What is Procure to Pay?
The procure to pay process is the end to end journey of acquiring materials needed to effectively run your business, while facilitating the complete bill payment steps for your supplier.
Accounts payable professionals know the challenges of disparate ordering and processing systems. Procure to pay systems connect the entire supply management and accounts payable process into one, simple-to-understand P2P process flow.
By uniting these systems, businesses can become more efficient, save time and money, and ultimately provide better shareholder value and an improved customer experience.
According to Raj Aggarwal, Director of Product Marketing and Analyst Relations at JAGGAER, a top 100 IT logistics provider, the P2P cycle is “all about getting rid of paper, automating, and getting more efficient.”
Some companies still do check cutting, invoicing, and every other purchasing process by hand, Aggarwal shares. “Procure to pay helps reduce errors and improve efficiency by linking the entire process under one system.”
Sometimes referred to as purchase to pay, procure to pay is a system that combines the following functions into one process for which managers and workers use to fulfill their various functions. The primary functions included in the purchase to pay cycle are as follows:
- Supply management – The process of connecting to and managing supplier relationships for the purpose of ordering.
- Requisition – The process of formally ordering a product for fulfillment.
- Purchase order – Creating a formal order document which contains specific order quantities and requirements.
- Receiving – Accepting the physical shipment and entering the accepted order into inventory, tracking, and accounting systems.
- Invoice reconciliation – Comparing the invoice to the purchase order to ensure all costs and charges are as expected.
- Accounts payable – The final step in the procure-to-pay process is focused on approving the purchase order for payment, sending the payment, and entering the payment into accounting systems.
Anyone with experience at a large corporation knows how disconnected these functions can be. Supply management and requisition are managed by the supply chain team.
Purchase orders and receiving can be managed by supply chain, individual departments, or even accountants. Invoice reconciliation and accounts payable are managed by accounting and finance teams. It is completely possible that these functions are not managed in the same building, state, or even continent.
With such distributed management, it’s no wonder some companies are spending over $10 per invoice to manage the entire process flow.
At its core, procure to pay aims to get the right items into the hands of the right people when they need them. But the ancillary activities are very important and should be treated with care; otherwise expenses can balloon out of control while efficiency plummets.
As Fiel points out: “Having visibility across the entire transaction is key to controlling costs.”
The Manual P2P Process Can Be Labor Intensive
Without automation, the procure to pay processes can be very tedious, slow, and labor intensive. Shuffling around papers, folders, emails, invoices, purchase orders, shipping information, and making on-time payments takes a lot of steps and a lot of work. Businesses employ legions of workers to fulfill these tasks.
What sets these companies apart? A focus on the procure-to-pay process. Implementing procure-to-pay best practices can help improve efficiency and lower costs. Without the right experience and information, however, implementing procure-to-pay solutions can be difficult.
As global supply chain consultant Jeremy Fiel notes, “There will always be challenges as you implement new systems.”
The technical aspects alone are enough to make many business leaders’ heads spin; but like any business process, those challenges can be overcome with the right resources and focus.
The Purchase to Pay Flow vs. Source to Pay
When setting up a procure to pay system, it is important to note that, while sometimes erroneously interchanged, source to pay and purchase to pay are not the same.
The purchase to pay process flow starts with the procurement process. This assumes that the vendor relationships are already in place. Some companies that create new and unique products regularly benefit from a source to pay system that includes strategic sourcing, requests for proposals (RFPs), and more.
In many industries, a strategic sourcing team works with vendors to manually fill each raw material and inventory need. With source to pay, much of that process is streamlined and automated.
Bringing the Purchase to Pay Flow Under One Roof
Supply chain, inventory, product, accounting, and finance team members are involved in purchase to pay systems for a clear purpose: each bring unique expertise and can contribute to a better result for the company. But with such a diverse group involved, team members face many opportunities for inefficiencies and slowdowns.
Procure to pay software unites each of these functions under one primary computer system. This allows everyone involved to have instant access to information about any purchase no matter its status in the procure to pay process flow. But according to a recent survey conducted by Software Advice, a subsidiary of IT consulting firm Gartner, 44 percent of companies use multiple systems for enterprise management, while only 34 percent have implemented an enterprise wide solution.
With quality procure to pay software in place, the entire business process is improved.
For example, if a company uses an internal cart system for office supply ordering, the moment an order is entered by an employee, it can automatically generate a purchase order and create an accounting transaction informing the finance department of the upcoming expense.
In companies ranging in size from dozens of employees to tens of thousands, this can be incredibly valuable. And with a larger organization, implementing a solid procure to pay business process can lead to much better scale and even bigger savings.
Assembly line pioneer Henry Ford, the namesake founder of Ford Motor Company, offers an insightful case study of this process. Ford built his company into the successful brand it is today by focusing on how his company produced each car. By implementing factory automation to produce the Model T, Ford was able to increase efficiency and quality at the same time.
Procure to pay—and enterprise resource management overall—is the next evolution of this assembly line. Rather than focusing on building cars, however, this evolution in automation is focused on office worker, ordering, and AP productivity and cost savings.
Implementing a Procure to Pay Process
If you are sold on the benefits of a procure to pay process for your business, you may be eager to dive in and get started, but implementing a new procure to pay system is not without challenges. A long list of complexities, including training staff to use the new system and integrating with existing systems, awaits companies looking to add procure-to-pay to their arsenal of technologies.
William Michels, a supply chain consultant with over 30 years of industry experience and co-author of Transform Your Supply Chain: Releasing Value in Business, believes that purchase to pay is going to be necessary for businesses looking to thrive and expand. “Businesses won’t be able to survive without a good procure to pay system,” he says.
At Fortune 500 size companies, adding or implementing enterprise resource planning (ERP) systems that contain procure to pay software can easily cost millions of dollars. Furthermore, a poorly implemented ERP system can lead to massive disasters, like when computer company HP lost $160 million in a failed rollout of SAP.
With so much money on the line, leaders across IT, procurement, and finance must work together to choose the right system and deploy the procure to pay software effectively.
Many companies choose to integrate an ERP—which includes procure to pay capabilities—by installing and rolling out the system for all company functions at once. In other cases, a company will deploy the ERP to specific parts of the company and may continue to migrate and add features over time.
From a short-term cost management perspective, it is much less expensive to do a small ERP deployment and then use it for a few tasks and processes. This myopic view, however, can lead to big frustrations for the employees working with the system and ultimately lead to a higher long-term cost when systems are migrated and integrated. Going all in at once is a larger risk and higher upfront cost, but offers the biggest opportunity for a successful transition.
Doing a partial implementation of a procure to pay flow can lead to a productivity increase, but it can also lead to additional frustrations and headaches. The entire reason to use an ERP is to bring all of those procure to pay features under one system. If a company is not implementing a full ERP solution, it could ultimately be creating more work as each step of the process must be rebuilt from scratch.
Michels notes that in the past businesses had distributed supply chains. “Now we are seeing consolidation,” he says. “Distribution is going from a distributed network to a linear network.” This has led to multiple, competing supply chains across industries. For example, in the automotive industry major manufacturers can choose between supply chains in Japan, Korea, Europe, and the United States. Competition in the supply chain is good for consumer pricing, but also highlights the importance of a well-managed supply chain system.
Cloud or Homegrown ERP Implementation
Companies have several options to host an ERP or procure to pay system. A decade ago, there was no such thing as a cloud ERP. Every company that wanted a large ERP needed to buy, install, and maintain expensive servers to house the system.
When establishing a company data center, computers can cost millions of dollars on their own and building out a networked data center space costs around $1,000 per square foot, factoring in raised flooring, electrical, cooling, power backups, and everything else that a reliable data center requires. After installation, the company has to pay the power bill—an impressive $50,000 to $100,000 per month—maintenance, and other costs.
An alternative option to building a dedicated company data center space is to use colocation space, which is an industry term for rented data center space in an existing facility. While the build cost is much lower, rent and networking costs in data centers can still be quite expensive. Depending on the location and the digital footprint required, this cost can easily reach into six figures per month for a large company.
A modern option has emerged that brings much of the power and security of colocation without the big price tag. This newer option that some companies are rushing to take advantage of is cloud hosted ERP. Sometimes the ERP is already hosted as a Software as a Solution (SaaS) product. Other times the ERP can be operated using a cloud like Amazon Web Services (AWS) or Google Cloud. With cloud computing, costs are elastic and move with your storage, processor, and other resource needs.
Aggarwal explains that companies with major security concerns may want a customized, self-hosted ERP. “Customizing ERP is very expensive, but can meet very specific business needs,” he says. However, if the company is not handling extremely sensitive information, the cloud can be a better option. Aggarwal says: “In the last three years there has been a big movement toward the cloud.”
The market for this type of SaaS solution is booming. According to Nate Clark and Donald Dawson at Supply & Demand Chain Executive, the overall market for SaaS spending is expected to exceed $78 billion annually, while traditional ERPs will decline to $15 billion per year.
Philip Ideson, founder of The Art of Procurement and Managing Director of Palambridge, an on demand strategic procurement startup, believes that the cloud is where the industry is headed. However, businesses should use caution when integrating a SAAS solution with homegrown systems. “The danger is for companies who may have built their own internal infrastructure that needs to integrate with a cloud based solution,” he says. In these cases, if the cloud provider upgrades the system, it could risk breaking custom integrations.
A Model Procure to Pay System Flow
If a company is trying to implement a new procure to pay system, it is best to start with a high-level view of how each process should link together. Remember that a well-built procure to pay process will include supply management, requisition, purchase orders (PO), receiving, invoice reconciliation, and accounts payable.
In a successful system, each time a new supplier is added by supply management, any authorized user can create a PO or enter an order. Each time an order or PO is created, a payable record is created for accounting and the receiving and processing team can see the expected delivery.
When an item is entered, it is marked off as received in the invoice reconciliation module and an accounts payable task is instantly created.
Once the invoice is fulfilled, AP is notified automatically to pay the invoice, or it is automatically placed in a queue for payment based on the agreed upon payment terms.
Then, when the payment is authorized, the accounting entries to reduce payables, reduce cash, and increase expenses are automatically posted to the general ledger.
For accounting and finance, the benefits go beyond automatic general ledger entries. Anyone with the right access can quickly lookup and export purchase data to create useful management reporting.
Imagine quickly clicking a few buttons to export data to Excel, clicking again to put the data in a pivot table, and instantly seeing expenses by vendor, month, year, and any other possible way you may want to mix, match, and display this type of data.
Not only does this system setup create more efficiency in the entire p2p cycle, it also gives leaders the tools to make informed decisions across the company’s vendor relationships.
Every Department Wins
A technician at a telecom company can compare the cost of a 10-gigabit card across vendors; a veterinarian technician can reorder supplies when the stockpile is running low; an office manager can enter a self-service order with the preferred vendor to restock pens, pencils, and printer paper.
In any industry that orders physical products, procure to pay systems can make the ordering function much easier and add controls and tracking to avoid over-ordering, overpaying, and misusing ordering systems. No one has to go through AP for approval, but if an AP or manager is wanted, the procure to pay system can help; there are even controls available which can prevent orders from being entered and processed if there is already enough inventory available.
Accounts payable and accounting typically work closely to ensure every order and dollar out the door is accounted for properly. In old fashioned systems, stacks of paper and slow approval processes take place.
With procure to pay in place, each time an order takes place, much of the process happens automatically. Even electronic order transmissions to vendors can happen completely within the procure to pay system.
Inventory Management in Procure to Pay
This article has examined the process flow for procure to pay, but there is one more important aspect to discuss: inventory. Some procure to pay systems and source to pay systems include inventory management modules that can do a lot more than just tell you what is in stock.
Companies with complex logistical needs might want to track multiple products and keep them in stock at various warehouses across the company’s footprint. Consumer cable and internet companies, for example, need to have modems and routers on hand in every location in case a new customer wants to sign up for service. The internet company has to act quickly to send someone with the right skills and equipment to activate the customer’s service quickly. If the provider can’t live up to that expectation, the customer will take his or her business to a competitor.
Keeping track of different items in various locations can be done with a spreadsheet or a notebook, but an ERP with procure to pay and inventory management built in is much better. A procurement manager can then log into the procure to pay system to view inventory by location and make decisions about ordering and moving products around, thereby ensuring the company’s working capital is being deployed well and products are being turned into profits.
Dell has done an incredible job managing inventory and procurement. The personal computer giant was a pioneer in utilizing “just in time” fulfillment to build custom computers without maintaining a large inventory. Thanks to well-designed procure to pay systems, each time a customer enters an order at Dell.com or a customer service representative takes an order on the phone, the parts are ordered from the suppliers and shipped to Dell. With little human interaction, almost every part to build a new PC comes together at the right place just in time to assemble and ship out to customers.
The Dell model utilizes another interesting innovation in supply chain and procure to pay management. Dell orders directly from manufacturers, rather than suppliers, which cuts out the middle man and saves money. By connecting the procure to pay system directly with supplier’s ordering and fulfillment systems, Dell can get everything it needs at a lower price and faster, thereby avoiding holding millions of dollars in extra parts in inventory.
Improve Order and Payment Accuracy
Incorrect orders happen on occasion. Sometimes an employee orders the wrong item or too many items and doesn’t bother with a return because of the inconvenience. Raj Aggarwal points out that just within the payments side of procure to pay, there is a lot of savings in automation.
Companies that run manual accounts payable processes are at risk to miss payments, resulting in pay missed and late payment charges, or accidentally send duplicate payments or incorrectly payments. With procure to pay, says Aggarwal, “wrong data from manual processes can be corrected” before the problem even occurs.
When it is your business, every dollar is important. Each return is worth the hassle if it will put dollars back in the bank, but oftentimes those money-saving tasks are not executed by employees. While workplace rules and company culture can help offset some of those losses, a quality procure to pay process can greatly help eliminate wasteful spending.
To help decide if a procure to pay system is worth the cost, look at your current procurement budget end to end. Include every aspect of the P2P cycle in your calculations. What would your savings be if you could cut those costs by 5 percent across the board? What about 10 percent or 15 percent?
It is very difficult to quantify wasteful purchasing, particularly as organizations grow larger and have more people involved in the procurement and purchasing process. But don’t discount the likelihood of wasteful spending taking place. Even with the best team, there is almost always an opportunity to save through better controls and systems.
Enabling Employees to Grow Their Skill Set
Layoffs are one of the most difficult decisions a manager can make. However, leaders sometimes have to make those hard decisions and look for opportunities to automate and save. While headcount reductions don’t typically take place all at once or right away, adding a procure to pay system will likely allow for the job to be done more accurately with fewer workers.
Automation is playing much more of a role for companies that embrace procure to pay systems. According to Ideson: “You don’t even need a human touch, which is prone to fewer errors.”
Rather than jump to let people go, many organizations find a way to shift workers focus to more pressing tasks once ERP efficiencies are realized. When team members retire or leave the company voluntarily, those roles often do not have to be backfilled, giving the company an opportunity to save while avoiding the unfortunate layoff process.
If you could reduce headcount in procurement, receiving, inventory management, accounts payable, and accounting teams by 10 percent, how much would your company save? Add that to the waste reductions discussed above and you can start seeing the financial impact of adding procure to pay.
Procure to Pay Saves Time, Money, and Resources
Procure to pay systems are powerful, flexible systems that can help a business manage its procurement and accounts payable systems and everything in between. While there are some costs and challenges involved with transitioning to procure to pay, the long-term savings from added efficiencies, better inventory management, and reduced procurement-related waste add up fast.
Companies might ask: How can we afford procure to pay?
But a better question prevails: How can we afford to go without it?
While it’s a costly and expensive endeavor to initiate, procure to pay offers countless benefits and very few drawbacks. If your business is not already utilizing procure to pay, it’s time to get started.
Bill heads up digital marketing for AvidXchange. Prior to AvidXchange, he was an inbound marketing consultant at Hubspot, a marketing automation software company in Boston, MA. His work has been featured in Inc, Entrepreneur, Forbes and many other top publications. You can find him on twitter @inboundy.