Introduction to Procure to Pay
• Explain the concepts of the Procure to Pay business
processes.
• Create a supplier price book.
• Create and process a purchase contract.
• Create and process a purchase order.
• Execute receipt procedure.
• Create and process a purchase order.
• Match a purchase invoice to a purchase order.
• Create and process a return purchase order.
• Match a purchase invoice to a return purchase order.
Procure to
Pay
Create purchase
requisitions --> send to Seller
Purchase agreements process
Create Supplier price books
Purchase contracts
Create request
for quotations --> send to Seller
create purchase
orders --> send to Seller
Purchase order master data
Specifying purchase order types
Specifying purchase offices
Specifying approval rules
Purchase order procedure
Approve purchase orders
Print purchase orders
Release purchase orders to Warehousing
Receive the purchased goods
Pay for the purchased goods
Process purchase orders
purchase
schedules to acquire materials --> send to Seller
Receive Materials
Receipts and inspections
Receive ASN
<-- From Seller
Goods received note
Receipt of goods
Run number
Generate and put away inbound advice
Storage list
Update Purchased Item Inventory
Receive Invoice
<-- From Seller
Matching purchase invoices to purchase orders
Return Purchase
Order --> send to Seller
Return inventory purchase orders
Ship returned materials
Create return invoice
Reject Return
Order <-- From Seller
Accept Credit
Notes <-- From Seller
Account Paybles
<-- From Seller
Procure
to Pay or P2P in procurement is
defined as an automated system that streamlines the process of requisitioning,
purchasing, receiving, and paying for goods and services. It involves
end-to-end integration with accounts payable, invoice management, and
vendor payment systems to ensure compliance, accuracy, and
efficiency. The Procure-to-Pay process is carried out to centralize procurement
and control the entire life-cycle of a transaction to gain financial visibility
across the organization.
Procure to Pay is the stream of cross-functional business
processes that covers the creation and management of purchase requisitions,
request for quotations, purchase orders and purchase schedules to acquire
materials for re-sale or internal production demand. Integration with Supplier
Exchange provides electronic collaboration with your suppliers. The return to
vendor process is integrated with the non-conformance process in Quality.
What exactly is Procure to Pay?
The
process of linking purchasing and accounts payable systems to
increase efficiency is known as procure-to-pay. It is part of a wider procurement
management process that has four stages:
choosing products and services, enforcing compliance and order,
receiving and reconciliation, and invoicing and payment.
Procure-to-pay
software solutions may help you improve compliance and control among suppliers,
contracts, regulations, buyers, and accounts payable by digitizing
your procurement process. Process automation using procure-to-pay software may
enable firms to acquire from chosen suppliers at agreed pricing without the
human paperwork and spreadsheet difficulties.
- Actively manage and
improve overall spending.
- Reduce mistakes by
consolidating the majority of manual commerce operations.
- Make catalog
maintenance more efficient, saving time and resources.
- Facilitate the
approval of new suppliers promptly.
- Increase the value
of sourcing discussions by driving
savings to the bottom line.
What procedures are covered by Procure-to-Pay?
Requisitioning,
purchasing, and payment are the three key stages in the procurement
lifecycle covered by the phrase Procure-to-Pay, also known as Purchase-to-Pay
or P2P.
The
Procure-to-Pay procedure includes everything from product research to
updating accounts payable. Between these two stages, the
following activities may be found :
- Conduct a product
search
- Add items to a
shopping cart
- Make a purchase order
requisition.
- Completing and
authorizing the purchase
- Produce a purchase
order.
- Take delivery of
the products
- Verify that the order
is in order.
- Recieve the bill
- Process and reconcile
the invoice
- Make
the payment on the invoice
- Make any necessary
changes to the accounts payable.
Procure-to-Pay
Process Flow
The procure-to-pay
process flow (also known as the procure-to-pay cycle) includes
various actions, such as :
Procure to Pay Process
1.
Identification is required.
Identifying the need for
certain products and services, as well as the available money for the
purchase.
2. Purchasing
goods
Researching vendors, checking up on
items, and negotiating costs are all possible steps in this process. As a
result, businesses can source items from an approved catalog or by sending out
a request for quote (RFQ) to suppliers, asking them to specify what products or
services they can give and how much they would cost.
3. Requisition
When a vendor has been chosen,
the buyer will enter the requisitioning step to formalize consent for
the purchase.
This is accomplished by preparing and
approving a requisition order, an internal document used when a purchase is
required. The products being purchased, as well as the vendor’s quote
and any delivery instructions, will normally be included in the requisition
order.
4. Placement of
Procurement Orders
When a customer places an order, he or
she will issue a purchase order that contains information such as the
kind, price, and quantity of the items or services being purchased. The
supplier will be notified.
5. Order
Acceptance
Receiving items from the supplier,
comparing them to the purchase order’s specifications, identifying any damage
that may have happened during shipment, producing a receipt, and
putting information into the appropriate systems are all part of this
process.
6. Invoices from
vendors
The supplier will send
the buyer an invoice that specifies the amount due and the due date.
Purchase orders and invoices must be reconciled, and applicable systems must be
recorded.
7. Payable
Accounts
Paying supplier bills on time and
accounting for transactions are all part of the accounts
payable process.
The purchasing business will need to
ensure that vendor payment data are up to date as part of this
process, as well as take precautions to prevent accounts
payable fraud.
8. Reporting
After the supplier has been paid, the
firm may evaluate the process to see if there are any areas where it can be
improved in the future.
Procure-to-Pay
Process Steps
Procurement management within a
purchasing company can benefit significantly from e-procurement, which
includes :
Steps in Procure to Pay Process
1. Choosing
products and services
Employees choose specifications for
items and terms of reference or statements of work for services based on
previously determined company needs. After that’s taken care of, they select
the necessary components from supplier catalogs or other available sources.
2. Creating
purchase requisitions is a time-consuming process.
Purchase requisitions (also known as
purchase orders) are official requests for products or services
(including subcontracts and consignments) that are required for company
operations. The requestor fills out the purchase information, double-checks
that it complies with administrative regulations, and then submits the PR for
approval.
3. Purchasing
authorization
The approval chain is then reviewed
and either authorized, rejected, or sent back to the originator for adjustment
by team leads, department heads, procurement officials, or top management
(depending on the organization’s structure). The majority of the choice is
based on the requirement assessment and the available money.
4. Ordering
The requester would normally build a
purchase order from the accepted requisition and deliver it to the designated
vendor. The PO becomes a legally enforceable contract after the supplier
acknowledges the order. The employee, on the other hand, may execute a spot buy
if the purchase is one-time, from an uncontrolled expenditure category, or of
low value. To guarantee compliance and specification correctness,
certain companies may have a distinct approval system for purchase orders.
5. Goods and
services are received and inspected.
To evaluate the
supplier’s performance, the customer should inspect the items or check
services after delivery. For the product receipt to be accepted by
the buyer, quality, delivery schedules, Total Cost of Ownership, and
other metrics indicated in the PO must conform with the contract
requirements.
6. Receiving the
invoice and doing the reconciliation
It’s time for a 3-way match between
the PO, the receipt, and the invoice when the responsible employee authorizes
the products and services receipt. The invoice passes through the
review process and is sent to the finance department for payment if
there are no issues. In the event of a discrepancy, the firm rejects the
invoice and returns it to the supplier with a reason.
Procure to Pay
Cycle
The Procure-to-Pay cycle refers to the
end-to-end purchasing process’s repeated consecutive steps done in tight order.
Requisitioning, purchasing,
and payment are all covered under the procure to pay procedure.
The procure-to-pay cycle isn’t meant
to speed up the vendor payment process because clearing bills faster
hurt the company’s cash flow and prohibits them from keeping their
cash for as long as feasible.
Procure to Pay Cycle
Benefits of
Procure-to-Pay (P2P) solutions?
Users are presented with suppliers’
items (through Punch-Out catalogs, e-catalogs, and APIs) before the procurement
and finance processes are digitized, automated, and enhanced. They include
actions like control, verification, validation, and document management,
allowing businesses to have more control over their purchases and increase
efficiency.
As its name indicates, a
Procure-to-Pay (or Purchase-to-Pay) system is a fully integrated solution
designed to enable an end-to-end process that starts
with products and services requisitioning and concludes with
ready-to-play files for upload into an accounts payable system. To
enable suppliers to submit invoices electronically, procure-to-pay systems
employ a scan-and-capture service, a supplier portal, and/or a multi-enterprise
network. Procure-to-Pay systems enable purchase-order-to-invoice matching and
processing for invoices that don’t match or when products are
returned, in addition to fundamental e-procurement features (such as
e-requisitioning, approval workflow, and e-catalog management).
Read More:- Spend Analysis – Comprehensive Guide to Procurement
Spend Analysis
Advantages of
using a Procure-to-Pay System
Procure-to-Pay systems can help
procurement departments improve their performance by :
Enhancing the
efficacy of processes
Manpower costs, processing times, and
dangers are all reduced by automating procedures.
Gaining more
control and visibility
Consolidating and
collecting data allows businesses to have a better understanding of
their spending and exert more control over it.
Teams’
upskilling
Procurement teams may focus on
objectives with more strategic value for the firm rather than spending time on
manual and repetitive administrative activities.
Procurement divisions can focus on value-added
responsibilities like sourcing, innovation, end-user intimacy, and
strategy since the Procure-to-Pay process is very simple to automate.
The
Procure-to-Pay Process Flow
Procurement executives select to
complete the most important steps of the procure-to-pay process based on
corporate practice and the demand in the issue.
Simfoni’s
Procurement technology and solutions can help with this. You may
tailor your flow to your company’s requirements. However, here’s an
example of a basic procure-to-pay method.
Step 1:
Determine your requirements.
With the support of cross-functional
stakeholders, develop and define the business needs as the first stage in the
procure-to-pay process. Procurement teams draw out high-level specifications
for goods/products, terms of reference (TOR) for services, and statements of
work after a legitimate requirement is recognized (SOW).
Step 2: Create
requisitions.
A formal purchase requisition is
generated when the specifications/TOR/SOW are finalized. After verifying that
all essential administrative criteria are satisfied, the requester submits the
completed purchase requisition form.
From ordinary purchases to
subcontracts and consignments, requisitions may be produced for any sort of
procurement.
Step 3: Approval
of the purchase requisition.
Department heads or procurement
officials evaluate purchase requisitions that have been submitted. After
reviewing the requirement, checking the available budget, and authenticating
the buy request form, approvers can either approve or reject the requisition.
Purchase requisitions with missing information are returned to the
originator for rectification and resubmission.
Step 4: Make a
purchase order (PO) or a one-time purchase.
A spot buy can be done if the
requested goods/products are unmanaged category buys, one-time unique purchases,
or low-value commodities. Purchase orders are generated if purchase
requisitions have been authorized.
Step 5: Approval
of the purchase order.
To verify the legality and correctness
of specifications, purchase orders are now passed through an approval loop.
Purchase orders that have been approved are subsequently sent to vendors.
Vendors can approve, reject, or initiate a negotiation after examining the
purchase order. A legally binding contract is activated when an officer
authorizes a purchase order.
Step 6:
Receiving the goods.
The buyer inspects the
supplied goods or services to confirm that they comply with the contract
requirements after the provider delivers the promised goods or services. The
goods receipt is then authorized or denied depending on the purchasing contract
or purchase order’s specifications.
Step 7:
Performance of the supplier.
The
supplier’s performance is assessed using
the information gathered in the previous stage. Quality, on-time
delivery, service, contract compliance, responsiveness, and Total Cost of
Ownership are all issues to consider (TCO). For future reference,
non-performance is reported in existing rosters
and information systems.
Step 8: Approval
of the invoice.
A three-way match between the purchase
order, the vendor invoice, and the receipt of the goods is done after a goods
receipt is accepted. The invoice is authorized and sent to the finance team
for payment distribution if no problems are discovered. In the event
of errors, the invoice is denied and returned to the seller with an
explanation.
Step 9: Make a
payment to the vendor.
The finance team will execute payments
by the contract conditions after an invoice has been accepted. Any contract
revisions or financial security liquidation evaluations will be considered.
Advance, partial, progress or installment, final, and holdback/retention
payments are the five types of payments made to a supplier. In the
procure-to-pay process, there are several best practices to follow.
The following five best practices can
assist firms to enhance their procure-to-pay process’ efficiency and
effectiveness :
- Procure-to-pay
software should be implemented.
- Maintain
transparency throughout the process.
- Boost
supplier participation.
- Inventory
should be optimized.
- Streamline
contract administration
Advantages of
Procure-to-Pay Software
Advantages of Procure to Pay
According to recent Simfoni research,
more than half of all enterprises across the world will have implemented a
cloud-based procure-to-pay suite by 2025. As companies discover more about the
benefits and cost-saving prospects of adopting procurement software, cloud-based procurement systems like Simfoni are
gaining favor.
The following are some of the ways you
may improve buying efficiency.
1. Purchase
orders and approvals
A digital procure-to-pay program
eliminates email threads by routing the purchase request to all stakeholders
and approvers in the correct order.
2. Management of
purchase orders
The majority of procure-to-pay systems
generate purchase orders automatically from approved purchase requisitions and
start the PO dispatch process. It’s possible to do everything from submitting
several batch orders to a single vendor to creating many Pos from a single PR.
3. Digital
Vendor management
When it comes to vendor management,
going digital impacts how your procurement team evaluates and ranks
vendor performance. Choosing the ideal vendor based on performance,
pricing, discounts, delivery schedule adherence, and policy compliance is a
breeze with the correct procure-to-pay platform!
4. Checking
invoices
For example, is a
procurement-to-payment program. Organizations may use procurement to do
three-way matching to assure a risk-free purchase, authorize invoices, handle
exceptions, and interact with electronic payment or account payable
systems.
5.
Purchase-related insights
One of the finest aspects of
automation is that reporting and procurement analysis assist you to figure out what is and isn’t
working. It provides end-to-end transparency. As a result, you can rapidly
check the progress of every work, monitor
vendor performance indicators, and more with custom reports and
analytics.
Procure-to-Pay
Process Challenges
The procure-to-pay cycle, as
previously said, consists of various phases. Typically, they will
entail activities by a variety of employees across various
departments within the firm, ranging from procurement to finance, who will be
using a range of platforms. People participating in procure-to-pay may have
conflicting or even opposing agendas and objectives.
These characteristics can result in a
variety of issues, ranging from a lack of reliable data across the
whole procure-to-pay cycle to the likelihood of mistakes due to manual
operations. Companies may attempt to solve these issues by automating their
procure-to-pay processes to improve efficiency, visibility, and intelligence.
Source to Pay Vs. Procure to Pay
Best Practices
and KPIs for Procure-to-Pay
Procurement-to-Payment
Process Best Practices
You may increase efficiency and
effectiveness by following the best practices listed below :
- Implement
an automated procure-to-pay system.
- Ensure
that the peer-to-peer (P2P) mechanism is always transparent and traceable.
- Collaboration
between procurement and accounts payable should be improved.
- Boost
supplier satisfaction and engagement.
- Create
quantifiable objectives and keep track of your progress.
Procure-to-Pay
Cycle Key Performance Indicators
Even though each company is unique,
the following key performance indicators (KPIs) are used to
evaluate the procure-to-pay process :
- The
time it takes to complete a purchase order
- The
average cost of completing a purchase order
- Time
to market
- Processing
time for electronic Pos
- The
time it takes to process an invoice
- An
invoice’s average processing cost
- The
rate of invoice exceptions
- Rate
of first-time matches
- The
time it takes to approve an invoice on average
- Outstanding
days payable
- Management
of spending
- Savings realized
- Discounts
were taken advantage of.
Procure-to-Pay
Automation’s Advantages
The procurement and accounts
payable teams, as well as the company as a whole, gain from automating the
procure-to-pay process. These advantages include :
1. Processes
should be simplified.
By removing time-consuming and
error-prone human procedures from procure-to-pay operations, P2P automation
generates cost savings and processing efficiency. You
can collect 100% of your financial data and gain the highest levels
of insight across the supply chain when you fully automate your procurement and
payables procedures.
2. Increase
Supplier Relationships
You may connect with your suppliers in
an automated and simplified manner using automation. You may connect with all
of your suppliers – from the largest to the tiniest – by utilizing a variety of
techniques to communicate with them and share data and documents. P2P
automation also improves supplier relationships and cooperation by increasing
on-time payment performance and providing real-time visibility
into transaction progress.
3. Maverick
Spending should be eliminated.
Providing an electronic procurement
(e-procurement) solution that allows end-users to rapidly locate and acquire
exactly what they need is a good method to verify compliance with purchasing
rules and negotiated contracts. Users will embrace a system with an easy-to-use
interface, a powerful underlying data architecture, and directed
purchasing, allowing them to stay compliant with procurement rules and reducing
maverick expenditure.
4. Improve
Control and Visibility
CFOs and CPOs are increasingly
focused on cost conservation and spending management while avoiding
operational interruptions. P2P automation solutions offer improved strategic
decision-making by providing a comprehensive picture of your suppliers and
spending from a single, central place. You’ll be better able to control
expenditure, minimize risk, and manage the whole supply chain if you have
access to data and visibility into your company’s spending.
Read More:- Comprehensive Guide
to Tail Spend Management.
Procure to Pay
software
End-to-end procure-to-pay solutions
are available from some suppliers, to automate the entire P2P process.
From vendor management platforms to
systems that automate the production of requisitions and the issuance of
purchase orders, technology may play a role in expediting key
components of the procure-to-pay cycle.
Furthermore, invoice automation
systems may help businesses streamline invoice data gathering,
decrease the risk of mistakes, and automate accounts
payable operations.
Vendors, too, may limit the risk of
mistakes or delay in the bills they send to their customers by utilizing
electronic invoicing systems that guarantee invoices are sent to the
correct location and in the correct format. Solutions that transform purchase
orders into invoices automatically, as well as a system-to-system connection
for huge numbers of invoices, are among them.
Advantages of Procure to Pay Software
Procure-to-Pay
Flowchart
o Requisition
for Purchase has been submitted.
Purchase requisitions are official
requests for products or services to be purchased. Most requisitions
are established and put into the procurement strategy when every item
can be described in advance. Even the most meticulously laid-out plans may
require more supplies owing to spoilage, unanticipated occurrences, client
scope creep, or new ideas for improving the original design. Budgets for
procurement plans that are well-crafted provide a buffer for such eventualities
and requisition orders can be issued later in the process if necessary.
1. Selection of
Vendors.
The vendor selection procedure may
need to be used for new orders. The procurement department issues a request for
proposal (RFP) stating the criteria, based on a limited list of bidders.
Suppliers submit a bid for the task, which includes information such
as turnaround time, pricing, and material specs.
Negotiations take happen as part of
the supplier selection process. Aside from quality, pricing, and delivery
dates, the procurement department will look into prospective benefits
like :
- Price
drop compared to the previous year
- Discounts
for large orders
- Quality
will improve in the future.
2. Costs of
transportation and insurance
Requirements for compliance must also
be considered. The industry may be bound by government regulations, and the
corporation may have a socially aware mission ingrained in its culture.
Consumers are becoming increasingly
concerned about corporate social responsibility, and organizations are required
to achieve specific sourcing requirements to impress their customers
and prevent unnecessary risk exposure.
For example, to prevent a public
reaction, several corporations have committed to fair-labor and environmental
criteria that contractors must be able to satisfy.
After all of the short-listed vendors
have concluded their discussions and the best offer has been discovered, a
supplier is picked based on the procurement plan’s selection criteria and a
purchase order is issued.
3. Issuance of a
Purchase Order (PO)
A complete order form with amounts and
delivery criteria is submitted when the requisition order has been authorized.
For fulfillment, the PO is forwarded to the relevant vendor.
4. Documents
Received and Filed
The vendor provides
the products or services, and the appropriate receiving paperwork is
filled out, with line items double-checked to confirm that everything on the
order is delivered.
5. The invoice
has been received.
The vendor sends in an invoice, which
is then processed by the system. Vendor portals are frequently used in
automated systems to assist with electronic invoicing (eInvoicing).
6.
Reconciliation of Invoices
The invoice is compared against the
purchase order and any other necessary papers from the receiving procedure. The
three-way matching procedure, also known as invoice matching, checks the
purchase order and receives a document with the invoice in automated systems to
ensure that the products were delivered and billed correctly.
Unmatched line items are identified and submitted for further examination.
7. Accounts
Receivable
Your finance staff sends invoices to
AP that have been approved for payment. The accounting system is updated,
and vendor payments are made.
Procure-to-Pay
System That Works
Many things might change throughout a
project or calendar period, and keeping the P2P system in top operating
condition necessitates meticulous attention to detail. In an ideal world, the
procurement and accounts payable teams keep in frequent communication
with suppliers, cultivating positive working relationships that encourage
vendors to bargain in good faith with customers who pay their bills on time and
keep their promises.
Raw material costs can rise or fall as
a result of anything from natural catastrophes to political events, influencing
every link in the supply chain. For procurement and AP professionals who want
to accomplish strategic sourcing while keeping costs low across
the whole purchasing process, supply chain
management and supplier relationship management are just as
important as process efficiency and data management.
The genuine value of a comprehensive
procure-to-pay solution, on the other hand, comes in its capacity to facilitate
open communication and entire transactional transparency between procurement
and accounts payable departments. Consider the following
scenario :
- The
purchase order and invoicing cycles are streamlined thanks
to centralized data management, automated routing,
notifications, and contingencies, which ensure automatic three-way
matching.
- All
of your data is brought together in one place for easy,
mobile-friendly access for all stakeholders thanks to integration with
your existing enterprise resource planning system (ERP
system) and accounting software.
- Artificial
intelligence and process automation decrease human error, expedite
processes, eliminate time-consuming manual chores, and allow employees to
devote their time and expertise to higher-value jobs while still being
able to investigate and solve issues as required.
Vendor management is substantially enhanced by
implementing the following strategies :
Total data transparency,
real-time reporting, and centralized contract administration are just
a few of the features available.
- A
closed purchasing environment that keeps maverick spending, invoice fraud,
duplicate/late payments, and late penalties out while allowing for greater
early-payment discounts to be captured.
- Cultivation
of long-term, strategic supplier relationships that enable firms
to create powerful alliances with their finest suppliers while reducing
supply chain bloat by removing under-performers.
- When
both essential participants have the tools they need to monitor and
improve expenditure, vendor management, and workflow efficiency, they may
create a P2P process that saves money and adds value to their businesses.
What is the
Procure-to-Pay cycle, and how does it work?
The procure-to-pay cycle is a
business’s systematic method for purchasing and paying for raw
materials and services. Procurement operations are linked to an
organization’s accounts payable department in this cycle. The major
responsibilities of this department are to keep track of how much money a
company owes its suppliers and creditors, as well as to ensure that
correct payment are paid to these parties. Procurement will be
simplified and efficient as these two procedures are connected. Because it
needs accounts payable teams, procurement departments, and suppliers
to interact, well-developed pay systems will also improve transparency.
Furthermore, being in frequent communication with vendors will aid in supplier management.
Procure-to-Pay
Vs. eProcurement?
What exactly is Procurement?
Procurement is the process of
acquiring products or services, usually in the business world.
Everything from acquiring products and services to negotiating
agreements, ordering, guaranteeing proper delivery and quality, and managing payments
fall under procurement. This procedure has several details and sub-activities.
Procurement encompasses the entire picture, yet depending on the company, an
organization’s procurement solution may or may not comprise many distinct
components.
A manufacturing facility, for example,
may have different procurement requirements than a film studio, yet both must
buy commodities and services to succeed. Because every organization has unique
requirements, procurement solutions should be tailored to meet those
requirements rather than being one-size-fits-all. Today, e-procurement refers
to cloud-based procurement software that enables companies to
execute their purchases online.
What does it
mean to Procure to Pay?
Procure-to-pay is a subset of
procurement that does not include sourcing. As a result, after a company
has identified its suppliers, it will turn to a procure-to-pay solution to
automate the rest of the process.
Procure-to-pay software assists
businesses in managing their purchasing processes by allowing them to place
orders digitally, handle approvals, and track shipments and payments. Companies
may get greater control and visibility into their whole procurement activities by
using tools like 3-way checks between purchase orders, goods receipts, and
invoicing.
Even though many people use several
procurement-related terminologies interchangeably, knowing the actual
definitions of procurement vs. Procure-to-pay is important. Procurement is a
broad term that encompasses a wide range of purchasing operations. Procure-to-pay
is primarily concerned with the operations that take customers from placing an
order to receiving their goods.
The
Procure-to-Pay Cycle’s Essential Best Practices
There are no two firms that are alike.
Best practices, on the other hand, are meant to accept variances and allow each
firm to identify areas in need of development, then build and formalize
workflows, protocols, and procedures that will result in efficiency, cost
savings, and other benefits desired.
For the highest return on your
procurement money, consider using these P2P best practices :
Procurement
Marketplace
1. Automate to
Reduce Expenses, Errors, and Excess Stress
You’ll need the correct tools to get
the greatest outcomes from any business procedure. Automation—specifically, a
fully built, cloud-based procurement system with support
for data management and analysis—is one of the most important
requirements for any firm serious about improving their procure-to-pay process
in today’s fast-paced, always-on marketplace.
Automation benefits all aspects of
procurement, but it shines brightest in the P2P cycle. Intelligent features
such as built-in three-way matching and supplier relationship management/contract management can help organizations achieve
massive gains in efficiency, cost-effectiveness, and decision making by
automating common workflows, increasing data transparency, and
eliminating common procurement process woes like invoice fraud, rogue spend,
and supply chain bloat.
Top-of-the-line procurement
management solutions can be standalone applications or
seamlessly integrated with existing enterprise resource management systems (ERP
systems) to bring all business units together for faster, mobile-friendly
collaboration and easy adoption of process improvements across the entire
organization.
Beginning with purchase requisitions
and continuing through vendor payment and financial record
reconciliation, automation, and artificial intelligence allow you to construct
unique « touchless » workflows with built-in contingencies and alarms. All
operations are significantly faster and more accurate, lowering cycle times for
purchase orders and invoicing, by removing the human element—and
errors !—from data input, document routing, and three-way
matching.
All transaction data and
accompanying documents are gathered and saved automatically on a single,
cloud-based server for real-time access and analysis from home, the office, or
on the road. Instead of manually inputting data or tracking down
exceptions, employees may focus on higher-value work.
Supply management and strategic
sourcing are also substantially enhanced; suppliers may be reviewed
and on-boarded from the very first transaction, and
their performance can be followed using whichever KPIs are most
important in your P2P cycle. Faster processing times, data analysis
to find potential for mutually beneficial partnerships, and stronger contract
negotiation backed by real performance and industry statistics may
all help to develop and enhance supplier relationships.
These are just a few of the advantages
that a high-quality, automated procurement system may give. Your team can
handle the guts and bolts of building particular best practices much more
successfully if you start with automation, data analysis tools,
and centralized, mobile-friendly data management.
2. Make
standardization a top priority
The first step is to get the correct
tools. Making sure everyone is on the same page and following the same playbook
is the second stage in P2P optimization. To achieve and maintain quantifiable
progress, standardization is required.
A successful standardization strategy
is as follows :
- Has
C-suite support and a cultural mandate emphasizing the significance of
compliance in accomplishing company objectives.
- Defines
the duties and responsibilities of everyone participating in the
procure-to-pay process thoroughly and explicitly.
- Provides
training (with periodic refreshers) on the use of procure-to-pay software
and other tools used throughout the P2P process for staff, management, and
the C-suite.
- Establishes
specific expenditure management policies that emphasize the necessity of
adhering to processes, as well as any possible repercussions for
non-compliance.
- Focuses
on simplicity to reduce unnecessary complexity and confusion while yet
allowing for further development as needed.
3. Gather and
Use Data to Define and Achieve Objectives
After you’ve got your software tools
in place and your team on board, the next stage in P2P optimization is to ask
and answer an important question: What aspects of our P2P process can be
enhanced to help us reach our objectives?
There is no wrong answer to this
issue; data management solutions make capturing and
analyzing data over the whole p2p cycle considerably easier. However,
you can’t measure what you can’t see, so having complete visibility of
your expenditure data, as well as role-appropriate access for all parties
to do analysis, is essential.
Your team will be able to correctly
monitor current performance thanks to this visibility and control,
allowing them to identify issue areas and design procedures and processes to
adequately address them.
4. Collaborate
and connect
Any effort to improve your
procure-to-pay process must have total buy-in from all levels, as well as the
communication tools and training needed to avoid misunderstandings and build a
feeling of shared purpose.
It’s much easier to ensure key
stakeholders can connect easily and access shared resources needed to complete
something as simple as a purchase order approval or as complex as a contract
negotiation when everyone is operating within the framework of the eProcurement
solution and following standardized protocols.
Your team will be able to correctly
monitor current performance thanks to this visibility and control,
allowing them to identify issue areas and design procedures and processes to
adequately address them.
Conclusion
Procure-to-pay software solutions may
help you improve compliance and control among suppliers, contracts,
regulations, buyers, and accounts payable by digitizing your
procurement process.
Introduction to P2P Cycle
Efficient
procurement and seamless payment processes are essential for sustained growth
and success in today’s competitive business world. This is where the
procure-to-pay (P2P) cycle steps in, serving as a comprehensive framework that
encompasses everything from sourcing and procurement to
invoice management and final payment.
In this article, we will delve into
the intricacies of the P2P cycle, exploring its various stages, common
challenges faced, and the significant benefits it offers for organizations. So,
let’s get started.
What is the P2P cycle?
The P2P cycle is a vital business
process encompassing the end-to-end journey of acquiring goods and services
from suppliers. It goes all the way through to making the final payment. The
process involves the following stages.
- Identifying the need for a
product or service
- Sourcing and selecting suppliers
- Creating purchase orders
- Receiving goods or services
- Managing invoices
- Processing payments.
For example, consider a manufacturing
company that needs raw materials for production. The process would look
something like this:
- Initiating the procure-to-pay
cycle by identifying the required materials
- Carrying out intermediate
processes
- Paying the supplier for their
services.
The procure-to-pay cycle streamlines
the procurement and payment processes, ensuring transparency, control, and
efficiency throughout the journey.
Importance of the P2P
cycle in business operations
The procure to pay cycle offers a
range of benefits for seamless business operations. It promotes transparency
and control by providing a structured framework for managing procurement
activities, from requisition to payment. Doing so helps organizations ensure
compliance with internal policies and external regulations.
Additionally, the procure-to-pay cycle
improves operational efficiency by streamlining accounts payable processes,
reducing human errors, and automating workflows. Furthermore, the
procure-to-pay system enables better supplier relationship management, fosters
collaboration, and improves negotiation power. Organizations can ultimately
expect cost savings and improved supplier performance.
Benefits of implementing
an efficient P2P cycle
Here are the five benefits of the P2P
cycle for your organization.
- Costs: An efficient P2P cycle brings substantial cost savings to
organizations by streamlining procurement processes.
It eliminates manual processes and automates workflows. These efficiencies
help businesses reduce processing costs and improve overall operational
efficiency.
- Cash flow: Implementing procure to pay cycle enables organizations to manage
their cash flow better by automating vendor invoice processing and payment approvals.
They can ensure timely payments to suppliers, which improves supplier
relationships and potentially unlocks favorable payment terms. It can
further help optimize working capital and
enhance overall financial stability.
- Operational
visibility: A well-implemented procure-to-pay cycle provides
enhanced visibility into everything from requisition to payment. This
visibility allows companies to track and monitor each step, enabling
better control over spending. There is also improved budget adherence and
compliance with regulations. Organizations can also leverage real-time
data and analytics to make informed decisions and optimize procurement
strategies.
- Supplier
relationships: Efficient P2P processes allow
organizations to foster collaboration and build trust with their
suppliers. They can streamline communication, automate order management,
and ensure prompt vendor payments.
These factors also help promote better negotiation power, favorable
pricing, and improved supplier performance.
- Compliance and risk
mitigation: Companies can mitigate the risk of fraud,
unauthorized spending, and non-compliance with a well-designed
procure-to-pay cycle. They can automate approval workflows and ensure
proper documentation to promote transparency and accountability. It thus
reduces potential legal and financial risks.
Components of the P2P
process cycle
The procure to pay cycle consists of
the following components that work together to ensure a seamless and efficient
procurement and payment process:
- Requisition
- Vendor selection
- Purchase order (PO)
- Goods receipt
- Invoice management
- Payment processing
- Vendor management
What are the steps in the
P2P cycle process?
The P2P process encompasses the
following steps that facilitate the seamless acquisition of goods or services
and the subsequent payment to suppliers. Let’s consider the example of a
furniture manufacturing company.
1. Requisition
For example, the relevant employees in
the company identify the need for a specific type of wood as raw material and
submit a requisition form to the procurement department.
2. Supplier identification
and selection
The procurement team evaluates wood
suppliers based on price, quality, and delivery capabilities. They select a
reliable supplier that meets the company’s requirements.
3. Purchase order (PO)
creation
The procurement team creates a
purchase order detailing the quantity of wood, specifications, and agreed-upon
terms. They send the PO to the chosen supplier.
4. Order fulfillment
Once the purchase order goes to the
supplier, they fulfill the order by delivering the requested wood within the
specified timeframe. The organization closely monitors the order to ensure
timely and accurate fulfillment.
5. Goods receipt
Upon receiving the ordered wood, the
organization verifies and acknowledges the receipt. This step involves
physically inspecting the wood, checking for any discrepancies, and recording
the details in the system.
6. Invoice processing
Following the receipt of the wood, the
supplier sends an invoice for the services offered. The organization matches
the invoice with the corresponding purchase order and goods receipt, verifies
the accuracy of the invoice, resolves any discrepancies, and prepares for
payment.
7. Payment authorization
Once the invoice is validated, the
organization authorizes the payment. This step involves reviewing and approving
the invoice, ensuring compliance with internal policies and payment terms, and
initiating the payment process.
8. Payment execution
Finally, the organization proceeds
with executing the payment to the supplier. This can be done through cheques,
electronic funds transfer (EFT), or online payment platforms. The payment
happens within the agreed-upon payment terms.
How does the procure to
pay cycle work?
The P2P cycle seamlessly integrates
the procurement and payment processes within an organization. It begins with
identifying the need for goods or services through a requisition, followed by
supplier selection and purchase order creation. Once the supplier fulfills the
order, the organization acknowledges the receipt of goods or services.
The invoice generated by the supplier
undergoes validation and matching with the purchase order and goods receipt.
After verifying the invoice’s accuracy, the organization proceeds with payment
authorization and execution. Effective vendor management and adherence to
internal policies and regulations are crucial throughout the cycle.
The procure-to-pay cycle ensures
transparency, control, and efficiency in managing procurement and payment
operations. It ultimately contributes to the smooth functioning of an
organization’s supply chain.
Best practices for
optimizing the P2P cycle
To maximize the efficiency of the P2P
cycle, organizations can implement the following best practices:
- Standardize and
automate processes: Establish standardized
procedures and workflows for each step of the P2P cycle. Automate
repetitive tasks such as purchase order creation, invoice processing, and
payment execution to reduce manual errors, save time, and increase
efficiency.
- Implement purchase
order (PO) compliance: Enforce adherence to purchase
orders by ensuring all purchases are against approved POs. The practice
helps control spending, prevents unauthorized purchases, and reduces the
risk of duplicate or incorrect orders.
- Enhance supplier
management: Maintain accurate and up-to-date supplier
information, including contact details, performance metrics, and contract
terms. Regularly assess supplier performance and nurture strong
relationships to improve collaboration and mitigate supply chain management risks.
- Embrace electronic
invoicing: Encourage suppliers to adopt electronic invoicing methods, like electronic
data interchange (EDI) or electronic invoicing platforms. It helps
eliminate manual data entry, reduces processing time, minimizes errors,
and enhances invoice traceability.
- Implement three-way
matching: Utilize a three-way invoice matching process. It
involves invoice matching against the corresponding purchase order and
goods receipt. There will be enhanced accuracy, reduced risk of
overpayments or duplicate payments, and improved control over the payment
process.
- Leverage analytics
and reporting: Use data analytics and
reporting tools to gain insights into the purchase-to-pay cycle’s
performance. Monitor cycle time, processing costs, and payment accuracy.
It will help identify bottlenecks, measure performance, and identify areas
for improvement.
- Implement segregation
of duties: Separate responsibilities within the P2P process to
prevent conflicts of interest and fraud. Assign different individuals or
teams for requisition approval, purchase order creation, goods receipt,
invoice verification, and payment authorization.
- Foster collaboration: Encourage cross-functional collaboration between the procurement
department and the finance team. Open communication and collaboration
improve efficiency, ensure alignment, and enhance decision-making.
- Improve and evolve: Seek feedback from stakeholders, benchmark against industry
standards, and stay updated with emerging technologies and best practices
to drive continuous improvement.
Common challenges in the
P2P cycle
While the P2P cycle offers numerous
benefits, it also presents the following challenges that organizations must
prepare for.
- Manual and
paper-based processes: Relying on manual and
paper-based processes can lead to inefficiencies, errors, and delays.
Manually handling purchase orders, invoices, and payments increases the
risk of data entry errors, misplaced documents, and processing
bottlenecks.
- Lack of automation
and integration: Insufficient automation and
integration among systems can hinder the smooth information flow between
departments. It can result in data discrepancies, delays in approvals, and
difficulties in tracking and reporting.
- Non-compliant
purchasing: Organizations may face challenges in ensuring
compliance with internal policies and external regulations. Non-compliant
purchasing practices, such as maverick spending or bypassing established
procurement procedures, can lead to increased costs, limited control, and
increased risk of fraud.
- Inadequate supplier
management: Poor supplier management can hamper the efficiency
of the P2P cycle. Challenges may include unreliable suppliers,
inconsistent quality, difficulties in supplier onboarding, and ineffective
communication. It can impact the timely fulfillment of orders and lead to
supply chain disruptions.
- Discrepancies and
disputes: Discrepancies and disputes like incorrect pricing,
quantity mismatches, or missing documentation can cause delays in payment
processing and strained supplier relationships. Resolving these
discrepancies can be time-consuming and require additional communication
and collaboration between stakeholders.
- Lack of visibility
and control: Limited visibility into the P2P process can hinder
organizations’ ability to track and monitor activities. It can lead to
reduced control over spending, increased risk of errors, and challenges in
identifying areas for improvement.
- Resistance to change: When implementing process improvements and adopting new
technologies, organizations often face resistance from employees
accustomed to existing manual or legacy systems. Overcoming resistance to
change and ensuring user adoption of new P2P processes and tools can be a
challenge.
- Data security and
fraud risks: The P2P cycle involves sensitive financial and
supplier data, making it susceptible to security breaches and fraudulent
activities. Inadequate data security measures, such as weak access
controls or insufficient encryption, can expose organizations to financial
losses and reputational damage.
Key performance indicators
(KPIs) for monitoring the P2P cycle
Monitoring the following KPIs is
essential for assessing the effectiveness and efficiency of the P2P cycle:
1. Purchase order cycle
time
It measures the time taken from the
creation of a purchase order to its final approval. The metric reflects the
efficiency of the procurement process and helps identify bottlenecks.
2. Invoice processing time
Invoice processing time measures the
duration from the receipt of an invoice to its final verification and approval.
Monitoring this KPI enables organizations to identify inefficiencies and
streamline invoice processing.
3. Payment cycle time
The payment cycle time measures the
time from invoice approval to payment execution. It provides insights into the
efficiency of the payment process, helping organizations ensure timely payments
to suppliers.
4. First-time match rate
The first-time match rate indicates
the percentage of invoices matched correctly against the corresponding purchase
orders and goods receipts without requiring additional adjustments or manual
intervention. A high first-time match rate shows better control and accuracy in
the P2P process.
5. Vendor performance
scorecards
Vendor performance scorecards evaluate
and measure the performance of suppliers based on on-time delivery, quality,
responsiveness, and adherence to contract terms. Monitoring vendor performance
enables organizations to assess supplier relationships and optimize the supply
chain.
Emerging trends and
technologies in P2P
The procure-to-pay process is
witnessing the integration of various emerging trends and technologies,
transforming how organizations manage their procurement and payment operations.
Let’s explore some of the notable trends and technologies shaping the P2P
landscape:
1. Artificial intelligence
and machine learning
AI and machine learning technologies
are revolutionizing P2P by automating manual tasks, improving data accuracy,
and enabling intelligent decision-making. AI-powered systems can automate
invoice processing, perform spend analytics, detect anomalies, and provide
predictive insights for better procurement planning and supplier management.
2. Blockchain in
procurement
Blockchain technology is gaining
traction in procurement due to its ability to provide transparency, security,
and traceability in transactions. Blockchain-based systems enable tamper-proof
record-keeping, smart contracts, and real-time visibility into the supply
chain. It reduces fraud risks, ensures compliance, and enhances trust between
buyers and suppliers.
3. Robotic process
automation (RPA)
RPA streamlines P2P processes by
automating repetitive and rule-based tasks. The software can handle purchase
order creation, invoice processing, and payment reconciliation. It reduces
errors, improves speed, and frees human resources to focus on more strategic
activities.
4. E-procurement and
digital transformation
E-procurement solutions drive digital
transformation in P2P, enabling organizations to digitize and streamline their
procurement activities. These solutions provide centralized platforms for requisitioning,
supplier management, purchase order creation, and collaboration.
Best P2P software
Selecting the right procure-to-pay
(P2P) software is crucial for organizations to streamline their procurement and
payment processes. A good P2P software solution should offer robust
functionality, user-friendly interfaces, integration capabilities, and scalability.
While the choice of procurement software depends on specific business needs,
here are the five top procure-to-pay solutions in the market:
- SAP Ariba
- Coupa
- PRM360
- Basware
- Precoro
Bottomline
The P2P cycle plays a critical role in
managing the procurement and payment processes within organizations. Seamless
integration of these functions helps ensure transparency, control, and
efficiency. It ultimately contributes to the smooth functioning of the supply
chain.
Despite the challenges, implementing
best practices and leveraging emerging technologies can optimize the P2P cycle.
As organizations continue to embrace digital transformation, it is essential to
prioritize the optimization of the P2P cycle to drive success in procurement
and payment operations.
FAQs
1. What is Procure-to-pay?
Procure-to-pay (P2P) is a process that
encompasses the entire procurement and payment cycle within an organization. It
involves requisitioning, sourcing, purchasing, receiving goods or services,
verifying invoices, and paying suppliers.
2. What is P2P vs. O2C cycle?
The P2P (Procure-to-pay) cycle focuses
on the procurement and payment functions, while the O2C (Order-to-cash) cycle
revolves around sales and revenue generation. P2P involves activities from
procurement to payment, whereas O2C covers everything from order placement to
cash receipt.
3. What is an example of a P2P
process?
An example of a P2P process is when an
organization identifies a need for a product or service, creates a purchase
requisition, obtains approvals, issues a purchase order, receives the goods or
services, verifies the invoice against the purchase order and receipt, and
proceeds to make the payment to the supplier.
4. What is the P2P payment process?
The P2P payment process involves
verifying invoices, matching them against purchase orders and receipts,
reconciling discrepancies, and initiating payments. It includes invoice verification,
approval, and payment execution.
5. What is the difference between P2P
and O2C?
The main difference between P2P and
O2C is the focus of the cycle. P2P centers around procurement and payment
processes, while O2C revolves around the sales and revenue generation
processes.
6. What is the difference between P2P
and procurement?
P2P refers to the end-to-end process
that includes procurement, receipt of goods or services, verification of
invoices, and payment to suppliers. Procurement, on the other hand, refers to
acquiring goods or services from suppliers.
7. What is a P2P marketplace?
A P2P marketplace, also known as a
peer-to-peer marketplace, is an online platform that connects individuals or
businesses directly to facilitate buying and selling of goods or services. It
eliminates the need for intermediaries, allowing users to transact with each
other.
8. What is the advantage of a P2P
system?
The advantages of a P2P system include
streamlined procurement processes, improved supplier management, increased
efficiency, reduced manual errors, and enhanced control and compliance.
9. What are the advantages of P2P
payment over O2C?
P2P payment offers advantages such as
faster payment processing, reduced dependency on paper-based transactions,
improved transparency in payment status, simplified payment reconciliation, and
lower transaction costs compared to traditional O2C payment methods.
10. What does P2P mean in purchasing?
In the purchasing process, P2P stands
for procure-to-pay, which refers to the process starting from identifying the
need for a product or service to making payments to suppliers. It encompasses
the purchasing cycle from initiation to payment.
What are the key
considerations in the planning stage of the Procurement Life Cycle?
The planning stage of any process is
crucial; however, laying the groundwork for successful procurement activities
translates to lower costs and a better bottom line. It involves careful
analysis, strategizing, and decision-making to ensure your procurement process
aligns with your organization’s goals and objectives.
Here are key considerations to
remember during the planning stage.
1. Define Your Procurement
Needs
This is the ideal place to begin by
clearly defining your organization’s needs and requirements. For example, if
you’re a technology company planning to upgrade your IT infrastructure, you
need to determine the specific hardware and software requirements, estimated
quantities, and desired quality levels.
2. Set Objectives and Goals
Establish clear objectives and goals
that align with your organization’s overall strategy. This will guide your
procurement efforts and help you prioritize your actions. For instance, if your
goal is to reduce costs, you may set an objective to identify cost-effective
suppliers without compromising on quality.
3. Conduct Market
Research
A thorough market research to identify
potential vendors, their capabilities, and pricing structures is critical. This
will enable you to make informed decisions and negotiate favorable procurement
terms. For instance, if you’re seeking new office space, market research will
help you identify available properties, compare rental rates, and assess
location suitability.
4. Develop a Procurement
Strategy
A well-defined procurement strategy
outlining your approach to fulfill your procurement needs will ensure the
workflows are smooth and efficient. Factors such as supplier selection
criteria, risk management, and sustainability goals must be considered before
designing a strategy. For example, if your company is firmly committed to
environmental sustainability, your procurement strategy may prioritize
suppliers with green certifications or eco-friendly practices.
5. Establish Budgetary
Constraints
Determine the budget for procurement
activities and set spending limits for each category. This ensures financial
discipline and helps you make informed decisions based on available resources.
For instance, if you have a limited budget for office supplies, you may need to
prioritize essential items and explore cost-saving alternatives.
6. Engage
Stakeholders
Involve relevant stakeholders, such as
department heads and end-users, to gather their input and requirements. Their
involvement ensures that the procurement process aligns with the business needs
of different units. For example, consulting with the IT department and
end-users will help you identify essential features and functionality before
you procure new software.
Procurement life cycle
flowchart
The procurement life cycle stages
cover the process that organizations go through to acquire the goods and
services they need. The stages are designed to ensure efficient and effective
procurement management. By going through the stages methodically, organizations
can optimize costs, ensure quality and timely delivery, and establish strong
supplier partnerships.
- Identify Procurement Need
- Conduct Needs Assessment
- Define Scope of Procurement
- Determine Budget and Funding
- Develop Procurement Strategy
- Conduct Market Research
- Identify Potential Suppliers
- Issue Request for
Proposal/Quotation
- Receive and Evaluate Supplier
Responses
- Select Preferred Supplier(s)
- Negotiate Terms and Conditions
- Finalize Contractual Agreement
- Procure Goods or Services
- Monitor Supplier Performance
- Closeout and Evaluation
16.
15 Key stages of the procurement life
cycle
17.
1. Identify procurement needs
18.
This is the foundational stage guiding
organizations toward effective procurement management. Organizations can
pinpoint their procurement needs with clarity and precision by comprehensively
analyzing operational demands, market dynamics, and strategic objectives.
19.
For instance, consider a healthcare
facility aiming to upgrade its diagnostic equipment to enhance patient care.
Through a thorough needs assessment process, the facility identifies a critical
need for advanced imaging systems, such as MRI and CT scanners, to improve
diagnostic accuracy and efficiency. This recognition of the need for modernized
equipment becomes the impetus for subsequent procurement activities.
20.
2. Conduct a needs assessment
21.
Conducting a needs assessment
represents the second stage within the procurement life cycle. This process
involves a complete evaluation and analysis of requirements to understand the
procurement outcomes.
22.
During a needs assessment,
organizations consider operational demands, technological advancements, and
stakeholder expectations. As a part of the process, most organizations conduct
feasibility studies, engage with end-users, and seek expert opinions to arrive
at an optimal solution.
23.
For instance, consider a manufacturing
company seeking to enhance production efficiency by implementing an enterprise
resource planning (ERP) system. Through a needs assessment, the company
evaluates its existing processes, identifies pain points, and determines the
functionalities and modules required from the ERP system, such as inventory management, production planning, and
financial integration. This thorough evaluation ensures the selected system
aligns precisely with the company’s operational needs and goals.
24.
3. Defining the scope of procurement
25.
Defining the scope helps to establish
the boundaries and objectives of procurement. This stage involves outlining the
extent and parameters of the procurement effort, ensuring that all relevant
aspects are identified and addressed.
26.
To define the scope, you must consider
various factors such as project requirements, budget limitations, and timeline
considerations. Also, you must assess the goods or services to be procured, the
quantity needed, and any associated deliverables or outcomes.
27.
For instance, imagine a government
agency initiating a construction project for a new public school. When defining
the scope for procurement, the agency would specify the scope of work,
including the architectural design, construction materials, and required
infrastructure. Additionally, they would consider factors like environmental
regulations, safety standards, and project timelines to ensure a comprehensive
scope that covers all necessary aspects of the procurement effort.
28.
4. Determine Budget and Funding
29.
Determining the budget is one of the
more critical stages in this lifecycle. It involves assessing the financial
resources available for procurement activities and establishing the allocated
budget. Organizations consider factors such as project scope, expected
deliverables, and available funds to determine the economic parameters for the
procurement.
30.
For example, a company may allocate a
budget for IT infrastructure procurement after considering the cost of
hardware, software, and implementation services.
31.
Develop Procurement Strategy
32.
In this step, organizations establish
a comprehensive plan for procurement activities. It
involves a strategic approach that aligns with organizational goals, maximizes
value, and mitigates risks. Organizations can optimize their procurement
processes by considering market conditions, supplier relationships, and
internal capabilities.
33.
Let us consider a construction company
aiming to implement a procurement strategy for infrastructure projects. The
company conducts market research to identify potential suppliers, evaluates
their capabilities, and develops long-term partnerships. They also analyze
project requirements, determine key performance indicators, and establish
guidelines for cost control.
34.
6. Conduct Market Research
35.
Market research involves gathering
information about potential suppliers, their offerings, pricing, and market
trends. Organizations explore sources such as industry reports, supplier
databases, and online platforms to gain insights into the market landscape.
36.
For example, a retail company must
conduct market research to identify potential clothing suppliers, assess their
quality and pricing, and understand current fashion trends to make informed
procurement decisions.
37.
7. Identify Potential Suppliers
38.
Organizations evaluate potential
suppliers based on product quality, reputation, financial stability, and
capacity to meet procurement requirements. For this, organizations must assess
suppliers, seek references, or explore industry networks.
39.
For instance, a manufacturing company
may identify potential vendors of raw materials by considering factors such as
reliability, cost-effectiveness, and adherence to quality standards.
40.
8. Issue Request for
Proposal/Quotation:
41.
Issuing a request for proposal (RFP)
or request for quotation (RFQ) is an essential part of the process.
Organizations communicate their procurement requirements to potential suppliers
by outlining specifications and indicating timelines. Also, setting up
evaluation criteria solidifies the process. Further, it allows suppliers to
submit their proposals or quotations.
42.
For example, a technology company may
issue an RFP for software development services, providing detailed information
about the project scope, functionality requirements, and desired outcomes.
43.
9. Receive and Evaluate Supplier
Responses
44.
Receiving and evaluating supplier
responses is important, as this is a great way to assess supplier proposals or
quotations based on pre-existing criteria. Factors such as pricing, quality,
delivery timelines, and supplier capabilities are considered at this
point.
45.
10 Select Preferred Supplier(s)
46.
Organizations choose suppliers that
best meet their procurement requirements and offer the most favorable terms. It
can be challenging, as several factors influence the selection process, such as
pricing, quality, reliability, and supplier reputation.
47.
For instance, a hospitality chain may
select a preferred food supplier based on product quality, pricing
competitiveness, and ability to meet delivery schedules.
48.
11. Negotiate Terms and Conditions
49.
Negotiating terms and conditions is
significant, as this can determine the feasibility of a vendor relationship.
Organizations engage in discussions with preferred suppliers to finalize the
contractual arrangements. This includes negotiations on pricing, payment terms,
delivery schedules, warranties, and other contractual clauses.
50.
12. Finalize Contractual Agreement
51.
A contractual agreement formalizes the
terms and conditions of the procurement through a legally binding contract. The
contract specifies the rights, responsibilities, and obligations of both
parties. For instance, a construction company finalizes a contract with a
subcontractor, detailing project milestones, payment terms, and performance
expectations.
52.
13. Procure Goods or Services
53.
At this point, organizations proceed
with the purchase or acquisition of the identified goods or services from the
selected suppliers. So, purchase orders are
issued, the concerned department manages delivery schedules, and adherence to
quality is emphasized. For example, a retail store procures inventory from
suppliers based on customer demand and stock availability.
54.
14. Monitor Supplier Performance
55.
Monitoring supplier performance is not
limited to just this stage. It is a continuous process that ensures
organizations have control over quality, timeliness, and adherence to
contractual agreements. Companies conduct periodic evaluations, track key performance
indicators, and address performance issues as part of this process.
56.
For instance, a manufacturing company
may monitor its suppliers’ delivery performance and product quality to maintain
efficient production processes.
57.
15. Closeout and Evaluation
58.
Closeout and evaluation are the final
stages in the procurement life cycle. Organizations must ensure that all
contractual obligations have been met. In this regard, they must conduct final
inspections, reconcile invoices, and evaluate the procurement process. Also, in
this stage, project learnings are studied so you can identify areas of
improvement. Further, based on stakeholder feedback, processes may be tweaked
for improvement and greater efficiency.
59.
For example, a government agency may
evaluate the success of a procurement project by assessing the performance of
the suppliers and vendors. They can measure project performance against KPIs
and other cost savings.