Introduction
If only everyone in your organization realized the impact of effective procurement on your budget. But for most, procurement is just a smart word.
By optimizing your procure-to-pay cycle, you can minimize your company’s vendor spending — which may reach 75 percent of your company’s spending if you don’t take action — and even avoid job cuts.
How do you make it happen? That's exactly what we’re covering in this article.
Continue reading to find everything you need to:
- Create a better procure-to-pay cycle.
- Choose P2P software that meets your needs.
- Communicate the entire process to your employees.
What is P2P?
P2P stands for procure-to-pay and refers to the process of sourcing and purchasing goods or services from suppliers at the best possible price for value. It includes multiple stages, from identifying needs to processing payments for products that meet those needs.
Companies often use specialized software or enterprise resource planning (ERP) systems to streamline the P2P process and automate many of the steps involved in it. A standardized procure-to-payment process allows you to save money, increase efficiency and improve supplier relationships.
The 7 steps in the P2P cycle
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The P2P process may differ depending on your company size and established workflows, but it always includes the following steps:
- Identifying the need for goods or services.
- Shortlisting vendors.
- Requesting a purchase (aka purchase requisition).
- Raising a purchase order (PO) for those goods or services.
- Receiving the goods or services.
- Approving the invoice for payment.
- Making a payment to the supplier.
🎓 Related reading: How to Build a Powerful Logistic Management Process to Optimize Your Supply Chain
1. Identifying the need for goods or services
The first step in the P2P process involves realizing and defining a need within the organization for goods or services. One may need to replace old equipment, increase production capacity or source raw materials for production.
Every team or department in your organization may be involved in the first steps of the P2P cycle. For example, if a sales team realizes the need for a custom CRM system, they’ll be the ones to start the entire P2P process.
In this stage, the team conducts the needs analysis (what exactly do you need?), assesses and clarifies business requirements (e.g. defining a budget and timeline) and determines specifications for a product that may solve your problem.
2. Shortlisting vendors
Finding and comparing vendors is considered to be a part of the first step of the P2P cycle, but we strongly believe the process deserves a separate section.
Once the team has identified the need, they’ll start looking for potential vendors who can supply the required products. They may use referrals from their network, but it’s good to consider at least three to five options for a procurement project. They may need to go for market research and identify your competitors’ vendors, highest-rated products and some new names in the industry.
Finally, the team makes a list of the providers that fit your company’s requirements and document all the relevant information so that it can be sent for further evaluation to stakeholders.
3. Requesting a purchase
After shortlisting vendors, it’s time to create a formal purchase requisition. This is an internal document that outlines the need for the goods or services, the expected delivery date, the budget allocated for the purchase and suggests potential suppliers.
If the stakeholders approve the request, the procurement team needs to choose the right vendor. You can do it by considering the information at hand or — if you don’t have enough data — you send a request for proposal (RFP) to the shortlisted vendors. When the suppliers inform you of their timelines, quotes and other specifications, you can make a buying decision and raise a purchase order (PO).
4. Raising a purchase order
The PO is a document you send out to the selected vendor so that they could confirm the deal.
It typically includes a unique identification number, the vendor name and address, the delivery date, the payment terms and any other relevant details. Only when the supplier signs the PO, it becomes a legally binding agreement.
5. Receiving the goods or services
When the vendor acknowledges the PO, your organization receives the products and checks whether they meet the required standards. It’s very likely that you spot some discrepancies and continue to communicate with the supplier to address them.
This is where you can create a goods received note (GRN) to acknowledge the delivery of products and also document your supplier's performance for future reference.
6. Approving the invoice for payment
If the received products meet your requirements, you approve the vendor’s request for payment and forward it to the finance team. However, in case of inaccuracies, you have the right to reject the invoice and send it back to the vendor, reasoning the refusal.
7. Making a payment to the supplier
It’s usually the finance team who handles the payment process. After receiving the approved invoice, they pay the amount specified by the vendor and acknowledge both sides that the money is on its way.
More often than not, you’ll continue your relationships with the supplier and the cycle will shorten to the four final steps.
What can go wrong in the P2P cycle
Procurement is a complex process. It requires cross-departmental collaboration, which can hardly be effective without a centralized system. Companies that fail to digitize and standardize their P2P cycle should be ready to face the following challenges:
- Poor communication with suppliers. Miscommunication between the company and its suppliers will lead to the delivery of insufficient services, delays and conflicts.
- Manual errors. If the P2P process relies heavily on manual data entry, the risk of errors and discrepancies will increase, leading to delays and additional work needed to fix the mistakes.
- Lack of visibility and control. When failing to automate and streamline the P2P process, you can’t ensure transparency in your procurement cycle. It’ll affect your company’s ability to make strategic decisions.
- Resistance to change. People don’t like change. The P2P cycle may get complicated if you fail to establish a strong change management framework in your organization.
🎓 Related reading: Do You Need Business Process Consultants to Help Improve Your P2P Cycle?
How to optimize your procure-to-pay process
These three steps will help you address the challenges that come with P2P processes and minimize your vendor spending:
Automate the cycle
The first step toward optimizing your P2P cycle is automating as much as you can. By automating the key processes such as purchase requisitions, purchase orders, invoice approvals and payments, you’ll save a lot of human hours and eliminate mistakes.
You may choose to automate certain tasks in the P2P cycle (e.g. implementing electronic invoicing) or entrust the entire process to sophisticated procurement software. A P2P system will automate the following steps for you:
- Purchase requisition. Software solutions can automatically generate purchase requisitions based on inventory levels, historical usage or predefined rules. You can also go for a semi-automatic approach and let your teams create purchase requests manually, using the templates from your P2P system.
- Purchase ordering. If you integrate your procurement software with supplier catalogs, you can also automate purchase order creation.
- Invoice processing. A system will automatically extract data from invoices and push it into your enterprise resource planning (ERP) software, allowing you to process invoices in just a few clicks. It’ll validate purchase orders against GRNs and automatically generate payment requests.
- Inventory management. You can also use it for inventory management. The system can monitor inventory levels and automatically generate purchase requisitions or purchase orders when inventory levels fall below a certain threshold.
- Reporting. P2P software will generate reports on your active and completed purchase requisitions and approvals, purchase orders, monthly spend and other metrics that help you evaluate the effectiveness of your P2P process.
These are just a few things that procure-to-pay software can do for you. We’ll feature our favorite P2P systems further down the article.
Standardize your P2P process
You need to standardize your procure-to-pay process to increase its efficiency and gain greater control over the entire cycle (without actually supervising every step). P2P cycle standardization involves establishing consistent desktop procedures and protocols to create a predictable, repetitive process.
Well said. So how exactly do you standardize your P2P cycle?
First, develop standard operating procedures (SOPs). Create standard procedures and protocols that outline each step of the P2P process and the responsibilities of each stakeholder. In the document, feature the tools you use in the procurement process, establish clear workflows for different scenarios and outline expected results. Whether your team needs to request a new CRM system or find a print paper supplier, they should be able to follow a standard procedure from start to finish.
As you’re developing SOPs for your P2P cycle, document them. If you have a complex P2P process, documentation will be no fun.
Luckily, you can save a lot of time with Scribe, free SOP software. The tool will generate step-by-step guides for you, following your steps through the process.
Say you’ve implemented a new P2P software system and need to create clear instructions for your entire organization. Just turn on the recording and go through the purchase requisition process within the platform — and Scribe will automatically create an SOP, filled with screenshots and captions.
And our users love it.
You can create instructions for any workflow, adjust them the way you need and combine them in Scribe Pages.
Why not start with this SOP template?
Set quantifiable objectives
Of course, you don’t make changes for nothing. What do you want to achieve by optimizing your P2P cycle?
Goals may vary from reducing the time it takes to process invoices to increasing supplier satisfaction or improving data accuracy. Pick one goal and specify metrics that you’ll monitor to evaluate the effectiveness of your new P2P process.
Here are some examples of procurement KPIs to inspire your thinking:
- PO cycle time.
- Supplier lead time.
- Supplier defect rate.
- Emergency purchase ratio.
- Inventory turnover ratio.
- Cost reduction and quality assurance.
- Procurement ROI.
Choose KPIs that align with your goal and measure them regularly.
The best procurement-to-pay software by need
You may be wondering what procurement-to-pay platform is best for your organization. We’ve grouped the best solutions by company size to help you find the one.
ProcurementExpress: P2P software for small businesses
The tool allows you to track your company’s spend, approve purchase requests right from your inbox and generate insightful reports through an extremely user-friendly interface.
Procurify: P2P software for mid-market companies
Procurify is a spend management platform for optimizing every workflow from procurement to payment. It integrates seamlessly with accounting systems and ERP solutions.
Coupa: P2P software for enterprises
This procurement platform is the ultimate solution for P2P and supply chain management for enterprises. The tool also offers predictive insights to optimize your P2P process and reduce spending.
Vendr: P2P software for SaaS buying
If you only procure SaaS products, Vendr is the right choice for you. The platform specializes in SaaS procurement, helping businesses of all sizes to cut their software expenses significantly.
📌 More tool recommendations: 8 SweetProcess Alternatives to Try Today!
Document your procurement strategy with Scribe
To optimize your vendor spending, you need to automate and standardize your P2P cycle. Implement a P2P platform in your organization’s workflows, establish repeatable procedures and educate your employees on a new system. To help your teams adopt new processes effortlessly, document your P2P workflows with Scribe.
Scribe is your helper with all things documentation. Try it for free today!
