In simple terms, the Procure-to-Pay process is how an organisation purchases the raw materials needed to do business. For most businesses, defining the process begins long before making transactions.
Procurement-to-Pay software systems are designed to make processes seamless and efficient. Every retailer, manufacturer, or service provider needs an efficient method to manage purchasing, cash flow, build vendor relationships, and maximise buying power.
The Procurement Plan
Prior to making transactions, every business should have a procurement plan in place to define purchasing. In the plan, anticipated goods and services are identified and expected costs are figured. A budget is set for each department or category of goods, with a delivery timeline defined. Optimally, goods arrive when they are needed and not before, to minimise costly storage and maintenance.
The procurement plan outlines the process of ordering. Some materials can be well defined and automatically ordered when a threshold is reached; for example, when a construction company is building a house, a new order of wood screws can by automatically triggered when supply reaches a specified low. With low cost constant-use items on straight-through processing, the business never runs out or overstocks, and the workload is minimised for that category of item.
Other items will require a requisition order that needs approval. The procurement plan defines the approval order for each type of requisition, and the system sends automatic alerts to people whose approval is required when such a requisition is filed.
Also in the procurement plan is a list of vendors, with preferred status flagged. The vendors offering the best price, quality, and most reliable service are designated preferred, while secondary vendors are identified for plan B orders. It’s critical to have alternate supply chain sourcing for unforeseen events, like a warehouse fire or a hurricane.
“Every retailer, manufacturer, or service provider needs an efficient method to manage purchasing, cash flow, build vendor relationships, and maximise buying power.”
Procurement Process Functions And Responsibilities
With a procurement plan in place, the supply chain issues are minimised, and so is the work to maintain deliveries. Terms are already negotiated with vendors, a master price list is on file, and protocols are defined.
Here’s how purchases are made, from start to finish.
- Requisition order placed. Requisition orders are a formal request for goods or services. In cases where every item can be defined in advance, most requisitions are defined and built in to the procurement plan. Even the most carefully defined plans, however, can need additional materials due to spoilage, unforeseen events, scope creep from clients, or new ideas to make improvements on the original plan. Well-crafted procurement plan budgets have a cushion built in for just such circumstances, and requisition orders can be submitted later in the process if necessary.
- Vendor Selection. For new orders, the vendor selection process may need to be brought into play. Working from a short list of vendors, the procurement department sends a request for proposal (RFP) outlining the requirements.
Suppliers return a bid on the job, detailing turnaround time, price, and pertinent material specifications.
During the process of choosing suppliers, negotiations take place. In addition to quality, cost and delivery schedules, the procurement department will explore potential advantages such as:
- Year-over-year price reduction
- Quantity discounts
- Future improvement in quality
- Freight and insurance costs
Compliance requirements must also be considered. The industry may have federal standards to meet, and the company may have a social conscious agenda endemic to company culture. Corporate social responsibility is a rising concern among consumers, and businesses are expected to meet certain standards of sourcing in order to please their customer base. As a result of this social pressure, many companies have committed to fair labour and environmental standards. Vendors must be able to meet the same standards to avoid consumer backlash.
Once negotiations with all the short-listed vendors are completed and the most advantageous deal is identified, a supplier is chosen according to the selection criteria outlined in the procurement plan and a purchase order is issued.
- Purchase order (PO) issued. Once the requisition order is approved, a detailed order form with amounts and delivery requirements is submitted. The PO is sent to the appropriate vendor for fulfilment.
- Receiving document logged. The vendor delivers the goods and the receiving document is entered, with line items verified to ensure that everything ordered is delivered.
- Invoice received. The vendor submits an invoice for payment, which is entered into the system.
- Invoice reconciliation. The system automatically uses a three-way matching process comparing the purchase order and receiving document with the invoice to confirm that the the goods were delivered as ordered and billed accordingly. Line items that do not match are flagged and reported for investigation.
- Accounts payable. Invoices are approved for payment, payments are made, and the accounting system is updated.
Maintaining an Efficient Procure-to-Pay System
Keeping the system in optimal working order requires attention to detail. The procurement department maintains contact with vendors, fostering good working relationships that inspire vendors to negotiate in good faith with customers who pay their bills on time and fulfil their commitments.
During the course of a project or calendar period, many things can change. Anything from natural disasters to political events can cause raw material prices to rise or fall, affecting every link in the supply chain. While suppliers are bound to contract terms, the procurement department must be aware of upcoming budget issues for future orders. Part of their responsibility lies in finding sourcing workarounds for rising costs as things change.
While the Procure-to-Pay system may sound complicated, software programs make it fast and easy. Long man-hours spent filling out mountains of paperwork are a thing of the past. Comprehensive procurement software does most of the work, starting with populating forms with all the information necessary for every step of the process. Automating the process reduces errors and simplifies reconciliation, reducing the opportunities for fraud, theft, and duplicate payments or missed deadlines.
Software that can manage and automate your procure-to-pay process with easeFind Out How