What is Procure to Pay (P2P)
Procure to Pay, also known as purchase to pay or “P2P”, is a process that organizations follow when procuring the goods and services it needs to do business. Procure to Pay is a process that includes requisitioning, purchasing, receiving, paying, and accounting for goods and services and includes all the steps between placing an order with a supplier through to payment. Procure to Pay solutions often include technology like ERPs, and other procurement software.
The P2P Process
The Procure to Pay process includes:
- Identifying a need. The procurement team identifies the need for a new good or service.
- Requisition is created. A formal purchase requisition is created.
- Purchase requisition approval. Submitted purchase requisitions are reviewed by department heads or procurement officers. Requisitions can either be approved or rejected. Incomplete requisitions are always rejected for correction and resubmission.
- Create a purchase order/spot buy. If the requested goods/services are considered low-value commodities, one-time unique purchases, or unmanaged category buys, a spot buy will be performed. Otherwise, purchase orders are created and approved.
- Purchase order approval. Purchase orders are checked to ensure the specifications are accurate and real. Once approved, orders are sent to suppliers. After reviewing the order, a supplier can either approve, reject, or negotiate the order. When an officer approves a purchase order, a legally binding contract is activated.
- Receipt of goods. Once the supplier delivers the goods/services, the buyer inspects the delivered goods/services to ensure they comply with contract specifications. The goods/services receipt is then either accepted or rejected based on the standards specified within the purchase order or contract.
- Evaluate supplier performance. Supplier performance is evaluated based on how well the supplier followed the contract specifications. Qualifiers such as quality of the goods/services, timeliness of delivery, service, contract compliance, responsiveness, and Total Cost of Ownership (TCO) are taken into account. Non or poor performance is flagged in existing information systems for further consideration.
- Invoice approval. Once the goods receipt is approved, a three-way match between the purchase order, goods received, and the vendor invoice is performed. This ensures that the vendor delivers and is charging for what the buyer specifically purchased. If no errors are found, the invoice is approved and sent to the finance team for payment disbursement.
- Vendor Payment. Once the finance team has received an approved invoice, the finance team will process payment according to contract terms. Any contract changes will be accounted for. There are generally five types of payments made to a supplier; advance, partial, progress or installment, final and holdback/retention payments.
Procure to Pay Challenges
Ensuring your company’s P2P processes are smooth and orderly is vital to the success of your business. The efficiency of procurement is ultimately the responsibility of sourcing and procurement departments. These departments have to source suppliers, manage contracts, minimize spending, and find ways to use automation in the purchasing cycle.
Many industries face challenges with the Procure to Pay process, but there are a wide variety of solutions being created and deployed to address them, especially in the Software-as-a-Service (SaaS) realm. While the challenges may vary from industry to industry, the below challenges are generally encountered regardless of sector:
Disparate systems and processing.
Large departments within the same organization often have their own sets of tools and processes to manage different steps in the P2P process. This makes data consolidation difficult. Sourcing, procurement, and accounts payable are all handled by different departments and separate systems. These systems are specifically optimized to suit each individual departments’ needs. Companies often deploy more than one ERP system, which creates data silos. These data silos make it very difficult to integrate data from multiple departments and create reliance on manual data input. Managing manual data, like manual data entry and paper invoices creates inefficiencies that costs organizations both time and money. An effective Procure to Pay solution will help eliminate data silos and increase cross-departmental communication.
Lack of compliance.
Governance and compliance of procurement processes tend to be rather static and unchanging. Spend approvals are often seen as unnecessary bureaucracy, which often results in ad-hoc and non-contract buying. This lack of both governance and compliance increases maverick spending, which is spending done without following the company’s procurement policy. This maverick spending, caused by purchasing from out-of-contract or non-preferred suppliers, causes your company to lose out on the benefits and cost savings that were negotiated with preferred suppliers.
Lack of stakeholder buy-in.
Management often sees procurement processes as unimportant to overall business operations and success. This means that improving procurement systems with technology like automation is low-priority. Inefficiencies multiply throughout the procure-to-pay process simply due to lack of consideration or use of outdated technology.
Poor systems training and adoption.
Most Procure to Pay solutions and procurement software is cumbersome and difficult to use. Users are normally poorly trained in using the software as well. Users expect easy to understand processes due to experience with B2C platforms like Google and Amazon, but this is not often the case in B2B processes. Procure to Pay software is often designed by procurement professionals who are intimately familiar with the intricacies of procurement. These programs are often full of features and lack focus on usability. Inadequate user training coupled with unfamiliarity with procurement policy can lead to reluctance in adopting up-to-date P2P technology.
Change management is difficult to handle in any area of an organization, let alone in procurement. Users are not often consulted about system changes or updates, and this leaves users frustrated. When making changes to procurement systems, it is vitally important that users and staff be consulted. If your staff isn’t consulted, your company may waste valuable time and money implementing a system that was a poor fit in terms of both user capability and solving departmental problems. Assessing both user needs and current problems will inform your choice regarding what new systems and technologies would be of benefit to your company.
Solving P2P Problems with P2P Best Practices
Automate your processes.
Automating your P2P processes reduces operational costs while increasing efficiency. Automation ranges from electronic purchase requisitions that automatically get turned into purchase orders once approved, automated approval routing to e-invoices. When you automate these processes, your organization and your suppliers reap the benefits of increased efficiency. Adopting automation allows your procurement team to focus its efforts on activities that add value to the organization while enabling the accounts payable department to be more productive and reduce cost.
Automating your P2P processes also improves supplier relationships throughout your supply chain by ensuring timely payments. You can significantly reduce late fees and even capitalize on early payment discounts if available, both of which add to overall cost savings.
Don’t underestimate user experience.
Investing in technology is absolutely essential for streamlining and reducing costs, but if your employees don’t use the technology the way it’s intended to be used, your ROI will be minimal at best. If the procurement team finds your new procure to pay solution difficult to use, they will resort to familiar methods or other workarounds, rendering your investment ineffective. Your procure to pay solution should provide an intuitive and responsive user experience. As you test various solutions, you should conduct a usability assessment with a framework like the system usability scale (SUS). Using a framework like this to assess software will give you an objective rating and evaluation so that you can accurately compare your options.
Use cloud technology.
Data security is of the uppermost importance. Cloud technology has come a long way, and implementing it can benefit your business in a number of ways. Cloud technology helps standardize business processes, improve efficiency, and reduce cost. It also helps support change management since support packages and other updates can be applied system-wide quickly.
Keep things mobile.
Procure to Pay solutions have traditionally been handled in-house with a P2P web portal or with digital forms. In today’s work environment, procurement professionals expect to have access to procurement systems anytime, anywhere. This means companies either need to develop or use procurement software that is not device-specific. A mobile-first approach keeps the user experience simple and allows for an easy, intuitive buying experience. Allowing access anytime, anywhere increases efficiency and reduces turnaround time on procurement requests.
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