Businesses constantly seek ways to streamline procurement, reduce costs, and improve efficiency. To do so, they need to take control and create consistent, repeatable, and transparent processes that govern every aspect, from identifying a need to supplier discovery to payment.
Source-to-Pay (S2P) is a comprehensive approach to sourcing and purchasing that encompasses all activities, from identifying a need for goods or services to the final settlement with the supplier. It aims to give companies the data they need to source strategically and the tools they need to procure efficiently.
In this article, we’ll explore the Source-to-Pay process, its key components, and the role procure-to-pay software like Vroozi plays in helping organizations optimize and streamline S2P processes.
What is Source-to-Pay?
Source-to-Pay (S2P) is an end-to-end procurement process that begins with identifying an organization’s need for goods or services and culminates in the final payment to suppliers. It is a comprehensive approach that encompasses all aspects of procurement, from strategic planning and sourcing to operational execution and financial transactions. The primary objective of S2P is to create an efficient, transparent, and compliant procurement ecosystem that maximizes value for the organization.
Strategic Sourcing vs. Tactical Sourcing
Strategic sourcing is a key component of the Source-to-Pay process. It involves a holistic evaluation of procurement needs and a comprehensive planning approach to select suppliers and negotiate contracts.
Unlike tactical sourcing, which is more reactive and focused on short-term needs, strategic sourcing is proactive. It aims to build long-term relationships with suppliers, achieve cost reductions, and enhance quality and sustainability.
Key elements of strategic sourcing include:
- Defining Requirements: Clearly establish vendor expectations and project criteria.
- Identifying Suppliers: Systematically locate and assess potential suppliers.
- Evaluating Suppliers: Rigorously examine suppliers’ qualifications, capabilities, and performance.
- Selection Process: Select the best vendor based on a set of predefined criteria.
- Contract Negotiation: Negotiate terms and conditions to finalize contracts.
- Contract Creation: Draft and formalize contracts with agreed-upon terms.
In contrast, tactical sourcing focuses on:
- Quick Order Fulfillment: Meeting immediate procurement needs.
- Cost Comparison: Frequently prioritizing the lowest cost over other factors.
- Limited Supplier Relationship: Transactional interactions rather than long-term collaboration.
While both strategic and tactical sourcing have their places in the procurement landscape, S2P focuses on strategic sourcing to lay the groundwork for effective procurement.
Source-to-Pay vs. Procure-to-Pay
Source-to-pay is an overarching term that brings together the two main phases of business buying. The first is the strategic source-to-contract process of identifying and evaluating suppliers, issuing and assessing RFPs and RFQs, and negotiating contracts.
The second is the procure-to-pay phase, a systematic and transparent system for procuring goods and services while reducing errors, minimizing costs, centralizing data for spend analysis, and ensuring compliance with procurement policies and negotiated supplier contracts.
A correctly implemented procure-to-pay process, supported by P2P software, can streamline and organize procurement activities, reduce supplier risk, and enhance spending control and visibility.
Together, these organized and centralized approaches to both sourcing and purchasing help businesses to keep buying and supplier relationships aligned with company goals and objectives to reduce cost, manage risk, support product innovation, and sustain the company’s sustainable procurement and ESG objectives.
An Overview of the Source-to-Pay Process
Source-to-Contract
Identifying a Need
The S2P process begins with identifying a need for goods or services within the organization. That might be a need for materials to support a new product line or a need that has arisen in the supply chain, such as an expiring contract or an underperforming supplier. Strategic sourcing aligns with corporate objectives, which might include reducing spending over a specified period or increasing green spending to support sustainability objectives.
When a need is identified that no approved supplier can currently fulfill, a sourcing request or procurement request is issued to the procurement team. This request includes the required items, quantities, and delivery timelines to facilitate supplier discovery. Source-to-contract (S2C) is the front-end process within S2P that establishes supplier relationships critical to achieving corporate objectives. Procurement formalizes these relationships in a contract, which is then enforced and utilized in the procure-to-pay (P2P) process.
Supplier Discovery
Upon identifying the need, the business may look for new suppliers to fulfill the requirement. Discovery involves conducting market research, reviewing supplier capabilities against requirements, assessing pricing, and analyzing past performance data. The goal is to identify a pool of qualified suppliers who can provide goods or services at competitive prices in an acceptable timeframe.
Request for Quote and Supplier Bidding
After identifying potential suppliers, the organization sends a Request for Quote (RFQ) or a Request for Proposal (RFP). The RFQ/RFP document outlines the specific requirements, including technical specifications, quantities, delivery timelines, and other relevant information. Suppliers are then invited to submit quotations or proposals based on these requirements.
Supplier bids may include pricing, delivery schedules, differentiating capabilities, and any value-added services they can offer. The buying organization evaluates the bids based on predefined criteria like price, quality, requirements, capabilities, and supplier reputation.
Contract Negotiation and Creation
Once the supplier bids are evaluated and a preferred supplier is identified, the process moves to contract negotiation and creation. The parties work together to agree on the general terms and conditions, including payment terms, delivery schedules, and service levels. Contract terms will include the pricing structure, incorporating any volume discounts, early payment incentives, or other financial considerations.
Contracts may also address potential risks and aim to ensure compliance with legal and regulatory requirements, company policies, and sustainability objectives.
Following successful negotiations, the contract drafting phase involves clearly outlining the technical specifications, quantities, and quality standards for the goods or services. Key performance indicators (KPIs) and service level agreements (SLAs) are defined to measure supplier performance effectively. The roles and responsibilities of both parties are specified, including points of contact for communication and issue resolution.
After obtaining the necessary approvals, the final contract is prepared for signing. Signed contracts are documented and stored in a contract management system for easy access and reference. Implementation involves communicating the contract terms to all relevant parties within the organization and onboarding the supplier, ensuring they understand the contract terms and performance expectations.
Procure-to-Pay
Once the terms of a supplier relationship have been established, the source-to-contract phase is concluded. However, businesses must ensure that they and their trading partners adhere to contract terms and that purchasing, invoice processing, and payment are carried out as efficiently and cost-effectively as possible.
That’s the role of the procure-to-pay system and P2P software, such as Vroozi, which centralizes, streamlines, and automates the entire procurement process while providing transparency and ongoing spend analysis.
Catalog Integration with Procurement Systems
Once a relationship is established, the supplier’s catalog, including the contracted and agreed pricing and terms may be integrated into the P2P system’s supplier marketplace. Catalog integration allows employees to easily search for and purchase the required items from the approved supplier. It ensures only authorized purchases are made and helps maintain compliance with procurement policies.
Buying and Purchase Order Creation
When an employee needs to purchase an item from a now-approved supplier, they create a purchase requisition. With P2P software, this process is automated. The buyer chooses products in an e-commerce-like interface, and purchase requisitions are generated automatically.
The requisition order is then submitted for approval, and the S2P system handles communication with designated approvers via an intuitive approval interface.
Once the requisition is approved, a purchase order (PO) is generated and automatically sent to the supplier. The PO is a formal agreement between the organization and the supplier specifying the items to be delivered, quantities, prices, and delivery timelines.
Purchase Approvals
Purchase requests are reviewed and approved by an authorized approver, who ensures they are justified and within budget. P2P approval systems expedite purchasing by ensuring approval requests are delivered to the correct approver and providing an intuitive, information-rich approval interface.
Delivery and Goods Receipt
The supplier fulfills the order and delivers the goods or services to the organization. Upon receipt, the organization inspects the delivered items to ensure they meet quality standards and quantities. If the delivery is satisfactory, a goods receipt is recorded in the procure-to-pay system. This stage can also be managed via API. For example, an external warehouse or inventory management system may trigger the creation of a goods receipt in the P2P software.
Invoice Processing and Payment
The supplier submits an invoice for the delivered goods or services. The invoice is received digitally or captured via AI-enhanced OCR. The details are matched against the corresponding purchase order and goods receipt to ensure accuracy.
The invoice is processed through the approval system, and if there are no discrepancies, it is posted for final payment. The accounts payable department processes the payment according to the agreed-upon terms, completing the Source-to-Pay cycle. If there are no exceptions, touchless invoice processing allows the invoice to be paid automatically without human intervention.
How Procure-to-Pay Software Streamlines The S2P Process
Procure-to-Pay software is designed to automate and streamline the various steps involved in the procurement process while ensuring purchasing and payment conform to the terms agreed during the source-to-contract phase. By leveraging a P2P platform, businesses can achieve significant benefits, including reduced manual effort, improved procurement efficiency, and better spending control.
Here are some key ways in which P2P software streamlines S2P.
Procurement Automation
P2P software automates various procurement tasks, such as purchase requisition creation, approval workflows, and purchase order generation. Organizations can reduce manual effort, minimize errors, and ensure compliance with procurement policies. Automated workflows also provide real-time visibility into the status of each procurement activity.
Expedited Sourcing and Buying
The software provides direct access to approved supplier catalogs, enabling employees to quickly find and purchase the required items. Advanced search capabilities, such as keyword search and category-based filtering, make locating the desired products or services easy.
Sourcing and Procurement Policy Enforcement
Because all sourcing and procurement activities are centralized, businesses gain insight into and control over adherence to procurement policies. For example, the software can enforce approval thresholds, ensure purchases are made from approved suppliers, and flag deviations from established policies. The software helps maintain compliance, reduces maverick spending, and minimizes the risk of fraud.
What Are the Benefits of Using P2P Software?
Implementing P2P software offers numerous benefits to organizations.
Eliminate manual processes
Time-consuming and error-prone manual tasks, such as data entry, paper-based approvals, and manual reconciliations, are automated. Automation eliminates the risk of human errors, reduces processing times, and frees up resources to focus on more strategic activities.
Integrate key processes into a single platform
P2P software provides a unified platform integrating procurement functions like sourcing, purchasing, and accounts payable. Integration enables a seamless data flow, real-time visibility, and better collaboration between internal stakeholders and suppliers.
Negotiate better pricing and terms
Organizations can leverage advanced spend analytics and enhanced data capture to identify cost-saving opportunities. By consolidating spending data from across the organization, P2P software provides insights into spending patterns, supplier performance, and potential areas for negotiation.
Reduce sourcing and procurement costs
Source-to-pay systems reduce sourcing and procurement costs in several ways. It promotes competitive bidding, which drives down prices. It also helps identify and eliminate maverick spend, ensures contract compliance, and reduces the risk of fraud and errors.
Increase spend visibility
One key benefit of P2P software is increased spend visibility. P2P software provides a comprehensive view of an organization’s spending by capturing and consolidating spend data from various sources. Greater visibility enables better decision-making, helps identify cost-saving opportunities, and facilitates strategic sourcing initiatives.
Enable strategic and sustainable procurement
Strategic sourcing and sustainable procurement rely on an organization’s insight into and control over procurement processes. P2P provides data transparency and the tools businesses need to steer procurement throughout their organization. Businesses are empowered to make informed sourcing decisions, mitigate supply chain risks, enhance business value, and promote sustainable and socially responsible procurement practices.
Improve supplier collaboration
P2P software facilitates better collaboration between organizations and their suppliers. It provides a platform for seamless communication, document sharing, and performance tracking.
For example, Vroozi includes a sophisticated supplier portal where suppliers can access the system to view purchase orders, submit invoices, and track payment status. This collaborative approach strengthens vendor relationships, improves transparency, and enhances supply chain efficiency.
Implement Guided Buying
Guided buying is a key feature of P2P software. It provides a structured approach to purchasing by directing users to approved suppliers and products. Guided buying catalogs ensure that employees can only select items that meet predefined criteria, such as price, quality, and contractual terms. This helps enforce procurement policies and optimize the procurement process.
Vroozi Is a Complete Procure-to-Pay Solution
Vroozi is a leading Procure-to-Pay platform that offers a comprehensive suite of procurement solutions to streamline sourcing processes, automate procurement workflows, and achieve significant cost savings.
With Vroozi, your business can:
- Manage tactical sourcing with RFQ generation, bidding events, and quote comparison tools.
- Streamline purchasing with a supplier marketplace and purchase request generation.
- Expedite approval processes and create custom approval workflows.
- Automate procurement through automatic purchase order generation and delivery.
- Accelerate accounts payable processes with invoice automation.
To learn more, experience a live version of the app or request a personalized walkthrough from one of our team members.
