Siloed, fragmented procurement software complicates the procure-to-pay process. Outdated procurement solutions are expensive, inflexible, and inefficient. Still, most organizations continue to ‘make do’ with their old-fashioned procurement software.
According to a Paystream 2018 Procurement Insights report, 80% of organizations still use manual or semi-digital tools to manage their procure-to-pay cycle. Most organizations are using the procurement module integrated with their ERP or accounting software. This is similar to using a flashlight to crack a nut. Although it gets the work done, it is still not the right tool.
Before long, this misapplication will stir up trouble. The consequences of using archaic procure-to-pay software, or worse, no solution at all, will ultimately damage an organization’s bottom line. In order to survive the competition, organizations need to move away from their traditional approach and embrace the right procurement technology.
Here’s all you need to know about choosing the right procure-to-pay solution, to make your procure-to-pay process truly effective.
The procure-to-pay process is the coordinated and integrated action taken to fulfill a requirement for goods or services in a timely manner at a reasonable price. It involves a number of sequential stages, ranging from need identification to invoice approval and vendor payment. Steps in a procure-to-pay cycle need to be executed in a strict order.
Based on organizational practice and the requirement in question, procurement leaders choose to complete the most relevant stages of a procure-to-pay process. Here are nine logical steps of an ideal procure-to-pay cycle.
The first step of a procure-to-pay process is to determine and define the business requirements with the help of cross-functional stakeholders. Once a valid need is identified, procurement teams sketch out high-level specifications for goods/products and terms of reference (TOR) for services, and statements of work (SOW).
After finalizing the specifications/TOR/SOW, a formal purchase requisition is created. A requester submits the filled out purchase requisition form after ensuring that all necessary administrative requirements are met. Requisitions can be created for any type of procurement from standard purchases to subcontracts and consignments.
Submitted purchase requisitions are then reviewed by department heads or procurement officers. Approvers can either approve or reject a purchase requisition after evaluating the need, verifying the available budget, and validating the purchase requisition form. Incomplete purchase requisitions are rejected back to the initiator for correction and resubmission.
If the requested goods/products have characteristics such as unmanaged category buys, one-time unique purchases, or low-value commodities, then a spot buy can be performed. Else, purchase orders are created from approved purchase requisitions.
Purchase orders are now sent through an approval loop to ensure legitimacy and accuracy of specifications. Approved purchase orders are then dispatched to vendors. After reviewing the purchase order vendors can either approve, reject, or start a negotiation. When an officer approves a purchase order, a legally binding contract is activated.
Once the supplier delivers the promised goods/services, the buyer inspects the delivered products or services to ensure that it complies with the contract terms. The goods receipt is then approved or rejected based on the standards specified in the purchasing contract or purchase order.
Based on the data obtained from the previous step, the supplier performance is evaluated. A number of factors like quality, on-time delivery, service, contract compliance, responsiveness, and Total Cost of Ownership (TCO). Non-performance is flagged in existing rosters and information systems for future reference.
Once a goods receipt is approved, a three-way match between the purchase order, the vendor invoice, and the goods receipt is performed. If there are no discrepancies found, the invoice is approved and forwarded to the finance team for payment disbursement. In the case of inaccuracies, the invoice is rejected back to the vendor with a reason for rejection.
Upon receiving an approved invoice, the finance team will process payments according to the contract terms. Any contract changes or reviews liquidated financial security will be taken into account. A payment made to a supplier will fall into one of the following five types: advance, partial, progress or installment, final, and holdback/retention payments.
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The following five best practices can help organizations improve the efficiency and effectiveness of their procure-to-pay process:
Key performance indicators (KPIs) in the procure-to-pay process monitor the efficiency of the process. These procurement KPIs enable organizations to control and optimize the spend, quality, and time of the procure-to-pay process.
Based on their purpose, procurement KPIs can be split across three groups:
Below par quality and poor compliance rates cause a rise in indirect and rouge spend. A clear procurement contract with penalties can improve the compliance rate.
Supplier defect rate tracks the percentage of substandard products delivered by a supplier. They are usually measured in defects per million. Low defect rate=high reliability.
Defect rate= Number of defective products/Total number of units tested
Supplier lead time captures the average amount of time a supplier takes to fulfill an order. This metric is often measured in days
Lead time = Delivery time (Goods receipt by buyer) – Order time (PO acceptance by a vendor)
It is the average amount of time between requisition submission to PO placement. This KPI covers the end-to-end ordering process.
The cost of purchase orders and invoices are the most disputed KPIs in the procure-to-pay process. The cost to process these purchasing documents internally often includes a staggering list of variables.
It is generally defined as the percentage of an organization’s spend that falls under some form of management (approved supplier, authorized purchase, visibility) by the procurement team.
Procurement ROI determines the cost effectiveness of a procurement department. It is best suited for internal analysis.
Procurement ROI = Annual cost savings/Annual cost of procurement
A recent Gartner report claims that by 2025, more than 50% of organizations around the world will have a cloud-based procure-to-pay suite in place. Cloud-based procurement tools like Kissflow are gaining traction, as organizations learn more about the benefits and cost-saving opportunities of using procurement software.
Procure-to-pay software integrates purchase requisitions, purchase orders, goods receipts, and invoices in a single interface. Procure-to-pay automation can streamline the process, optimize spend, improve compliance, reduce cost, and mitigate risk.
Comprehensive procure-to-pay solutions like like Kissflow deliver a number of functionalities including:
Someone sending in a purchase request simply enters the appropriate details into your procurement tool, selects the required product/service, and picks their preferred vendor from a master database.
A digital procure-to-pay suite also routes the purchase request to all the stakeholders and approvers, in the right order, without any of them so much as sending an email regarding the request.
Most procure-to-pay solutions auto-create purchase order from approved purchase requisitions and initiate the PO dispatch process. Anything from sending multiple batch orders to a single vendor to creating multiple POs from a single purchase request can be done.
Going digital with vendor management changes the way your procurement team gauges and rates vendor performance. Instead of a hopeful “I think that hardware vendor we used in 2013 offered some great discounts, but I forgot their name”, you can depend on conveniently accessible and reliable vendor data from your procurement system.
With your procure-to-pay tool crunching the data on vendor performance–pricing, discounts, delivery schedule adherence, policy compliance, and more–you can choose the best vendor for any deal, every time you need to make that choice.
Procure-to-pay software lets organizations confirm goods receipt and capture invoice information. Organizations can approve invoices, manage exceptions, perform PO matching, and integrate with electronic payments or account payables system.
One of the best parts about taking procurement digital, reports and analysis help you understand what’s going well, and which process inefficiency is costing you money.
Since procurement is a spend-heavy department, it’s good to have process transparency and visibility into each process, from purchase requests to invoice approvals. You can pull up the status of any task instantly, analyse vendor performance metrics, and more through custom reports and analytics.
Procure-to-pay solutions that digitally connect vendors, organizations, policy, and processes are unearthing new savings opportunities. From preventing manual data entry to improving spend visibility, automated procurement software address all existing process gaps.
Kissflow’s Procurement Cloud leverages the power of workflows, digital forms, cloud tech, smart processes, and detailed analytics to help you derive more value out of the procure-to-pay process flow. It covers everything from purchase requests and orders all the way up to payment. It also integrates seamlessly with any accounting or ERP software you may be using, too.
With Kissflow, you can digitalise the entire procure-to-pay cycle, comprehensively improving all purchasing processes. Say hello to a digitized procure-to-pay process with Kissflow to find out why it is the best option to transform your procurement process.
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