To begin with, the terms purchase-to-pay and procure-to-pay are often used synonymously. Purchase-to-pay refers to the process of acquiring goods in companies, in other words the procurement process. In short, it deals with the purchase of goods and services up to their final payment. That is the rough framework in which the procure-to-pay process moves. It is desirable to model these processes digitally.
In the search for a catchy description of a procurement process that is digitally integrated from start to finish, one term keeps popping up: Purchase-to-Pay, often abbreviated as P2P and occasionally modified to Procure-to-Pay. Purchase-to-pay covers the process steps from the purchase of goods and services to their payment.
In this blog post, we will introduce you to the most important features and benefits of an integrated purchase-to-pay process and how you can successfully implement it in your company. You will also learn why an efficient procurement process is becoming indispensable in times of digitalization and Industry 4.0.
What does Purchase-to-Pay mean?
Purchase-to-pay covers all the process steps involved in procurement, from the notification of requirements and the ordering process through to invoice verification and payment. Many companies still carry out all or at least some operations along this process chain manually. A study on digitization by the IT industry association Bitkom recently confirmed this impressively: In four out of ten companies, half of the business processes are paper-based. Definition: Purchase-to-pay enables companies to link the individual steps of the procurement process with the help of digital solutions and to automate the exchange of data – from the notification of requirements to delivery and invoice processing.
An integrated process based on the purchase-to-pay principle is designed to minimize inefficiencies and potential errors that arise during manual processing in procurement. With the help of purchase-to-pay software, the entire procurement process can be optimized by digitally mapping the data exchange between the individual process steps and thus largely automating them.
A completely digitized purchasing process sounds like a noble goal. EASY Request, the digital brain for procurement, brings you a very big step closer to it. EASY Request stores information from all process steps in a central application. Find out how this works in practice in one of our recently published blog posts.
What problems does purchase-to-pay solve?
One of the greatest challenges for the procurement function in a company is to map the different circumstances and requirements of all departments on the basis of a standard process. Starting with the notification of a requirement, the individual processes typically take place distributed across the entire company in numerous organizational units. Many people are involved in the process and exchange information with each other.
The goal of Purchase-to-Pay is to optimize the procurement process holistically through a smooth exchange of data. But what challenges do purchasing organizations in companies actually face?
- Long process cycle times: With manual and paper-based processes, the runtimes of the overall process can quickly become protracted. Procurement processes are characterized by many individual decisions. If one of them is delayed, the entire process gets bogged down. In practice, for example, demand notifications are “forgotten” time and again and are left undone. Digital purchase-to-pay solutions, on the other hand, function like a digital brain. Thanks to intelligent workflows with escalation and reminder functions, all process participants are automatically reminded of their open tasks.
- Media breaks between process steps: e-mails, phone calls and even faxes are still part of everyday communication around the purchase of goods and services in many companies. Such media breaks make procurement processes inefficient and ultimately expensive.
- Lack of process transparency: Without digitization and integration of the individual process steps, purchasing organizations quickly lose track of everything. Numerous process participants and different communication channels are the perfect ingredients for losing track of procurement. Digital solutions create daily transparency and give purchasing and finance departments an overview of all incoming and outgoing costs.
- Inefficient manual steps: Non-digitized processes cannot be automated and thus cause manual work. Even more dramatic, however, is the additional work often created for employees as a result of errors in the process or problems in communication.
- Failure to take advantage of optimal payment terms: Many suppliers grant special terms and discounts for timely payment. If coordination between the purchasing and finance departments does not function well, such financial advantages can be lost quickly.
- No forward-looking liquidity planning: For short-term liquidity planning, it is advantageous to schedule upcoming payments early. This allows cash flow to be optimized – but only if it is already clear when a payment is due when the order is placed. In addition, real-time transparency and the linking of procurement and finance mean that monthly, quarterly and annual financial statements can be prepared, checked and closed more quickly in accounting. This so-called “fast close” is becoming increasingly important simply due to legal framework conditions, but often fails in practice due to the lack of process integration between purchasing and accounting.
An integrated and automated purchase-to-pay process enables companies to eliminate these typical problems in procurement.
What process steps does Purchase-to-Pay include?
The purchase-to-pay process consists of a large number of individual process steps. Essentially, a distinction can be made between purchase-related and payment-related processes.
The demand-related processes (purchase) cover the first part of the procurement process from the requisition to the goods receipt:
- Demand request
- Order confirmation
- Goods receipt
The payment-related processes (Pay) refer to the second part of the procurement process, which begins with the receipt of the supplier’s invoice and ends with its payment:Invoice receipt
- Invoice processing
- Comparison with purchase order
- Invoice approval
In an integrated purchase-to-pay process, both parts are linked together, resulting in an overall process that is integrated from start to finish. Digital procurement solutions regulate the exchange of data for all transactions along this process chain.
Subprocesses of purchase-to-pay
A closer look shows that the procurement process consists of potential individual process steps. In principle, the entire process of purchase-to-pay can first be divided into two process aspects – the aspect of needs-related processes and that of payment-related processes:
Purchase-to-pay – the needs-related processes
Everything starts with the requirement notification. Either manually – someone needs something and initiates the requirement notification – or the whole process starts automatically. In overview, the needs-related part of the purchase-to-pay process consists of:
- the requirement notification
- its verification and approval
- the order
- the order confirmation
- and the goods receipt
The payment-related processes in procure-to-pay
An incoming invoice is present no later than with the goods receipt. From there, the payment and posting part of the purchase-to-pay begins. That consists of:
- invoice receipt
- invoice processing
- matching with the order
- invoice release
It is obvious that a digital purchase-to-pay process in companies provides a tremendous boost to transparency. Similarly, purchase-to-pay also accelerates the process cycle times immensely – a well-functioning Purchase-to-Pay system assumed.
What does a successful purchase-to-pay strategy look like?
Digitization is a crucial success factor in the implementation of an integrated purchase-to-pay process. But it is also true that “digitization is about much more than transforming analog processes into digital processes,” says Barbara Engels of the German Economic Institute in an interview with a German newspaper. Digital transformation alone is no guarantee of success for your company.
Rather, you should fundamentally put your procurement process to the test and uncover inefficiencies step by step. Review the communication between your company and your suppliers, starting with the purchase order and order confirmation through to internal testing and approval processes. In the case of manual processes, critically question: Are there plausible reasons for paper-based and manual processes when sophisticated digital solutions are available?
Thanks to Industry 4.0, machines will soon communicate with each other intelligently and autonomously. It would therefore only be logical not to stop at such an essential process as procurement when it comes to digital transformation. Manual processes are associated with a high expenditure of time and personnel as well as an enormous potential for errors. A purchase-to-pay process that is automated at least in part minimizes sources of error, increases transparency, and saves your company valuable time and money.