprieties.
Professional with extensive experience, sharp negotiation skills, and industry-specific expertise in the field of procurement. Businesses hire procurement consultants for guidance in one or more of the following areas: procurement system installation, business process review, strategic advice, or training. Most procurement consultants hold the designation of Certified Procurement Professional® (CPP®) from the National Association of Procurement Professionals®.
A legally binding agreement between a buyer and a seller. By providing agreed-upon terms, contracts protect both entities.
Multiple award contract
The award of a contract for an indefinite amount of a procurement item.
An agreement in which quantities and prices of goods are estimated because, at the time of the award, the buyer does not know the exact quantities of needed items.
A person, business, or entity that enters into a legally binding contract to perform a service or do a job.
A product or service purchased by an organization for internal use or an external client. Most deliverables are measurable, specific, and have due dates. Examples range from training services to software to raw construction materials.
The application of technologies such as process automation, Artificial Intelligence (AI), and data analysis to the procurement process via software or a portal system. Benefits of digital procurement include less manual work, cost reductions, increased organizational transparency, and improved customer experiences.
Digital procurement also improves supply chain management and increases efficiency by improving a business’ internal and external data flow.
Software or Web portal procurement systems used to carry out the procurement process (requisitioning, ordering, and purchasing goods and services) online. These systems are often made available only to registered users, encouraging preferred suppliers to submit bids and quotes. eProcurement automates time-consuming manual tasks like evaluating suppliers and sourcing and ordering items. It also centralizes financial transactions and reduces overhead costs.
Enterprise resource planning (ERP) software is, at its core, a series of business management tools. It most often consists of several integrated applications that manage all aspects of an organization, including distribution, human resources, procurement, and supply chain. By standardizing and automating business functions, it unifies a company’s procurement process across multiple business units.
Invitation for bid (IfB)
A call from a buyer or business for suppliers or vendors to submit a proposal for a good or service. The IfB is typically a shorter process than that of RfPs, focusing mainly on lowest price.
A bill for goods or services. In the supply chain process, a PO is issued to a supplier by a buyer ordering goods. The supplier then issues an invoice to the buyer notifying them of how much they owe for those goods. A PO serves as a contract of a sale, and an invoice is the confirmation of the transaction.
Lead time is a fundamental metric used across many industries. It refers to the period of time between the initiation of a task or project and its completion. Establishing and meeting lead times is crucial for any business; after all, the reason businesses exist is to deliver products to customers in a timely manner.
Inaccurate lead times often result in supply delays, which often lead to unexpected cost increases and unhappy customers.
Lead time is often calculated by the following formula:
Lead time = procurement time + manufacturing time + shipping time
The process of gathering and interpreting information about a product or service in order to gain insight into the procurement need and the market that supplies it. The aspects of market research an organization conducts depend on the product or service in question, however the main topics most businesses research are: demand, market size, economic indicators, location, market saturation and pricing.
A procurement need is the instigator for the purchase of goods, works, or services. It is the first stage of procurement planning, creating specific terms, and planning for associated risks. Once a need is recognized, it is typically followed by a purchase request.
A process procurement professionals use to establish agreeable terms as part of a supplier contract. It can involve updating terms with an existing supplier, or discussing initial terms with a new vendor. The agreed upon terms should offer some value to both parties. A few objectives in procurement negotiation include, but are not limited to, cost, value for money, delivery times, payment terms, after–care / maintenance terms, quality standards, and lifetime product costs.
Order to cash (O2C)
A structured workflow for the management and completion of customer orders. The O2C process often takes the form of a cycle as relationships form with customers who make repeated orders. The cycle begins when the order is sent and ends when payment is received. While the procure to pay (P2P) model includes all the business processes related to procurement from suppliers, the O2C method consists of all business processes involved in a sale.
Payment Terms are a fundamental part of any Procurement or Purchasing documents. They establish price, or the exact amount that a business has agreed to pay for a specified product or service in the requirement. They also specify when payment is due, most often expressed as a net number of days, such as Net 30 or Net 45.
Procure to pay (P2P)
A structured workflow that involves receiving goods or services and issuing payments. Procure-to-pay is a part of the larger procurement process, connecting the purchasing and accounts payable (AP) processes, and directly influences a company’s financial projections and quarterly financial statements. P2P controls costs by reducing manual and repetitive work, simplifying three-way-matching, increasing accuracy, and improving efficiency.
Procurement is the process by which businesses obtain goods, services, and works necessary to effectively operate a business model. The procurement process is a structured workflow the business develops in alignment with its goals and best interests.
The procurement process aims to secure the best value on behalf of an organization, decreasing spending while ensuring timely delivery of quality goods and services.
The use of software to carry out the procurement process, in part or as a whole. The goal of procurement automation is to accelerate processes in order to free employees from time-consuming tasks and focus on critical operations. Most steps in the procurement process can be automated, including purchase approvals, supplier bid submittals and evaluation, and invoicing and payment.
Another name for the procurement process. The cyclical nature of procurement is made visible when, in the final stages of procuring goods, a procurement administrator recognizes needs for future projects and issues new quote and bid solicitations accordingly. The administrator’s acquired product knowledge and rapport with suppliers play a key role in their repeated use of the supplier for goods or services.
Purchase order (PO)
One of the most commonly used source documents in the procurement process. POs officially authorize the release of funds to a seller for goods or services. The PO contains all of the information about the good or service, along with the procuring organization’s standard Terms and Conditions. Each PO is individually numbered for identification and audit control.
Learn more about the purchase order process.
The internal document used by a team or department to request permission to buy goods or services once a need is identified. See also: “requisition.”
Procurement transformation, or digital procurement transformation, refers to the evolution of procurement from a tactical-focused function to a more strategic and business-focused function. This shift has become necessary as procurement departments are tasked by management with new strategic duties.
A process to fulfill payment for any goods/services that have been requested for purchase. It provides a structured approach to negotiating and buying the goods or services a business needs to directly or indirectly generate business value. Purchasing differs from procurement in that it is a single part of the overall procurement process, working within it to prevent procurement bypass and invisible spending due to unregulated spending.
A purchasing system model in which all purchases are managed and handled by a single team, department, or branch. This means that any employee or team purchase must be submitted, reviewed, and approved through a single purchasing process.
A decentralized purchasing system model in which purchases are made and managed by various specialized teams, departments, or branches. This means that teams or employees refer to a variety of departments or teams — depending on their needs — for purchase requests, rather than a single department.
An estimation document that a seller issues to a buyer offering goods or services at a stated price under specified conditions. Also known as a quote, sales quote, or sales quotation, it may also contain terms of sale, terms of payment, and applicable warranties.
Request to pay (R2P)
An invoicing method that allows customers to pay sellers almost immediately upon receiving an invoice using their credit card or eCheck. R2P was developed to confront the challenges of delayed delivery that late payments pose. Rather than send paper invoices and emailed PDFs, R2P platforms allow buyers to send them electronically via text (SMS) message or email.
A formal request for goods and services made by a procurement professional. The requisition form should contain as much information about the product needed as possible, as well as an accurate need date.
The organization’s procurement department head then determines whether or not to approve the requisition; if it is approved, a PO may be issued. Purchase requisitions allow organizations to control costs as well as produce documentation in case issues arise at a later date.
Invitation to bid (ItB)
A document procurement professional issues to suppliers soliciting bids for goods or services for a project or contract. The three main types of ItBs are:
Request for Information (RfI)
A solicitation from a buyer for information about a supplier or vendor’s operations in order to determine whether or not to do business with the supplier. Information buyers seek includes, but is not limited to, supplier facilities, finances, strategic focus, competition, and pricing strategies.
Request for Proposal (RfP)
A process and document soliciting bids for goods or services. It outlines the buyer’s requirements, specifications, terms and conditions, and time schedule for the products needed.
Request for Quotation (RfQ)
A process and document in which a buyer or procurement administrator solicits a set of potential suppliers to submit price quotations for goods or services. Once the buyer receives the quotations, they choose the vendor that best meets the stated criteria for the goods or services.
Learn more about RFI vs RFP vs RFQ.
A source document issued to a buyer by a seller prior to the delivery of the specified goods or services. Sales orders are often triggered by the receipt of a purchase order. They are typically sent when a buyer makes a payment, but may also be issued when credit purchases are made.
Fundamental statements within an invitation to bid that map out the transportation of goods, from supplier to customer. Shipping terms specify the shipping carrier that will transport the purchased items and the destination to which they will be shipped, as well as use standardized verbiage to establish the point at which ownership of the goods transfers from the seller to the buyer.
Shipping terms also formally establish the means by which the carrier will deliver the materials, for example: overnight air, or ground.
Documentation posted by a wide variety of prospective suppliers / vendors inviting quotes for goods or services. Several solicitation methods are used and generally accepted across industries. They are:
An officially recognized document providing evidence of a transaction. It contains transaction information including parties involved, amount paid, shipping date, and details about the product or service.
Most source documents are assigned a unique number to be controlled within the accounting systems of both the procurement organization and the supplier for easy reference in the event of a dispute or audit. Examples of source documents include requisitions, POs, and RfQs.
Source to pay (S2P)
Source-to-pay is a supply chain management workflow process which encompasses the entire cycle of sourcing goods and services, from supplier selection to contract management.
Learn more about source-to-pay vs procure-to-pay.
A technical description of exactly what is needed for purchase, most commonly generated by an internal user. Specifications include, but are not limited to, detailed engineering drawings including dimensions and material types, chemical formulas, and test procedures.
Statement of work
A document describing the requirements for a service. A statement of work may describe not only what service should be performed, but the method to be used and how often the service must be performed.
A method of supply chain management by which businesses formally gather and use vendor and supplier information to get the best total value for the entire supply chain process.
Strategic sourcing differs from traditional purchasing because it focuses on costs and values of the process rather than lowest purchase price for an individual item. It requires constant market analysis and continual evaluations of vendor performance and prices. Benefits of strategic sourcing include sweeping cost savings in the short term, and a more sustainable supply chain and better supplier and vendor relationships in the long term.
A B2B entity that makes goods available to another business. A supplier may be an individual, a business, or a country. Many businesses view their suppliers as the first link in the supply chain.
Evaluation process for the selection of qualified suppliers. The assessment should be based upon quantitative evidence, research, and in-depth observations. The metrics businesses measure when vetting a supplier vary depending on the industry, but the most common are: production capacity, quality, performance, risk, and environmental impact.
Supply chain management
A supply chain is the network of businesses, people, resources, and functions that produce a good or service and deliver it to the final buyer. Supply chain management is the governance of the process from beginning to end. Procurement differs from supply chain management in that it focuses mainly upon obtaining the good or service in a timely, cost-effective manner.
A B2C entity that sells finished goods and services to a final customer. Vendors often purchase goods and services from manufacturers, then directly distribute or sell them to consumers.
Some businesses refer to vendors as the final link in the supply chain. Vendors often sell small quantities of required products to businesses, as opposed to suppliers, who provide raw materials and tools in bulk quantities to manufacturers.