Discover how procure-to-pay process automation and other next-gen technologies are giving organizations a competitive advantage.
Procurement plays a major role in the success of a business. Managing the flow of materials and services, forecasting costs and negotiating the best prices impacts nearly every aspect of an organization, from manufacturing to customer satisfaction. The procure-to-pay process creates a way for organizations to document this complex workflow, from the point of need through the final payment. Its aim is to integrate purchasing, supply chain management and accounts-payable functions seamlessly.
Because the procure-to-pay cycle is so complex and touches so many parts of the business, it is prone to backlogs and inefficiencies. Businesses need procure-to-pay software that can identify bottlenecks and more efficient workflows, as well as check all the procurement boxes. That includes using real-time analytics and flexible decision-making to optimize the procure-to-pay process, making businesses more agile in an era of unstable supply chains.
In this post, we’ll take a closer look at the procure-to-pay system and how cloud-based procure-to-pay solutions improve the bottom line and increase the speed of business.
What is the procure-to-pay process flow?
Procure-to-pay — also known as purchase-to-pay or P2P — is the cycle of procuring and accounting for the goods or services needed to run a business in a timely manner and for a reasonable price.
A P2P solution seeks to document the procurement process and provide a system for accountability so that organizations can improve purchasing decisions and realize cost savings, such as early payment discounts.
Stages of the P2P process
Different organizations take different approaches to the procurement process, based on cost, availability, sustainability and a wide range of other factors. Each organization will design its own procurement route based on its business strategy. Here is an example of a purchasing process commonly found within an enterprise:
Often confused with procure-to-pay, the source-to-pay process focuses on the initial stages of identifying a need and selecting the right goods or services to meet that need. These steps include the following:
- Identifying a need: Stakeholders review business needs and determine what goods or services are required, if they must be fulfilled by an outside vendor and which departments that will benefit.
- Selecting goods and services: A formal purchase requisition is made that identifies a product, service and vendor the manager or department would like to use. This kicks off the finance team’s vetting process for placing the correct order, selecting the best vendor and investigating potential cost discounts.
- Purchase order: Once the details of the purchase request are reviewed and a contract with the vendor is finalized, the finance team issues a purchase order approval and an order is placed with the vendor for the goods and services.
- Receiving: Goods and services are received, reviewed to ensure the right order was sent and integrated into the requesting department’s workflow, such as onboarding software or sending components to the correct manufacturing department. A goods receipt, which certifies the order was received as ordered, is sent to accounts payable team.
- Invoice processing and payment: The invoice is checked against the order received; then, payment is made to the vendor. This can be done with invoice matching, such as two-way matching, which checks the vendor’s invoice against the details of the purchase order, or three-way matching, which compares the details of the purchase order, the invoice and the delivery receipt to ensure they all match before the vendor payment is made.
Benefits of an efficient P2P process
A procurement solution that integrates the procurement department, accounting system and organization workflows offers many advantages:
- Better supplier relationships: Business is built on a foundation of good relationships. Being a great customer helps ensure products are high quality and delivered on time, and it increases the chance a supplier will go above and beyond during times of need. Having a system that not only ensures invoices are paid on time, but also offers visibility of the invoice’s status, helps keep a supplier happy.
- Visibility: Internal control and visibility over the end-to-end P2P cycle gives organizations full insight into cash-flow and financial commitments. When you’re capturing records of all transactions, they are easier to track. Plus, the data can reveal optimization opportunities.
- Fraud prevention: While having great business relationships is helpful, it can also open the door to favoritism and fraud. A P2P system that includes strict invoice matching and multiple points of review protects against fraud, such as granting a contract to an unqualified vendor personally connected to a buyer or making purchases without adhering to the agreed-upon price.
- Efficiency: Human error occurs when a system is overly complicated or is siloed within separate departments. Centralization of the procurement, supply chain and accounts payable processes helps organizations identify ways to improve the workflow and pay invoices faster.
- Cost savings: The P2P process helps organizations identify and foster good relationships with preferred suppliers and ultimately negotiate the best prices. When adding P2P automation and software solutions, it saves time and improves spend management. This enables better forecasting to prevent a spot buy — that is, making an immediate purchase to fill a need — when production demand increases.
- Speed: E-procurement solutions and automation help companies move faster and more quickly respond to disruptions in the supply chain. Streamlining the procurement process also saves time, frees up resources and rapidly enables new supplier approvals.
- Predictive modeling: Data analytics, process mining and other digital tools can identify areas of potential concern and opportunities for further process optimization. Emerging platforms are modeling changes before they are made to ensure no unforeseen consequences occur.
Addressing the challenges of the P2P process
IBM has identified five main challenges to the procurement process:
- Maverick buying: Spot buying, poor contract management and unauthorized purchases make goods and services more expensive. Prices are higher when purchases are made at a lower volume or during peak demand.
- Deviations: Deviations are an expected component of business processes, such as unanticipated fluctuations in economic markets, changes in technology and spikes or lulls in customer demand. While deviations are a challenge that can increase costs, reviewing data on these deviations can also reveal where the P2P cycle may need to change.
- Reworks: Manual and repetitive tasks within the P2P process are prone to errors and ultimately slow down a workflow. Reworks are time-consuming, pulling the procurement team away from more important tasks.
- Enabling automation: Organizations may be missing an opportunity for efficiency and cost savings with legacy or semi-manual P2P systems that do not enable automation.
- Cash discount losses: Early payment programs offer negotiated cash discounts with suppliers that also support the organization’s supply chain. If payments are not managed in a timely manner and deadlines are not met, organizations miss out on important cash discounts and risk losing the supplier’s confidence.
The role P2P software plays in solving challenges
Despite the shift toward cloud solutions, there are organizations today that still use a manual or semi-manual process for procurement and accounts payable. Many others use procurement software integrated into an enterprise resource planning (ERP) system or accounts payable system. This may get the job done, but an ERP system can lack deeper insights into key performance indicators (KPIs).
A cloud-based P2P software solution with analytics and process mining capabilities can improve compliance and control, providing deeper insights into global spend and process inefficiencies. The following are a few ways it can improve the process:
- Automation: Automatically send purchase orders, validate payments and trigger payments for faster invoice turnaround.
- Track KPIs: KPIs — such as lead time, average invoice approval time and average cost to process an invoice — offer insights into fine-tuning operations and keeping teams accountable.
- Deeper insights: Using process mining and data analytics, a P2P system can help organizations make informed decisions at a low cost, such as determining which supplier discounts deliver real value or identifying common bottlenecks in the approval process.
- Root cause analysis: When a problem consistently arises, process mining within P2P systems can dig deeper into the root causes and reveal where inefficiencies lie.
- Process optimization: Making process changes takes time and presents some uncertainty. Organizations may be hesitant to make changes because it may cause unforeseen problems elsewhere. An advanced software solution can conduct process simulations to determine the best path forward and safeguard against the unexpected consequences of process changes.
Procure-to-pay process and IBM
All procurement professionals have the same objective: find new ways to create cost savings and increase business value. Procurement leaders that can that take full advantage of intelligent automation solutions like process mining will be able to make more informed, cost-effective decisions by knowing where the opportunities are and testing ideas before implementation (and pretty much guarantee expected savings).
Read this paper to learn more about how process mining can help overcome five of the most critical challenges for procurement leaders: maverick buying, deviations, rework, automation enablement and cash discount losses.