Source to Pay Process
Procurement is a key part of running any organization. Your ability to efficiently source and for your supplies and services will play a major role in determining your success and growth.
By optimizing your procurement process, you’ll get all the supplies you need at the right time and at the right price. However, focusing your sole attention on the procurement process will divert you from other key tasks. This is why it is critical that you take advantage of procurement automation software to make your procurement process highly efficient without taking too much time.
In this guide, we discuss the source to pay process, why it is important for your business, and how automation software can help make it more beneficial.
What is Source to Pay?
Source to Pay or S2P is a strategic sourcing model that starts the procurement process. It starts with evaluating, shortlisting, negotiating with, and hiring suppliers for services that you will finally pay them for.
The S2P process incorporates procurement software that uses big data to help catalog suppliers, evaluate the best candidates, make a spend analysis on their efficiency, and even monitor contract management.
How is Source to Pay Different From Procure to Pay?
Procure to pay starts when the procurement team uses procurement requisitions to create purchase orders. In procure to pay, the accounts payable department is integrated with the purchasing department.
Source to pay begins when demand in the supply chain is identified, bids are prepared, negotiations are done, and then supply vendors are vetted and chosen to satisfy the need.
As the names suggest, the first step in procure to pay is procurement. Goods and services are first procured and then paid for by the accounts payable. In source to pay, the first step is recognizing a demand, then strategic sourcing from possible suppliers. These suppliers can be hired from previous ones, or you could source entirely new suppliers.
Therefore, the biggest difference between source to pay and procure to pay is that in source to pay, the procurement process starts earlier. Procure to pay is thus like a procurement process within the source-to-pay model.
Now, the question is whether or not this method of strategic sourcing is necessary for your company.
Benefits of Source to Pay
What benefits does source to pay have to offer for your company?
- Higher procurement proficiency through the creation of a complete, consolidated supply chain.
- Creation of a comprehensive spend analysis for vendor and supply chain evaluation
- Regulating procedural and contractual compliance
- Facilitating accurate and consistent contract management
- Use of procurement software to centralize critical data processing for strategic sourcing
- Creation of stronger collaboration between you and your trusted suppliers
When Should You Consider Source to Pay for Your Business?
Although source to pay has numerous benefits. The kind of strategic sourcing a procurement team uses depends on the needs of a company at a certain time. There is no dividing line between which company should use source to pay and which should use procure to pay. If possible, every company should incorporate some source to pay and AP software in their procurement process.
This is mainly because source-to-pay is ideal for situations where you need to change your suppliers due to evolving needs. Every company will need to do this once in a while, especially if it is a growing company.
It may seem costly to choose a source to pay for your procurement but given its advantages in certain situations, it is a worthy investment. However, in any other situation, procuring to pay will suffice.
The Steps Involved in Source to Pay
Source to pay is an online procurement process that involves the following steps:
In any procurement process, the first thing you need is demand for a certain item. Demand could arise from needing the item or service, or also requiring fairer purchasing terms on items you have already procured.
Finally, demand could also arise from needing better quality products. Whichever it is, the item first has to be essential to the supply chain before the purchase order is made.
After the demand is established, potential suppliers in the supply chain are found and evaluated for suitability. This strategic sourcing can be done by the use of procurement software equipped to handle big data. The procurement software will effectively sort through all your data on purchasing, invoice processing, contract management and spend analysis to identify vendors who have provided the most consistently profitable outcomes.
After that, certain standards are measured against them, such as whether or not their services pass certain purchasing thresholds. Once these suppliers have been found, they are shortlisted.
3. Preparing a Bid
The next step is preparing bids to present to the shortlisted suppliers. You need to collect all RFX documents necessary along with the bid, then wait for the suppliers' responses. RFX documents are simply all the documents needed, processes, and actors involved in the bidding process.
4. Decision Making
Once you have received responses from your suppliers, you need to make a final decision about which supplier you will work with. If you are still not satisfied with any supplier’s terms, you are at liberty to start the process again. You could even search for suppliers outside your existing pool. Alternatively, you could move on to the next step on the list and negotiate their terms.
5. Contract Management
Contract management involves cataloging all successful vendors on a supplier management database using your procurement software, followed by negotiations. Once you reach favorable agreements, you will create contracts stipulating all the terms and duration of service. When settling on the duration of a contract, consider company and tax-related contract retention policies to avoid legal confusion. This is why it is necessary to use procurement software for all your contract management needs.
6. Contract Signing
Once you are satisfied with the contract terms and you have made sure that it complies with all tax and company regulations, you need to sign it. All shareholders involved in the decision should see the document and agree to it too.
7. Transition to Procure to Pay
At this stage, the contract is given to the procurement team, which will involve procure-to-pay processes. From this point, the procurement team will be responsible for handling the purchase orders, invoice processing, and any other indirect spending.
8. Accounts Payable Invoice Processing
Accounts payable do the vendors’ invoice processing. This process involves screening vendor authenticity, matching vendor invoices with purchase orders, verifying invoices, invoice approval, and making accounting reports.
This step in verification is also crucial for the data entry required to run the procurement database. If there are many errors at this point, then the AP software will be riddled with inaccuracies and false conclusions will be drawn from the data analysis. A company with inaccurate data is at a huge disadvantage.
Finally, the accounts payable will make the necessary payments and in this way, bring the source-to-pay process to a close. The accounts payable will also keep the vendors up to date about their payment status.
Advantages of Source to Pay Software for Your Company
One of the strengths of source to pay is its ability to fully leverage the power of AP automation. Any kind of reliable automation gives a company a competitive edge over other companies that decide not to use technology.
Therefore, at the forefront of your S2P ventures should be an investment in the accompanying technology. Here is a deeper look at the advantages:
- Accurate automated spend analysis
- Lower processing costs
- Simplified cash flow analysis
- Streamlined supply chain management
- Streamlined spend management
- Efficient risk management through analysis of big data
- Centralized supplier information
- Improved UX
- Real-time data analysis
- Easier analysis of competitive bids from suppliers
- Enhanced vendor qualification and evaluation
- Long-term savings
- Streamlined workflow
Every company would benefit from taking advantage of source to pay in their procurement process. Even if your supply chain is relatively stable, having an annual review of your vendors and a critical spend analysis is a great idea.
Source-to-pay is reliant on AP software and other convenient technology. We cannot stress the importance of leveraging technology enough, especially in this day and age when everything is moving at sonic speed.
Key Points to Remember About Source to Pay
The nine steps for source to pay are:
- Preparing a Bid
- Decision Making
- Contract Management
- Contract Signing
- Transition to Procure to Pay
- Accounts Payable Invoice Processing
Each of these steps needs to be followed correctly while making good use of all the accompanying technology. Source to pay goes hand in hand with AP automation. Therefore, invest in state-of-the-art procurement software and technology to get the best result from source to pay.
However, automation must also be accompanied by a culture of scientifically informed best practices for procurement. Over-reliance on technology may end up becoming counter-productive and costly.
Leverage the Power of Source to Pay with ControlHub Software
Proper strategic sourcing is crucial to the success of your procurement process and supply chain. Whichever sourcing method you decide on between source to pay and procure to pay will depend on the unique needs of your company.
Regardless of your selection, strategic sourcing methods work best with AP software automation, like the tried and tested purchasing solution for hardware-centric teams: ControlHub. Leveraging the benefits of technology always gives a company an advantage over its competitors.
Source to pay could be a game-changer for you. Coupled with a sophisticated work ethic and best practices, your procurement team will be more efficient than you could ever imagine.