Procure-to-Pay is a system for automating procurement and supplier payments in a smooth end-to-end process. P2P offers organizations numerous benefits from reduced risks to improved supplier relationships.
By Cecil Parang
Procure-to-pay is a process that has been around a while, but it has taken on new importance as a supply chain strategy as supply chains become more global and more complex. The short definition is that it is a process organization's use to purchase the raw materials needed for manufacturing a product or providing a service. The goal is to make the purchasing process seamless, while also meeting certain goals. Ideally, the Procure-to-Pay (P2P) process optimizes cash flow, builds stronger vendor relationships, improves supply chain efficiencies, reduces risks, and maximizes purchasing power.
Taking Supply Chain Management to a Higher Automated Level
Implementing and maintaining good P2P processes involves more than putting a technology-based system in place and paying invoices as fast as possible. Done right, P2P delivers all the goals mentioned and enables organizations to build more flexibility into their supply chains, especially if they regularly add new suppliers.
It is not a process that is suitable for every organization, but for many it is the ideal way to introduce buying and efficiency controls throughout the supply chain management cycle. P2P should be thought of as a fully deployed supply chain system rather than a simple procurement and invoicing system.
The real customer of the P2P process is the supplier. Paying suppliers efficiently and in a timely manner builds relationship capital with suppliers by building trust. P2P can play a central role in strengthening supplier relationship management (SRM) programs which leads to advantages like innovation sharing, supplier delivery priorities, supplier loyalty, and general information sharing. P2P can make an organization a supplier's "Customer of Choice" because the supplier knows it will be treated equitably.
For organizations, the P2P process delivers the goals mentioned, but it also provides two critical dimensions for the modern procurement function operating in a dynamic business environment: technology and performance management working in tandem. P2P closes gaps in procurement systems by offering a method for managing and measuring performance based on procurement decisions made up front and automated decisions built into the system.
Beginning to End Processing
The P2P process includes the full range of activities needed to inquire, request, receive, and pay for raw materials and services. The procurement process is typically a series of steps. Required goods and services are identified, allowable costs determined, terms defined, delivery dates set, items ordered, automatic reorders set (if applicable), deliveries noted, and documentation of order, delivery, and invoicing are matched so payment can be made. Built into the system is a list of approved vendors, some preferred ongoing-use suppliers and some one-off suppliers.
The P2P process eliminates many of the issues that can arise in a fragmented procurement and payment model.
For example, suppliers are paid on time and at the optimal point at which the business takes advantage of discounts while holding onto cash as long as possible. Paying suppliers on time is of major importance for all sizes of suppliers, but it is most critical to diversifying the supply chain. Many MWBEs and local firms in international locations are small-to-medium sized businesses. From this perspective, P2P becomes a socially responsible process.
Step by Automated and Manual Step
The basic steps of the P2P process begin with developing a supply chain management system to manage supplier relationships. The simplest form is a supplier portal on which suppliers register and data is maintained. When an order is made, procurement researches and selects the preferred vendor to purchase from. The P2P includes processes for requisitioning products or services, creating a formal purchase order, entering successfully shipped orders, reconciling the invoice to the purchase order, and making payment.
The sophisticated P2P systems handle the process from beginning to end, with the system identifying the best vendors for an order, requesting quotes, and managing many of the details.
This does not preclude procurement from negotiating with vendors, of course. However, the P2P system can include contract management; inventory management; vendor performance measurement; and three-way matching of the purchase order, receiving report, and invoice. It can ensure payment is made in a timely manner while also making payments that take discounts.
One of the important points to keep in mind is that P2P automates as much of the procurement and payment process as possible, but there are manual steps involved also, like the negotiation process.
A successful system needs a full commitment of resources and efforts too. It cannot be implemented piecemeal with a mixture of centralized and decentralized procurement processes. Technology continues to enhance P2P, too. A cloud-based P2P system offers more flexibility, and visibility, but it requires sophisticated technology and skilled talent.
Not for All Businesses
Not all businesses should implement P2P. Small companies that issue a minimal number of purchase orders and have few suppliers would not invest in such a sophisticated system. It is also not appropriate for scaling companies that are in the process of expanding and improving infrastructure. In very large companies, purchasing processes cannot be decentralized and contained within units. The P2P benefits are only fully realizable in a centralized procurement system or a system that is fairly easily centralized.
The procurement personnel must manage P2P, but it is important that SRM includes fostering good working relationships with vendors so that negotiations yield the best results. Procurement personnel must also manage unexpected events, like sudden spikes in material prices or interruptions in the supply chain. P2P is not intended to fully replace procurement. It is a process for automating the more routine purchases, speeding up vendor payments, reducing the number of errors, and reducing opportunities for unfavorable events like duplicate payments and fraud.
Software, of course, simplifies the implementation process. It is recommended that businesses take advantage of systems developed by professional software companies, rather than building a homegrown system. In the near future, emerging technologies will further automate the procurement process. They include machine learning, artificial intelligence, and even more sophisticated analysis of individual procurement tasks. In fact, the growing sophistication of technology means that transactional activities are not the only activities that can be automated. Soon, sourcing activities, like vendor selection, will be automated via intelligent technologies. The potential of P2P is enormous, even though it already offers remarkable benefits. The best is yet to be.