Top 20 Procurement Terms to Know – Cheat Sheet.  

1. Purchase Order (PO)

Insight: A Purchase Order (PO) serves as a formal, legally binding agreement between a buyer and a seller. It outlines the details of the transaction, such as the products or services being purchased, their quantities, the agreed price, delivery terms, and payment conditions. POs help ensure that both parties are on the same page regarding the transaction. Once a supplier accepts the PO, it becomes a contract. POs also help track and manage inventory, validate invoices, and facilitate budgeting.

Application: Companies use POs to control spending, create an audit trail, and maintain accurate records for accounting and reporting purposes.

2. Request for Proposal (RFP)

Insight: An RFP is a document issued by an organization to solicit proposals from potential suppliers or service providers. It typically provides detailed specifications for the goods or services needed and sets out the criteria for evaluating the bids. The process allows suppliers to submit their qualifications, pricing, and solutions, which the buyer reviews before making a selection. RFPs are commonly used for complex purchases where the buyer requires specific expertise or a customized solution.

Application: RFPs are used when an organization is looking for a vendor to provide a solution or service that requires detailed proposals, such as IT services, construction, or consulting.

3. Request for Quotation (RFQ)

Insight: An RFQ is a simplified version of an RFP and typically requests a price quotation for specific products or services. Unlike RFPs, RFQs are used for standardized or commoditized products where the primary differentiator is price rather than customization. RFQs usually have clear specifications, and suppliers submit their prices for the specified quantity or service. RFQs are typically used for low-complexity items with well-defined requirements.

Application: RFQs are commonly used for items like office supplies, raw materials, or routine services where price is the most critical factor.

4. Supplier Relationship Management (SRM)

Insight: SRM is the strategic approach to managing and improving an organization’s relationships with its suppliers. It involves collaboration, communication, and mutual understanding to ensure that suppliers meet the organization’s quality, cost, and delivery expectations. Effective SRM includes performance tracking, contract management, joint innovation efforts, and continuous improvement initiatives. 

Application: SRM helps organizations improve supplier performance, reduce risks, and drive innovation. It’s particularly useful in industries like manufacturing, where suppliers play a critical role in product quality and timely delivery.

5. Procurement Strategy

Insight: A procurement strategy outlines the long-term vision and goals for sourcing goods and services. It helps guide the procurement process and decision-making, including supplier selection, contract management, risk management, and cost control. A well-defined procurement strategy aligns procurement activities with the broader business objectives, whether it’s cost reduction, supply chain efficiency, or innovation.

Application: Companies develop procurement strategies to ensure they get the best value from their suppliers while aligning with corporate goals such as sustainability, ethical sourcing, or global expansion.

6. Total Cost of Ownership (TCO)

Insight: TCO is a financial estimate that helps organizations assess the total cost of acquiring, using, and maintaining a product or service over its entire lifecycle. TCO includes direct costs (e.g., purchase price, installation) and indirect costs (e.g., maintenance, training, disposal). Understanding TCO allows businesses to make more informed purchasing decisions by considering both the initial cost and the ongoing costs of ownership.

Application: TCO is used in procurement to evaluate alternatives, especially when decisions involve high upfront costs but long-term benefits, such as in capital equipment purchases or software systems.

7. Lead Time

Insight: Lead time is the time it takes from placing an order to receiving the goods or services. It includes both the supplier’s processing time and the shipping/delivery time. Lead time management is critical for maintaining inventory levels, avoiding stockouts, and ensuring that production processes aren’t disrupted. Shortening lead times can improve supply chain efficiency and responsiveness.

Application: Companies track lead time to plan their procurement cycles and maintain optimal inventory levels. Short lead times are particularly important in industries with high demand variability, such as fashion retail or electronics.

8. Inventory Management

Insight: Inventory management involves overseeing the flow of raw materials, work-in-progress, and finished goods within an organization. Efficient inventory management ensures that a company has the right amount of stock available when needed, without overstocking, which ties up capital, or understocking, which can lead to stockouts. Inventory management techniques, such as Just-in-Time (JIT), Economic Order Quantity (EOQ), and ABC analysis, help organizations maintain balance.

Application: Companies use inventory management systems (IMS) to track stock levels, manage orders, and forecast demand. This is especially critical in industries with perishable goods or high demand variability.

9. Contract Lifecycle Management (CLM)

Insight: CLM refers to the process of managing contracts from their creation through to expiration or renewal. It involves drafting, negotiating, executing, and ensuring compliance with contract terms. Effective CLM ensures that the organization gets the benefits stipulated in the contract and minimizes risks, such as disputes or non-compliance. Technology solutions like contract management software can automate and streamline this process.

Application: CLM helps ensure that all agreements are adhered to, and can be used to track performance metrics and renewals, helping organizations optimize contract terms over time.

10. Sourcing

Insight: Sourcing is the process of finding, evaluating, and selecting suppliers to meet the organization’s needs. It can be categorized into two types: strategic sourcing (long-term, value-focused sourcing) and tactical sourcing (focused on cost-saving). Sourcing involves identifying potential suppliers, negotiating contracts, and managing supplier performance.

Application: Companies use sourcing strategies to align their procurement decisions with business goals, whether they want to prioritize cost savings, quality, supplier diversity, or innovation.

11. Purchase Requisition (PR)

Insight: A Purchase Requisition (PR) is an internal request within an organization that initiates the procurement process. It typically outlines the products or services required, the quantity, and sometimes the desired specifications. The PR is submitted to the procurement department, which then takes the necessary steps to fulfill the request.

Application: PRs help ensure that purchases are made with the approval of the relevant stakeholders and are within budget constraints. They are a key tool for controlling spending in the procurement process.

12. Procurement Cycle

Insight: The procurement cycle refers to the complete process of obtaining goods and services, from identifying the need to managing the final payment. This cycle includes stages such as requisition, supplier identification, bidding, purchase order issuance, delivery, and invoice processing. The cycle ensures that the procurement process is organized and consistent.

Application: A well-managed procurement cycle reduces inefficiencies, avoids procurement delays, and ensures cost-effectiveness by standardizing processes.

13. Supplier Diversity

Insight: Supplier diversity is the practice of sourcing from a diverse range of suppliers, including minority-owned, women-owned, veteran-owned, and other historically underrepresented businesses. It promotes inclusivity and encourages competition, which can lead to innovation and cost savings. Many organizations implement supplier diversity programs to support local economies and social responsibility.

Application: Supplier diversity can be a strategic priority for companies that aim to reflect diversity in their supply chain, meet regulatory requirements, or drive social change.

14. Negotiation

Insight: Negotiation in procurement is the process of discussing and reaching agreements with suppliers on key terms, including pricing, delivery schedules, and other contractual conditions. Effective negotiation can result in cost savings, better payment terms, and improved delivery conditions. It requires skills such as communication, persuasion, and compromise.

Application: Procurement professionals use negotiation techniques to secure the best possible terms with suppliers and ensure favorable outcomes for the organization.

15. Purchase Agreement

Insight: A purchase agreement is a legally binding contract between a buyer and supplier that outlines the terms and conditions of the sale. It includes details such as payment terms, delivery schedules, warranties, and penalties for non-performance. Purchase agreements help mitigate risks by clarifying obligations and expectations.

Application: Purchase agreements are crucial for high-value or long-term contracts where clear terms are necessary to avoid misunderstandings and disputes.

16. E-Procurement

Insight: E-Procurement refers to the use of digital platforms to automate the procurement process. This includes sourcing, purchasing, invoicing, and payment processing through online systems. E-Procurement helps streamline procurement, improve efficiency, and reduce manual errors. It can also improve transparency and compliance with procurement policies.

Application: E-Procurement systems are widely used in large organizations to reduce the time spent on procurement tasks, enforce policy compliance, and enable data-driven decision-making.

17. Just-in-Time (JIT)

Insight: JIT is an inventory management strategy that aims to minimize inventory levels by ordering and receiving goods only as they are needed for production. This reduces storage costs, minimizes waste, and helps ensure that capital is not tied up in excess inventory. However, JIT relies on efficient suppliers and a reliable supply chain.

Application: JIT is particularly popular in manufacturing industries like automotive, where components are delivered just before they are needed in the production process.

18. Vendor Management

Insight: Vendor management involves overseeing and coordinating relationships with external suppliers and service providers. This includes selecting vendors, negotiating terms, ensuring service delivery, and monitoring performance. Strong vendor management ensures that vendors meet their contractual obligations and that the relationship is mutually beneficial.

Application: Effective vendor management helps optimize supply chain performance, reduce costs, and ensure high-quality goods or services.

19. Ethical Sourcing

Insight: Ethical sourcing refers to the practice of obtaining goods and services from suppliers who adhere to ethical standards, including fair labor practices, environmental sustainability, and responsible sourcing. Companies that prioritize ethical sourcing demonstrate corporate social responsibility (CSR) and contribute to the well-being of workers and the planet.

Application: Ethical sourcing is a critical component of modern procurement, particularly in industries like fashion and electronics, where supply chain transparency and fair treatment of workers are key concerns.

20. Risk Management

Insight: Procurement risk management involves identifying, assessing, and mitigating risks that may affect the procurement process, such as supplier disruptions, price volatility, or geopolitical events. Effective risk management ensures continuity in the supply chain and helps avoid costly delays or quality issues.

Application: Risk management in procurement helps companies anticipate potential supply chain disruptions and create contingency plans, such as diversifying suppliers or holding buffer stock.

These expanded explanations offer a deeper understanding of each procurement term and how they play an integral role in the procurement function. By mastering these terms, procurement professionals can enhance their ability to make informed decisions and manage supplier relationships effectively.