A Typical Source to Pay Lifecycle
Source to pay is a digital journey that leads to e-procurement. The source-to-pay process can be tedious and time-consuming without a proper strategy. The following steps are part of the source-to-pay life cycle.
1)Finding suppliers: the first step in the S2P lifecycle is the identification of potential suppliers. Finding the right supplier requires extensive market research. The sourcing teams would send out the requests for information (RFIs), requests for proposals (RFPs), and possibly requests for quotes (RFQs) to potential vendors. Some organizations use templates for gathering vendor information easily. E-Auctions are a popular way followed by sourcing teams to get the best deals for goods and raw materials. Finding reliable and affordable suppliers is more effective through e-auctioning.
2)Vendor evaluation and vetting: the vendor information collected through RFX and results from the e-auction helps the sourcing team to vet the vendors to find suitable matches. Effective sourcing is all about finding the balance between the affordability of products and realizing profits. The raw materials must come at affordable prices so that the company can make a profit. Suppliers are evaluated not just on their quality, but on pricing, minimum order quantities, delivery times, and other factors. Once the sourcing team narrows down on the right buyer negotiations begin.
3)Negotiating and contracting: after evaluating vendor information of several vendors, the sourcing team may narrow down to 2-3 vendors with whom they engage. Negotiating and contracting phase focuses on narrowing down on the right vendor. Businesses are always on the lookout for ways to keep production costs low along the supply chain, and the sourcing stage is the best point to reduce costs. When larger quantities are sourced the purchasing price of goods can be reduced drastically. An accurate determination of the price and order quantity is required for issuing contracts.
4)Purchase order: the purchase order is issued based on the agreed pricing and quantity of goods. Once the vendor accepts the purchase order it becomes a legally binding document. It contains all the terms of the contract between the buyer and vendor.
5)Goods delivery and payment: this is the final step in the source-to-pay process. Once the goods are received, the data in the goods received note is verified against that in the purchase order to ensure that the goods received are as per the PO. The quality of the goods received is also inspected at this stage. Once the verification is complete payment to the vendor is processed. Depending on the business requirements, a delivery and payment schedule is set up to ensure accurate verification and on-time delivery and payment. Following a delivery and payment schedule ensures that raw materials are delivered on time and production processes are not interrupted.
The entire source-to-pay lifecycle can be effectively automated to save time and effort. A source to pay software delivers a wide array of functionality across the procurement cycle.
Source to Pay Best Practices
In the supply management industry, source to pay embodies an integrated process workflow that connects strategic sourcing and procurement to accounts payable (AP) and financial operations. It is a closed-loop process that can be standardized, linked, and automated for the holistic management of goods as per business requirements. The best practices in source to pay may be categorized as people, process, and technology.
People best practices in S2P:
- Developing a hiring and staffing strategy that recruits and retains staff with the right mix of skills and competencies
- Investing in developing, training, and equipping a workforce for being future-ready.
- Acknowledging the growth of the Gig Economy and the Future of work and planning accordingly.
- Driving seamless communication, collaboration across the organization and in supplier relations.
Process best practices in S2P:
- Standardizing processes up and down the source-to-pay spectrum
- Integrating and linking processes to close process gaps and drive efficiencies for a closed-loop data lifecycle
- Optimizing and rationalizing process workflows vis-à-vis technology
- Automating processes for a seamless process workflow and driving efficiencies
Technology best practices in S2P:
- Adopting a holistic view of the source to pay transformation
- Consulting functional partners and business users to understand and fulfill technical requirements at various levels
- Migrating to cloud-based solutions and deployment models
- Exploring next-gen technologies and related use cases
Source to Pay versus Procure to Pay
Source to pay and procure to pay are two closely related procurement processes that are mistakenly thought to be the same. Another procurement process is purchase to pay. What is the difference between these processes? Before we go into the source to pay vs procure to pay vs purchase to pay, let us first understand the definition of each process.
Procure to Pay (P2P) process combines the company’s procurement and accounts payable functions. The starting point of this process is when the need for goods/services arises, and the ending point is the payment for the goods/services. The purchase-to-pay process on the other hand covers the entire process from point of order through payment. The source-to-pay process covers all the tasks from sourcing to payment for goods and services.
|Source to pay
||Purchase to pay
||Procure to pay
|The process that organizations go through in order to source, order, and pay for goods and services
||The process that organizations go through to place an order for goods and pay for them
||Like purchase to pay, the procure to pay also starts with ordering goods and paying for them
|This model is designed specifically for organizations with complex procurement needs.
||The purchase-to-pay process is beneficial for organizations with relatively simpler procurement needs.
||The procure to pay process is used by businesses with simple procurement systems
|Businesses use source to pay when they require a dedicated, strategic sourcing process
||Sourcing is not part of the purchase to pay process
||The procure to pay does not involve the sourcing step.
|Automating the S2P process is beneficial for the business
||Automating the purchase to pay process saves time and money for the business
||Automating the procure to pay process improves the efficiency of the procurement function
Businesses can choose to automate the source to pay or the procure to pay process as per the unique requirements of their business.
Digitizing the Source to Pay Process
Technologies that are available today could effectively automate more than half of the source-to-pay process. The various source-to-pay tools available in the market are designed to streamline the source-to-pay process by eliminating repetition and redundancy. The S2P tools help lower procurement costs, greater savings, and more opportunities to explore new sources of value. According to a McKinsey survey, automating the source-to-pay process can reduce spending by 3.5%. The potential for automating the entire source-to-pay process is put at 56% of the tasks within the workflow by the survey.
The opportunity to automate was found to be highest in the more transactional parts of the S2P process, more specifically in the placing and receiving order phases. 88% of the tasks can be automated and around 93% of the tasks in payment processing can be effectively automated. Further, 47% of the vendor selection process and negotiation activities can be automated. The potential to automate is depicted in the image below.
Choosing the right automation tools for the source to contract process flow is a crucial business decision. Each of the automation technologies like robotic process automation, machine learning algorithms, cognitive agents, smart workflow technologies, and natural language processing (NLP), can be used to automate various phases of the source-to-pay process. The McKinsey survey reveals the suitability of each of these automation technologies for source-to-pay workflow.
NLP technologies are suitable for tasks that act as a bridge between human inputs and the most structured data used by machines.
RPA technology is most suited for transactional activities associated with procure to invoice and invoice to pay activities.
Smart workflows are useful for more complex transactional activities associated with vendor management that deals with contextual information and coordination with multiple parties.
Cognitive agent and machine learning capabilities are used for dealing with complex activities related to the initial parts of the source-to-pay process, like the development of spend category strategies.
For companies, the first and the most important step is to identify the best targets for automation within the procurement process. The current level of automation should be ascertained, and it should be compared to what is technically achievable for each task in the source-to-pay process. The value of closing this gap can be estimated by the team. The estimation is based on the amount of work that can be automated and improvements in compliance, cycle times, and payment terms in each step. With the digital landscape evolving continuously, businesses that are looking at automation must make thoughtful and focused decisions on implementing appropriate technologies for digitizing the S2P workflow.
Advantages of Source to Pay Software
Automating the S2P process could be a huge time and money saver for the business. Businesses that adopt source-to-pay software see higher sourcing savings through increased visibility into procurement. Key business processes can be integrated into a single platform to get signed contracts faster and more efficiently. S2P software can strengthen procedural, contractual, and regulatory compliance. The relationship with trading partners can also be improved by using source-to-pay software. Digitization of the source-to-pay process enables better pricing and accurate forecasting.