One term repeatedly crops up in the search for a handy way of describing a procurement process that is digitally integrated from start to finish: Purchase-to-pay, often abbreviated to P2P and occasionally called procure-to-pay. Purchase-to-pay encompasses the process steps from the purchase of goods and services right up to payment.
In this blog post, we introduce you to the most important features and benefits of an integrated purchase-to-pay process and show you how to successfully implement it in your company. You will also discover why an efficient procurement process has become indispensable in times of digitalization and Industry 4.0.
What Does Purchase-to-Pay Mean?
Purchase-to-pay covers all process steps involved in procurement, from the purchase requisition and ordering process to invoice verification and payment. Many companies still carry out such processes along this chain in a completely, or at least partially, manual way. A recent study on digitalization conducted by the IT industry association Bitkom has emphatically confirmed this: In four out of ten German companies, half of all business processes are carried out on paper.
In four out of ten companies, half of all business processes are carried out on paper. Purchase-to-pay digitalized the procurement process.
Definition: Purchase-to-pay enables companies to connect the individual steps of the procurement process using digital solutions and to automate the exchange of data – from purchase requisition to delivery and invoice processing.
An integrated process based on the purchase-to-pay principle is designed to minimize inefficiencies and error potentials that arise during manual processing in procurement. Purchase-to-pay software can be used to optimize the entire procurement process by digitally displaying the exchange of data between the individual process steps – this also helps to largely automate the whole process.
What Problems Does Purchase-to-Pay Solve?
One of the greatest challenges for the procurement function in a company is to display the different conditions and requirements of all departments on the basis of a standard process. Starting with purchase requisition, the individual processes usually take place across numerous organizational units throughout the company. This process includes many people who exchange information with each other.
The aim of purchase-to-pay is to optimize the procurement process in its entirety through seamless data exchange. But what challenges do purchasing departments face in companies?
Lengthy process cycle times: The entire process can become rather prolonged when manual and paper-based processes are adopted. After all, procurement processes are characterized by countless individual decisions. If one of them is delayed, the entire process will come to a halt. In practice, for example, purchase requisitions are repeatedly “forgotten” and left undone. On the other hand, digital purchase-to-pay solutions function like a digital brain. Thanks to intelligent workflows with escalation and reminder functions, all process participants are automatically reminded of their outstanding tasks.
Media disruptions between process steps: Emails, telephone calls and even faxes remain part and parcel of everyday communication in many companies when it comes to purchasing goods and services. Such media disruptions make procurement processes inefficient and burn a hole in the company’s wallet.
Lack of transparency in the process: Without the digitalization and integration of individual process steps, purchasing organizations can quickly lose the overview. Numerous process participants and different communication channels are the perfect ingredients for losing the overview in procurement. Digital solutions create daily transparency and give purchasing and finance departments an insight into all incoming and outgoing costs.
Inefficient manual work steps: Non-digitalized processes cannot be automated, which ends up causing more manual work. However, even more dramatic is the frequent overtime that employees have to work due to errors in the process as well as communication problems.
Non-utilization of optimal payment conditions: Many suppliers grant special conditions and discounts if the payment is timely. If coordination between the purchasing and finance department doesn’t work all that well, such financial benefits can quickly go down the drain.
No anticipatory liquidity planning: For short-term liquidity planning, it is beneficial to schedule pending payments early. This way, it is possible to optimize your cash flow, but only if it is clear when a payment is due when the order is placed. In addition, real-time transparency and the linking of procurement and finances allow the monthly, quarterly and yearly financial statements to be prepared, checked and finalized more quickly in the accounting department. This so-called “fast close” is taking on increasing importance due to legal conditions. However, it often fails in practice due to the lack of process integration between the purchasing and accounting departments.
An integrated and automated purchase-to-pay process enables companies to overcome these typical procurement problems.
Which Process Steps Does Purchase-to-Pay Include?
The purchase-to-pay process consists of a large number of individual process steps. The principal difference between these processes is that some concern the purchase whereas others concern the payment.
The purchase-related processes cover the first part of the procurement process, from the purchase requisition to the receipt of goods:
- Purchase requisition
- Order confirmation
- Receipt of goods
The payment-related processes refer to the second part of the procurement process, beginning with receipt of the supplier’s invoice and ending with the payment:
- Receipt of invoice
- Invoice processing
- Comparison with order
- Invoice approval
Both parts are connected to each other in an integrated purchase-to-pay process, resulting in an integrated overall process from start to finish. Digital procurement solutions regulate this exchange of data for all transactions along this process chain.
What Does a Successful Purchase-to-Pay Strategy Look Like?
Digitalization is a decisive success factor when implementing an integrated purchase-to-pay process. However, we must also bear in mind what Barbara Engels from German Economic Institute said in an interview with Süddeutsche Zeitung: “Digitalization is about much more than the conversion of analog processes into digital processes.” Digital transformation alone will not be the silver bullet that guarantees your company’s success.
Instead, you should always put your procurement process to the test and pinpoint inefficiencies step by step. Analyze the communication between your company and your suppliers, starting with the order and order confirmation right through to internal testing and approval processes. If you still have manual processes, critically ask yourself this question: Are there plausible reasons for having paper-based and manual processes when advanced digital solutions are available?
Thanks to Industry 4.0, machines will soon be able to communicate intelligently and independently with each other. For this reason, it would make no sense if you didn’t let digital transformation do its magic on such an important process as procurement. Manual processes are associated with a high level of time and personnel expenditure as well as a huge potential for errors. A purchase-to-pay process that is at least partially automated will minimize sources of error, increase transparency and save your company precious time and money.