Everything comes at a cost. From your Netflix subscription to the pen that keeps getting lost at your desk, every good or service has a value. Naturally, it explains why everything comes at a price. Companies must charge for the materials and services used to create the final product, and a little more to ensure a return on investment of raw goods. In the B2B world, this process is better known as procure to pay.
What is Procure to Pay?
The procure to pay cycle, sometimes known as purchase to pay, is a system that combines numerous finance department functions into one process. Most responsibilities in the purchase to pay cycle include:
- 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.
Tech is Transforming the Procure to Pay Process
Some companies still handle check cutting, invoicing, and other purchasing processes manually. On the other hand, modern businesses are relying on tech to save time and money. Digital processes have many benefits including better shareholder value and purchasing experiences for vendors and suppliers.
The procure to pay process includes many functions, such as invoice reconciliation from accountants and the finance department. Supply chain teams are tasked with managing inventory and vendor relations. On the other hand, the finance department manages the budget and payment methods. With such distributed management, companies are spending over $10 per invoice in the procure to pay cycle.
There’s a big difference between companies that automate procure to pay and companies that stick to the Stone Ages. According to CFO magazine, the average cost per invoice processed ranges from $4.98 per invoice for top performers and $12.44 per invoice for bottom performers. The goal of every procure to pay process is to purchase raw materials for production as quickly and efficiently as possible. Teams strive to get the goods into the hands of the right people without delay. The small details make a big difference, and should be treated with care; otherwise expenses can balloon out of control while efficiency plummets.
According to the Tungsten Network Global Study, manual procure to pay processes are inefficient and troublesome due to obstacles such as high volumes of invoices, manual approvals and exceptions, and supplier requests. According to the study, more than 125 hours and $171,340 are wasted annually due to manual procure to pay issues. It’s time for businesses to make the switch to tech in order to get the biggest bang of their bucks.
According to Raj Aggarwal, Director of Product Marketing and Analyst Relations at JAGGAER, “Procure to pay helps reduce errors and improve efficiency by linking the entire process under one system.“
Without automation, it’s evident that the procure to pay processes can be very tedious, slow, and labor intensive. Manually organizing invoices and purchase orders wastes hours and trees, and that doesn’t include payment processing. Keeping track of all of these responsibilities manually comes with human errors, missed discounts, and lack of big data to make informed decisions on strategies and spending.
Aggarwai shares a key point that procure to pay is “all about getting rid of paper, automating, and getting more efficient.”
Procure to pay processes should do more than streamline the tedious process. Automating P2P processes provide support for purchasing and vendor decisions for the finance department and the business. In a recent study, GEP highlighted the number one benefit of automating procure to pay.
“A key benefit of automation is the ability to track detailed data on spending trends throughout the organization.”
Having quantitative and qualitative insight into procure to pay processes and purchases improves cash flow and effective spending without the worry of manual errors or oversights.
Understanding 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.
Cloud or Internal ERP Implementation for Inventory Management
It’s tough to keep track of piles of paper for inventory management, but an Enterprise Resource Planning (ERP) with procure to pay and inventory management is the modern way of managing and monitoring products. A procurement manager can simply log in to view inventory by location and make the right purchasing decisions, thereby ensuring the company’s working capital is being deployed well and products are being turned into profits.
Companies have several options to host an ERP system or procure to pay system. Today, buyers are investing in a modern, digital integration to buy, install, and maintain expensive servers to house the system.
Cloud ERP implementation has emerged with big benefits, power, and security of colocation without the hefty price tag. Sometimes the ERP is already hosted as a Software-as-a-Solution (SaaS) product. Other times, the ERP can be operated using the cloud, such as Amazon Web Services (AWS) or Google Cloud. With cloud computing, costs are elastic and move with your storage, processor, and other resource needs.
Aggarwal explained 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 stated. 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. With so much money on the line, leaders across IT, procurement, and finance must join forces to implement the right procure to pay system effectively. Many companies choose to integrate an ERP that includes procure to pay capabilities. They often install and roll 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 has a 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 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.
The Art of Procurement and Managing Director of Palambridge, Philip Ideson, believes that the cloud is where the industry is headed. As the founder of his on-demand strategic procurement startup, Ideson cautions businesses when integrating a SAAS solution with use internal systems as solutions. “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.
Bringing the Purchase to Pay Flow Under One Roof
As the B2B World adapts to new tech, there are many solutions for digitizing procure to pay processes. Procure to pay strategies are not “one size fits all.” Each company has different needs for payment methods, approvals, and exceptions. It’s important to know what to look for in a solution so that it best serves the needs of the business. The purchase to pay cycle includes many responsibilities for finance departments to effectively manage spend and purchases.
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.
In a recent Chron article, the direction of supply management became clear for the B2B World to see. In order to keep up with the times, supply management for businesses is migrating to the Internet. Suppliers understand that buyers are searching high and low for the best deals on products.
“Suppliers are interested in having a high, predictable sales volume, while purchasers are looking for a reliable, low-cost source.”
Real-time inventory updates, prices, and offers available online 24/7 creates an intense competition in the B2B World. This easy access to product information can be a headache of information overload.
Improve Order and Payment Accuracy
When it boils down to ordering and payment processing, it’s critical to get it right the first time. Order errors are common with manual procure to pay processes. Sometimes an employee orders the wrong item or too many items and doesn’t bother with a return because of the inconvenience and expense. 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.
Supply chain and finance departments implement purchase to pay systems for one, clear purpose: efficiency. 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.
The Tungsten Network study pointed out that 64% of 400 surveyed professionals agreed that late P2P payments are due to slow processes. Other late payment factors include errors and manual processes instead of automation.
Every dollar is important to your business. 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.
It’s a challenge 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.
Blockchain is the New Building Block
Blockchain is the disrupter of the P2P process. The best way to define it is a list of secure online transactions stored via a database. Think of a secure, online folder that stores all of the receipts for a big project. You’ll have the cost, date, purchasing information, and some notes. You cannot change your receipts, but they’re always there for your reference.
Likewise, Forbes finds that blockchain will solve many of the problems businesses face. Businesses are using blockchain to improve accountability, increase visibility, and track purchase costs to monitor ineffective spend. The article highlights that a variety of applications, platforms, and partnerships are making their way to the blockchain evolution quickly. In fact, IBM recently made a striking move to change the game for blockchain.
“IBM is working with seven European banks to develop a blockchain platform, and the R3CEV consortium was formed to advance the blockchain technology.”
This new addition to P2P has changed the payment game for companies by providing transparency and security. Accenture sees this technology platform as disruptive and impactful to the finance industry according to a recent release.
“Blockchain technology would help increase trust among clients and vendors through shared public IDs, simple and fair referral mechanisms and ratings/score assigned to all market players based on the quality of the goods, reliability in delivery of timely payment of invoices.”
Adopting blockchain is the must-have service for businesses to form data and analysis around vendors and product purchases. Keeping a record of all transactions, forms, agreements, and conversations only strengthens your company’s P2P and B2B processes.
Procure to Pay Solutions Save Time, Money, and Resources
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.
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.
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?
Companies might ask: How can we afford procure to pay?
But a better question prevails: How can we afford not to have 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.