In recent years, the procure-to-pay process (or the “P2P process”) has become best practice for both businesses and their suppliers.
How do we know? The growth of the procurement software industry provides a pretty good indication – by some counts, it’s forecast to expand by nearly ten percent between now and 2026, reaching almost $10 billion in revenue.
If you’re involved in procurement – and most businesses are – P2P is a term you may have heard thrown around, and it’s one you’ll want to understand. Researchers at Gartner think that in three years, as much as 80% of B2B sales interactions between suppliers and businesses will take place digitally. There’s a safe bet your competitors are amongst that number.
So, why are market researchers and procurement professionals so bullish about procure-to-pay? Let’s start by defining the term.
What is a procure-to-pay process?
It’s clear that it’s an important concept, and thankfully it’s not too hard to understand what a procure-to-pay process is.
In simple terms, the function of a procure-to-pay process is to align your procurement team with your accounts payable team – ensuring that those requesting goods or services for your business are working in tandem with the people that sign off on procurement and purchases.
P2P takes your business from initial requests to the final payment of your suppliers. It does so by formalizing everything in between to ensure that you’re avoiding errors, maximizing potential savings, making payments on time and getting as much transparency as possible into your supply chain.
With some of the watchwords for the global supply chain being “disruption” and “delays” over the next few years, a transparent and efficient P2P process starts to sound even more valuable.
The typical procure-to-pay process flow
Every business’s supply chain will look slightly different, but there are a few steps that are common to every strong procure-to-pay process flow.
- Identification of required goods or services
- Supplier selection
- Purchase order creation and approval
- Receipt of goods or services
- The “three-way match”
- Invoice approval and payment
Identification of required goods or services
Employees working in a specific department (i.e. marketing, operations, sales, etc.) identify a need for goods or services, and submit a purchase request to their manager or the procurement team.
That purchase request is then either approved or denied based on business need, cost, and budget. Depending on who it’s been sent to, it may need to be passed on to a more senior procurement professional for revision or approval. For smaller teams, this may all be handled by a single employee.
At this stage, the “approver” should review other open purchase orders and make a comparison. If there are similar orders in progress, it may be possible to consolidate the procurement.
Identifying preferred vendors is part of the “source-to-pay process”, another term you may have encountered. It’s similar to P2P, but the source-to-pay process deals specifically with a business’s interactions with suppliers.
A mature procure-to-pay process will involve a list of pre-approved suppliers that have been selected based on past performance, favorable pricing and existing relationships. If you’re just at the start of your procurement journey, though, this is the stage at which you or your team will identify those suppliers for future purchases.
This is one of the many areas in which a fully joined-up procure to pay process flow will come in handy. Integrated procurement and accounts payable teams are better able to identify suppliers that align with compliance, logistical and social responsibility requirements for the entire business.
Increased transparency, exponential savings
A lack of cross-team communication can leave hundreds of thousands of dollars on the table. Independent supply chain consultant Daniel Barnes found that misalignment between one of his clients’ technical teams and the procurement department was leading them to waste potential millions on a supplier that was a bad fit for the organization’s needs.
By bridging the gap between the two departments and encouraging a collaborative approach to procurement, Barnes was able to save them between seven and nine hundred thousand pounds, and identify suppliers whose products better served their technical stakeholders. It’s a procure-to-pay example that should turn your finance team into communication evangelists.
Those logistical requirements matter. If your accounts payable team isn’t involved in supplier selection and run into confusion when it comes time for payment, you could be missing out on healthy supplier relationships that have a knock-on effect when it counts the most:
“In the event of a larger problem, such as capacity constraints during the pandemic, suppliers will prioritize customers known to be prompt payers.”
– Andrew Allen, CIPS Supply Management
Purchase order creation and approval
Once a potential supplier is identified, the procurement team will send a request for quotation, or a “request for proposal” (RFP). This can result in negotiations concerning:
- Discounts – for quantity purchases or return business, in many cases;
- Delivery terms and conditions;
- Shipment and insurance costs;
- Payment terms and expectations;
- Year-over-year discounts.
If everything’s above board and agreed-upon, the purchase request is turned into a formalized purchase order (PO) that needs to be internally approved. If you use procurement software, the supplier can remotely download and acknowledge POs to speed this step up.
Receipt of goods or services
It’s best practice for suppliers to send an advance shipment note to your business as soon as your goods are shipped. This note should contain the shipping date, the transporter’s name, tracking numbers, packing weights, your address and the PO number.
Once the goods arrive, your receiving staff should check the delivery note to confirm that everything’s in order and acknowledge receipt. This will then kick off an inspection of the material for quantity and quality – if anything’s incorrect, it should be flagged on receipt.
The accounts payable team will then process the invoice and enter it into the procurement system.
The “three-way match”
In the context of a procure-to-pay process, a “three-way match” is arguably the most important step. It’s the point at which the efforts of the procurement and accounts payable teams come together, and ensure that suppliers have delivered what was ordered.
The accounts payable team compares the purchase order, invoice and delivery documents. If there are any discrepancies, the supplier or procurement team are involved. Without a successful match, invoices won’t (and shouldn’t) be paid.
Invoice approval and payment
Once the three-way match has taken place, the accounts payable team is clear to pay the supplier for their goods and services, and the procure to pay process is complete.
Or is it? Some people do call it a procure-to-pay cycle, after all. If you really want to make the most of P2P’s benefits, you’ll want to iteratively improve your workflows.
Here’s where to start.
How to improve the procure-to-pay process
It’s one thing to know what the steps that make up a strong procure-to-pay process are, and another to start optimizing them.
Start by auditing your current process, and use the previous section as a checklist. Go through each step, and ask yourself the following:
- Who are the blockers? Often this will be the stakeholders responsible for approving or denying purchase requests and payment. Is the approval flow as quick as it should be, or are you keeping employees and suppliers waiting?
- Do all stakeholders have visibility? Transparency is one of the major goals of P2P. It’s the mechanism through which inefficiencies and opportunities for savings come to light.
- Is it possible to automate this step? In many more cases than you might expect, the answer is yes – from purchase orders to three-way checks. All approvers should need to do is make a few clicks. Procurement software has skyrocketed in popularity for its ability to eliminate human error and ensure suppliers are paid faster.
Automate, record, analyze and improve
That last point is what those bullish procurement software statistics we mentioned earlier are all about. They’re indicative of a global trend towards automating repetitive procurement tasks. If you’re a procurement professional, though, don’t start fearing for your job!
Procurement experts get to avoid tedious admin and checks, and use their skills for problem-solving and building stronger relationships with suppliers – high value tasks that contribute directly to the business’s bottom line. There’s peace-of-mind to be had, too – integrations with tools like Slack make for clear alerts when approval is needed.
The digital approach feeds into transparency as well. Manage your entire procure to pay process with a single platform, and you’ll have gathered all of your supply chain data in a single, searchable database.
Case study: Automation for large-scale growth
That’s incredibly valuable as your business grows. Procure-to-pay examples are plentiful, so we’ve drawn on one from our own experience. We’ve seen a biotech startup go from a few purchases a week to hundreds after receiving Series A funding, and their previous procure to pay process (Excel spreadsheets and word-of-mouth) offered little visibility into the status and health of their supply chain.
To avoid suffering from success, they adopted P2P software and were able to consolidate their increased efforts on a single platform. Automation has answered those three questions above – their Accounts Payable coordinator now does less invoice-chasing and doesn’t need to worry about colleagues blocking progress, despite the huge increase in purchases.
As an added bonus (that’s fast becoming a non-negotiable), that platform should have the ability to analyze said data and identify potential improvements for you. Suddenly, evaluating vendor performance or spotting a discrepancy between purchase orders and invoices takes seconds instead of hours. With your procurement and accounts teams at the helm, that advice can be interpreted and applied.
Up-front investment, long-term returns
Managing and optimizing the full procure-to-pay process can seem overwhelming. Supply chains are never as simple as many of us would like them to be, but thankfully, the philosophy of P2P is that no one person should manage procurement in a vacuum.
Consult with your team, external stakeholders and procurement professionals today, and you’ll save valuable time and money tomorrow.
Editor's note Original publish date: 3 April, 2013 Original author: Kenneth Loi We've since updated and republished this blog post with new content.
Procurify Procure to Pay Software Features
Procurify software includes dozens of procure to pay software features covering Request & Approve, Purchase & Receive, Accounts Payable & Payments, Dashboards & Mobile, Spending Cards & more.