Overarching Terms Related to Procurement Technology
eProcurement (and eSourcing, ePayables, eAuction, eInvoice, eAnything)
eProcurement and all of its various component terms such as eSourcing, eAuctions, eInvoices, ePayables, etc. are all terms that simply imply the use of information technology and internet-based communications to support the Spend Control process – including all procurement and ﬁnancial control aspects of that process. For instance eSourcing simply means using electronic methods to create, communicate and evaluate supplier responses to purchase requirements. eAuctions are a subset of eSourcing used in some cases to run a competitive real-time reverse auction process online via the internet to obtain the best price available in the market for a well-deﬁned need. ePayables is the use of information technology and electronic invoice records to automate some or all aspects of the invoice receipt, validation, matching, discrepancy resolution and payment authorisation process. eInvoices are electronic invoices. See that deﬁnition for more detail.
Although they don’t have a ‘e’ in them, terms often used similarly to group these technology-supported processes into the two primary cycles involved are ‘source-to-contract’ and ‘purchase-to-pay’. See those deﬁnitions for more detail. In today’s world, the use of eProcurement methods and tools has become virtually mandatory to achieve the level of Spend Control any mid-size or large organisation needs to be successful.
Purchase-to-Pay (P2P) is a term commonly used to describe the part of an end-to-end eProcurement system that enables and manages the routine purchasing of goods and services by an organisation’s staff. It provides control and visibility of all activity from entry of a purchase request through purchase approval per policy; PO generation; receipting or service acknowledgement; invoice receipt and 2-way or 3-way matching with discrepancy resolution when needed; to payment authorisation.
Robust P2P systems allow for various different purchase workflows such as direct selection of an item from a catalogue or website, routing of a general request to a professional buyer or a category expert such as a PC purchase specialist, or automated generation of simple quote requests from multiple authorised suppliers with integrated quote selection. It may allow for a range of approval processes including multi-level approval workflows, use of substitute approvers or approver pools, automatic approvals based on established business rules and so on. It will also allow for the handling of both PO and non-PO invoices in the invoice processing portion of the system.
A good P2P system:
- Provides financial managers with the ability to ensure compliance with the organisation’s approval process, and with visibility of the cost pipeline as well as cash requirements
- Provides departmental managers with a greatly improved ability to manage budgets
- Provides employees with a streamlined way to get what they need
- Provides Procurement with a framework for guiding staff to purchase from the best suppliers
- Provides Accounts Payable with a way to automate the majority of the invoice processing effort
- Provides the organisation as a whole with a way to control spend while enabling the entire organisation to get what they need quickly and easily
- Purchase-to-Pay ‘closes the loop’ to capture actual savings from the supplier agreements created by Procurement in the Source-to-Contract process
Source-to-Contract is a term often used to represent the part of an end-to-end Spend Control process that supports the procurement team in the activities they perform to make qualified suppliers and negotiated best-value agreements available to the organisation for use when they need to buy something.
Source-to-Contract usually includes Supplier Relationship Management, Sourcing, Contract Management and Content Management. With eProcurement, this results in making electronic information about approved suppliers, offerings (e.g. catalogue), and contracts (e.g. negotiated pricing) accessible to buyers from within the organisation’s Purchase-to-Pay system. The better the Source-to-Contract process is working and the better the resulting information is tied into the Purchase-to-Pay process, the more savings will be realised by an organisation.
As stated above, complementary Source-to-Contract and Purchase-to-Pay processes ‘close the loop’ between savings creation done by Procurement and savings capture done throughout the organisation. An effective Spend Control process supported by an end-to-end eProcurement system relies equally on both sides of the equation.
Spend Control (aka Spend Management)
The terms Spend Control and Spend Management are generally used interchangeably. They are both used as the umbrella term for an organisation’s overall process for maximising value, minimising cost and ensuring steady supply of the direct and indirect goods and services the organisation buys.
Since purchase spend is either the largest or second largest (only to payroll) expense category for most organisations, control of how that money is spent is critical to the financial and operational performance of any organisation. Although, in theory, effective Spend Control can be achieved through manual processes and procedures; in practicality, it requires the use of information systems and technology to go beyond the basics. That support technology is usually referred to as eProcurement. So Spend Control is the managerial process; eProcurement is the technology that supports that process.
Spend Under Management
Spend Under Management is a term that is used in many different ways. It is usually expressed as a percentage of an organisation’s total addressable spend (e.g. 60% Spend Under Management). To some, it is simply the portion of the organisation’s spend that is ‘influenced by procurement’. But that can be a rather vague, unmeasurable definition for such an important concept. A more pragmatic and meaningful definition would be: That portion of addressable spend that meets the objectives of best-in-class Spend Management. That is the portion of spend that meets all of the following criteria:
Spend that meets that criteria is clearly ‘under management’ in the way financial, procurement and operational managers want it to be.
- Made with suppliers that were properly sourced & managed
- Made with proper purchase authorisation
- Properly coded for both financial allocation & purchase category
- Paid with correct pricing & terms
- Processed quickly & efficiently by everyone involved: employees, rocurement and AP
- Clearly visible to management at all times
Procurement Technology Terms
The level of usage of a deployed information system. For instance, the level of staff usage of an organisation’s purchase-to-pay system, including the range of business units and departments that use the system, the categories the system is used for, and the percentage of spend that goes through it. Another example is supplier adoption of self-service capabilities offered by a buyer through a supplier portal – for instance self-service catalogue maintenance and self-service invoice status enquiry. A high level of adoption is key to the success of any eProcurement system.
Automatic notifications delivered to particular individuals when action needs to be taken. A common way to deliver alerts is via email. Alerts are normally generated by exception-driven systems. For instance, in a contract management system, a program will review all contracts each day and generate alerts for contracts that are within an established number of days before their expiration date or some other milestone date. In this way, procurement professionals can assume they will be notified when action is needed and therefore do not need to take time reviewing contracts.
The transformation of the Accounts Payable process to a largely automated process based on electronic records. The transformation is usually done in phases, but ultimately includes: receipt of invoices in electronic form – usually via a combination of methods (supplier file transfer, supplier online entry, scanning with OCR data capture), automated 3-way matching for PO-based invoices, automated validation and workflow based authorisation of non-PO based invoices, workflow-based resolution of discrepancies, and final approval of valid invoices for payment. It may include the use of Supply Chain Financing as well.
The objectives are to pay only valid invoices and avoid duplicate payments, process as many invoices as possible ‘straight-through’ with no manual intervention, process invoices as quickly as possible so payment can be made at the optimal time (e.g. early, if payment discounts are available and profitable), and maintain full visibility of cash requirements for cash flow and working capital management.
Cloud-based solution (multi-tenant, multi-instance, private/public)
Cloud computing is the delivery of computing as a service rather than a product, whereby shared resources, software, and information are provided to computers and other devices as a utility (like the electricity grid) over a network (typically the Internet).
Clouds can be classified as public, private or hybrid. Cloud-based solutions can be either multi-tenant (all organisations use the same instance of the software and the same database, though the database is securely partitioned by organisation), multi-instance (all organisations use the same version of the software, but each has its own database), or hosted (which allows for - although does not necessarily imply - that each organisation could use a somewhat different version of the software along with their own database).
Cloud-based solutions are usually licensed on a monthly or annual subscription basis vs. a large one-time initial charge. Good cloud-based solutions are highly configurable to meet the needs of different organisations without change to the software.
Some solution providers offer different deployment for all or parts of their solution suite to allow organisations to decide what, if any, parts of their overall eProcurement system they want to use via the cloud.
In order to be properly posted to an organisation’s financial system every purchase or invoice transaction must be properly associated to the correct accounting code (e.g. expense and account department). To provide useful spend analysis, every transaction also needs to be associated with the correct spend category.
When this coding is left to system users to do manually, it is sometimes done incorrectly or not done at all. Good eProcurement systems automate most, if not all, coding based upon who is making the purchase, the supplier, the item, and other basic information within the transaction. This ensures accurate information for both financial management and spend analysis.
In the context of procurement information systems, collaboration usually means the performance of a complex task among multiple people, supported by access to shared information and some form of electronic workflow or alerts to let the different parties know that they need to do their part of the process or possibly review what someone else has done.
One example of a collaborative process is the development of an RFx document among, say, the department with the need, procurement professionals, legal, quality management and possibly other participants, each of whom contribute to parts of the final document. Another example of collaboration is when a buyer and supplier work together on the design of a product that has never been made before.
Effective collaboration is far more possible in today’s world where information can be more easily shared.
The relevant definition in the Cambridge English Dictionary is “the act of obeying an order, rule or request”. There are at least three important types of compliance that organisations strive for within the realm of procurement:
Approval compliance: following the organisation’s established policy for approval of a purchase request before the purchase is made. This is one of the primary functions of a purchase-to-pay (P2P) system.
Source compliance: the purchase of an item or service from a supplier that has been qualified by the organisation – usually by Procurement. Better yet, the use of a ‘preferred’ supplier when more than one has been qualified for that particular item (the preferred supplier typically has been deemed to provide the best value). In order to make this consistently happen, an organisation’s supplier management and sourcing processes need to be closely linked to the organisation’s P2P system so that staff are guided quickly and easily to preferred sources for whatever they need to purchase.
Contract compliance: the use of the proper price and other terms defined within the contract established with the qualified supplier. This is best achieved when contract information is tied directly into an organisation’s P2P system so proper contract terms are automatically applied to all purchases.
The overarching goal of an organisation’s procurement process is to steer the greatest amount of spend possible through all levels of compliance so as to ensure only proper purchases are made and that the greatest value is obtained for the organisation’s overall spend.
Solution configuration is the process of tailoring a software solution to the structure, policies and procedures of a particular organisation without actually changing the software. Well-designed software solutions allow for this through easy, non-technical selection of options, input of the organisation structure, incorporation of business rules and defining of workflows. In this way, a standard software solution can operate in different ways for different organisations while still ensuring use of best practices and maintaining the low-cost, low-risk advantages of standard software solutions.
In the context of procurement information systems, content management is the process of maintaining access to up-to-date information about the offerings of qualified suppliers from within the organisation’s purchase-to-pay system. The ‘content’ may be made accessible through buyer-managed or supplier-managed electronic catalogues, 'punch-out' access to supplier websites, direct links to contracts, or other means.
Combined with good search capabilities, such access makes it fast and easy for staff to find what they need from qualified/preferred suppliers, thus guiding them to purchase from the sources that provide the best value. Good eProcurement systems provide the tools for content management, and some organisations choose to outsource the process to qualified managed service providers.
Contract management/contract repository
In the context of procurement information systems, contract management generally consists of:
A centralised electronic repository of all supplier contracts with all key information in a structured format and links to all related documents (e.g. in PDF format)
An automated monitoring process that continually identifies upcoming contract milestones and expiration dates, and alerts the appropriate people (usually via email) that some action needs to be taken (e.g. review and potentially cancel, extend or re-negotiate the contract)
Automatic capture of actual purchase activity against each contract reporting and analysis capabilities. Primary goals of a contract management system include, but are not limited to: Achievement of those goals can save organisations considerable expense while also reducing risk.
Cost pipeline visibility
Easy access to all known future purchase activity for a given department or the organisation as a whole. Ideally, this includes all open purchase requests (approved and not yet approved) in addition to open purchase orders and invoices. This typically requires the combination of account balances and budgets from the organisation’s financial systems with all activity within the organisation’s purchase-to-pay (P2P) system.
Because a P2P system holds all purchase requests, POs and invoices in electronic form well before they are posted to financial systems, it contributes to providing a much more comprehensive view of the organisation’s committed and potentially committed future expense.
This visibility is extremely valuable to a department or financial manager’s ability to effectively manage budgets and is a key benefit of a good P2P system to all types of operational and financial managers.
In the context of procurement information systems, a dashboard is a well-organised, largely graphical online presentation of key performance indicators (KPIs) and information important to the user. Metrics that are outside a defined ‘normal’ range are usually highlighted in some obvious way and often provide the ability to ‘drill down’ to the detail transactions that make up the summary information presented. Dashboards are usually configurable to include the information that is most important to a particular role or individual – usually people with manager or executive roles.
Dynamic Purchasing System (DPS)
A Dynamic Purchasing System (DPS) is an electronic purchasing system, intended specifically for commonly-used goods and services - rather than one-off purchases or bespoke projects. A DPS can work well with contracts that are reissued on a regular basis. Examples could include social care provision, education services, gas and electricity. A DPS is open to a pool of suppliers that can come and go continually.
A DPS can be a valuable tool within any procurement strategy. With a DPS, an organisation can streamline and accelerate the purchasing process, often achieving much lower prices.
Electronic invoice (eInvoice)
Broadly speaking, an electronic invoice is any invoice sent by a supplier to the buyer in electronic form rather than as a paper invoice. Though not technically a ‘paper’ invoice, a faxed or emailed PDF invoice is NOT considered an electronic invoice. An electronic invoice will be in some standardised electronic format (e.g. XML) that can be properly read by the buyer’s invoice processing system.
Electronic invoices may be submitted in a number of different ways depending on the technical capabilities of the supplier and buyer. For instance, a file of multiple invoices may be sent directly from a supplier to a buyer, or a file of invoices for many buyers may be submitted to a central transaction hub that then sends them on to the proper buyer(s) in various formats. Or a supplier may input invoices in various ways via a buyer’s online supplier portal.
The advantages of electronic invoices are considerable: elimination of manual handling; reduced lag time between sending and receiving; reduction in ‘lost’ invoices; elimination of keying errors; and more. Both buyers and suppliers benefit greatly.
In cases where electronic invoices are not practical, a process that gains some of the benefits is to scan paper, fax and PDF invoices using tools such as OCR to extract key information and produce electronic records similar to an electronic invoice. When done either in-house or using an outside managed service, this process can be combined with true electronic invoice methods to deliver 100% of invoices in electronic format to the buyer’s invoice processing system.
Often referred to as ‘source to-settle’ or ‘procure-to-pay’, end-to-end eProcurement is the application of electronic methods to the entire procurement process. Simply stated, it combines the ‘source-to-contract’ process with the ‘purchase-to-pay’ process to drive a high level of ‘spend under management’. See p7 for further explanation on each of those terms.#
A process within an organisation’s purchase-to-pay (P2P) system that uses search capabilities with access to supplier content via electronic catalogues and/or websites to ‘guide’ an employee from a basic expression of need (e.g. search terms or navigation through a hierarchy of narrowing categories) to products or services that satisfy that need from suppliers that have been qualified by the organisation. Ideally, staff are guided more specifically to the supplier that currently offers the lowest price or best overall value. The final decision on specific supplier or item selection may still be left to the purchaser, but the process should make buying from the best source the fastest and easiest thing to do, thus driving the savings process while quickly meeting the needs of the organisation.
Guided buying is a relatively advanced process that requires a well-functioning P2P system integrated with source-to-contract and content management processes. The payback, however can be tremendous in terms of savings.
eProcurement systems never operate in isolation. They are always connected in some way with the organisation’s financial systems, including general ledger and accounts payable. They are sometimes also connected with other ancillary systems that may involve specialised purchases, such as a Maintenance, Repair and Overhaul (MRO) system.
In technical terms, the actual integration may be performed in ‘real time’ (one system updates the other at the same time it is updated), near real time (same, but with a possible short delay), or on a scheduled periodic basis. Data may be passed using web services, files or individual transactions. Different points of integration are usually handled in different ways, but almost always one of these ways. But what is important is that the integration be: a) as timely as needed (which is not always immediate), and b) highly reliable (people will count on it). When information is replicated in two systems, it is very important to clearly determine which system is the ‘system of record’. For instance if a central supplier directory is in place, it should be considered the system of record, and as such changes made to it will be forwarded via integration to any other systems that contain supplier information. Of course it’s always best to have any given information stored in one place, but that is sometimes neither practical nor critical if integration is handled well.
Business is more and more being done on a global basis, and supporting systems need to be designed accordingly. An internationalised eProcurement system has, at a minimum, several design aspects, including:
Multi-currency: the ability to designate the currency of any transaction, with the ability to translate the value of that transaction to/from the ‘base’ currency used by that organisation for financial management using up-to-date currency conversion tables.
Multi-language: the ability to display screens and reports in the language preferred by each user. Modern systems are typically designed to associate a language with a user and display all screen/report labels accordingly. Certain types of data can usually be handled as well, such as the labels applied to spend categories. Managing the language of certain actual data often needs to be done procedurally, through – e.g. the proper name of a supplier.
Multi-tax: Since sales/purchases are taxed in very different ways with different rates in different parts of the world, the system needs to have built-in capabilities to recognise the correct tax regime that applies to each transaction and have access to the proper rates and calculations. Then data needs to be accumulated to tax reporting to the various tax entities.
Larger organisations that operate across multiple companies fundamentally require these capabilities to operate. And any organisation that envisions ever operating in multiple countries would do well to position themselves for that day by adopting a system with those capabilities to avoid the need for dramatic change later.
Invoice data capture
Sometimes referred to more generally as document data capture, invoice data capture is the process of scanning paper, fax and PDF invoice documents using OCR and other technologies to identify and extract key information, and create electronic invoice records that are ready for automated processing through to payment authorisation – usually in a purchase-to-pay (P2P) system. Includes manual receipt and handling of the original invoices as well as resolution of any exceptions such as missing or unreadable information. Although not as efficient as true electronic invoices, this process can eliminate considerable manual effort, reduce invoice processing times and reduce the overall cost per invoice within Accounts Payable.
Even organisations that are focused on moving to electronic invoices as extensively as possible often use this approach for the remaining invoices where fully electronic methods are not possible. A growing number of AP departments are moving to the use of an outside managed service to perform this process to simplify and speed the core AP process.
A managed service is a service performed by an outside resource responsible for the result of the process within specified service level agreements (SLAs). Managed services are normally used for well-defined processes with an easily measured output, and for processes which are not considered core competencies.
Cloud hosting of software solutions, technical application management, invoice data capture and supplier content/catalogue management are processes where managed services are frequently used in the context of Spend Control.
Marketplace or eMarketplace
This term is used in multiple different ways. The primary meaning is an online website operated by a third party where certain categories of products or services are bought and sold. These are usually public sites open to all appropriate suppliers and buyers. Most marketplaces are focused on a narrow range of categories, although Amazon.com is an example of a marketplace covering an extremely broad range of categories.
The marketplace term is also used to describe a buyer-centric site where the suppliers represented are only those suppliers that have been approved and qualified by the buyer, and where special buyer-negotiated contract prices may be in place. It may contain a combination of supplier catalogues and website punch-outs and may even offer pass-through access to certain public marketplaces. However, this type of marketplace is under the control of the buyer and used to give staff easy access to only those sources the organisation would like staff to use.
An information system’s design concept where the system is continually ‘watching for’ situations where action needs to be taken. Alerts are generally generated automatically and directed to the person responsible for taking the action. For instance, the monitoring of supplier contracts ‘watching for’ upcoming expiration dates or other milestones. This is one of the powerful and useful things eProcurement systems do for organisations because the system can monitor any number of items and situations with no manual effort required, then focus people only on exception situations and required actions.
A somewhat whimsical term used to imply all of the lag time, effort, opportunity for misplacement and opportunity for errors associated with handling paper documents such as purchase orders or invoices. Come to think of it… given the real cost of the paper chase, maybe it’s not all that comical! One of the goals of eProcurement is to turn the paper chase into ‘straight-through processing’ (electronic records processed automatically with no manual intervention) in as many business processes as possible
A portal is simply a website that gives a certain type of user access to an established set of information and capabilities. A supplier portal is an online site where a buyer gives authorised suppliers secure access to information the buyer posts such as invoice payment status, open tenders and associated RFx documents available for download, etc. A supplier portal may also provide the ability for the supplier to maintain their own profile information, post certification documents, submit RFx responses, upload catalogues, submit or upload electronic invoices, etc. A buyer portal provides similar capabilities to authorised buyer personnel as a place to view supplier information and post information for suppliers. Portals are often an important part of cloud-based services or solutions. Web portals are valuable tools for streamlining buyer-supplier interaction, providing supplier self-service capabilities and making both parties easier to do business with.
Increased process efficiency is one of the biggest benefits of eProcurement systems. Process efficiencies are improvements of various aspects of a process, such as elapsed time, manual effort involved, non-value-added steps involved like handling, copying or filing paper. Process efficiency also implies process standardisation with less opportunity for error. Some processes can be 80-90-100% automated, resulting in the ultimate in process efficiencies.
More efficient processes usually translate into cost savings through reductions in required manpower (ability to re-assign people to more value-adding roles), paper handling and storage resources, and the ability to leverage certain cost-saving options due to increased speed (e.g. take early payment discounts when invoice processing becomes faster and more efficient).
An information system design concept whereby the system automatically processes information through various steps as long as information or transactions are determined to be valid or within an acceptable range.
For instance, automated 3-way matching of invoices is an exception-driven process. As long as the items, quantity, price and maybe other information on the invoice matches the referenced PO and associated receiving information – possibly within acceptable tolerances – the invoice is automatically authorised for payment without the need for any manual intervention. But if something does not match (an exception detected), a resolution process is automatically initiated – e.g. an email notification to the purchaser to review the invoice and state if it is correct or not. If the purchaser does not respond within a given amount of time or after a certain number of reminders, (an exception detected), someone in Accounts Payable may be notified to manually contact the purchaser.
This approach to system design enables the great majority of work to be done automatically while giving the organisation confidence that the right people will be notified to take action when necessary. This is one of the major ways eProcurement systems create process efficiencies.
A standardised process is a business process that is performed the same way every time by anyone that performs it. Standardised processes are essential to quality, efficiency and transparency. In theory, this can be achieved through documented policies and procedures. But in reality, information systems do a much better job of ensuring that processes are performed in a standardised way because they always ‘remember’ the right way and have no incentive to cut corners or skip steps.
For instance, a purchase-to-pay (P2P) system ensures that a standardised process is followed for pre-approval of all purchases requested through it, and an eSourcing system ensures that someone from Legal inserts the current legal boilerplate into any RFx document before it is released to potential suppliers if that is the organisation’s policy.
Process standardisation is one of the significant benefits of eProcurement systems.
Punch-out is a term used to describe the process by which a purchase-to-pay (P2P) system can allow an employee to go to an eCommerce website, find and select an item they wish to buy, bring that item back into the P2P system along with pricing and other information as a purchase request, pass that request through the normal approval rules/process, and make the purchase once approved.
The detailed mechanics of this process can vary by the situation and may be done a bit differently in various P2P systems, but the basic process is to allow the use of external websites within the approval controls of P2P. This provides convenience and choice for staff while still maintaining compliance with approval policies. This approach may or may not leverage negotiated pricing agreements, so should be used carefully.
From CIPS: The generic name for market enquiries. This reflects the fact that whether the enquiry is for information [RFI], quotation [RFQ], proposal [RFP] or tender [RFT], there are some common characteristics. The most obvious common characteristics are that a common enquiry document is sent to multiple respondents, aspects of the enquiry require a response, and the responses need to be collated, recorded and evaluated in a systematic and transparent way.
Abbreviated from CIPS: Risk is the potential for a chosen course of action or unexpected external or internal events to lead to an undesirable outcome. ISO 31000 defines risk as 'effect of uncertainty on objectives'. This definition mentions uncertainty as the cause of risk, and includes events that may not happen, as well as perceiving risk as creating both negative and positive impacts, rather than simply negative outcomes.
Risks in the procurement process can occur in a variety of dimensions: the operational risk of non-performance, the technical risk of poor quality performance, the commercial risk of uncompetitive markets and the reputation risk of unsustainable practices by suppliers are just a selection of potential operational risks.
Supplier qualification, selection and appraisal processes, as well as contract management processes are all part of risk management as they help organisations identify, avoid and mitigate supplier risk.
Captured savings is the actual savings realised when a purchase is made against a contract with negotiated pricing below what would it would have been without the agreement. This is the true savings contributed by the procurement function.
Created savings is simply the opportunity to capture real savings. Savings creation is what Procurement does when negotiating a supplier contract to include prices that are below normal market prices. This creates the opportunity for the organisation to capture actual savings as they buy against that contract. This is why source compliance (buying from the right supplier and contract) and the effort to maximise non-contract spend is such an important aspect of Spend Control. There is no actual savings capture unless negotiated contracts with qualified suppliers are used to meet the needs of the organisation.
A searchable file is an electronic file that can be searched by various key words or key data to find records that meet that criteria. For instance a centralised contract repository can be searched for all contracts with a given supplier or for a given spend category or that expire before a specified date. Similarly, a central supplier directory can be searched by name (or key words in the name), location (e.g. city), spend category, designation (e.g. SME, minority owned, etc.). This is one of the fundamental benefits of electronic records and well-designed eProcurement systems.
Self-service is a concept we are all becoming very familiar with. Every time you look up your bank account balance, withdraw cash or make a deposit at an ATM you are doing a self-service process. The ability to do that helps both you and the bank – you can get money any time you want it, and the bank needs fewer tellers to service its customers because more of them are serving themselves. It’s the same in the world of eProcurement. When an employee can find what they need in an approved supplier catalogue and submit it for approval rather that submitting a requisition to a buyer to find a suitable item for them, they are performing a self-service process that is both faster and more satisfying. When a supplier can go to an organisation’s supplier portal, log in, and instantly see the status of their invoices along with expected pay dates, they are performing a self-service process that gives them the information they want at any time while saving the time someone in the buyer’s AP department would have needed to take answering a phone call or email. Multiply that situation by the hundreds of times they happen in a week, and it adds up to a lot of time saved by both parties.
The Internet combined with robust eProcurement systems is opening up more and more opportunities for self-service processes that ultimately save immense time and cost.
The sourcing pipeline is the prioritised list of spend categories the procurement team has identified to pursue using strategic sourcing methods.
Strategic sourcing is the process of proactively identifying the best suppliers and negotiating advantageous agreements to deliver best value to the organisation for targeted spend categories. The categories on which to perform strategic sourcing are usually determined through a spend analysis process that results in a sourcing pipeline for a given period – often a year. Strategic sourcing is in contrast to tactical sourcing, which is where a supplier is selected and agreement made for a particular one-time purchase, rather than for ongoing supply.
Spend analysis is a broad-based process for analysing all or a portion of an organisation’s spend over a period of time for the purpose of better understanding the organisation’s spending patterns. This improved understanding is then used to drive strategic sourcing, risk management, compliance management and purchase-to-pay (P2P) process improvement efforts. In essence, spend analysis is the only practical way to measure the actual results of an organisation’s overall Spend Control process, and to make continual improvements to that process.
Spend analysis can be relatively straightforward with the right supporting systems. That includes:
A system (e.g. P2P) or series of systems that capture actual spend activity that is accurate and reasonably well coded
A repeatable spend data acquisition, cleansing, enrichment and classification process that brings in data from all spend sources and prepares it for standardised analysis.
Access to the resulting spend data repository by analytical tools designed or well-suited to the particular purpose of the analysis of spend. This includes views by category, organisation structure, supplier, supplier types, other dimensions and meaningful spend-related KPIs. It should also include the ability to drill down from summaries to detail transactions to better understand the root cause of results.
Automatic notices and alerts that tell the right people when certain KPI thresholds or tolerances are exceeded – preferably including mobile device capabilities.
A good spend analysis system is an essential element of an end-to-end Spend Control and eProcurement system.
Spend visibility is the ability for managers – especially financial managers and department managers with budget management responsibility – to easily access past, in process, and potential (request submitted but not yet approved) spend within their realm of responsibility. Only with this level of visibility can managers truly manage budgets and cash requirements. See also ‘cost pipeline.’
An organisation’s addressable spend is that portion of spend where the supplier(s) used, the price and/or the overall value can be impacted through the sourcing activity. That generally includes all spend except payroll, taxes, depreciation and amortisation, rent, utilities, and maybe a few other categories where further savings are not possible. Everything else is fair game. Some would say it is the ultimate ‘size of the prize’ for Procurement.
Spend that is compliant with approval, source and contract usage policies. See ‘compliance’ (p8) and ‘spend under management’ (p8) for more detail.
Direct spend is generally defined as spend on such things as ingredients, materials, parts, components, assemblies, packaging and related items, and services that is accounted for under costs of goods sold (COGS) from an accounting perspective.
Indirect spend is generally defined as all of an organisation’s non-payroll spend other than direct materials, products and services that are used to produce or make available a product or service for sale. See also ‘spend direct’ (above) for more definition of what is not included in indirect spend. Indirect spend is considered by most to be the most broad-based, difficult to manage and important to manage portion of an organisation’s overall spend because it is made up of so many different categories of goods and services, and because so many people throughout the organisation are involved in purchasing those categories. The Purchase-to-Pay portion of Spend Control is generally focused on indirect spend, while the Source-to-Contract portion is generally focused on both direct and indirect spend.
On-contract spend is the value of purchases made using established contract pricing and other terms as established in the procurement process. Off-contract spend is the value of purchases made outside the realm of existing supplier contracts. Obviously, the goal of Spend Control is to drive more on-contract spend because contracts generally include advantageous pricing and terms that generate savings, and because contracts are generally established with suppliers that represent less risk to the organisation than suppliers that have not been methodically qualified. On-contract spend can be increased in two ways:
- By guiding more of the organisation’s purchases to be made against existing contracts. This is done through the controls and ‘guided buying’ done within the Purchase-to-Pay system portion of Spend Control
- By increasing the capacity for the procurement process to strategically source more categories, thus creating more contracts for the organisation to purchase against. This can be done by streamlining and improving the Source-to-Contract portion of Spend Control so that procurement teams have more time for sourcing activities
Today, most cloud-based software solutions are licensed on a subscription basis. That means that the user organisation pays a relatively small annual or monthly fee to use the software over a specified period of time rather than paying a large up-front fee and a periodic maintenance fee. Some software deployed on premise also can be licensed in this way as well. User companies usually commit to a subscription period of a year or more. Advantages of subscription-based licensing are:
- Without a large up-front cost, the ROI and other benefits of the software are better aligned with the licensing costs
- Subscription-based license fees can usually be approved and managed as an operating cost rather than a capital expenditure
- Maintenance and support fees are usually built in to the subscription fee to simplify things
- Subscription-based licensing usually makes it easier to add users incrementally as use of the software expands through the user organisation (e.g. Purchase-to-Pay rolled out incrementally to various departments or business units). This also helps to closely align value and cost
The terms supplier appraisal and supplier qualification are used interchangeably to mean the process of ensuring that a supplier has all of the right qualifications, certifications, insurance, quality assurance processes, etc. to be reasonably expected to perform as needed as a supplier for the category of goods or services the organisation would or does purchase from them. This is an important element of determining best value and managing risk. Suppliers are generally put through a qualification or appraisal process when first considered to be an approved supplier and are generally re-appraised periodically based on actual performance and re-checks of basic qualifications and certifications. Being qualified does not necessarily mean that a supplier has been selected as a/the preferred supplier in a sourcing process – it simply means they meet the fundamental qualifications to be selected – ideally in a competitive sourcing process such as a tender or a reverse auction.
Supplier directory, central
A central supplier directory is an electronic repository of all of an organisation’s information about suppliers. Ideally, this directory is maintained as a ‘single version of the truth’ about all suppliers and any systems that do not actually use this as their supplier master but contain supplier information (e.g. AP) are kept in sync by being fed additions and updates from this closely maintained central source.
See also ‘Supplier Information Management’ and ‘Supplier Relationship Management.’
Supplier engagement is often used as an umbrella term for all supplier interaction and commerce. That includes all communication throughout the lifecycle of a supplier relationship, from initial contact and qualification to sourcing activities, content management, contract management, and performance appraisals, as well as all purchase, invoice and payment transactions, and communication about financial matters such as payment status.
A tremendous amount of buyer time and effort goes into supplier engagement, which is why there is currently a lot of focus on streamlining that process via supplier networks, supplier portals and automated supplier relationship management processes.
Supplier information management (SIM)
Supplier Information Management (SIM) is a relatively new term used to describe the overall process of obtaining, maintaining and using supplier information. It usually implies establishment of a central supplier directory as ‘a single version of the truth’ about suppliers. And usually includes internal processes to feed additions, deletions and updates to any other systems where supplier information is held. It increasingly implies the use of supplier self-service capabilities via a supplier portal and other methods to maintain much of the information about suppliers as possible by the suppliers themselves. Done with proper controls and well-motivated supplier participation, that process creates far better information with far less effort on the part of the buyer.
Supplier network (public & private)
Supplier Network is a term that is used in very different ways by different solution providers and industry analysts today. Some supplier networks charge fees to participating buyers and/or suppliers; some do not. Some are open to any participants; some are by invitation only. Some are buyer/supplier neutral; some are buyer centric. Some can act as any or all of those models depending on the goals of individual participants. Some supplier networks are focused primarily on transaction passing (e.g. invoices and POs); others are focused more on buyer/supplier communication for information management and sourcing activities. The line between Supplier Network, Business Network, Invoicing Network and Marketplace are quite blurred today.
A general, all-encompassing definition you might use as a benchmark against which to compare any supplier network you are looking at might be: a multi-faceted communication and commerce network designed to connect buyers and suppliers in ways that remove time, cost and risk for both parties every day. One that replaces slow, expensive and inconsistent manual communication methods with fast, low-cost, electronic methods that help buyers reduce the cost of their purchasing and payment processes while at the same time helping suppliers of all types and sizes reduce the cost of servicing their customers.
Capabilities you might look for in a Supplier Network would be:
- A transaction hub for passing electronic POs, invoices and other transactions between buyers and suppliers
- Buyer and supplier portals to provide secure access to the networks capabilities for all participants
- eCommerce connections that make supplier websites and electronic catalogues available to buyers in a way that can be incorporated into buyers’ P2P systems
- The flexibility to act as either a public or private network for individual participants and trading communities
- A secure network that participants can use with confidence
There may be no supplier network that meets ALL of that criteria today, but you can still evaluate options using this framework.
In general terms, supplier on-boarding is the process of performing all of the right qualification processes and getting all the necessary information to establish a supplier as being approved and ready for an organisation to buy from. Supplier enablement is also sometimes used to mean the same thing – especially when supplier engagement is going to be performed though a supplier network or supplier portal. Suppliers are being ‘enabled’ to use the capabilities of those platforms on their end.
Supplier relationship management (SRM)
CIPS definition: Supplier Relationship Management (SRM) is the segmentation by buyers of the business relationships with their suppliers. The process involves reviewing the portfolio of suppliers, categorising supply relationships by their significance, devoting resources in proportion to the relationship’s significance and managing processes between the parties to realise the relationship objectives.
In terms of Procurement technology, Supplier Relationship Management (SRM) – or sometimes shortened to just Supplier Management – is a solution in the Source-to-Contract cycle of eProcurement that helps you to build and maintain a strong supplier base by structuring and streamlining the activities involved in the supplier lifecycle – from supplier recruitment, through qualification, on-boarding, and performance appraisal. It helps you reduce supplier risk and improve supplier relationships while reducing administrative effort. It makes supplier information readily available by consolidating it into a central supplier directory.
Supply chain financing
A set of technology-based business and financing processes that link the buyer, seller and potentially third parties to offer beneficial financial solutions and improve business efficiency. Supply chain finance (SCF) provides short-term credit that optimises working capital for both the buyer and the seller. Supply chain finance generally involves the use of a technology platform in order to automate the settlement process. The growing popularity of SCF has been largely driven by the increasing globalisation and complexity of the supply chain, especially in industries such as automotive, manufacturing and the retail sector and the diminished level of traditional finance available to the vast but underserved SME market following the Global Financial Crisis.
A particular form of supply chain financing involves the acceleration of settlement of invoices before the due date for settlement. There are many terms for this including ‘Accelerated Payments’, ‘Early Payments’, ‘Spot Reverse Factoring’ or ‘Dynamic Discounting’ where the supplier is offered the opportunity for or contracted to an early settlement in exchange for a discount on an invoice amount. The amount of the discount can be determined dynamically based on how early the supplier would like to be paid or can be fixed or can be negotiated on an invoice by invoice basis. Both the buyer and supplier may or may not choose to participate in the accelerated settlement and discount or may be contracted to participate. The finance to support the accelerated settlement can be provided by the buyer or a third party or a combination.
The term ‘tail-spend’ comes from the well-known Pareto principle – that 80% of spend will come from 20% of suppliers; and that, conversely, 80% of suppliers will account for 20% of spend; typically across a wide range of categories.
The percentage and nature of tail-spend varies from organisation to organisation, but it nearly always displays a number of similar characteristics:
- A large number of categories (that rarely include direct materials)
- A disproportionate level of spend from the farthest-flung locations within the organisation
- Suppliers that no one in Procurement has heard of or worked with
- Non-compliance and maverick spend are rampant
- Many categories will be low value, but not all; many will have high transaction volumes
Tail-spend is an area that is often ignored – or at least not closely managed – because there are so many suppliers and the idea of tackling them can seem overwhelming. Procurement professionals spend the majority of their time managing the big core areas of spend where the numbers are larger and savings are more quickly won.
However, significant savings can be realised from greater focus on tail-spend by applying a professional, methodical approach; and by using the right combination of eProcurement technology.
The general definition of tolerance is: “an allowable amount of variation of a specified quantity, especially in the dimensions of a machine or part.” In terms of Procurement technology, tolerance is usually a parameter that can be applied to a comparison process to allow values that are not 100% equal, but that are very close to equal, to be considered to be equal. A primary example is in the 3-way invoice – PO – receipt matching process. A good eProcurement system will allow an organisation to apply a tolerance (usually a percentage) to the matching of quantity and/or price. The idea is that very small discrepancies will cost more to resolve than they cost to accept. This is one way eProcurement systems are fine-tuned to operate well in the ‘real world’.
A transaction hub is a cloud-based, third-party operated, central clearinghouse for transactions. In the Procurement world, they are usually used for sending invoices from suppliers to buyers in electronic format. POs, acknowledgements and payment notices may also be processed through the same hub. The value added by the hub is to make changes necessary to transform transactions from one party’s format to another, and to distribute a file of transactions from one party to many. That greatly simplifies system requirements for both parties.
CIPS definition: A label given to a change program that seeks to align the procurement process in an organisation more closely with the organisation’s overarching strategy through a range of initiatives including people, process and technology.
The deployment of eProcurement solutions is almost always an important aspect of transforming the full Spend Control process, including Procurement, Accounts Payable and related processes.
User experience (vs. user interface)
In terms of information technology, a User interface (UI) is what you see when you use a software program. User experience (UX) is the overall feeling and result you get from using that program. UX focuses on having a deep understanding of users, what they need, what they value, their abilities, and also their limitations. UX best practices promote improving the quality of the user’s interaction with and perceptions of a software program and any related services.
A leading UX authority says that, in order for there to be a meaningful and valuable user experience, information must be:
- Useful: fulfil a need Usable: easy to extract and use
- Desirable: design elements evoke emotion and appreciation
- Findable: content is navigable and easily locatable
- Accessible: content needs to be accessible to people with disabilities
- Credible: users must trust and believe the information
Or… you might think of it this way:
- UI is the saddle, the stirrups, and the reigns
- UX is the feeling you get being able to ride the horse, and rope your cattle
In general, workflow is a sequence of industrial, administrative, or other processes through which a piece of work passes from initiation to completion.
Electronic workflow is “the computerised facilitation or automation of a business process, in whole or part”. It is concerned with the automation of procedures where documents, information or tasks are passed between participants according to a defined set of rules to achieve, or contribute to, an overall business goal. Whilst workflow may be manually organised, in practice most workflow is normally organised within the context of an IT system to provide computerised support for the procedural automation.
Electronic workflow is one of the most important and valuable design concepts incorporated within good eProcurement solutions. It is used to standardise, streamline and ensure completion of business processes involving multiple people and systems. For example, workflow is used to take a purchase request submitted by an employee and route that request to the person or people that need to approve that request based on the employee’s role as well as the nature and cost of the requested purchase.