Guide

The Ultimate Guide To Understanding Source-To-Pay vs Procure-To-Pay

    Looking at implementing a procurement system into your business? Here’s a comprehensive guide to understanding source-to-pay vs procure-to-pay to get you started.
The Ultimate Guide To Understanding Source-To-Pay vs Procure-To-Pay

The Ultimate Guide To Understanding Source-To-Pay Vs Procure-To-Pay

The procurement process is an integral part of business. Understanding the difference between procure-to-pay vs source-to-pay is important to ensure that you execute the procurement function in your organization effectively. 

Let’s take a comprehensive look at both procure-to-pay and source-to-pay to understand the fundamentals of each and how they differ. 

Understanding Source-to-Pay vs Procure-to-Pay

The procurement process covers the set of activities and workflows organizations follow to source goods and services at competitive prices and terms. 

The process often involves multiple individuals and departments across an organization, including the end-users of the item being procured, storekeepers and warehouse managers, and finance and audit personnel.

This is where understanding the procure-to-pay and source-to-pay approaches come into practice. 

Source-to-pay and procure-to-pay describe the beginning and ending points of the procurement process. 

Source-to-pay will often involve the discovery of suppliers and products, sometimes involving browsing things like marketplaces and catalogs. For services, they may need to initially float a Request For Information (RFI) to better define the scope of the service they need. 

In contrast, for procure-to-pay, usually an RFP or RFQ is sufficient since there is no discovery needed. 

Procure-to-pay starts after the initial sourcing is done and ends with the final payment being made to the vendor. 

 

Source-to-Pay

Procure-to-Pay

Definition

The initial step in procurement involves the strategic sourcing of goods or services.

The procurement process starts after sourcing is done.

When they are used

When an organization has a demand but has not yet identified a supplier.

When an organization already knows the exact item they need and which suppliers they want to invite to bid. 

Advantages

Allows for the strategic sourcing of suppliers.

Allows organizations to efficiently execute procurement.

The Ultimate Guide To Understanding Source-To-Pay Vs Procure-To-Pay

Source-to-Pay

Source-to-pay vs procure-to-pay has one major difference, which is that source-to-pay systems have an extra layer of strategic planning. 

They both form part of the same system, but source-to-pay comes before procure-to-pay.

If the company needs to find a new vendor for the goods or services required,  it will need to follow a source-to-pay process. 

This means procure-to-pay and source-to-pay are integrated as a single system.

Advantages of Source-to-Pay

Since source-to-pay is integrated with procure-to-pay, both systems offer the same general advantages. 

However, source-to-pay could add additional value to procurement by enhancing internal controls and making the supply chain more efficient. 

Here are some source-to-pay advantages:

Stricter Internal Controls

With a dedicated source-to-pay workflow, organizations have stricter internal controls on how new vendors are sourced for procurement. 

This ensures that the best possible vendors are sourced and approved.

Improved Supply Chain Efficiency

When followed correctly, the additional sourcing process can completely streamline the entire procurement operation. 

With a source-to-play system in place, organizations improve their supply chain efficiency. This is enhanced by introducing a standardized sourcing framework.

Improved Vendor Relationships

Source-to-pay processes create a stronger foundation for vendor relationship management. 

By carefully sourcing vendors and running efficient bidding and onboarding processes, organizations can benefit from stronger vendor relationships. 

The Ultimate Guide To Understanding Source-To-Pay Vs Procure-To-Pay

Source-to-Pay Workflow

To understand source-to-pay vs procure-to-pay and how they differ, here are the steps followed by most source-to-pay systems: 

1. Demand

As mentioned above, the demand for new goods or services is identified, which initiates the procurement process. 

The difference in a source-to-pay process is that this demand comes from outside of what is available in the existing supply chain.

2. Sourcing

This is the critical step in source-to-pay. Various data-based factors are considered to find and evaluate potential new vendors. 

A list of possible vendors that match certain requirements is created, and different vendors are carefully assessed. 

Potential vendors who are a suitable match are included in the buyer’s procurement system.

3. Bid Preparation

The shortlisted vendors then need to bid for the procurement/tender. 

All bid documentation is created, approved, and distributed to the vendors. 

4. Bidding

The potential vendors send in their bids and participate in the bidding process. 

The submitted bids are reviewed by the buyer, and the best/most suitable one is rewarded with the purchase order.

5. Contract Management

Once the vendor has been selected, contract terms are established. 

A new contract is created and signed by both parties. The terms and pricing details are necessary for adding the vendor to the procurement system to make the ordering process simpler and straightforward for future purchasing

6. Procure-to-Pay

This procure-to-pay process follows from here onwards. The purchase order, invoicing, and payment steps follow the same standardized process for procure-to-pay and source-to-pay.

The Ultimate Guide To Understanding Source-To-Pay Vs Procure-To-Pay

Procure-to-Pay

Procure-to-pay (or P2P) is the process of procuring goods or services from a vendor once the organization already knows exactly what they want. 

Procure-to-pay includes a range of solutions to improve accuracy and efficiency while introducing process automation across the entire procurement function.

Procure-to-pay usually forms one module within the larger enterprise resource planning system.

The entire procure-to-pay process is focused on saving costs and creating more value throughout each of the different stages. 

The Advantages Of Procure-To-Pay

Here are four of the main benefits that a procure-to-pay system offers: 

Improved cash flow

Procure-to-pay provides complete spend visibility. This is achieved through forecasting and reporting, which improves the decision-making process. 

Businesses already know what they want and what vendors they will use. Ultimately, this means better cash flow, as well as increased access to working capital.

Easier spend management

By using process automation and being able to have complete data transparency, spend management becomes completely streamlined. 

You can use procure-to-pay solutions to access an accurate spend analysis whenever you want. 

Purchase order cycle times are reduced

By optimizing the different procurement processes, it becomes far quicker to generate and manage purchase orders. 

This is helped by automated procurement systems.

Improved invoice processing time

Invoice processing efficiency is also optimized due to the automation function and a more efficient procurement system.

The Ultimate Guide To Understanding Source-To-Pay Vs Procure-To-Pay

Procure-to-Pay Workflow

When understanding source-to-pay vs procure-to-pay, you need to understand the specific steps of each process and how they fit in with each other. 

While source-to-pay and procure-to-pay processes will change between companies, the procure-to-pay workflow generally follows six key stages.

1. Demand

The procurement process starts by identifying a demand for certain goods or services. These goods or services will generally need to be sourced from outside the organization. 

In procure-to-pay, there will already be a vendor loaded in the supply chain, as the demand has already been recognized. 

2. Requisition

A purchase requisition is created based on the demand. The requisition will require approval before moving on to the next stage. 

This step considers the best set of vendors available to handle the demand. The process should be done by using an eProcurement solution

This way, the organization making the order will be able to access a list of vendors that have already been pre-approved. 

An eProcurement solution also ensures that all of the goods and services these vendors offer have suitable pricing structures and terms in place.

3. Purchase order

Following purchase requisition approval, the purchase order is sent to the chosen vendor. This purchase order outlines the procurement deal and marks the formal start of the procurement.

Once the purchase order has been accepted by the vendor, it becomes a legally binding contract. Both parties can be held accountable for the terms and conditions listed in the purchase order. 

4. Goods or Services Received

After the purchase order has been accepted, the vendor needs to issue their goods or services. The ordering party receives these goods or services and conducts an audit.

The received goods need to be reviewed and compared to the purchase order to ensure the correct items/services were delivered. 

With the right procure-to-pay system, any receiving paperwork is automatically compared and cross-checked with the purchase order.

If there are any issues identified, the purchasing party can request a refund, a return, or another suitable alternative to fix the issue. 

In this case, we might go back to receiving a new round of goods or services.

5. Invoicing

The invoice is checked for accuracy and compared to the purchase order. If any issues are identified, the order is processed accordingly. 

Once the invoice has been reconciled and approved, it is sent for payment. 

6. Payment

Payment to the vendor is made by the AP department. The AP department will then update the records to indicate that the payment was made accordingly.

Summary

Source-to-pay vs procure-to-pay forms two essential parts of the procurement process. Both exist to improve business practices, maintain profitability and improve speed and efficiency in procurement. They are just used at different stages of procurement. 

As procurement digitizes, understanding source-to-pay vs procure-to-pay is important for optimizing the overall procurement process. 

With the right digital solutions, both of these processes should be strategically implemented by businesses to enhance their procurement systems.

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