All You Need To Know About The Procure-to-Pay Process

Procurement software is the heart of any organization’s supply chain system. If it's outdated or performs slowly, then it can cause issues. Companies with an inefficient procure-to-pay system face negative impacts to their bottom line and risk falling behind competitors. 

What Is A Procure-To-Pay Process?

Procure-to-pay can be abbreviated to P2P. It is the process of systematic and integrated action taken to fulfill a requirement for goods or services; in a timely and orderly manner, taking into consideration the price. There are a series of steps involved, like invoice approval, vendor payment, etc. 

What Is Meant By A Procurement Process?

The global procurement market is expected to grow at a CAGR of 8.2% between 2021-2028, an increase from USD 5.8 billion in 2020. A procurement process involves getting the required raw materials for production of the goods and services which needs to be made by the company. 

A good procure-to-pay process ensures that the production happens smoothly and at the least cost possible. For example, all orders should be placed by using EOQ (Economic Order Quantity) principle so that the ordering cost and carrying cost stays the same and the lowest. 

There are other principles like just in time, and more, which you can follow too. “Organizations are able to critically evaluate sourcing opportunities through data driven product and supplier insights; allowing them to better understand key industry and macroeconomic trends,” reads an excerpt from this Deloitte report about AI opportunities in the Procurement Process. 

Essential Steps In The Procure-To-Pay Process

Now let’s take a look at the essential steps to follow for an effective procure-to-pay system:

Step 1:

Determine and define the business requirements. Use key data inputs to do this. For example, arrange a meeting with your key suppliers and then identify the gap in the existing system. Next, work together for a better supply commitment and price. After you've identified the gaps, your procurement team should draft up high-level specifications for goods/products. It should then focus on terms of reference for services and a statement of work. On a side note, read here if you want to learn what procurement means.


Photo by Scott Graham on Unsplash

Step 2:

The procurement department gives you the final specifications and statement of work. You create a formal purchase requisition. The accounts and admin department give the necessary approvals. The purchase department then submits the filled out purchase requisition form. Depending upon the order size, consignments should be tendered accordingly.

Step 3:

After submitting the purchase, department heads or dedicated procurement officers need to receive requisition orders. Depending on their evaluations, they can approve or reject a purchase requisition. A lot of factors need to be taken into consideration. For example, the purchase budget, validation of needs, supplier quality-to-price ratio and others. Depending upon this evaluation, you may or may not have to submit a revised requisition form. 

Step 4:

What if you need the product on an urgent basis or you need a small quantity of it? In that case, a spot buy transaction can be performed without going through every step.


Photo by Marissa Grootes on Unsplash

Step 5:

All purchase orders are sent through an approval loop to ensure that the specifications are legitimate and accurate. If they satisfy the predetermined terms, they are sent to the respective vendors. The vendors receiving the order receipts can either approve or reject it. They may sometimes negotiate prices if no price guarantee contract exists. Once the vendor accepts the purchase order receipt, it gets converted into a legally binding agreement.

Step 6:

The supplier will tell you about the delivery date after they accept the order. If they do not explicitly tell you, they have to inquire about it. If no fixed delivery date is provided, ask about a tentative delivery date. Now on the actual delivery date, you have to inspect the goods delivered and give your approval. Be careful about this: You have a right to reject the goods if they don't meet the agreed quality and specifications. After you approve the goods, issue a payment invoice acceptance receipt. Now depending upon your company’s policy, the vendor payments will be released. The vendor can also factor in the payment receipt with any bank and financial institution at a nominal discount (2-3%) and get paid.

Step 7:

You should rank the supplier on its promise based on feedback from the purchase requisition and quality control department. You also need to check other factors like delivery promised time, service, contract rules compliance, responsiveness, etc. If you have encountered any gaps in their performance, then note them down in your systems. According to another recent report, the global procure-to-pay industry has grown by double digits since 2020 and continues to grow.

Step 8:

Once you’ve completed all formalities and approved the payment invoice, the accounts or finance department steps up. They will have to cross verify the prices. They then liaise with the purchase and quality assurance departments over any discrepancies.

Step 9:

This is the final step. After all the necessary checks are done, the payments will be processed, and according to the terms of the contract, they will be released.

Conclusion

It's essential to have a good procure-to-pay process for efficient supply chain management. Hence if your existing system is outdated, you must prioritize upgrading it. The future of your company depends upon it.

Now read: How To Do Payroll For Your Small Business

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