Purchase to pay cycle or purchase to pay process is a business process that involves various activities from requesting for the raw materials or service from the supplier, through to making payment to the supplier for the supplied products or services.
Purchase to pay cycle is also known as procure to pay cycle often abbreviated as P2P.
A well followed P2P cycle helps organizations to maintain good buying practices.
The Process of Purchase to Pay
The following diagram shows the different steps involved in the procure-to-pay cycle.
The process of Procure-to-Pay or P2P starts when a buyer finds a need for some goods or services.
1. Need Identification
This is the first step in the P2P cycle.
Whenever there is a shortage of raw materials or service or any parts needed to continue the operation, the person in charge will identify the need for the material or the service.
The need for the material or service is then informed to the purchasing department by creating a purchase request.
Purchase request will be submitted to the purchasing manager
2. Authorizing the purchase order
The purchasing manager evaluates the purchase order received.
Depending on the importance and cost of the material or the service, it will be sent to the senior level executives for revision.
Here the purchase order can either be approved or rejected.
3. Purchase order Approval
If the purchase manager gets approval from his seniors, he will authorize the purchase order and the PO will be sent to the procurement department.
Procurement department checks the request form to understand the requirement
4. Shortlisting the vendors
Depending on the type of the request, either a new list of vendors will be shortlisted or procurement department may directly approach the existing vendor for the material.
Shortlisting of the vendors depends on their credibility, quality of the product or service and pricing.
5. Taking quotations from the vendors
Here the buyer sends RFPs to all the shortlisted vendors explain the requirements.
The vendors are then asked to give their quotation.
6. Vendor Selection
Here the vendor responses to the RFP are evaluated, terms and quotations are negotiated with the vendors.
The vendor whose quotation and terms are accepted by the buyer is shortlisted and the agreement will be signed.
7. Shipment Notice
Once the agreement is signed and the PO is confirmed, the vendor sends the shipment notification to the buyer informing about the goods or services that they are providing.
The shipment notice includes all the details like a description of the goods, Shipment date.
8. Receiving the goods
The company receives the goods from the supplier.
The materials or services received are inspected to check the quality of the materials.
The delivery team compares the PO with the shipment notice to validate if the two match.
If they match, the company issues the receipt to the vendor
But if there are discrepancies, the company can contact the vendor and ask for the refund or replacement.
9. Recording the invoice
After receiving the receipt from the company, the supplier sends them the invoice for payment.
The invoice will have all payment details related to the goods delivered.
10. 3 Way Match
Once the invoice is received from the vendor, all the related documents like purchase order, shipment notice and invoice has to be reviewed by the accounting department of the company.
11. Making payment to the supplier
If the account payable department finds the match between all the documents in terms of price, quantity and terms and conditions, the payment will be done to the vendor as per the agreed terms.
Once the payment is done to the vendor, the complete process is documented and reports are created
Automating P2P Cycle
Procure-to-pay cycle involves many departments of the organization as well as many vendors.
Since it is a long process involving a lot of paperwork and administrative tasks, it demands a lot of money and time of the organization.
By automating the P2P cycle, organizations can optimize the entire process with the help of technology.
Decreased paperwork and human interference by automating P2P process help companies to reduce the operational costs.
Benefits of Automated P2P Cycle
- Supply chain transparency
- Reduced complexity and risk
- Establishes a good relationship with suppliers
- Results in on-time delivery of the products or services
- Improved Productivity