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Procure To Pay or Source To Pay?

Procure To Pay or Source To Pay?

As the procurement processes keep evolving with the dynamic market and challenges faced by procurement teams, new terms emerged to define the procurement process. While procure-to-pay is a widely known term, source-to-pay is also used interchangeably.

In this article, Prasanna Rajendran, Vice President at Kissflow differentiates between the two terms to provide a clearer picture of the two processes so you can understand which one to adopt to streamline your procurement processes.

Let’s start with the basic definitions of P2P and S2P. 

What Is Procure-to-Pay?

Procure to pay involves requesting, buying, getting, paying for, and representing labor and products. It gets its name from the arranged sequence of procurement and monetary cycles, beginning with the initial steps of obtaining the desired items to the last stage of engaging with different stakeholders internally and externally to get the right approvals for paying for it.

Although there is software specifically made to handle the complete procure-to-pay process or parts of it, like invoicing or associated processes, such as inventory management and financial accounting, it is a process, not a technology.

P2P is a common abbreviation of procure-to-pay; however, it shouldn’t be confused with other P2P terms like peer-to-peer networking technologies. Purchase to pay is another name for procure to pay.

What Is Source-to-Pay?

Finding, negotiating with, and contracting with the supplier of the goods is the first step in the source-to-pay (S2P) process, which concludes with the ultimate payment for the items.

Technology, big data, and digital networks are all used by S2P software to increase procurement efficiency. S2P increases performance provides better spend analysis and creates business value by sourcing the best available supplier. 

Processes

Let’s take a deeper look at what sub-processes are involved in each of the P2P and S2P processes:

P2P Process

P2P process consists of the following steps:

  1. Identify Needs:  First step includes identification of organizational needs such as additional raw material or administrative items required to execute business operations.
  2. Purchase Requisition: Then a purchase requisition is placed, which is simply an internal request to buy something.
  3. Purchase Order: Once the purchase requisition is approved, it is transformed into purchase order (PO). The order is then placed to the supplier and they acknowledge if they can deliver the required products within the deadline.
  4. Goods Receivable Note: Once the order is received, a goods receivable note (GRN) is generated which confirms that the required goods are received as per the purchase order.
  5. Supplier Invoice & Verification: Supplier, then, sends out an invoice which is matched with purchase order and goods receivable notes for verification.
  6. Payment: Once the invoice is approved, payment is made to the supplier and the cycle ends.

S2P Process

S2P process mainly consists of the following steps:

  • Sourcing: It is determined that additional inventory or a review of prices and contracts is necessary. The S2P platform then leverages data from historical records, market trends, and user-entered data to find and evaluate the solutions available to fulfill the organization’s goals.
  • Management of contracts: The sourcing team bargains with suppliers, considering factors such as quality, cost, delivery date, and payment conditions.
  • Order placement and delivery tracking: Following the signing of a contract, orders may be submitted electronically through the system and are tracked all the way to delivery.
  • Billing and payment: After the product or service is delivered, it is examined, and an invoice is created. This is handled by the accounts payable department, which pays the supplier.
  • Performance Management: S2P also tracks and monitors suppliers’ performance against pre-set KPIs and rates the supplier performance. In case, suppliers deviate from the benchmark performance, new suppliers are then sourced.

Difference Between P2P and S2P

First off, even though the P2P and S2P processes are quite similar, they differ in several ways. Here are some differences between the two processes: 

 Procure-to-PaySource-to-Pay
1.   The procure-to-pay process typically starts with the request for goods and services and finishes with the payment of the vendor by the accounts payable team.The source-to-pay process spans from sourcing competitive suppliers, supplier selection, negotiation, contract administration and ends with the payment to the vendor.
2.   P2P is can cater to more unique needs as it does not focus on sourcing and negotiating.S2P is more rigid than P2P as sourcing the best and most reliable supplier might limit choices.
3.   Procure-to-pay increases efficiency within the procurement and accounting department.S2P can result in cost reductions across the board, not just in the procurement division.
4P2P is a simpler process as compared to S2P.S2P is a complex process and involves the implementation of organizational strategy.
5When organizations want to increase productivity while focusing on simplicity, the P2P process is preferred.When organizations need to identify new vendors who offer better purchasing terms, lower costs, or new commodities that is not supplied by current vendors, a source-to-pay system becomes extremely helpful.

Benefits

Both processes have their own set of benefits that make them unique and help organizations decide which one they want.

Benefits of P2P

Better Visibility – Because the entire process is digital, firms can see their spending more clearly. This aids in locating cost-saving opportunities and potential areas for development.

Reduced Costs – By streamlining the procurement process and removing manual errors, the P2P model can assist firms in reducing their overall costs.

Greater Efficiency – Organizations can increase their overall efficiency and shorten the time it takes to receive goods and services by automating the procure-to-pay process.

Benefits of S2P

Reduced processing and administrative costs – Automated processes eliminate the need for manual involvement. Saving money can result from this.

Increased visibility and control over the supply chain – The Source-to-Pay approach gives businesses more insight and control over their supply networks, which can increase productivity and lower the risk of disruptions.

Improved compliance – Automated procedures ensure that companies abide by contracts and legal obligations.

Increased agility – The Source-to-Pay model enables businesses to respond more swiftly to market developments by allowing them to quickly adjust their procurement procedures.

When Should You Choose?

Procure-to-pay procedures are recommended when buying goods and services from reputable, well-known vendors. Businesses turn to the source-to-pay process when there is a need for new suppliers offering lower prices for goods and services, more favorable terms, or even new goods that old vendors aren’t supplying.

Moreover, if you are looking for complete digitalization, then S2P can help through full automation, eliminating the human lead time required for data collection, communication, and reporting. 

Procure-to-Pay is an effective and simple approach, and its usefulness is constrained. If you are looking for a quick boost in productivity, then implement P2P. Whereas if you need to stay on top of the competition, you will require S2P to help you source the best suppliers, negotiate with them effectively and monitor their performance while performing all the P2P functions.

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