April 04, 2023 | Procurement Software Blogs
Businesses understand the vital role of procurement in today’s rapidly changing market conditions. They are also aware of the need to optimize procurement processes to derive the most value out of the function. To do this, they are extending the scope of the function by integrating strategic sourcing into procurement.
Source-to-pay (S2P) and procure-to-pay (P2P) are two distinct modes of operation in the procurement function. Both models have helped streamline many processes in procurement.
At the outset, the two procurement models differ in their scope of operation. Procure-to-pay (P2P) integrates procurement and accounts payable functions. It describes the full cycle of actions that a business engages in when they buy goods or services from an outside supplier.
P2P begins with the requisition of goods and services and culminates with payment to vendors. Simple as it may seem, P2P can, in fact, be a complex undertaking for enterprise-level businesses with many moving parts. And it can become further complicated as the business grows and expands over time.
Source-to-pay (S2P) begins earlier and adds strategic sourcing to the procurement process. It can be seen as a prelude to, or an extended version of, procure-to-pay. It involves demand identification, sourcing, preparing a bid, finding and evaluating suppliers, negotiating prices, managing contracts, procurement, invoice processing and payment.
The S2P process begins in a similar manner to P2P with the identification of demand for goods and services.
However, as the vendor needs to be selected, the next steps in this process are different. The buying organization looks at different vendors and conducts a data analysis to evaluate them based on set parameters. It then shortlists a few vendors and requests more information from them.
The buying organization then compares different vendor proposals and quotes to make a final decision regarding vendor selection. It can still negotiate with a shortlisted vendor before a contract is finalized and signed by both parties.
The true value of S2P for a business goes much beyond tangible benefits such as more efficient processes, reduced maverick spending, higher levels of spend under management and greater policy enforcement. In essence, it helps redefine the function’s role by moving away from the mundane and tedious aspects of procurement and sourcing.
A key advantage of S2P is that it reduces the dependence on a static list of preferred suppliers. This drives healthy competition among vendors and encourages them to offer attractive pricing and terms to win a contract. This arrangement benefits a business. By continuously evaluating vendors and benchmarking prices, organizations can gain competitive advantage in a fast-changing business landscape.
S2P also helps a business engage in post-purchase vendor evaluation. It helps evaluate vendor performance vis-à-vis established KPIs such as pricing, compliance, delivery and quality. Such evaluation can determine if the vendor’s performance is at par with the expectation.
The P2P model is more suited for businesses that source goods and services from a fixed set of vendors. On the other hand, S2P works best when a business needs to identify new vendors for goods and services. The objective of finding new vendors can be varied. A business may look to mitigate risks, enhance savings or diversify its supplier base. It may also need to onboard new vendors for new raw materials and components.
By deploying advanced source-to-pay software, a business can automate its end-to-end procurement process. This not only boosts process efficiency and bottom-line savings, but it also allows procurement resources to focus on more strategic tasks. Further, it minimizes paperwork and eliminates manual, time-consuming repetitive tasks that procurement performs.
Additionally, it enhances spend visibility throughout the purchasing cycle. It also simplifies contract management and vendor evaluation against key performance indicators. Further, it helps to boost user adoption and increase spend compliance with easy-to-use purchasing tools.
In addition to deploying technology, successful S2P transformation requires effective change management and leadership alignment. It requires organizational buy-in and support from different business functions, considering its impact across the business and supplier base.