Check out the Arkestro glossary, your one-stop guide for all things procurement. Bookmark this page as we’ll be updating this resource regularly with new definitions and must-know procurement terms.
A system of prioritizing different types of inventory based on their value or importance to the business.
Indicators or measures used to assess whether a product or service meets the standard required.
A company’s short-term debt owed to creditors, including vendors and suppliers.
Money owed to a company by its customers for goods and services that have been delivered but not yet paid for.
A proactive budgeting process that is collaborative, comprehensive, and continuous. Data is constantly updated to ensure teams are working with the latest information. It enables data-driven decisions, which increase accountability and corporate buy-in. Active planning is the opposite of static planning.
Documented, actual numbers as opposed to those that have been projected or estimated.
Agile is a set of principles, behaviors, and approaches to delivering work iteratively. It allows teams to deliver value quickly and often.
Overhead costs (such as utilities) that are shared across multiple cost centers or departments. The allocated cost is the amount of the shared expense that is assigned to a specific cost center or department.
Short for application, a program that runs inside another service. Many mobile phones allow apps to be downloaded, leading to a burgeoning economy for modestly priced software. Can also refer to a program or tool that can be used within a website. Apps generally are built using software toolkits provided by the underlying service, whether it is iPhone or Facebook.
A list of suppliers whose basic credentials have been checked. This would normally cover financial stability, compliance with any laws or licenses needed to operate, adequate insurance, health and safety policies, and the like. There is no contract with the suppliers, but there is some assurance as to their appropriateness for specified categories. This list may restrict what types of order (by category, value, or geographical location) can be placed with each of them.
Customer orders which cannot be immediately fulfilled and are awaiting future stock delivery/manufacture before fulfillment.
The initial price of something without the added costs such as handling, transport and profit.
Comparing an element of one business, such as price, quality or service, against another.
Offer of a price.
A potential supplier who makes an offer (a bid is an offer or tender).
A comprehensive list of components, items, materials and parts to create a product, essentially a recipe for the production of an item.
An order that is placed with the supplier which allows the buyer to call off quantities as they need them over an agreed time period. This works in accordance with a manufacturing organization’s production schedule- A system of prioritizing different types of inventory based on their value or importance to the business.
A financial analysis that determines the amount of revenue from a sale required to cover all associated expenses and costs without making a profit.
The use of tools (software, technology, and processes) to analyze data and turn it into information that can be used for informed, effective business decisions.
CapEx procurement oversees capital expenditures that tend to be one time purchases rather than day-to-day costs. OpEx procurement is based on repeatable processes whereas CapEx procurement is typically different each time. CapEx procurement might include large pieces of equipment or even entire facilities.
An organization’s expected capital expenditures (such as facility and machinery costs) for a specific period of time.
Also known as CAPEX, capital expenditure is money spent on the acquisition and maintenance of fixed assets. These are assets that provide long-term value, such as land, production facilities, and equipment.
An accounting method where the cost of an asset is expensed over the lifetime of the asset instead of at the time of purchase. Capitalization can also be used to define the value of a company, in which case it is the sum of the company’s stock, long-term debt, and retained earnings.
The estimated cash flow for a company for a set period. Cash flow includes sources of cash (cash balance plus any expected cash inflow) and all expected cash expenditures (cash outflow).
Measures how quickly a company can convert an expenditure into cash. For example, how long does it take for money spent on raw materials to be converted into a finished product in inventory and then sold to a customer?
A financial statement showing all cash inflows and outflows for a company for a given period of time. Along with the balance sheet and income statement, the cashflow statement is one of the three most important financial statements for managing a company.
Category Management is a strategic approach to procurement. Organizations segment their spend into areas that contain similar or related products. This allows opportunities for consolidation and efficiency.
The process of combining the financial data for multiple business entities or companies, rolling it up into a single entity such as a parent company.
A department or organization within a company that costs money to operate but generates revenue indirectly (unlike a profit center). Examples of a cost center include customer service or an R&D department.
Forecasting in accounting refers to the process of using existing and past cost data to predict future costs. It’s essential for planning purposes—forecasting is necessary to estimate and plan for costs that will be gained before actually incurring them.
Understanding costs helps organizations save money and make more money. Without an appropriate way of understanding costs, businesses can be at a loss. This means they could lose out on important opportunities. Cost modeling is a process that helps companies understand the best cost to create a product. So, it essentially allows businesses to understand the most cost-effective way to produce their goods. Cost modeling helps stakeholders make significant decisions regarding cost, which can help businesses in many ways.
Target costing is an approach to profit planning. A manufacturing company identifies a target profit margin and calculates the maximum cost of manufacturing—based on the prevailing market price—that will produce the target profit level. This target cost will then affect the product design, materials, specifications, and manufacturing choices. All of which they will then try to ensure that they reach the profit target. Target costing seeks to engineer profitability from the time of the product launch. Since product life cycles have become shorter, value engineering the design during the product’s life cycle has declined.
A measurement used to determine how leveraged a company is. Debt ratio is calculated by dividing total debt by the total value of assets. A high debt ratio indicates a company that is leveraged — its assets can’t pay its debt, and it could be exposed to rising interest rates.
A calculation that assigns a present-day value to estimated future revenue and expenses. Discounted cashflow (or DCF) is often used to evaluate the value of a potential investment or project.
The practice of including people from a wide range of social, ethnic, race, physical ability, gender, and sexual orientations in a company. Diversity extends not just to employees in the workplace but also to suppliers.
When a company spends far less money than was projected for a good, service, or project.
Dynamic pricing is a pricing strategy that uses variable prices instead of fixed ones. Essentially, the dynamic pricing model’s concept is to sell the same product at different prices to various people.
An e-auction (or electronic auction) is a procurement auction that’s done electronically. The most typical type of e-auction is a “reverse auction.” If correctly applied, it can be a very effective procurement tool for businesses and suppliers. This is because the buying organization will benefit from a significant price reduction. At the same time the supplier gains because an e-auction is a transparent competition.
A calculation used to measure a company’s financial performance; EBIT is the company’s net income before the deduction of interest and income tax expenses.
Software used by companies to integrate the day-to-day management of key business processes and centralize information storage. ERP software typically covers core functions such as accounting and human resources, but some systems also incorporate additional functions such as CRM and logistics.
A method used to calculate the anticipated value of a project or investment at a point in the future. Companies use expected value (EV) as part of a risk assessment by adding the sums of different possible outcomes multiplied by the probability of each outcome.
All of the costs a company incurs as part of doing business. These can be divided into different categories of expenses, for example, fixed or variable, operating or non-operating, and direct or indirect expenses.
Time to Value (TTV) is the amount of time it takes for a customer to receive value from your product or service. Potential customers will consider factors like cost and brand name, but they will also be looking for a fast TTV.
Simply put fair market value is the “fair” cost of assets under normal market conditions. It is largely dependent on the industry, compulsion to buy or sell, internal timing and pressure, and a reasonable knowledge of relevant facts which can be difficult to determine in some industries where disruption is present.
An accounting term for the point where all financial transactions related to a process have been completed. After financial close, there are no further adjustments, and numbers can be reported as final.
The process of producing financial statements that disclose a company’s financial position (including revenue and expenses), operating performance, and cash flow for a specific period. With publicly traded companies, financial reports are typically released on a quarterly and annual basis.
Firmographic data procurement means utilizing datasets in procurement that help businesses effectively segment organizations into meaningful categories.
A company’s fiscal year is a 12-month period used for accounting and tax purposes and in financial reporting. The fiscal year does not necessarily match the current calendar year.
This is a long-term asset or property owned by a company and used to generate revenue or income. A fixed asset is not expected to be sold and can’t be easily converted into cash. Fixed assets can be tangible (like a factory) or intangible (like a trademark).
A technique that uses historical data to make informed predictionsthat baseline future trends and can also include managing projects in a pipeline to exceed targets. Forecasting relies on KPIs to measure success.
The comparison of actual performance and potential performance. In procurement gap analysis can be used to measure gaps in performance to determine the current state of business and where an organization would like to be. In can be used in procurement skills to assess teams as well as process and performance to increase business efficiency.
This is a company’s financial record-keeping system. The general ledger (GL) tracks and summarizes all financial transactions for all accounts used by the company. The general ledger also records all account balances.
The system of rules, practices, and processes used to run a company, including rights and responsibilities. Governance ensures accountability, fairness, and transparency for all stakeholders. At the corporate level, governance is overseen by the company’s board of directors. However, governance is also applied in some form across all levels of a company, including departments and large projects.
The profit a company earns after deducting the direct costs (such as manufacturing and distribution) from revenue. Gross profit does not account for indirect costs such as taxes, overhead, or interest paid on debt.
A head contract is the contract between the Principal party and the Contactor party for the duration of a project. It is the initial contract with a supplier or vendor and may impact terms and conditions of sub-contracts.
A top-tier procurement team that is driving value, sustaining process excellence, and implementing effective and disruptive procurement strategies. High-performing teams deliver more than their cost and assess and prioritize activities that drive value on a consistent basis.
The value of an employee to a company. There are several factors that go into calculating the value of human capital. These include an employee’s job-related knowledge and experience, their training, and their skills. The value can also include personal traits that employers value, such as punctuality.
A strong effect or influence. One procurement process may impact another. Impact sourcing means using a BPO sourcing model (business process outsourcing) to outsource work to disadvantaged areas to help those living there.
Indirect procurement is the sourcing of all goods and services for a business’ day-to-day operations. Typically these items and services are used by internal stakeholders and functions rather than externally.
These are assets without physical substance like corporate intellectual property, patents, franchises, goodwill, trademarks, software, and brand recognition that are considered useful beyond one year.
Supplier data that has been gathered, analyzed, and transformed by AI and machine learning. Intelligent supplier data allows for more strategy, insight, and dynamics to improve purchasing experiences and can include existing and potential suppliers.
A collection of processes from end-to-end production to control and manage inventory for projects. An effective inventory strategy maintains inventory, removes bottlenecks, minimizes cost, and minimizes stocking issues.
The process of using funds as efficiently as possible with the objective of acquiring a profit or maximum returns.
A provision against an event or action that could lead to inefficiencies and problems. In procurement these provisions could be increasing inventory to avoid a shortage.
A manufacturing system where components, parts, and materials are delivered immediately before they are needed to reduce inventory costs. In procurement this could be done to reduce storage costs and reduce wasted. JIT is famously used by Toyota and is also known as the Toyota Production System or TPS.
The top stakeholders in a project or organization. Key stakeholders have the power to prevent the project from reaching deadlines and achieving its full potential if they withdraw their support. Members of this group tend to be important roles with power such as regulatory bodies and C-suite.
Goals and metrics that are monitored to measure success of an organization. KPI monitoring involves capturing specific data, converting it into trackable metrics, and then monitoring those figures to see if the organization is on target, above target, or below target.
Lead time is the amount of time in a process from the start until the end and is a consideration in logistics procurement. Calculating lead time correctly in procurement is essential for a smooth end-to-end process to ensure the process remains steady with no gaps.
Using “lean” techniques on end-to-end supply chain to increase efficiency in any area that is wasteful and utilizes non-value-added time and activity. It can be applied to any part of supply chain management such as operations, purchasing, distribution, or logistics.
Using something already owned in your organization to attain something new. In procurement, companies use leverage to secure improved value by using the fixed cost of a supplier and spreading that over a bigger volume, or reducing the amount of vendors for the same need. Leveraging can be applied to most parts of procurement, from best practices to office equipment, to technology solutions.
Every item associated with a purchase order being procured, broken out line by line in a spreadsheet. Purchase orders might include thousands of line items and can be categorized into regular line items (the goods and services being purchased), comment line items (where notes can be left regarding regular line items), and miscellaneous line items.
These are fixed assets that can’t be converted into cash within one year of the balance sheet date. They are investments that will benefit the company over the long term, like property, factory equipment, real estate holdings, and long-term securities.
Long-term liabilities are also called long-term debts. They are the financial obligations of a company that won’t be paid within one year.
A low-touch model generally involves no human interaction. Customers can solve their issues, have their questions answered, and even move along the acquisition funnel and acquire a product with little or no human support. This strategy involves digital engagement and is often used for volume customers with low recurring revenue and/or uncomplicated rollout.
Used in construction procurement primarily. The main contractor of a construction project manages its subcontractors on the client’s behalf. Typically the managing contractor would be an experienced firm with expertise that has ability to manage different groups of subcontractors whereas in traditional procurement the client would divide up and contract the work themselves.
Management contracting would typically be used on a large and complicated project and allows risk to be spread out among different contractors. The client only communicates with the management contractor.
Identifying and handling anomalies in the procurement process. Managing by Exception means identifying an exception, determining the reasons for it, and handling the deviation before the procurement process is disrupted.
The difference between selling price and cost of production, or the space in which an organization makes money. Procurement’s cost savings is associated with margin and procurement will often be relied on to vet suppliers and conceptualize a strategic sourcing process to optimize margin.
Analyzing the supply market to understand competition, key suppliers, and overall direction of the marketing to create an effective strategic sourcing plan. Procurement may conduct interviews with suppliers in the industry and will determine all of the macro factors with potential to impact procurement.
MOQ or minimum order quantity means the fewest amount of units a company is required to purchase at a time so the manufacturer can remain profitable. It can show up as a note on a line item and can be a confusing unit of measure for procurement and sourcing teams.
This process aims to improve financial decisions by simulating specific variables’ effect on a financial outcome. It’s an essential part of driver-based forecasting, using the core elements of a business process to model and estimate its future performance.
A discussion between two or more parties to reach an agreement that is mutually satisfying. In procurement companies may be negotiating price, value, performance, quality, agreement, or a number of other factors that may impact manufacturing or a function’s strategic sourcing plan.
A company’s net income is its income minus the cost of doing business, expenses, and taxes. It is how much the organization has earned after all operational and non-operational aspects.
NPV is a measurement for determining how profitable an investment or project is. It’s a way to calculate your return on investment (ROI) for an expenditure or project. A common formula for calculating NPV is NPV = PV (inflows) – PV (outflows).
Purchasing something new for a company rather than redistributing owned assets among different locations.
An essential requirement to form a contract by giving the other party the opportunity to accept something or refuse.
An item that is not customized or made to order, but is part of a regular inventory and taken from existing supplies and inventory.
On time in full, or OTIF, means when a customer receives their order when they wanted it without any missing items. It allows retailers and manufacturers to maintain a smooth supply for consumers and is a metric often used in the CPG industry and the food and beverage industry. OTIF can also be referred to as “perfect order proficiency.”
Also known as a return on sales, an operating profit margin is the remaining revenue after variables (cost of production, distribution, and sales) have been paid for. Bu looking at how much profit every dollar in sales generates, companies can use it to measure efficiently they operate. Divide the operating profit by the total net sales for a period to calculate the operating profit margin.
Using AI to simulate procurement processes ahead of time, such as quotes and purchase requisitions to attain greater visibility into cost savings and strategy. Predictive Procurement Orchestration can spot anomalies, exceptions, and outliers to increase value. Auto detection helps procurement teams maximize their time and prioritize areas where procurement can bring more value.
The current value of a future sum of money or stream of cash flows discounted by an expected rate of return. The higher the discount rate, the lower the present value of the future cash flows. Present value shows that money a company receives in the future is not worth as much as an equivalent amount received today.
Pro Forma is a statement or financial report combining historical values and estimates with possible future events and conditions. It comes from Latin “for the form” and is done to understand how future events could impact an organizations’ financial performance.
The act of pertaining services, goods, and technology for business purposes, sometimes through a bidding process. Procurement covers all of the end-to-end processes of purchasing including compliance, cost analysis, risk analysis, and ESG. Procurement is often associated with purchasing during supply chain disruptions or scarcity and can be a strategic function and department of any organization to apply strategy to achieve greater profitability and value. Procurement also includes relationship management, evaluation of contracts, and negotiation.
Data that is collected and analyzed to give insights that help create business strategy. Procurement analytics help businesses make effective decisions and help teams become high-performing.
Procurement Performance Management, or PPM, is a process that is ongoing that measures KPIs like spend, efficiency, or cost savings. It is a method of measuring the performance of a procurement function.
Key Performance Indicators specifically for procurement teams. KPIs help procurement evaluate its performance and measure effectiveness to optimize decision making and overall strategy. Also referred to as metrics, common procurement KPIs are supplier diversity, purchase price variance (PPV), cost savings, cycle times, and OTIF (on time and in full).
A profit center (a department, area, division, or group within a company) produces profits from its own operations. It is measured as if it were a separate business within an organization. The profit center leader generally controls the budget and makes decisions within the profit center to deliver profits to the organization.
Buying goods and services in a straightforward fashion and transactional nature. Purchasing is different from procurement and doesn’t include any of the strategic activities of procurement.
Purchase Price Variance (PPV) is the difference between that baseline price and the price the organization actually pays for a product or service. PPV can be positive or negative denoting a profit or a loss. It is one of the most important procurement KPIs used in most organizations. It is a crucial factor in determining cost savings and the effectiveness of a procurement function.
All relevant factors of an analysis that cannot be tied to numbers or statistics. Qualitative analysis uses opinions and non-quantifiable information such as supplier relationships to make a decision. It is often used in conjunction with quantitative analysis.
Quantitative analysis uses numbers, modeling, and statistics to understand cost and can be used to measure performance internally or to compare the cost of outsourcing a product or service in manufacturing rather than making it in-house. It is also used to evaluate financial instruments and predict real world changes.
In procurement a quote is a document given by a potential supplier or vendor that specifies the cost of their product (whether good or services) over a specified period.
Investors define Required Rate of Return (RRR) as the minimum return they will accept from an investment in a project. When an investment’s expected return is lower than the RRR, prospective investors will not commit to the investment. When calculating RRRs, investors usually add an expected risk premium to the current interest rate of a risk-free investment (i.e., U.S. Treasury bonds).
The measure of how profitable an organization is relative to the resources being financed by debt and/or equity. Divide net income by assets to calculate return on assets (ROA).
A financial ratio that can be used to evaluate a company’s profitability and capital efficiency. The ratio can be used to measure how well a company uses its capital to generate profits.
The money generated from normal business operations, calculated as the average sales price times the number of units sold. Net income is determined by subtracting costs from the top line (or gross income).
RFP automation is the use of technology and AI to complete RFP evaluation tasks. Many procurement teams use strategic sourcing software to automate all or part of the RFP process in a strategic sourcing process.
Automating the Request for Quotation process using AI. Automated RFQ solutions are purchase order systems that help standardize the purchasing process to help procurement teams maximize their time and use time for more value-added activities.
A company measure of how much and what kind of risk it is willing to accept or assume to achieve its financial goals
The process of identifying, analyzing, and accepting uncertainty in a company’s investment decisions. An investor or fund manager who manages risk quantifies the likelihood of loss in an investment and takes the appropriate action, based on the investment objectives or risk tolerance.
Realized savings are the excess of a budgeted amount that have been saved on a line item. They are impacted by other factors such as if a process impacts and detracts from another area such as a facility. Not all realized savings that are estimated at the beginning of a project become actual cost savings, as they are impacted by many different forces such as rogue spending, manual entry, supplier shortages, discrepancies in units of measure, or any other lack of internal control.
The output, schedule, and resource boundaries needed to complete a project. This term is frequently used in project management and consulting. In defining the scope of a project, managers can estimate costs and the time it will take to complete the project.
(SG&A) represent the category in a company’s income statement that includes all general and administrative expenses. Also included are the direct and indirect selling expenses of the business and nearly all business costs not directly associated with producing or performing a service.
The goal of sensitivity analysis is to determine what sources of uncertainty in a mathematical model contribute to the model’s overall uncertainty. Also known as the what-if analysis.
An amount assigned to the value of transactions with a supplier specified in a contract, or types of cost management inside an organization. Different types of spend include direct spend, indirect spend, tail spend, and maverick spend.
Presented as a multidimensional cube, the spend cube is a review of spend data. Subcategories or variants bought by different stakeholders or departments across the organization are usually reviewed, as well as comparative spending with different suppliers.
A financial document that is issued by a company as part of their balance sheet. This document gives investors information on account changes to provide transparency. It details equity changes due to net income, dividends paid, or the repurchasing of stock.
The analysis of a supplier’s performance or the analysis of the supplier base. Supplier analytics might compare supplier performance, analyze supplier risk, or factors like diversity.
Creating supplier data governance and building supplier data pipelines inside of an organization. Data engineering could include storing data, analyzing data, and ensuring data is compliant.
The process of making the bidding process easier for suppliers. Suppliers are typically required to login to many disparate systems to manage transactions which is frustrating. Supplier Experience Management alleviates those frustrations.
Supplier lifecycle management (SLM) is the process of managing vendors in an organization’s end-to-end procurement process. Companies build relationships with suppliers to drive value and create transparency in the procurement and supply chain.
Supplier master data is all relevant data about whatever is being sourced, whether good or services. It can include contact information, contracts, category information, procurement history, and information about inventory.
A process of ensuring that duplicates in an organization’s data is avoided, the data is current and the same between multiple locations, and that data is accessible for all procurement team members.
All suppliers of a company’s products and services. Supply base can include potential suppliers, current suppliers, and former suppliers.
AI that helps procurement automatically source products to meet immediate needs. Tactical sourcing is typically focused on finding the lowest cost and is a short-term activity and tactical sourcing AI can help the function complete ordering cycles quickly and efficiently.
Tail spend is an aggregate of small purchases that are typically low value but add up to be a large cost factor. These purchases are made outside of procurement in other departments and locations inside of a company and the data is typically siloed and not easily identified. Tail spend can also be referred to as maverick spend or rogue spend.
A target cost is a cost for a project that is set at the beginning of a project’s life cycle. Overruns of the final project are then shared between parties based on the contract and formula set at the beginning of the project’s life cycle.
A form of “budget allocation” where a high-level budget is created, and then the budget amounts are distributed to individual departments or functions. Depending on the amount of funds allocated to each department, each must either develop new plans or reduce existing ones.
TCO is the purchase price of an asset, whether good or services, plus the costs of its operations over the lifecycle of the asset.
Corporate operating costs that are not directly or indirectly related to the production, sale, or delivery of a good or service. As a result, these costs are not included in COGS (Cost of Goods Sold).
Data that cannot be processed with regular data tools because it is qualitative in nature. Unstructured data is not predefined and is often stored in its native format. It is hard to use and classify and can make up the majority of a company’s data.
Every process a procurement team might undertake from sourcing to awarding the contract. Downstream refers to all the processes after the contract is awarded.
The importance, worth, and usefulness of a thing or activity. In procurement, value is the competitive advantage of a company based on procurement’s efforts. Value can be calculated by factoring in cost savings, quality of data, compliance, growth, strategy, and innovation.
Value analysis is a review process assessing purchasing activities for efficiency and cost reduction. The idea was popularized by Lawrence D. Miles during a period of material shortages and was conceptualized to ensure unnecessary cost was not a factor in production.
Increases the value of a product, service, asset, or business. Factors include the actions, processes, and results that add profitability, reduce risk, and promote growth in accordance with strategic goals.
Corporate expenses related to production costs that change in proportion to a company’s production or sales volume. This can include manufacturing costs or raw materials and packaging, and shipping expenses.
Weighted scoring prioritizes different parts of an RFP based on what a business does and the importance of those factors to business. Weighted scoring can assess which suppliers will be more impactful long term and is more complex than simple scoring. If done manually in spreadsheets errors are common.