Understanding the Product Lifecycle from Procure to Pay
Digital transformation throughout the retail product lifecycle from concept to delivery.
What is Procure to Pay
Procure-to-pay, otherwise known as p2p procurement is the process of integrating purchasing and accounts payable systems to create greater efficiencies. It exists within the larger procurement management process and involves four key stages: sourcing and selecting goods; enforcing quality, compliance and order; receiving and reconciliation; invoicing and payment. Digitalizing your procurement process with a procure to pay solution can strengthen factory compliance, product quality and control among vendors, contracts, regulations, buyers, and accounts payable. Because it helps retailers buy from preferred suppliers at negotiated prices without the manual paperwork and spreadsheet headaches, process automation with a procure to pay solution can:
Actively control and improve global spend
Consolidate most manual commerce processes to reduce errors
Streamline catalog maintenance, saving time and freeing up resources
Rapidly enable the approval of new suppliers
Drive savings to the bottom line to maximize the value of sourcing negotiations
Procure-to-pay management solutions create approval flows that ensure negotiated savings actually reach your bottom line.
Gain valuable insights into essential procure to pay process
Digitalizing the procure-to-pay process with today’s software solutions can improve the entire procure-to-pay cycle and establish control over global sourcing and spending. It delivers quick ROI through the catalog and contract compliance and can identify areas of current and potential concern for further procure to pay and process optimization. Procure-to-pay software is the key to better compliance and spending control, retail buyers, sourcing, and procurement teams stay flexible and achieve procurement goals with scalable solutions that can be dialed up or down as you need different resources at different times. A sound procure to payment process can provide:
Simple and elegant shopping experiences
Efficient and effective integration with PLM & ERP systems
Improved speed, usability, and performance of the procurement to pay process
Control over purchasing, including complex business services
Best practices integrated within the context of the task at hand
Seamless receipt and reconciliation processes
Flexible global processes, budget checking, and approvals with dynamic purchasing units
Supplier, process, payment, budget, and approval management for operations anywhere in the world
Let’s dive into procure to pay a little deeper
The following sections will give more insight into questions that retail procurement or sourcing teams should consider, why they are important, key indicators to look for, and how an effective procure to pay system can help you address the challenges and achieve the improvements you’re ultimately after. In the summary, we’ll provide a few examples of the improvements you can reasonably expect with an improved and automated p2p (procure to pay) process.
The procure to pay cycle for indirect procurement encompasses everything that happens from the time an employee sets out to buy a product or service they need in order to do their job, through the appropriate authorization process, to send the Purchase Order (PO) or purchase release to the supplier, and ultimately to receiving and paying the supplier’s invoice. The class of software systems that have come into being in recent years to address this important cycle is generally referred to as Procure to Pay or Purchase to Payment – P2P procurement for short. The P2P process consists of two essential components: eProcurement and ePayables.
Procure to Pay – eProcurement
eProcurement addresses requisitioning, approval, ordering, and receiving. eProcurement replaces paper forms, spreadsheets, and email with online tools, workflow, and reporting. Much like the online shopping experience employees are already familiar with, eProcurement allows employees to log on to a secure website where they are able to see all the suppliers, catalogs, items, and services that you permit them to see. Once their requisition (think “shopping cart”) is completed, rule-based workflow automates the approval routing based on established financial
and organizational criteria. From there, approved requisitions are converted into orders and delivered to suppliers in the format they prefer, whether it’s mail, email, fax, EDI, or cXML. After the goods or services have been delivered, confirmation is performed online. Account coding and collection of all pertinent detail is largely automated.
Procure to Pay – ePayables
ePayables as part of the procure to pay process automates invoice registration, validation, matching and payment approval for PO and non-PO invoices. In an ePayables enabled organization, suppliers can submit invoices via electronic files, through a secure website, or by mailing/emailing/faxing hardcopy invoices that can be scanned and then treated as electronic invoices, thereby eliminating data entry and reducing errors. PO and receipt matching can be automated with validation and tolerances. Discrepancy resolution can be streamlined by rule-based workflow.
Why is Procurement to pay so important?
Without proper authorization controls, employees may buy things that are not budgeted, not a current priority, or not appropriate for their function.
Quality and risk control:
For some types of purchases, such as capital equipment, computer hardware and specialized outside services, the involvement of an expert that understands technical, legal or other category-specific issues beyond the requesting employee may be needed to ensure the right purchase is made.
Though the vast majority of purchases are well-intentioned, there is always the risk of fraudulent buying –something you certainly want to prevent.
Financial controls are essential for any organization and pre-purchase authorization is key to effective Purchase-to-Pay management. As people throughout your various departments and functions spend money on behalf of your organization, you want to know that those expenditures are being reviewed and authorized by the right people before they are committed.
Do the right people really have control of what we’re buying? What to look for – key indicators in the P2P Process
Invoices with no PO#:
A high percentage of invoices arriving in Accounts Payable without an approved PO on file probably indicates insufficient authorization controls.
Excessive AP workflow:
A high percentage of invoices being coded in AP and sent to an appropriate department for approval, effectively getting approval on what has already been spent (i.e. “spent management” vs. “spend management”).
Frequently surprised managers:
When managers are surprised that purchases have been made within their department, there is clearly a problem with the authorization process.
How to improve clearly define authorization rules:
Develop clearly defined rules for approval requirements based on monetary value, item category, department, and other criteria.
Make everyone aware:
Make everyone in the company aware of these policies and the importance of adhering to them.
Track unauthorized purchases:
Ask your AP Manager to track invoices with no PO to identify frequent offenders.
Make it easy to define your policies:
Because it provides a pre-designed framework, a good Purchase-to-Pay (P2P) system will make it easy to define your authorization policies and procedures without the need for extensive paper documentation.
A good P2P procurement system will check all purchase requests against the established rules and route them to the appropriate person(s) for authorization as needed. Routine purchases can be automatically approved when appropriate.
Make it easy for employees to do the right thing:
A good P2P procurement system eliminates the need for employees to be fully aware of approval requirements. They need only submit their request and the system will automatically apply the correct authorization process.
Make authorization easy for managers and buyers:
Using workflow technology, a good procure-to-pay system will conveniently organize requisitions and purchase requests for those who do the authorizing. In many cases, requests can be authorized with a few mouse clicks and from PDA devices.
Make it visible:
Since everything is captured electronically, everything in the procure-to-pay solution is visible to the people who need to know. Employees can always see the status of their request, managers can always see what they’ve approved, denied, or questioned, and executives can see a complete history of all activity.
The value of an effective Procure to pay solution
In today’s fast-paced world, they also need clear, up-to-date visibility of outstanding commitments in order to see the full financial picture within their scope of responsibility. In addition to paid invoices (what they see on last month’s financial statements), the full picture includes open Purchase Orders, approved but not yet placed POs, and outstanding purchase requests. Managers who don’t know the full cost pipeline simply don’t have the information they need to make good financial and operational decisions. That puts them and your entire organization at a competitive disadvantage to those who do.
Since purchase commitments are made well in advance of when they are paid, trying to manage a budget with just last month’s financial statement is like trying to drive down the expressway with one eye closed – accidents are bound to happen.
Cash flow management:
At times, department managers are asked to help manage cash flow in addition to their budgets – that’s a lot easier when they can see the commitments that are already made when deciding if they can approve another request.
A department manager’s primary responsibility is to perform an operational function such as order fulfillment, maintenance, or customer service. If in the effort to manage the budget, a manager needs to spend an inordinate amount of time “asking around” about open commitments or trying to re-do his/her plan because (s)he’s suddenly over budget, productivity and operational results are going to suffer.
Do our managers have enough visibility of purchase commitments to properly manage their budgets? – What to look for – key indicators within Procure to Pay
Are some managers often surprised to find that they are over budget, or likely to go over budget? Conversely, are some managers overly cautious about doing necessary things because they’re concerned they could go over budget due to expenditures they’re not aware of?
Frequent EOY budget crises:
Situations where important activities cannot be covered in the budget because less important things were already purchased (i.e. times when things are not getting done due to budget constraints).
Ask managers…how do you decide if you can approve a request or not?
What do you look at to know where you really stand with your budget? Do you often just guess about open commitments?
Ask yourself…how do you know what your organization’s overall cost pipeline is?
Do you have visibility beyond last month’s financial statements? Do you have the visibility you really need to know where the organization stands with respect to budget and upcoming cash requirements?
How to improve your Procure to Pay workflow
Institute good authorization procedures:
As discussed in the previous question, this is critical to having any chance of knowing about purchase commitments before the invoice arrives.
Capture purchase activity early:
Put in place a way of capturing purchase requests and commitments as early as possible. Try to capture enough detail to enable managers to really know what the requestor commitment is, who originated it, what it’s for, and why it’s needed. Be sure proper account coding is done upfront.
Make the information accessible:
Make it easy for managers to see summaries and details of open commitments in addition to their financial statements. Enable this at multiple levels of organizational roll-up.
Make capturing the information practical:
Capturing purchase commitments and requests may not even be practical without a Purchase-to-Pay system – the effort to do this on its own may not be justified. But since a P2P system captures and holds purchase activity from the time of request through PO, invoice, and payment authorization, it provides this information as a natural by-product of streamlining the buying process.
A good P2P procurement system will provide a summary and drill-down capability for all outstanding commitments within a given manager’s span of responsibility. Combined with General Ledger (GL) account balances, this provides a complete picture of expenses.
With the ability to easily view to-date and future expenditures right at the time of authorizing new requests, managers can more quickly make the right decision to approve, deny or delay. With the ability to analyze the full cost pipeline at any time, managers are better able to make the right decision when asked to do things like contain costs, help with cash flow and reduce budgets.
The value of an effective Purchase-to-Pay system
That’s why your Procurement people research suppliers and negotiate contracts. Studies have shown that 10–15 % savings are easily possible when purchases are made through pre-established suppliers. It’s simple: once good suppliers are identified and contracts set, you want as much of your spending to go through those suppliers as possible. An important way for you to get a handle on how effectively your organization is using its money is
to ask: 1. How much of our spending is with preferred suppliers and contracts; how much is not? 2. What information do we have when we negotiate supplier contracts? Do we capture detailed information about our spending over time (e.g. on what, with whom, and at what prices)?
Why it’s important
You don’t want to pay more than necessary:
Every time someone buys something from a supplier other than one with whom you have a favorable contract, the price savings you worked hard to negotiate are lost.
You want the best overall value:
Price alone is not always the only criteria for selecting the best supplier. When an employee buys something from an unauthorized source, they may not understand how to evaluate other important dimensions such as quality, delivery, or payment terms. What may look like a “good price” might actually cost more.
You want to avoid undue risk:
Another factor in selecting a supplier is the potential risk they might entail in terms of their ability to ultimately deliver the product or service they sell. If your performance to your customers relies on their performance to you, you want to be sure you know the supplier well before selecting them. In some cases – especially with outside service providers – there could even be liability transferred to your organization if they don’t meet certain regulatory requirements.
You want to fully leverage your spend:
If employees around your organization are buying essentially the same product or service from many different suppliers (e.g. stationery), you are losing a lot of buying power. By consolidating those purchases with fewer suppliers, your volume with them goes up; making it much more likely that they will agree to discounts based on the higher level of business you provide them.
You want to continuously improve:
If you don’t have any good way of knowing what is being spent by category, supplier, etc; your Procurement people do not have the basic information they need for activities like contract negotiation and supplier consolidation that can lead to further savings over time.
Summary: It takes people, processes, and systems
As discussed, streamlining the procure to pay process, will quickly become clear that it’s all about creating a culture of cost-consciousness and the need to follow the right procedures. And that the only way you can do that is to make it easy for everyone involved. And, furthermore, that the best way to do that is almost certainly to utilize technology. A good procure-to-pay system addresses virtually all of the issues you uncover in an integrated fashion, that’s why so many companies are turning to them. And it’s already proven to work. To learn more about CBX Software’s end-to-end, concept to delivery, store brand development, product lifecycle management solutions & sourcing tools contact us here.