The procure-to-pay (P2P) process—which encompasses everything from identifying procurement needs to making final payments to suppliers—has become a crucial factor for success in the manufacturing and distribution industries. The procure to pay process plays a big role in ensuring operational efficiency, cost management and financial health of your organization.
The procure-to-pay process is a complex system, involving multiple departments, stakeholders and touchpoints, making it more than just purchasing and paying. When your organization optimizes the procure-to-pay process, you can enjoy substantial cost savings, improved supplier relationships, enhanced visibility into spending and increased operational efficiency. However, many manufacturers and distributors struggle with their procure-to-pay processes due to inefficiencies, manual processes and lack of visibility.
This article will look into detail the procure-to-pay process and answer twelve crucial questions that your organization needs to ask about this process.
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Procure to Pay Process: What is it?
Procure-to-pay involves the end-to-end cycle of acquiring goods or services from external suppliers. Also referred to as the purchasing process, this process includes everything that takes place from the initial identification of the need for goods or services to making the final payment to your supplier.
Some of the steps involved in the procure-to-pay process include:
- Need identification
- Purchase requisition
- Supplier selection
- Purchase order creation
- Receipt of goods/services
- Invoice processing
- Payment
Phases of the Procure-to-Pay Process
1. Need Identification
The first stage in the procure-to-pay process is identifying a need for certain goods and services. This could be raw materials, equipment or logistical services. In this phase, your organization clearly defines the need in terms of the:
- Required quantity
- Quality specifications
- Budget
Your procurement teams—once a valid need is identified—are tasked with sketching out high-level:
- Specifications for goods/ products
- Terms of reference (TOR) for services
- Statements of work (SOW)
2. Purchase Requisition
The purchase requisition is the next stage after the need identification in the procure-to-pay process. A purchase requisition is a document that outlines the details of the goods or services your organization is in need of. This document needs to undergo a verification and approval process from all relevant managers and department heads. To reduce the risk of delays and improve the efficiency of the verification process, your organization must ensure that the purchase requisitions approval processes are streamlined.
3. Supplier Selection
The supplier selection is the stage of the P2P process where your procurement team starts identifying potential suppliers or vendors. As a manufacturer or distributor, this P2P process phase is crucial in ensuring that you deal with suppliers who are reliable and offer quality products. Reliability and quality are the two primary factors that have a direct impact on your production schedules and your product quality. When vetting suppliers, consider the following factors:
- Pricing
- Past performance
- Production capacity
- Alignment with your company’s quality standards and sustainability goals
4. Purchase Order Creation
Once the supplier has been selected, the next step is to issue a formal purchase order (PO)—a legally binding document serving as the contract between your company and the selected supplier. This document details the agreed-upon prices, quantities, delivery terms and payment conditions.
5. Receipt of Goods/Services
This P2P process phase is where your company receives the goods or services you ordered from your selected vendors. Your receiving department plays a major role of verifying the received goods or services, ensuring that they match your purchase order specifications. This is the phase of the P2P process for quality control which guarantees that your organization is only paying for what you’ve actually received. In this phase, a goods received note (GRN)—or a similar document—should be created to accurately record the receipt of your ordered goods and services.
6. Invoice Processing
The invoice processing is a phase of the P2P process where your supplier submits an invoice based on the delivered goods or completed services. Your accounts payable department must review the received invoice carefully, comparing it with the original purchase order and the receiving documents. This P2P process phase is crucial in maintaining positive supplier relationships and potentially capturing early payment discounts, enabling cost savings for your organization.
7. Payment
The procure-to-pay process ends with making payment to the supplier according to the agreed-upon terms. Payment can be made in various methods, such as checks, electronic transfers or credit cards. This P2P process phase is crucial in supplier relationship management, because when your suppliers’ invoices are honored, they will likely desire to continue working with your company in the future.
Procurement cycles differ by company; small and medium businesses (SMBs) should refrain from trying to create a one-size-fits-all plan. Instead, complete an internal review to learn what goods and services each department requires.
1. Does your purchasing team have a sourcing database in a system (not Excel)?
To have an effective procure-to-pay process, your organization needs to have a robust sourcing database—and no, we are not referring to spreadsheets. With a centralized sourcing database, your organization can enjoy numerous benefits, such as:
- Better organization of supplier information
- Easier comparison of vendor offerings
- More efficient supplier selection processes
- Enhanced spend visibility
A dedicated sourcing database system enables your purchasing department to quickly access historical data, compare supplier performance and make informed choices based on comprehensive information. All these go a long way in improving your procurement decision-making.
2. How easy is it to buy from new organizations?
The manufacturing and distribution industries are highly competitive, and companies in these sectors are always on the lookout for ways to stay ahead of competitors. One way to stay ahead is having the ability to onboard new suppliers quickly and efficiently. Streamlining the supplier onboarding process can help your company reduce the time and effort that is required to initiate new business relationships.
Your procure-to-pay software should have the ability to support an efficient onboarding process for new suppliers. The software should have features, such as:
- Self-service portals for suppliers to input their information
- Automated approval workflows
- Integration with your existing systems
- Automated data capture and validation
- Workflow management
- Performance metrics and reporting
- Supplier classification and segmentation
Making it easier to buy from new organizations helps you increase your flexibility to respond to market changes. Also, you increase the potential of accessing better pricing or innovative products and services.
3. Do you have a system to forecast demand (sales) beyond “same as last year”?
Demand forecasting is a crucial tool that allows your business to predict future customer needs. Effective procurement planning depends on your organization’s ability to accurately forecast future demand. There are organizations that still heavily rely on historical data—”same as last year” projections—to predict future demand. Relying on this method alone can result in inefficient inventory management and missed opportunities. Modern businesses—who aim to stay ahead of competitors and meet the ever-evolving customer demands—look beyond historical data and “same as last year” projections, focusing on factors, such as:
- Market trends
- Seasonal variations
- Economic indicators
- Customer behavior
- Competitive activity
- Supply chain disruptions
Advanced P2P systems often include or integrate with demand forecasting tools. These tools can analyze historical data alongside external factors to provide more accurate predictions. By improving your demand forecasting capabilities, you can optimize inventory levels, reduce carrying costs, and ensure better alignment between procurement activities and actual business needs.
Having a modern procure-to-pay system that either has or integrates with demand forecasting tools can help your company analyze historical data alongside external factors to provide more accurate predictions. Such a system helps your company optimize inventory levels, reduce carrying costs and ensure better alignment between procurement activities and your actual business needs.
4. Do you have a sales and operations planning (S&OP) process?
To effectively align your procurement activities with your business strategy, effective sales and operations planning (S&OP) is crucial. Regular meetings between sales, operations and finance teams, discussing forecasts and developing a comprehensive inventory plan are essential in this process. This plan should cover at least 12 months and include agreed-upon service levels to guarantee customer satisfaction. Having a rolling forecast allows your procurement team to:
- Strategically plan purchases to meet anticipated demand
- Ensure you have enough inventory to fulfill orders, allowing your organization avoid stockouts and minimize overstocking
- Negotiate better deals with suppliers based on projected volume
5. Do you have a vendor portal to communicate with suppliers?
A vendor portal (or supplier portal) is an online platform that is used to streamline communication and collaboration between your organization and vendors. This is a centralized platform that allows your organization to:
- Share information
- Manage documents
- Track orders and payments
A vendor portal offers numerous benefits, such as reduced manual communication with vendors and reduced errors in order processing. Additionally, with this portal your suppliers can self-manage certain aspects of their operations, resulting in increased efficiency and satisfaction on both sides.
Seventy percent of companies use manual processes like phone calls or emails to validate supplier credentials before making a payment. Manual processes crack the door wide open to fraud, as it’s easy for fraudsters today to usurp supplier identities and intercept payments.
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6. Are you tracking vendor performance and, if yes, are your vendors improving?
Performance evaluation is one of the critical aspects in supplier management. To maintain a high-quality supplier base and continuously improve the procure-to-pay process, tracking the performance of your vendors is crucial. This involves regularly tracking and monitoring key performance indicators, such as:
- On-time delivery
- Quality of goods
- Vendor responsiveness
- Cost performance
- Compliance performance
A comprehensive procure-to-pay system must have tools for tracking and analyzing vendor performance. With this data, your organization can be informed on supplier selection decisions, identify areas for improvement in your supply chain and drive continuous improvement in your supply chain. Regular performance reviews with suppliers, based on this data, can lead to enhanced collaboration and overall improvements in your procurement process.
7. Do you track inbound shipments by product and lot number?
For effective inventory management and quality control, it’s essential to track inbound shipments at granular levels—including product and lot number information. Tracking with this level of detail allows for better traceability, which is important for the manufacturing and distribution industries as they are subject to strict regulatory requirements that include costly product recalls when necessary.
New generation procure-to-pay systems may come with—or integrate with—warehouse management systems (WMS) that are essential in tracking inbound shipments at this level of detail. This capability can improve receiving processes, enhance inventory accuracy and provide valuable data for supply chain optimization. It also facilitates more efficient handling of quality issues or recalls if they arise.
8. Can you divert shipments without them ever crossing your dock doors?
Your supply chain flexibility and efficiency can be greatly enhanced by having the ability to divert shipments without them having to physically enter your facility. This functionality is especially valuable when you have operations in multiple areas or when your business carries out drop-shipping.
Advanced procure-to-pay and logistics systems are needed to implement this capability in your organization. These systems can help coordinate activities between your suppliers, carriers and multiple delivery locations. Although these systems may require a significant investment in technology and process changes, they offer the following benefits:
- Reduced handling costs
- Faster order fulfillment
- Improved inventory management across multiple locations
9. Are more advanced receiving processes (e.g. license plating) part of your process?
Advanced receiving processes, such as so-called “license plating”, can significantly improve warehouse efficiency and inventory accuracy. License plating is the process of assigning a unique identifier to a group of items with an aim of making it easier to track the item within your warehouse.
When these advanced processes are incorporated into your procure-to-pay system, you can:
- Reduce the time and effort required for receiving and put-away operations
- Improve inventory tracking accuracy
- Facilitate more efficient order picking and shipping processes
10. How is quality maintained?
The satisfaction of your customers and your operational efficiency depends on your organization’s ability to maintain quality throughout the procure-to-pay process. Waiting for your customers to report quality-related issues before you can address them—which is a reactive approach—can be costly and can damage your reputation. A proactive quality management system can help your organization avoid quality-related issues.
Having established processes for quality control, such as receiving inspections, should be a standard part of your procure-to-pay workflow. Your procure-to-pay process software should have features, such as quality check checklists, automated alerts for potential issues and integration with quality management systems. These features can help your organization address any quality-related issues as soon as they are identified, enabling you to reduce customer complaints, minimize returns and improve your supplier performance.
11. Do you have an automated three-way match for accounts payable?
Within the procure-to-pay cycle, an automated three way match feature forms a cornerstone of efficient accounts payable, and helps streamline invoice processing and reduce the risk of errors. The three-way match process compares your purchase order, goods receipt and supplier invoice to guarantee accuracy before any payment is made. Some organizations—even though we are in the 21st century—still rely on manual matching, which is time-consuming and prone to errors. Automation in this process can improve your company’s procure-to-pay efficiency.
A well-implemented, automated three-way match can offer your organization the following benefits:
- Reduce invoice errors
- Increase capability to identify fraud
- Eliminate double payments
- Create confidence in your numbers
- Build stronger relationships with your vendors
12. Do you have a separate defined business process to work with drop-ship suppliers?
Drop-shipping has become a popular order fulfillment method for distributors in the current e-commerce era. In drop-shipping, your organization doesn’t have to keep products in stock. When a customer makes an order, your company forwards this order with the payment to a dropshipping supplier who then ships the product directly to the customer. This makes it crucial to have a well-defined process for working with your drop-shipping vendors.
Your procure-to-pay system should support drop-ship processes, with features such as:
- Automated order forwarding to suppliers
- Real-time inventory visibility from supplier warehouses
- Integrated tracking information for customer orders
Conclusion
For distributors and manufacturers aiming to increase efficiency, streamline business processes, reduce costs and improve supplier relationships, optimizing the procure to pay process is crucial. This article has offered twelve questions to ask about your procure-to-pay processes. A robust procure-to-pay software can play a big role in helping your company streamline operations—from purchase requisition to payment execution. When evaluating your procure-to-pay processes, consider how each of these aspects align with your current operations and strategic goals. Optimizing your procure-to-pay processes can result in cost savings, improved cash flow management, improved supply chain management and enhanced supplier relationships.
Ultra Consultants is a technology consulting firm helping manufacturers and distributors achieve their digital transformation goals—including helping organizations streamline the procurement and payment processes. With our help, your organization can unlock its full potential and thrive in today’s dynamic business environment. Our business process management consulting services leverage decades of hands-on expertise across business strategy, business process optimization, technological innovations, digital capabilities and enterprise program management. So, take the first step towards elevating your business by partnering with Ultra, your trusted business process consultants.
