Procurement plays a critical role in any business. For many years, the role of the procurement department in creating a competitive advantage was overlooked. Rarely was it considered a significant source of cost savings or a driver of organizational change with the ability to innovate. Seldom has the procurement function been perceived as a source of strategic insights. Advanced process automation technology, however, has changed all that.
However, procurement teams often encounter a plethora of specialized jargon that can puzzle even the most experienced professionals. Two terms, Source to Contract vs Procure to Pay are frequent in procurement discussions. But are these terms interchangeable? What do they mean? Why should you be concerned about them? Let’s dig deeper into these two terminologies and understand their intersection to establish a comprehensive procurement strategy known as Source-to-Pay (S2P).
Decoding Procure-to-Pay (Downstream)
As its name implies, a procure-to-pay (or purchase-to-pay) system is a fully integrated solution designed to support an end-to-end process that begins with goods and services, requisitioning and ends with ready-to-pay files for upload into an accounts payable system.
The P2P process prioritizes cost savings and value creation generated from:
- Real-time insights provided by master data management on a cloud-based server
- Reduced purchase order cycle times and invoice processing efficiency improvements achieved through three-way matching, eInvoicing, and internal process optimization
- Streamlined, value-focused spend management supported by process automation, total transactional data transparency, and on-demand spend analysis
- Improved cash flow and access to working capital through better decision making and forecasting/reporting supported by complete spend visibility
While the specifics of business processes may differ across organizations, the typical P2P workflow is as follows:
- Demand: An individual inside or outside the procurement team recognizes the need for goods or services and begins the process of obtaining them.
- Requisition: A purchase requisition is created and routed for review and approval. Ideally, the ordering party uses an eProcurement solution to select from a pre-approved set of vendors and specific goods and services that adhere to best pricing and terms for that specific need.
- Purchase Order (PO): The purchase requisition is used to create a purchase order, which is sent for review and approval. Upon approval, the purchase order is sent to the corresponding vendor, becoming a legal contract once accepted.
- Goods and Services Received: For goods, orders are reviewed and, ideally, receiving paperwork is automatically cross matched to the corresponding PO. Any exceptions generate returns, refunds, or additional documentation as required by circumstances.
- Invoicing: The vendor’s invoice is received and checked against the purchase order and receiving paperwork. Exceptions are noted and processed as events warrant. Properly reconciled invoices are routed for payment.
Payment: The accounts payable (AP) team issues payment and updates the accounting records to reflect the transfer of payment in exchange for goods/services.
The P2P process works well for goods and services that are already optimally sourced, and whose vendors have master data files in the buyer’s procurement system. But in cases where a need is recognized, but a company doesn’t have a current (or at least satisfactory) source for the goods and services required, leveraging the source-to-contract process can help. Like P2P, S2C prioritizes value, efficiency, and continuous improvement, but expands these concepts to include contract management and strategic sourcing.
Decoding Source-to-Contract (Upstream)
Source-to-Contract or Strategic Sourcing consists of integrated solutions for sourcing, contract management, spend analysis and supplier management that would optimize an organization’s supply base and improve procurement’s overall value proposition. S2C process becomes valuable when organizations require goods and services for which optimal sourcing strategies are not readily available.S2C expands on P2P principles, emphasizing value, efficiency, continuous improvement, contract management, and strategic sourcing to address these specific procurement needs
The S2C process prioritizes risk avoidance, cost savings and value creation generated from:
- Savings realization for capital reinvestment or further transformation
- Source-phase negotiations enable organizations to centralize purchasing and procure larger quantities.
- Rationalized spend and supplier relationship reduces maverick spending, nurtures supplier ties, boosting collaboration, terms, and service
While the specifics of business processes may differ across organizations, the typical S2C workflow is as follows:
- Analyze Sourcing Requirement: Procurement evaluates the need after receiving department requests, using modern spend analysis tools to examine historical expenditures for accurate insights and automated reporting.
- Supplier Search: Based on category spend analysis, procurement identifies potential suppliers with factors like financial stability, performance records, and industry collaborations in mind.
- RFI for New Suppliers: Procurement emails potential suppliers for information, including certifications, manufacturing details, and response capabilities, leveraging technology for varied question types.
- RFP/RFQ Stage: After RFI feedback, procurement sends requests for proposals/quotations, streamlining the process through a unified platform for email correspondence.
- Event Roll-Out: Suppliers are informed of bidding events, with flexible scheduling across time zones, large supplier capacity, and the ability to adjust event parameters.
- Analyze Supplier Bids: Received bids are assessed, using collaborative technology for senior management input, automated scoring, and thorough analysis beyond price, encompassing quality, performance, and capabilities.
- Award Contract and Supplier Tracking: The final step is awarding the contract, supported by technology to determine optimal matches based on criteria, or manual selection if preferred. Following the contract award, supplier management is initiated, involving on-boarding, KPI definition, and periodic reviews.
Incorporating Source-to-Contract (S2C) practices offers organizations a strategic advantage by optimizing their supply base and enhancing procurement’s overall value proposition. S2C serves as a vital solution when traditional sourcing strategies fall short, fostering risk mitigation, cost savings, and value creation. Strategic sourcing enables substantial savings for reinvestment or transformation, centralized purchasing through source-phase negotiations, streamlined spend, nurtured supplier relationships, heightened collaboration, improved terms, and enhanced service delivery. As organizations tailor their workflows, the S2C approach facilitates comprehensive sourcing excellence, from requirement analysis to supplier management, ultimately driving efficiency and unlocking the potential for sustained procurement excellence.
Read our blog on: Your Guide to Source-to-Contract
Unlocking Comprehensive Source-to-Pay
As seen above, the Procure-to-Pay process starts with the requisition of goods and services and ends with payment being issued to the vendor by accounts payable. Source-to-Contract adds strategic sourcing to the process, providing an even more closely integrated spend management solution. For an organization to move out of its silos, it has to take an integrated approach. The benefits of Source-to-Contract with Procure-to-Pay can, in a true sense, help them to create a tightly & seamlessly integrated Source-to-Pay process that drives procurement efficiency and value.
Integrating these two would not only make procurement function achieve best results but also provide a seamless procurement system that will help-
- Increase budgetary and contractual compliance
- Increase spend under management and thus a decline in maverick spend
- Provide guided support in buying and guidance to correct supplier.
- Provide better visibility in terms of supplier performance, orders and payments.
Read our blog on: Your Guide to Source-to-Pay
Unearthing Procurement Treasure – Source to Contract vs Procure to Pay
At the end, Source to Contract vs Procure to Pay – S2C and P2P stand as two sides of the same coin within procurement. These interconnected processes collectively form a comprehensive Source-to-Pay (S2P) strategy. While Procure-to-Pay optimizes downstream activities, ensuring efficient requisition, procurement, and payment, Source-to-Contract enhances the upstream phase by emphasizing strategic sourcing, contract management, and supplier relationships.
The symbiotic relationship between S2C and P2P holds the potential to transform procurement into a strategic powerhouse. Integrating these processes harmoniously leads to improved compliance, reduced maverick spending, and heightened visibility into supplier performance. The intersection of these processes not only streamlines procurement but also creates a cohesive ecosystem that empowers organizations to make well-informed decisions, drive efficiency, and maximize the value derived from their procurement endeavors. In this pursuit, Source to Contract vs Procure to Pay are truly complement each other, contributing to an integrated Source-to-Pay approach that revolutionizes the procurement landscape. Book a demo today to get a clear understanding.
- Blog – “Touchless” Long Tail Spend: The New Benchmark for World-Class P2P Process Efficiency – An Intro
- Blog – What Procure to Pay (P2P) Transformation Vendors Don’t Tell You?
- Blog – Your Guide to Source-to-Pay
- Research Report – Robotic Process Automation in Procurement What leaders need to know about?
- Whitepaper- Essential Components of a World-Class Supplier Performance Management Tool : A MENA Perspective
- Blog – Linking Source-to-Contract & Procure-to-Pay