Your Procure-to-Pay Suite Won’t Cut It For Supplier Management – Here’s Why
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The continued growth in adopting procure-to-pay (P2P) or source-to-settle (S2S) suites in recent years is a testament to the significant value they deliver to procurement teams in businesses of all sizes.
Exercising control of the procurement process enables businesses to achieve continuous cost savings, purchasing compliance and a level of automation of repeat processes in accounts payable.
What is procure-to-pay (P2P)?
Procure-to-pay is a process that includes the complete cycle of activities involved in purchasing goods or services, including the initial purchase requisition through to making payment to the supplier.
It is intended to create increased efficiencies from the perspective of the organization by integrating purchasing and systems, and includes the following key areas:
- Identifying goods or services to be purchased
- Ensuring regulations and compliance are adhered to
- Receiving payments and reconciliation
- Handling invoices and payment
How does the P2P process work?
The most common steps in a P2P process are detailed below; however, organizations may choose to eliminate some depending on internal departmental processes.
- Identification of needs: The first stage of a P2P process is for the organization to determine the needs of the business based on insights from relevant stakeholders. Once the requirements have been defined and agreed upon, the relevant stakeholders provide specifications for the required goods or services.
- Purchase requisition: The relevant department or organization will request goods or services.
- Purchase requisition approval: Procurement managers or heads of departments will review the request and either approve or reject the request.
- Purchase order: A purchase order is created if the request has been approved and sent to the supplier, detailing the goods or services required and a timeframe for when they are needed.
- Goods receipt: When the supplier delivers the goods, the relevant department inspects the goods and confirms that they meet the order specifications and terms of the contract. Based upon the outcome of these, the goods are either approved or rejected.
- Measurement of supplier performance: The organization evaluates the supplier’s performance based on the data obtained in the previous step. Further areas that could be included are whether the goods were delivered on time, the quality of goods, responsiveness and contract compliance.
- Invoice approval: Once the receipt of goods has been approved, checks are then performed against the purchase order, the supplier invoice and the goods received. If no discrepancies are identified, the invoice is approved and passed onto the internal finance team for payment. If issues are identified during the initial checks, the invoice is rejected and returned with reasons outlining the rejection.
- Supplier payment: Payment for the invoice is then arranged by the finance team in line with the terms of payment outlined in the contract.
What are the benefits of procure-to-pay processes?
Procure-to-pay processes provide several benefits for organizations.
- Cost reduction: A well-defined and streamlined P2P process empowers organizations to negotiate better contracts with suppliers, identify areas where spend could be better utilized and reduce the time to process invoices and payments.
- Increased efficiency: If well optimized, a P2P process ensures that procurement activities are better managed within an organization. This allows the relevant stakeholders to focus elsewhere on the businesses that require attention to increase revenue.
- Control of finances: If the process is followed, organizations have more awareness and control over spending across the business. This means that budget management is streamlined, and internal rules related to purchasing can be better adhered to and implemented.
What are the challenges in the procure-to-pay process?
There are procure-to-pay challenges that organizations need to be aware of when determining the business use cases and best fit solutions to these problems:
- Lack of ownership: Unfortunately, most organizations do not maintain good master data on their suppliers. This is often due to processes needing to be defined between the procurement and finance departments. Usually, the vendor master contains an overload of data that is not relevant and there is a reluctance to take ownership of ensuring quality data.
- Lack of data governance: The responsibility for data governance is usually assigned to the Finance team, but there is often a need for more communication around the purpose of the data and what it will be used for in the future. The consequence is that the data needs to be maintained correctly and fit for wider purposes, which is difficult to achieve.
- Inability to enable suppliers: Organizations using P2P suites often need help to engage and effectively onboard suppliers and develop mutually beneficial supplier relationships.
Perhaps inevitably, organizations that have invested heavily in P2P solutions would like them to do more to help some of the underlying issues that procurement teams (and the business buyers they support) face.
What are the challenges with procure-to-pay suites?
One of the most common scenarios is to have the P2P system become the master for supplier data and the single portal for all suppliers to the business.
Mature organizations, often those that have been on the long, painful and ultimately fruitless journey of trying to implement supplier management in their P2P suite, have realized that in businesses with any complexity – indeed any with more than around $1B in revenue – P2P suites should focus on what they are best at. Supplier management should be treated as a separate (albeit tightly integrated) discipline.
Why should supplier management be independent from P2P?
Here are two reasons and three consequences that we’ve seen time and time again.
Procure-to-pay suites are not intended for the wide variety in the supplier base
While it is a common denominator that suppliers sell your organization goods or services, that is where the commonality ends. This is an issue for P2P suites as they must be designed to handle the immense range in the supplier base.
Large multinationals have indirect suppliers (usually managed through P2P), direct suppliers (often managed through ERP and supply chain applications), suppliers that are global strategic partners, and others that are occasional low-value purchases – not to mention local, state and national government departments.
They have complex relationships with suppliers where any given company might be supplying multiple separate business units in the buying organization, selling different products, at different prices, with varying levels of service, payment terms and compliance and risk requirements, and so on.
Some of the information relating to that supplier will be common – company name, HQ address, etc. – but some of it will be specific to the buying unit. This has significant implications for who can add or modify data related to the supplier.
Any ProcureTech leader who has encountered these issues in the real world will shudder at shoe-horning this complexity into a P2P system designed to manage purchase transactions.
Integration with the company’s ERP is essential
If you are to enjoy the benefits of automated supplier onboarding and supplier management, integration with the company’s ERP is essential.
Unfortunately, it is highly problematic for the P2P suite.
For supplier data used in transactions, the P2P is subservient to the ERP vendor master – as you might expect, given that the ERP controls the payment to the supplier. But as soon as you have a second ERP instance, even if it’s from the same vendor (and it so often isn’t), your P2P will have a second vendor master.
This results in duplicated supplier data, leading to inaccurate or incomplete analytics and inefficiencies for the business user and procurement team.
Using a separate, specialist supplier management platform, which is designed to integrate with both ERP and P2P systems, resolves these conflicts and allows you to be the owner of the master record for each supplier, therefore solving this problem.
Why does this matter?
The business likely embarked on a supplier management program to automate (as much as possible) the supplier onboarding process for 100% of its suppliers to remove the needless inefficiencies of the manual process your business customers, buyers and suppliers go through.
It’s also often the case that the business wanted greater control of risk in the supplier base – whether that includes financial, fraud, compliance, or supply risk – hence the need for 100% supplier inclusion.
And it is also often to provide deep insights into spend, risk, efficiency, and supplier performance to make critical business decisions.
As detailed below, attempting to achieve one or more of these goals with a P2P suite often results in numerous challenges.
Significant project delays, sometimes endless
The P2P suite vendors, no different from many enterprise software categories, are quick to promise what is possible, usually in good faith, but are more reluctant to acknowledge when a given use case that they haven’t dealt with before can’t be supported.
Consequently, if you’re trying to include 100% of suppliers – and you have to – then there will always be use cases that the vendor has not thought of, which means the system must be designed to extend the data model and workflow to accommodate every possible variation, and P2P suites just aren’t built for this task.
Additional & unforeseen costs
With delay comes cost. Rather than cutting losses, customers try to work with the vendor and/or their (expensive) implementation partner to figure out workarounds. This inevitably means the project hours rack up, systems due to be replaced must be extended, and anticipated cost savings or other financial benefits get delayed.
Parts of the process remain manual
And thirdly, with compromise almost always comes an acceptance that parts of the process must continue as manual steps. Validation rules for a subset of suppliers will have to be handled offline; performance management assessment will happen in Excel using an export, which will have to be de-duped first, and so on and so forth.
The importance of the P2P suite in a modern buying organization inside a large, complex business is undeniable, but experience in recent years has shown that a system designed to manage spend, invoicing and transactions – while superficially similar to a true supplier management platform – really shouldn’t be forced so far out of its comfort zone. It’s not a mistake that many procurement leaders make twice.
Article updated September 2023