The procure to pay process is complex and far more than simply making a phone call, or sending a few emails to arrange the purchase of goods. It is a key part of your company’s supply chain. Strategically approaching the procure to pay process can see your company reap the rewards.
In this guide, we’ll cover:
- What is the procure to pay process
- 8 steps in the procure to pay process
- Measuring and reporting
- How to improve the procure to pay process
Keeping all the data when it comes to a company’s purchasing process, let alone organising it, is a daunting task. If you don’t have a formalised procurement department with a good enterprise resource plan (ERP), you’re hardly alone. A recent PayStream Advisors report shows only 44% of companies had a dedicated procurement department with standardised organisational processes.
Procure to pay plays a critical part in the operational success of a company. So, a well-defined and executed procurement strategy, along with the implementation of procurement software capabilities, can effectively help reduce costs in manufacturing, distribution and wholesale companies.
What is the procure to pay process
The procure to pay process is a strategic way of organising a company’s purchasing habits as well as managing supplier relationships.
It helps keep material costs down, avoid delays or inconsistencies when it comes to inventory stock quality, prevents stock-outs or overstocking, and deals with other supply chain issues.
The procurement process can have many moving pieces. By understanding this complexity, companies can start developing and implementing strategies that would lead to better business outcomes while minimising the risks due to poor procurement practices.
Take the time to plan out the procure to pay process
What are the steps in the procure to pay process
There are eight steps in the procure to pay process:
- Identify your company needs
- Conducting market research
- Qualifying suppliers
- Choosing your suppliers
- Creating POs
- Monitoring the delivery process
- Evaluating supplier performance
1. Identifying company needs
First, define your needs and create an initial budget. It’s a good idea to specify the inventory in as much detail as possible. Then add any details that could set some vendor’s merchandise above others would be beneficial.
You should think about:
- What are your inventory needs, and why?
- How much should they cost, how much are you prepared to pay?
- When do you need them by?
- What are the vendor’s specifications?
- What are the quantities?
- How long can the supplier’s lead time be?
- What level of quality do you accept, and how do you measure it?
When you have answered these questions, you have already begun budgeting by defining the products, their amounts, and how much you would be willing to spend on them. Besides giving you a good idea of what is affordable to your company, a procurement budget allows for better planning while making the procurement department accountable for its finances.
2. Conducting market research
When finding suppliers, an excellent place to start is by going to trade shows, asking around, including posting in reputable industry online forums or internet searches.
When researching the market for potential suppliers, you need to consider your company finances and time while setting standards relating to the suppliers’ operations. For example, you can also assess vendors’ public information such as financial records, online reviews, location, social and environmental responsibility, range of products, and other important standards to your company.
A simple checklist could be a handy tool in this early part of the screening process.
3. Qualifying suppliers
After creating a list of potential suppliers, narrow it down even further. For example, you can start the nitty-gritty of your due diligence. Additionally, you can ask vendors for referees to see what their clients have to say about their strengths and weaknesses.
You should also find out the professional organisation of the business. You can ask what kind of management methodologies they have, which certifications they have, how they ensure their products’ quality, etc. Request photos and videos or a site visit, as seeing their production floor will tell a lot about how suppliers run their business.
- Finding Value-Adding Suppliers
- How to Identify Underperforming Suppliers and to Choose the Right Ones
4. Requesting proposals and choosing your suppliers
As the final phase of choosing your vendor, forward requests for quotation (RFQs) to the suppliers that have made it to your shortlist and compare their prices.
Try visiting them at their sites or hiring an independent third-party to do this for you. Pick your best supplier and put the other two suppliers on file as second options. So in future, if something goes wrong with the chosen vendor, you have back-ups.
5. Negotiating and contractual obligations
Before creating your contract for terms of trade, seek legal advice from lawyers. Some of the terms of the contract that you should discuss and specify or negotiate with your supplier are:
- General – general description of the terms and conditions and subject matter
- Product specifications
- Prices and payment terms– show in detail and any incentives or penalties
- Quality standards
- Lead times
- International Commercial Terms (if applicable)
- IP and Copyright
- Site access
- Return policies
- Dispute resolution
6. Creating purchase orders
When a purchase requisition comes in from your business, the procurement manager needs to approve it before creating the purchase order, especially when it’s over a certain amount as defined by your company.
Once a purchase requisition is approved, it turns to a purchase order and is forwarded to your supplier. The procurement team or person has to make sure that the supplier has received the order.
7. Monitoring the delivery process and reviewing the goods
Once the supplier delivers the products, inspect it to ensure that it complies with the contract terms. Then approve or reject the receipt of the goods based on the purchasing contract’s standards or PO.
From here, it’s time to pay for the receipted goods. Invoice reconciliation is the act of comparing the invoice to the PO to ensure that everything matches up and your vendor is charging you correctly. The next step is accounts payable. This step refers to handling the PO for payment, ensuring the payment gets sent out on time and logging the payment into your accounting system.
Invoice reconciliation and accounts payable can be tedious but making a mistake here is costly. Automate your procure to pay process by integrating your inventory management software with your accounting solution. Such integration will allow purchase order information to flow through seamlessly to your accounting software so there’s less margin for error and fewer time-consuming tasks to do. This ensures payments are correct and suppliers are paid on time — it’s a win-win for everyone.
8. Evaluating supplier performance
Set up KPIs to assess each vendor and create scorecards to track their results easily and quickly. Creating scorecards for your suppliers is a great way to keep an eye on suppliers’ performance. Evaluating supplier performance in this way allows you to pinpoint and solve issues in your supply chain early on or give praise when due.
To really improve your procure to pay process efficiency, you need to start measuring and reporting your performance
Measuring and reporting on the procure to pay process
When you begin to measure your procurement activities’ performance, you can demonstrate the procurement team’s value to an organisation. Measuring and reporting on the procure to pay process enables managers to shift focus from the transactional aspects of the organisational side of procurement to bring more value to the business through to more strategic decision-making.
1. Procurement cycle time
Procurement cycle time is the time taken from placing a requisition to receiving the goods. Decreasing the cycle times associated with procuring materials and services is an effective way to cut procurement costs.
Automating the procurement process with suppliers can significantly reduce the time it takes to receive the ordered product.
Some ways to reduce procurement cycle time include:
- Minimise the time it takes to produce and approve a requisition
- Get approved POs into the hands of vendors more quickly
- Proactively monitor open orders
- Provide vendor self-service portals empower vendors to enter their invoices
2. Vendor performance
Monitoring vendors performance can help your company boost efficiency and profits, reduce stock levels and inventory stock costs, and improve customer satisfaction.
Some vendor performance metrics to monitor are:
- Delivery lead times
- Communication time lags
- Quality of the products supplied
- Pricing competitiveness
- Price changes and frequency
- Compliance with terms and conditions
- Number of substitutions made
- Number of backorders
3. Cost savings
Cost savings remains a fundamental metric to measure the success of the procurement function. Cost savings sounds simple enough, but how can companies successfully reduce costs? One direct way is to reduce the cost per purchase order, using techniques including:
- Investing in digital technology and process automation
- Adding mobile requisition and approval capabilities
Capture your procurement data and turn it into useful information to guide decision making using Unleashed BI.
How to improve the procure to pay process
Massively improve your procure to pay process by implementing an inventory management solution that integrates seamlessly with your accounting software. The procurement team (and all departments for that matter) can gain better insight into their operations, waste less time on tedious, repetitive tasks, and focus on the strategic aspect of the procure to pay process.
If you already have an inventory management solution set up, make sure you’re analysing your procurement data. That can help you create accurate forecasts and spot bottlenecks or opportunities. The Unleashed BI Vision module digests your purchases data and displays it on a dashboard, perfect for your procurement team to monitor their performance at a glance.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.