4 Common Procurement Terms and Their Meaning
Common Procurement Terms and Definitions 101
4 Common Procurement Terms and Their Meaning
We wanted to create a blog post that could serve as quick reference guide for some common procurement terms. We hope you find this helpful and come back to this post whenever you need to.
“Spend” is a grammatically incorrect but commonly used term in the procurement world that describes an organization’s entire non-payroll expenditure base. More often than not, in the procurement world, you will use this verb as a noun.
“Direct Spend” includes costs for goods and services typically listed in Cost of Goods Sold. In a manufacturing environment, for example, it includes the product and anything that goes out the door with the product “direct” to the customer. In a retail environment, “directs” are typically called “merchandise” or “products for resale.”
“Indirect Spend” includes all of the things a company spends money on to run its business and to enable the delivery of products and services to customers, such as general supplies or legal services. This type of spend is most common because it applies to every company.
Defining Spend Visibility
To properly define spend visibility, it’s important to understand a larger picture—one that paints a portrait of a traditional sourcing scenario that very commonly leads to poor data clarity, which in turn results in a lack of spend visibility.
Most companies’ spend breaks down into 90 to 130 different categories of expenditures, with a different set of vendors in each area. Each vendor strives to be an expert in its niche. The vendors hire strategy consultants to help them develop pricing schemes, and they implement account management programs to maximize profitability.
When a company negotiates pricing and terms once every three years or so in any one category of expenditure, it is essentially walking onto an uneven playing field. The company is competing for margin against experts that generally have better data than its customers and certainly have greater market visibility. A customer will often come away from these asynchronous negotiations feeling like he or she received a fair deal without recognizing the loopholes and land mines buried in the contract. Vendor account managers are often compensated based on account profitability improvement, so they work throughout the contract term to improve margins, shifting the benefits away from their customers. This approach often leads to high savings projections and low savings realization.
Beyond the obvious misalignment of goals with the vendors, procurement success is often undermined by internal stakeholders. Buyers may resist change to a new vendor and continue to use old, less competitive vendors due to habit or personal relationships. Buyers may lack discipline in their buying habits, using the lower pricing but with higher consumption, resulting in a loss of savings. The procurement organization, if one even exists, may be its own worst enemy. It may strategically source a great deal but then “throw it over the wall.” Deals that are not aggressively implemented, and then not actively monitored and managed, tend to degrade quickly. The benefits your team fought so hard for are not realized.
As a common but egregious example, one publicly traded company negotiated a 15% improvement in rates with its small parcel carrier. The procurement team concluded the project and moved on to the next one. However, no one validated that the new rates were fully implemented in all locations. More than half the locations continued to use the old rates with the same carrier. The supplier did not have an incentive to correct the problem. No one from the company did any basic auditing or ongoing analytics (these activities, among others, are called “Category Management”). This resulted in waste and lost opportunity that was not discovered for three years. Interestingly, the vendor had inserted a clause in their contract limiting price audit recoveries to 90 days.
In the procurement world, this counter intuitive but stunningly common problem is called poor “spend visibility.”
Download this white paper for more details on this common problem and how to overcome it in your organization.
SpendHQ is a spend analysis software that provides rapid, accurate and detailed visibility into your spend data. This full-service SaaS spend visibility solution delivers actionable insight for sourcing and procurement professionals. Designed from the ground up by top sourcing experts at Insight Sourcing Group, it bypasses months of ERP integration, strips out all the unnecessary functionality, and finally solves the problem of bad data. This SaaS tool features the industry’s most intuitive user interface and has US-based procurement specialists handling the data optimization. Recognized for innovation and industry impact in the procurement space, SpendHQ was named to the 2015 Red Herring Global 100 list, and listed as a finalist in the CODiE 2016 Awards as a “Best Supply Chain Management” solution. With SpendHQ at their fingertips, clients ranging from Fortune 500s to mid-market companies are finally able to see their spend clearly and drive savings confidently.