Purchase to Pay (P2P) Supply Chain Overview
P2P connects procurement through to payment of goods
The purchase to pay process, also known as the P2P process, connects the procurement and entire supply chain processes within a company through the goods receipt process, and finally to the payment issued to the vendor.
In recent years, companies have carefully looked at their purchase to pay processes to:
- Reduce overall supply chain and inventory costs
- Free up needed cash
- Improve operational performance
- Make improved financial decisions
In addition to reducing overall supply chain and inventory costs, improving the purchase to pay process can add a visibility that allows management the opportunity to have better communication with the vendor as to where the items are in the delivery process, and payment to the vendor.
Elements of the Purchase to Pay Process
There are many elements to the P2P process, each of which is important in the overall process. The process begins with the sourcing of items and ends with the payment to the selected vendor.
The P2P process begins with the purchasing department being asked by research and development or the production department to find a vendor for a special item or service. The R&D department may have produced a specification within which the vendor has to perform.
In some instances, the item may be standard stock item that is needed for the production process, and it may only require the purchasing department to find the best quality item at the best price. Depending on the item or service required, the purchasing department may issue a Request for Quotation (RFQ) or may select suitable vendors based on previous relationships.
When the purchasing department has selected a suitable vendor or vendors, there will be a contracting process where vendors and the purchasing department will negotiate a contract based on price, payment terms, and delivery schedules.
After the contracts are signed between the company and the vendor, purchase orders can be raised and sent to the vendor. To improve the delivery time of the items, the company can send the purchase order electronically rather than sending or faxing.
By sending an electronic purchase order, the information can be entered directly into the vendor's computer system. To ensure that there is visibility, the vendor should provide the company progress information such as updated delivery dates and documents such as advanced shipping notice (ASN).
Following the shipment of the items from the vendor, the next step is for those items to arrive at the customer. The items will be checked to ensure the quantity is the same as the purchase order, as well as checking the items for damage and quality.
If there is any issue with the items that are received, the customer will inform the vendor so that either item can be returned or a discount arranged.
The vendor can invoice the customer at any time after the items are shipped. By using an electronic invoicing solution, the P2P process can be streamlined so that the information is entered into the customer's accounts payable system.
When the items are received, matched against the invoice and purchase order, the invoice processing can commence.
In the P2P process, the processing of invoices should be made so that any discounts offered by the vendor are obtained. In the negotiated contract, the vendor can offer discounts for payment that is made by the customer before the payment is due.
For example, the vendor may offer a five percent discount for payments made less than ten days after the receipt of the items.
As part of the P2P process, a company should have complete viability to its purchasing spend. Constant monitoring of the spend will identify areas that could be a cause for concern such as vendors increasing prices, or rogue spending.
A P2P process that incorporates best practices can save companies money. It should include limitations on what can be purchased outside of the standard P2P process.
By allowing non-standard purchases, the incidences of unnecessary costs rise and policing these purchases can waste resources that could be saved if the correct P2P process was used.
This article has been updated by Gary W. Marion, Logistics and Supply Chain Expert for The Balance.