What is P2P?

Purchase-to-pay cycle (P2P) is the set of business process activities taken during the creation and acceptance of a purchase order and payment for the items or services.

Purchase to pay cycle is also known as procure to pay cycle, often abbreviated as P2P. In this post, we are using those terms interchangeably.

A well-followed P2P cycle helps organizations to maintain good buying practices.

All modern ERP systems, including SAP, maintains good P2P process automation functionalities. In this post, procure to pay cycle in SAP MM is taken as reference.

Procure-to-pay process

The following diagram shows the different steps involved in the procure-to-pay cycle.

procure-to-pay cycle or purchase-to-pay cycle (P2P)

The process of Procure-to-Pay or P2P starts when a buyer finds a need for some goods or services.

1. Requirement Identification

This is the first step in the purchase-to-pay cycle.

Whenever there is a shortage of raw materials or services 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.

The 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.

The 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, vendor rating, quality of the product, or service and pricing.

5. Taking quotations from the vendors

Here the buyer sends RFPs to all the shortlisted vendors to 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 the buyer accepts terms are 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. Notification informing about the goods or services that they are providing.

At this point, we are halfway through the purchase-to-pay cycle.

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 a 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, and shipment notice 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 made to the vendor as per the agreed terms.

12.  Reporting

Once the payment is made to the vendor, the complete process is documented, and reports are created.

Automating P2P Cycle

The purchase-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 for 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 the P2P process help companies reduce operational costs.

Benefits of automated purchase-to-pay cycle

The purchase-to-pay cycle helps your business grow with the following advantages.

  1. Supply chain transparency.
  2. Reduced complexity and risk.
  3. Establishes a good relationship with suppliers.
  4. Results in on-time delivery of the products or services.
  5. Improved Productivity.

Conclusion

Future technology could be the blockchain in procure-to-pay in order to enhance transparency.

blockchain in procure-to-pay

 The Blockchain is an open, distributed ledger that can record activities between two parties in a verifiable and unchanging way.

Companies of all sizes need to keenly look into the purchase-to-pay cycle in order to improve business performance.

Not just SAP MM, procure to pay cycle in Oracle apps, PeopleSoft, and similar enterprise software solutions provide P2P functionalities.

   

Subscribe to our Email Newsletter