Procure to pay is a term used mostly in the soft-ware industry such as ERP. With an aim of designating certain sub divisions of the process followed in procurement. This system makes it possible to integrate purchasing department and account payable department. Thus, it offers you a combined view of information and a cohesive central platform for all your P2P operations.
Unlike the source to pay system, this system does not include the function of sourcing. The procure to pay system is basically designed to provide the organizations with an easy way of controlling and overseeing the entire life-cycle of a transaction, i.e. the flow of data during the transaction usually sent to the supplier and the data that confirms the order made and subsequently the payment for the product. This provides an insight into cash-flow and financial commitments.
The main objective of procure-to-pay system is to automate the entire process by introducing the efficiency controls. Most of the companies using this system are interested in centralization of their procurement department or to setup shared services organizations. However, just like any system that handles a significant number of users, its implementation requires significant knowledge of the as-is business processes and the to-be.
Procure to pay cycle
Procure to pay cycle has in recent times become a standardized process for the procurement practitioners and service providers. It has become part of the modern day efficient business operation.The steps that are usually involved in the procure-to pay-cycle include:
Identification of requirement
Whenever an employee working in a certain department such as the sales or the marketing department want to purchase something, usually they make a purchase request that is usually to submitted to the manager.
Authorization of purchase request
After the purchase request has been submitted to the respective person, it can be approved or rejected based on factors such as the cost of the good or budget issues. However, if the request if it is not within the approval limit of the person given, it is further redirected to the most senior employee for approval.
Final approval of purchase request
Once the request has been authorized, it is sent to the inventory controller. He will then review the available open purchase order in order to establish if there are any orders that are similar. Once the inventory controller has approved the order, the purchase request is sent to the procurement department.
Procurement
The procurement department will then send out tender details. The prospective buyers will identify existing contracts with suppliers. They can identify the potential suppliers from the internet or by using referrals. Once they have identified them, they send requests for quotation.
Receipt of quote
Once the supplier receives the requests for quotation, they will send the quotes back to the respective buyers. The buyer will then send the quotes to the department where technical evaluation is made. Once it has been reviewed, the buyer will send the charges and requests made back to the supplier who then sends the commercial quote to the buyer.
Negotiation between the buyer and supplier
A list of shortlisted suppliers is usually made to invite the suppliers for negotiations. During this period, the buyers and suppliers can negotiate on issues that will aid in maximizing their business position. Some of the issues include quantity and price breaks, yearly improvements in quality, insurance charges etc.
Selection of vendor
Once the negotiations have been made with the selected vendors, the winner of the tender will be awarded the contract.
Purchase order acknowledgement
Once the supplier has received the purchase order, he will send out an acknowledgement to the buyer for recording purposes. If there is any software being used for procurement functions, the supplier can remotely download purchase orders and acknowledge the purchase order.
Advance shipment note
Usually the supplier can send the buyer an advance shipment note once they ship the material requested to the buying organization. The note usually entails the ship date, the transporters name, the tracking number, number of packages, weight of the packages, the location address where they will receive the goods, the number of the purchase order and a brief description of the goods shipped.
Receipt of the goods shipped
Once the warehouse of the buying organization receives the goods sent, the receiving staff will check the goods against the delivery note, the purchase order number etc. in addition to this, they will check against the quantity and quality of the goods to ensure that they are in proper condition. If some of the goods are unfit, they immediately rejected and sent back to the supplier. This is very important so that they can ensure all the requisite parts were sent. Once they confirm that everything is okay, they will then acknowledge the receipt of the materials.
Recording of the invoice
Once the receiving staffs have acknowledged the receipt of the goods, the accounts payable will then process the Invoice and enter it into the procurement system.
Once the accounts department receives the purchase order, invoice and receiving documents, they will check these three documents to ensure that there is consistency in the order. The invoice will confirm that the buying company does owe the supplier some money for the goods ordered. It will also guide them in establishing where the payment will be made, when it is due and what payment terms should be met.
The purchase order is intended to break down the order in terms of quantity, price or any discounts that were negotiated on the offer. They must be notified on these discounts so that they can claim the discounts from the vendors. This is a very important step because it acts as a confirmation that everything has been paid for and has been received as outlined in the documents. In case of any deviation from the documents, the respective department should be contacted and discrepancy solved.
Once the accounts department has established that the documents are okay, they will credit the Vendor account, this will be usually through a bank account or a third party supplier who will then make relevant payments to the vendor.