What is Procure to Pay Optimization…?

By December 18, 2013No Comments

Procure to Pay Optimization: As your company looks to move beyond just “procurement” and into a complete supply chain system, one of the key challenges is to find ways to improve efficiency in the procure-to-pay (P2P) business cycle especially in the area of facilities maintenance, production machine repair, field service, business supplies, and on-site contracts for services. Challenges also exist where field people are working from manual or electronic systems, requisitioning on-site services, and making sure that the data from these activities is captured effectively.
Equally important is ensuring that the proper service levels agreements are honored, proper prices are charged, purchase orders are delivered quickly, received invoices match the purchase order, and the supplier is paid the correct amount for the products and services that are actually delivered.
While your enterprise system may claim that these activities are correctly defined in its business logic, the reality is that there are many chances for errors and delays. Without a planned process for managing the P2P cycle, your organization may be faced with significant costs as a result of non-compliance to the process requirements.
What is the Procure-to-Pay business process?
In obtaining procure to pay optimization, first most organizations are faced with the issue of determining, defining, and using their buying channels, depending on the situation in which the requirement occurs.  All purchases are not the same.  A “buying channel” is a process to specify a need, locate the supplier of that need, determine the terms of the purchase, and execute an agreement with one or more suppliers to fulfill that need.  An efficient and effective process is designed to fit different situations and circumstances identified by the end users of your P2P process.
What are the activities in this process?

  1. Ensure that internal customers are able to easily define and select the right products and materials from the right supplier for the best overall value, with delivery to the right place at the right time.
  2. Cost efficient execution of the process.
  3. Effective and efficient communication between the requester, the buyer, and the suppliers for the goods and services purchased.
  4. A high level of data integrity to be able to track the effectiveness of the process.
  5. Provide buyers with the information they need to effectively leverage contracts for sourcing materials and services.
  6. Ensure invoices are accurate and approved; make sure to take advantage of any discounts and quick payment options that are offered.

How can these activities be improved?

  1. Users should effectively use all of the tools at their disposal to determine what they need.  The products and services that are under contract should be chosen from internal browser-based catalogs, or on-line supplier catalogs, and clearly defined so the buyer can identify appropriate products and services to fit the need.
  2. This process should be accomplished with the tools that users already have at their disposal, including email, web browsers, supplier performance tracking, contract management, phones, and tablets.
  3. This process should be a collaboration, with instant communication between the requisitioner, the approvers, the buyer, and the supplier.
  4. You need to capture all of the pertinent information in the process.  Who requisitions? What is requisitioned? Who is the supplier? Was it the correct price? Was delivery on time? Was the invoice correct when received? Is the item or service something that can be contracted for better price and performance?
  5. Once you have the information, you can go back to key suppliers and negotiate for better contracts.  That could mean better prices and better quality, better delivery, faster response, and many other attributes beyond just price.
  6. Find ways to cross check supplier invoices against purchase orders more quickly and effectively, with approvals required on invoices executed quickly.  Make sure that Finance is aware of any pre-payment or other discounts, such as annual volumes.

What are the benefits of these improvements to the entire P2P process?
There are several key benefits to these process improvements.  One of the biggest is that your organization will gain greater transparency and control over its external spend, while providing maximum flexibility to make sure the various needs of your organization can be met. By capturing all of the data of the procurement process, you give your staff the ability to change their mode from “pushing” transactions through a system to strategic sourcing and contracting.  As process disconnects are identified, key changes can be planned.  In addition, as transactional details are reviewed and analyzed, buying channel and spend concentration analysis is also done. You can compress the time lost in approvals of requisitions, specifications, and invoices. Once a process is optimized by automating most of the approvals processes, the time saved can translate to faster delivery of needed items, reduced inventory of standard items, and better relationships with your suppliers.
When you establish close ties with key suppliers, your users can find what they need directly on the suppliers own websites or on locally maintained electronic catalogs, ensuring that they buy only contracted products from approved suppliers. When employees can perform their functions easily from wherever they are, using the tools they are familiar with, the process can run smoothly. When rules can be set up to approve documents so that there are fewer roadblocks, the process speeds up.
In most cases P2P efficiency can be increased 20%-30% and transactional costs can be reduced by 30%-50%.  Reduction in the number of suppliers can be achieved by identifying key partners to source across multiple services or product lines, giving additional options for contract savings.
For more information on this subject, stay tuned for our upcoming Web presentation coming in January 2014.