Improving the Procure to Pay Process
In this section, we examine in detail the purchasing process, which includes all the steps that must be completed when someone within the organization requires a product, material, or service. As stated in the chapter introduction, purchasing is a process made up of all activities associated with identifying needs, locating and selecting suppliers, negotiating terms, and following up to ensure supplier performance. While there are strategic activities associated with managing high level processes associated with developing suppliers, measuring their performance, establishing new performance initiatives, and the like, the fact remains that procurement must still manage the “day to day” activities of buying products and services, and handling these transactions efficiently. These buying activities are highlighted in Exhibit 2.3; these are often referred to as the procure to pay cycle, purchase to pay process, (or sometimes the “P2P” process for short). This term includes all of the steps required, from the initial identification of requirements, to the procurement/purchasing of the item, through the receipt of the goods, and finally, to the payment of the supplier once the goods are received.
There are two things to keep in mind as we describe the P2P process. First, how much effort a company spends on these activities will differ greatly from one situation to the next. The purchasing process leading to a $30 billion contract for military jets is very different from that for a routine purchase of office supplies. As such, there is a need to dedicate the appropriate amount of resources and time to a purchase situation which makes sense. Purchasing organizations are often strapped for staff, and rarely have a lot of excess resources. An efficient P2P process is therefore critical to ensure the best utilization of people to the right set of activities.
Second, as you look at the steps in the procure to pay cycle shown in Exhibit 2.3, recognize that companies can often gain a competitive advantage by performing these activities better than their competitors. Many organizations, for example, use information systems to automate routine purchase order preparation, whereas others use sourcing management teams to improve the outcome of supplier evaluation and selection efforts. Finally, an effective P2P system will provide “clean data,” which is critical to perform a good spend analysis (as we discussed earlier), which in turn will make purchasing’s strategic activities more effective.
This section presents the P2P process as a cycle consisting of six major stages:
Forecast and plan requirement
Need clarification (requisition)
Supplier identification/selection
Contract/purchase order generation
Receipt of material or service and documents
Settlement, payment, and measurement of performance
These stages may vary in different organizations, depending on whether purchasing is sourcing a new or a repetitively purchased item, and also whether there is a detailed approval process for purchases that exceed a specific dollar amount. New items require that purchasing spend much more time up front evaluating potential sources. Repeat items usually have approved sources already available. Exhibit 2.3 illustrates a typical purchasing process used in many enterprises, with some typical contingency elements shown.
A document flow accompanies the movement of orders and material throughout the procure to pay process. Historically, preparing and managing the proper purchasing documents has been a time-consuming process. Most firms have streamlined the document flow process to reduce the paperwork and handling required for each purchase. The suite of tools used to achieve efficiency in purchasing transactions is broadly defined as e-procurement. Companies are using e-procurement tools to manage the flow of documents by (1) automating the document generation process and (2) electronically transmitting purchase documents to suppliers. The benefits of electronically generating and transmitting purchasing-related documents include the following:
- A virtual elimination of paperwork and paperwork handling
- A reduction in the time between need recognition and the release and receipt of an order
- Improved communication both within the company and with suppliers
- A reduction in errors
- A reduction in overhead costs in the purchasing area
- A reduction in the time spent by purchasing personnel on processing purchase orders and invoices, and more time spent on strategic value-added purchasing activities
The electronic documents often used in the process are represented in Exhibit 2.3 by boxes, which we will now discuss.