In this article, we will try to understand the whole concept of Procure to Pay and how it works. Procure to Pay can be defined as the process in which the raw materials that are needed to manufacture a given product or provisioning a service and paying for it in return. With this basic understanding, it should be evident that this is the process that almost every other manufacturing unit or service provider would try relentlessly to make it more and more efficient - in order to manage smoother cash inflows and outflows.
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let’s take a look at the topics covered in this article.
- What is Procure to Pay?
- Responsibilities in a Procure to Pay process
- Steps in the Procure-to-Pay Process
- How to maintain an efficient Procure to Pay process?
What is Procure to Pay?
In the above section we understood that the Procure to Pay is a process that each and every Organization sets up to keep a balance on the raw materials or services that are needed in order to execute their businesses. Having said that, it should be evident that these processes should be laid out months and years earlier than making their first official business transaction.
Now that you understood the ‘What’ in this question, now there is a need to understand the ‘Why’ in this question too. Here it is very important that as an Organization, you choose and execute the best possible process to maximize your gains and see a definite ROI (Return on Investment) for your Organization.
The Procurement Plan:
Every Organization should nail down this point, as this forms the basis on which an Organization deals with each and every transaction in an efficient, cost-effective manner to purchase the needed goods and then delivering a finished product out of it. This plan should list down all the effective and efficient ways to acquire the needed raw materials and services to manufacture finished good(s).
Each department and category to which these goods and services fall should have a detailed budget, a well defined timeline and on what terms these can be manufactured. This should also outline when can the manufacturing unit produce in order to save upon the additional costs of storage before sales.
This also outlines the ways and means to procure products avoiding all possible delays and production shutdowns. Need to also outline procurement of certain products automatically as they are very much needed without given a second thought.
These ensure that there is no delay in procuring at that very moment but always keeps an Organization on its feet to start it’s production cycles. Having said all of this, this also outlines a way to get the necessary approvals for the whole procurement to happen without any hiccups.
Use of tools that are efficient enough to alert the necessary approvers to quicken the approval process and in turn to quicken the Procurement as well. It also helps identify / validate the selected and preferred vendors for the necessary raw materials and services. This not just helps in curtailing any delays, wastages but also prepares an Organization with contingency plans in order to complete a Procurement plan.
Responsibilities in a Procure to Pay process:
The first and foremost responsibility of this ‘Procure to Pay’ process is to minimize the supply chain issues to the bare minimum. Before we get down to the intrinsic details of this process, we must also need to deepen and strengthen our understanding of how the procurement process works in conjunction with the Accounts Payable department, Vendors and then to execute all the phases within a Procure to Pay cycle.
Procure to Pay Process Flow:
From the very beginning when a Purchase Order is initiated until the Invoice is approved and finally paid off, both the Procurement and the Accounts Payable teams / departments would work in tandem vesting interest to ensure that the process is executed smoothly. Not just that, it is also taken care to be much more efficient based on the maturity of the Organization and at the same time building value for themselves.
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On the whole, the Procure to Pay process can be broadly divided into 3 phases as mentioned below. This should be a self repeating loop whereas feedback from any of the completed transactions be applied to the process to improve it further.
Purchase Order process
- Requests for the needed purchases are created in this step.
- Selection of Vendors and the necessary evaluation will be done in this step.
- Purchase orders are issued against the required raw materials, services.
- Requested raw materials, goods and services are either received / executed.
- Documents are reviewed and documented for raw materials, goods.
Invoice Approval process
- Invoices are received at the approver’s end, in this step.
- Errors that are observed within this step are corrected and resubmitted.
- Once all the approvers approve, these invoices are paid.
Now that we have gone through the important phases of the Procure to Pay process, let us now try and understand the whole process from inception until realization. Following are the steps in a Procure to Pay process (not limited to, but the most common ones):
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7 Steps in the Procure-to-Pay Process
1) Place the Requisition Order:
Requisition orders are nothing but orders for raw materials or goods. If there are any items that could be planned in advance, then it is built into the procurement plan itself. Whichever case, the most well planned orders might also have to be rechecked because of damage in goods midst the delivery, any other unforeseen circumstances. If the procurement plans are well defined, these will ensure that there’s enough buffer period to accommodate such issues at first hand.
2) Select your vendor:
Vendor selection might depend on various factors and also depends on the way businesses are carried out. Few of the pointers that could define this step are:
- Year on year, price reduction
- Improvement w.r.t quality
- Freight, insurance costs
3) Issue a Purchase Order (PO):
Once a requisition order is approved by all the necessary approvers, a detailed form with all the amounts and the delivery requirements are submitted. These POs would further be sent to the appropriate vendors for fulfillment.
4) Log the received documents:
The vendor executes the delivery of the requested good or raw materials. With this, the receiving documents will be verified for all the line items - what are ordered are delivered or not.
5) Invoices received:
The invoices submitted by the Vendors would be entered into the system - be it paper based invoices based on the Vendors or Vendors with automated e-invoicing softwares.
6) Invoice reconciliation:
The invoice is reconciled with the corresponding purchase order and also the documents from the receiving process. If your Organization uses any automation at this place, the invoices are matched up against your purchase orders and received documents any discrepancies in the line items would be logged for further investigation.
7) Accounts Payable:
Invoices that are received and approved will be paid by the AP, and the necessary updates are made to the accounting as well.
How to maintain an efficient Procure to Pay process?
During any given annual / financial year, there can be ‘n’ number of factors that could cause a change in the status-quo. In order to keep the Procure to Pay process for an Organization in an optimally run way, there is a definite need to streamline the whole process altogether.
If not done, there can be catastrophic outcomes that could lead to shutdown or bankruptcy of an Organization. In general, the Procurements and Accounts Payable teams will always be on their feet to maintain healthy relationships with their counterparts - be it Vendors, 3rd party counterparts or mediators to keep the process as smooth as possible.
Natural disaster, political conditions prevailing in the country where the businesses are run will always rule the rates of the raw materials that are required for the manufacturing units. This is also kept in mind when the efficiency of the Procure to Pay process is laid.
There lies enough buffer to pull an Organization from any such situations that are unforeseen and also that can hamper the future of an Organization. This leads to keeping the sourcing part strategically achievable and at the same time keeping it at the lowest possible across the purchase process.
Though all of the above helps in detailing out a better process, finally it boils down to the better communication and transparency that are maintained between the Procurement and the Accounts Payable departments. Many of the following pointers should keep the process efficient:
- Maintaining better transparency to keep the Vendor management happy and self-satisfied.
- Centralized data management and real time reporting helps get the necessary details on demand.
- Automatic routing and alerting systems when and where there are pain points identified.
- Knack on gaining better discounts in paying early than shelling out late-fees and penalties by paying late or standing defaults.
- Keeping a check on their suppliers and making stronger relationships with the ones that are better performers.
- Relying on artificial intelligence than keeping buffers on manual errors.
- Putting together both your Enterprise Resource Planning system and your Accounting systems together to keep all the data together.
Challenges, Business Impacts in maintaining a Procure to Pay Process:
There are a number of challenges and a considerably equal number of impacted points on an Organization with Procure to Pay process for an Organization. If these are well thought through, then an Organization can excel in its manufacturing and sales. Having said that, let us go through the list of challenges that can hamper an Organization when there is a Procure to Pay process in place:
There are a greater number of checks as a Procure to Pay process has to deal with many departments - for the purchases, authorizations and accounting.
Many of the Organization still follow an orthodox way of dealing with all transactions manually via paper based documents. This not only causes delay in moving across departments for the necessary authorizations but also can cause manual mistakes.
There can be differences within an Organization, not just limited to the Organization but across the vendors as well. There can be cases where the acquisition of a certain set of raw materials is placed over benchmark amounts set by the finance department(s) - given the prevailing market conditions. These could cause additional delays for the authorization process alone, let alone hitting the manufacturing phase of the cycle.
There can be orders for raw materials that were ordered a long time back which are no longer required for the production, as there was an alternative identified. These are additional overheads that the Organizations have to either waive off or write off as wastage.
Hampering the buyer-seller relationship(s), when there’s an additional delay in getting the needed documentation on the payments made.
In this article, we have tried our best to explain the process of Procurement and also have tried to portray how the whole Procure-to-Pay process works. In addition to that, we have gone through the detailed explanations of each of the processes that constitute P2P. We have even understood the ways and means to maintain the best and efficient ways to maintain it.