In procurement, we can describe all our
activities as the Source – to – Pay (S2P) process. A part of it is the Procure
– to – Pay (P2P) process, which is quite often mentioned, especially in
presentations of procurement-related software. So, let us go in details and see
what are the elements of these processes.
A picture says more than 1000 words. So,
the below diagram is the complete Source – to – pay (S2P) process, which
consists of two parts: the source – to -contract (S2C) and Purchase – to – Pay
(P2P).
Source-to-contract is the sourcing part of procurement.
Firstly, we have to do the spend
analysis to figure out what we need to procure. So, we either take the
historical data or, in the case of a new product, establish the parameters with
our stakeholders. Here we are creating our goals: quantity, delivery plan,
target cost.
The next step is to reach out to the
suppliers and source the goods or services. This is the part where we
issue tenders or RFQ's, either using email and phone of some of the e-tendering
systems. Once we get the initial quotes, usually we negotiate further. This is
a trap many new procurement people fall in quite often: the cheapest offer is
not necessarily the best one. It is needed to check other terms as well. Who is
bearing transportation, customs or other costs? What about payment terms, which
are in some industries of very high importance. Not to forget the warranty and price
lock clause.
Once all terms are agreed, and the internal
stakeholders are in agreement with our suggestion (don’t forget this part, we
are a service for them), we are creating the contract. The contract summarizes
the terms and condition of our agreement. I did in the past contracts with fixed
prices for the duration of the contract, but as well with clauses that allowed
price changes. The important thing is to have everything that was agreed in
writing.
The contract usually is the end of the involvement
of the Sourcing manager in large corporations. Once the contract is signed, it
serves as the base for orders. This is the complete S2C process.
Purchase-to-pay deals with operational procurement. Some call this tactical procurement, but in its basic, it is the day-to-day process of arranging the goods needed for our organization.
So, the contract is signed, and we can
start placing orders with our new supplier. The order states, at least,
the item name, quantity and price. And be aware, it is a document binding for
both parties. If the goods appear on your gate and you decide that you do not
need them anymore, technically you are in breach of contract. Most suppliers
will forgive you this if it happens once, as they want to continue supplying. But
if it is a custom-made product, the supplier can claim full value.
Once the goods are delivered, the next step
is payment. Quite often, this part is managed by the accounts payables person or team, and sometimes they report to finance instead of procurement. When it comes to the payment, is common to get the goods on agreed credit terms, but
there are many possibilities available in this area. In the case of larger projects,
the supplier will ask a Letter of credit, where your bank guarantees that the
payment will be done as per the agreement terms. Also, there are options for
the supplier to sell his receivables from your company, hence another
organization will contact you for the payment. But, let us not go too deep into
it, as it is a quite complicated topic.
So, here we are. These steps complete the
P2P process and we have closed the circle. Well, not quite yet. It is a circle
because the data we have generated in the P2P process is the base data we
needed for our spend analysis we started the process with. Therefore, the
operational (tactical) procurement team should collect as much data as possible.
About the prices, supplier relationship and reliability, quality issues and warranty
claims. The more data is available and the better quality they are, it makes
the job of the sourcing team easier.
Further reading:
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