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The Procure-to-Pay (P2P) process: Everything you need to know

The Procure-to-Pay (P2P) process: Everything you need to know

Procure-to-pay (P2P) is, simply put, the end-to-end process of purchasing goods and services for an organization. The P2P process begins when someone at the organization identifies a need for goods or services, and then ends with the payment of the corresponding invoice. Sounds easy, right?

It is a bit more complex than just swiping the credit card, however. 

A fully mature procurement process includes many crucial stages, such as requisition, approval, purchase order (PO) generation, collection and confirmation receipts of goods or services, invoice matching, and then—finally—payment processing. 

There’s a point to it all—by integrating these functions, P2P aims to optimize the procurement cycle, minimize errors, and approve efficiency so employees can get exactly what they need to work better, faster, and smarter.

In this article, we’re going to deep dive into the details: what is procure-to-pay, why it’s necessary for business to thrive, what are the common challenges of P2P, and how to use advanced procurement tools like Zip that can help you accelerate your workflows and grow faster.

After reading this article, you will:

 
  • Learn what procure-to-pay (P2P) is and the steps that make up the P2P process
  • Understand why P2P is important for your business
  • Discover how to measure the efficiency of your P2P process and what key performance indicators (KPIs) to use
  • Identify the common challenges of P2P and how to overcome them
  • Explore how automation software can improve your P2P process and what features to look for
  • Find out what are the best practices for P2P and how to implement them
  • Learn what is the future of P2P and how to prepare for it

What are the steps of the procure-to-pay process?

The P2P process consists of a series of interconnected steps designed to facilitate effective procurement of goods and services. Let’s break down each phase of the purchasing process to help you understand what’s involved. 

  1. Need identification

It’s simple—you need something, therefore you need to buy something!

Procure-to-Pay starts with identifying that need. Whether that be an employee, a department manager, or a procurement professional—someone has determined that a project, campaign, contract, or some other initiative requires goods or services to move forward. Time for the P2P cycle to get in motion!

  1. Requisition creation

The cycle starts by creating a requisition, or a formal request for a purchase. The requisition typically includes the details of the item: the name, the quantity, the price, the supplier, and an ideal delivery date. Young companies sometimes do this manually, but this initial intake can be done in a requisitioning environment built specifically for procurement.

  1. Requisition approval

Once the requisition is submitted, it goes through an approval workflow—a set of rules and conditions that determine who needs to evaluate and approve the purchase. 

Supervisors or managers may evaluate the request based on factors like budget availability, urgency, and compliance with the company’s purchasing policies. In automated systems, this can be a quick and streamlined step; however, in manual or semi-automated systems, this can often be a bottleneck.

  1. Purchase order issuance

Once the requisition is approved, a purchase order (PO) is generated. This is a formal document that confirms and authorizes the order with the supplier. The PO contains the same information as the requisition, plus the terms and conditions of the purchase. 

A PO legally binds the vendor and the buyer to the terms outlined in the document.

  1. Goods or services receipt

Once the vendor receives the PO, it’s time for delivery of the requested goods or services, with receipt. Upon arrival, the items are inspected for quality, quantity, and adherence to the specifications outlined in the PO. Any discrepancies must be resolved before moving to the next stage.

  1. Invoice receiving

The vendor then sends an invoice to the buyer (you!). The invoice can be received by mail, email, portal, EDI, or XML. The invoice confirms the PO number, the invoice number, the invoice date, the supplier details, the item details, the final purchase price , and the payment terms.

  1. Invoice approval (aka The “Three-Way Match”)

The invoice then goes through a matching and approval process, which verifies that the invoice matches the PO and the GRN or SES. 

It’s often known as the “three-way match”, because what you’re looking for are matching details between the purchase order, the delivery receipt, and the vendor invoice. If all three documents ali

The matching can be done manually or automatically, depending on the level of accuracy and automation required. The approval can be done by the same approvers as the requisition or by different ones, depending on the workflow.

  1. Vendor payment

After a successful three-way match, the accounts payable department processes the vendor payment. The payment method, whether it be through electronic funds transfer, credit, or check, is executed according to the terms set out in the PO and invoice.

  1. Record keeping and analysis

The final step is to keep records of all the transactions and documents involved in the P2P process and to analyze the data for insights and improvements. 

The records can be stored in a document management system, cloud-based records, or  even better—a fully integrated procurement platform like Zip, which can even leverage AI for advanced insights at a glance. 

Understanding the nuances of these sequential steps in the P2P cycle can significantly improve your procurement efficiency, reducing material friction across your entire organization.

Importance of procure-to-pay

Remember, this P2P process is not just a routine operation, but a strategic function that can have a significant impact on business performance. 

Distilled down, there are ultimately two overarching benefits to having a process-oriented P2P approach:

  • Gain deeper procurement process insights

By having a clear and complete view of your spending, you can identify opportunities for savings, optimization, and innovation. You can also monitor and benchmark your suppliers, contracts, and compliance.

  • Ensure compliance and maintain spending control

With a standardized and automated P2P process, you can reduce errors, fraud, and risks. You can also enforce your policies and regulations, as all necessary information is collected and ready to be strategically acted upon.

How to measure the efficiency of your P2P process?

What’s the point of all of this, if you aren’t measuring results and optimizing for P2P success?

To evaluate and improve your P2P process, you’ll need to measure its efficiency using the most relevant and reliable KPIs. Here are some of the most common metrics to measure performance of a P2P workflow:

1. Average purchase order processing time

This is the average time it takes to process a PO from the requisition creation to the PO issuance. It measures the speed and agility of your P2P process. The lower the time, the better!

2. Invoice processing time

You’ll certainly want to track the time it takes to process an invoice from the ‘invoice received’ to the ‘vendor payment’. It measures the accuracy and automation of your P2P process. Everyone wins when the processing time is as low as possible.

3. Spend under management

SUM is the percentage of your total spending that is managed by your procurement function. It measures the visibility and control of your P2P process. Get that percentage up.

4. Realized savings

Your actual savings—this is the amount of money that you’ve saved by negotiating better prices, terms, and discounts with your suppliers. It measures the value and impact of your P2P process. The higher the realized savings, the better.

5. Supplier defect rate

Supplier defect rate is the percentage of your orders that are delivered with defects, such as wrong items, damaged goods, or late deliveries. If this percentage isn’t extremely low, something is wrong with your P2P or supply chain.

What are the challenges of P2P?

P2P is not without its challenges, especially in today’s fast-paced and ever-evolving business environment. Here are some of the most common challenges of P2P:

Siloed data and tooling

Many organizations use multiple and disparate systems and tools for their P2P process, such as spreadsheets, emails, paper forms, and legacy software. Manual processes like these often lead to siloed and inconsistent data, which hampers visibility, collaboration, and efficiency. 

Check out how Instabase conquered the chaos of manual procurement with Zip.

Compliance with policies and regulations

Growing companies are constantly faced with evolving policies and regulations, both internal and external, that affect their P2P process. Compliance with these ever-changing rules can be challenging and costly. 

Supplier onboarding and management

Companies are increasingly working with a larger and more diverse supplier base, which requires effective onboarding and management. 

From verifying supplier credentials, negotiating contracts, monitoring performance, resolving issues—this kind of supplier onboarding and management can be time-consuming and complex if you haven’t implemented an advanced AI-powered vendor management system.

Spend visibility and analysis

Some organizations just building out their P2P process lack the ability to capture, consolidate, and analyze their spending data across. This limits their ability to gain insights, identify opportunities, and make informed decisions. 

Fortunately, Zip was designed to solve these issues foundationally, with a single front door for every purchase, full transparency into every step of the P2P process, AP and compliance automation, and more thoughtful features that make the entire procurement workflow a breeze.

How can automation software improve the P2P process?

Here’s where things get fun. Automation is where you can save time, energy, enhance visibility so everyone is fully informed during the P2P process, and integrate with the tools you already use. 

Here are some details on how P2P automation can work for you:

Standardized workflows

You can create and implement standardized workflows for your P2P process, such as approval rules, routing logic, and exception handling. This can improve consistency, compliance, and efficiency.

Enhanced visibility and workflow analysis

Automation software can help you capture and consolidate all your P2P approval workflows into a single platform, ensuring requisitions, POs, invoices, payments, and your supplier information is all in one place. 

Shorten cycle times, route requests to the right subteams, dynamically select appropriate approvers using queues and user hierarchies—there’s no limit to how automated your workflows can get.

Document management

With process automation, data and documents will be transferred seamlessly between different stages of the P2P cycle. This reduces that change for misplaced or lost documents, leading to a more streamlined, efficient, and faster procurement cycle.

Improved vendor onboarding

By keeping all your vendor data in a single automated work environment, you’ll have a single source of truth for documents, assessments and risk scores, payments, and vendor spend data. 

With a centralized system, data and documents are already at the ready with automated scheduling of tasks so everyone can stay on track.

Integrations

Last but not least, automation can help you integrate your P2P process with your other systems and tools, such as your ERP, CRM, and other accounting software. Quickly connect your existing tech stack and let your stakeholders evaluate requests and work within their preferred tools. 

Your teams will find that these powerful automation features help scale your business without disrupting the employee experience,  using Zip as the fully integrated front door.

Procure-to-pay best practices

Once you understand the Procure to Pay cycle and the benefits of an automated process, the next step is to implement it effectively. Below are some best practices that can help you get the most out of your P2P process.

Clear procurement policies and procedures

Without clear and documented procurement policies and procedures that define your P2P process, rules and responsibilities may be misunderstood by members of your team. 

Be sure to communicate and train your stakeholders on these policies and procedures and ensure adherence to the compliance issues that may trip up the process.

Centralize procurement processes

The best thing you can do is centralize your procurement processes and data in a single platform that can support your P2P process. The benefits in efficiency, collaboration, and visibility cannot be overstated.

Check out how HR software leaders Lattice found massive improvements to their workflows after implementing a centralized single source of truth into their procurement process.

Consolidate purchases and leverage volume discounts

Modern AI tools like ZipAI can help you consolidate vendors, surfacing duplicative spend and helping you save money. 

ZipAI can flag requests and contracts with redundant capabilities, and nudge requesters to use already-approved vendors to facilitate volume discounts. This can be a huge gain for optimizing P2P budgets and workflows.

Establish clear payment terms and negotiate favorable payment conditions

Taking a step back, it’s important to establish clear payment terms with your suppliers, and whenever possible negotiate favorable payment conditions. 

Consider negotiating for early payment discounts, extended payment terms, and flexible payment methods—this can improve cash flow and working capital, while also building healthier and trustworthy supplier relationships.

Continually track and analyze procurement data

Finally, you must be sure to continually track and analyze your procurement data across your P2P process—or else what’s the point?

Zip’s Intake-to-Pay system comes with built-in analytics capabilities. Guiding you with data-driven insights, you’ll be able to continuously engage in process automation and have proactive influence on stakeholder demand. 

Now, rather than reacting to procurement issues, you can predict them and put solutions in place ahead of time.

The future of procure-to-pay is intake-to-pay

The traditional procure-to-pay model, while effective, falls short in tackling several procurement and financial challenges that modern businesses face. As we've seen, even the most effective P2P systems are often plagued with issues like lack of standardization around intake, mismatched invoices, and more. 

As Nick Heizmann, Head of Research of Zip notes in his monthly ‘Margin Makers’ newsletter: the solution lies in the evolution of this model to Intake-to-Pay.

Intake-to-Pay is an advanced, holistic approach to procurement that starts with a standardized intake process for all procurement requests and extends all the way to payment. 

Unlike the traditional Procure-to-Pay model, which often sees fragmented or ad-hoc requisition processes, Intake-to-Pay offers a streamlined, user-friendly system that centralizes all procurement activities. 

It covers the entire procurement journey, from the moment an employee identifies a need for goods or services to when the payment is finally processed, offering superior control, transparency, and efficiency.

Zip’s approach to intake-to-pay

An advanced, consolidated Intake-to-Pay solution can help you transform your P2P process and take it to the next level. 

Here’s why Intake-to-Pay and Zip represent the next crucia;l step in streamlining procurement operations. 

  • Increased visibility and control over spend

Zip gives you a complete and real-time view of your spending across your organization, departments, and categories, allowing you to set and enforce your spending policies and limits, and track and measure your compliance and savings.

  • Better employee adoption

Zip makes purchasing easy and enjoyable for your end users, by offering a consumer-like shopping experience, a smart and intuitive interface, and a personalized and guided workflow. 

Zip also integrates with your existing tools and systems, such as your ERP, CLM, GRC, ITSM and more, to make purchasing accessible and convenient for everyone involved.

  • Streamlined approval workflows for POs, Renewals, and Vendors

Zip simplifies and automates your approval workflows for POs, renewals, and vendors, by using AI and ML to generate and route requests, match and verify documents, and suggest and approve actions.

Automated alerts and reminders enables stakeholders to approve requests on any device, anywhere, anytime.

The world of procurement is rapidly evolving, with an increasing emphasis on services as opposed to goods, and a fantastic employee experience over everything else.

Zip is designed to handle this complexity. Whether you are procuring goods, services, or anything in between, Zip’s system is flexible and scalable enough to meet your needs. 

It’s your ticket to a more efficient, strategic, and user-friendly future. So, why wait?

Book a demo today and let us show you the future of procurement with Zip.

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