Source-to-Pay vs. Procure-to-Pay: Choose the Right Approach

Is your organization unable to deal with several procurement initiations and supplier management? Then it is essential to take a deep look at the efficiency of the procurement process. Procure is not just simply about purchasing what you need. It is the dynamics of accurate decision-making, supplier management, and financial management. If this has to be achieved then what you need is an approach that would allow you to streamline all these. 

Here are source-to-pay and procure-to-pay, the two procurement methods specifically designed for effective and optimized procurement activities. 

Read further to explore more on source-to-pay and procure-to-pay procurement methods. Additionally, decode the source-to-pay vs. procure-to-pay formula and figure out which approach is the best for your business here.

What is Procure-to-Pay (P2P)?

The procure-to-pay process integrates the two functions – the procurement process of acquiring goods and services and the process of accounts payable. Purchase-to-pay is another term for the procure-to-pay process. The procure-to-pay method entails all the important steps involved when a business seeks a product or a service from an outside vendor to when all the dues are settled and closed. 

Let us have a detailed look at the phases involved in the procure-to-pay process:

1. Identifying the Need

The first phase is where the organization realizes the demand. This demand can be triggered due to factors like low inventory levels, requirements in a new project, etc. 

2. Vendor Selection

In the P2P process, the vendors have been contracted and onboarded. The procurement initiator just has to pick a vendor from the catalog and proceed with the process. 

3. Generating a Purchase Requisition

This is the phase where the purchase requisition is raised after the vendor is chosen, giving all the required information about the quantity, price, etc., of the product that needs to be purchased. 

4. Purchase Order Creation

Once the purchase requisition is raised, a purchase order is created that has to be sent to the chosen vendor. The purchase order will have details of the product that has to be purchased. 

5. Receiving Goods

At this phase, the buyer inspects and verifies the goods received with the purchase order. 

6. Processing the Invoice

At this phase, the accounts payable team comes into play. The supplier of the product here sends the invoice to the AP team by matching it with the purchase order. This is where the three-way or even a four-way matching is conducted.

7. Releasing the Payment

The final phase is where the payment is made abiding by the terms and conditions agreed upon.

The process might seem straightforward with simple steps but with the number of external parties involved and several other factors in the process, the complexity heightens in practice. From the different phases, it can be deduced that the P2P process’s primary focus is on the operational elements of the procurement activity.

Advantages of Procure-to-Pay

The advantages of the procure-to-pay are as follows:

Improved Visibility

With the process being more systematic and digitized, the visibility of the process is improved. This advantage helps the organization to find areas of improvement and opportunities for cost-saving. This improves the cash flow of the procurement process as well as of the organization. 

Reduced Costs

When the process is standardized, the process becomes more streamlined avoiding the wastage of any resources. This helps in reducing the costs involved in the procurement process. 

Greater Efficiency

Since the process is optimized using digital solutions, the efficiency of the performance enhances bringing out the desired results. 

Reduction in Purchase Order Cycle Times

When the process is streamlined and optimized the management of the purchase order becomes more simple and efficient. The purchase orders can be generated and processed quickly. 

Improved Invoice Processing Time

The invoices generated can also be processed and moved for payment due to the optimization through automation. This offers an effective and improved procurement system.

Disadvantages of Procure-to-Pay

Here are some of the disadvantages of procure-to-pay process:

High Implementation Costs

High implementation is one of the major limitations in the procure-to-pay process. To make the process smooth and efficient, leveraging some of the technical solutions like automation becomes necessary. 

Lack of Control

Compared to any other type of procurement method, it is difficult to have complete control over the procure-to-pay method. The limitation here is that the buyers have to totally rely on the existing supplier for the supply of good products and services. Here the buyer/organization has zero control over choosing the supplier or product. 

Potential for Inefficiency

There are always risks associated when working with automated systems and processes. If these solutions are not properly implemented it can create unnecessary inefficiencies.

What is Source-to-Pay (S2P)?

Source-to-pay entails all the functions of procure-to-pay with an additional branch that deals with strategic sourcing practices. Source-to-pay is where the sourcing happens in the procurement process. Sourcing is an essential function of the procurement process helping the organization.

These sourcing practices include finding high-quality suppliers that meet the business needs and standards, onboarding and management, contract management, etc. This particular method starts two steps ahead of P2P. It is important to remember that the S2P process will differ for different organizations. 

Here are the different phases involved in the process of source-to-pay.

1. Strategic Sourcing

Strategic sourcing involves identifying, evaluating, finalizing, and building a group of potential suppliers. This pooling is done based on factors such as pricing, quality, market feedback, their terms and conditions in building a long-term partnership. The strategic parts come in during the identification and assessment stage of the sourcing. During this phase, the organization discusses some of the curbs like ESG considerations, reputation, vendor reputation, etc. 

2. Contract Management

Contract management is also the negotiation phase where the supplier is found fit to the standards of the organizations. This is where details like price, quantity, quality of the goods,  payment terms. During this stage, it is important to establish all the expectations clearly from both sides. 

3. Supplier Onboarding

Once the contract management has been achieved, the shortlisted suppliers are onboarded in the procurement process. This process is done through registration on the supplier portal followed by the reviewing of critical information. 

4. Supplier Management

After the onboarding stage, the procurement has to manage and take care of two aspects, they are, supplier risk and performance. 

• Risk – Managing risk is to ensure that the organization has a strong frontier against all possible obstacles to the supply process. 
• Performance – Ensuring that the suppliers are meeting the standards of quality and performance. 

5. Purchase Requisition

This is the stage where the purchase requisition is raised. From the stage of purchase requisition, the source-to-pay process has the same phases as the procure-to-pay procurement process.

6. Purchase Order Creation

Once the purchase requisition is raised, a purchase order is created that has to be sent to the chosen vendor. The purchase order will have details of the product that has to be purchased. 

7. Receiving Goods

At this phase, the buyer inspects and verifies the goods received with the purchase order. 

8. Processing the Invoice

At this phase, the accounts payable team comes into play. The supplier of the product here sends the invoice to the AP team by matching it with the purchase order. This is where the three-way or even a four-way matching is conducted.

9. Releasing the payment

The final phase is where the payment is made as per the terms and conditions agreed upon.

Advantages of Source-to-Pay

Stricter Internal Controls

Contrary to the P2P process, the source-to-pay process offers more internal control over the entire procurement activity. As the S2P method has a potent workflow, it is more defined and can offer stricter internal controls. The method also ensures that only the best vendors are sourced and contracted. 

Improved Supply Chain Efficiency

Even though this process has more stages than the P2P, the S2P process can set the bar high with supply chain efficiency, given that the workflow is followed. With the right vendor being sourced, there is much more security brought into the later stages of the process. 

Improved Vendor Relationships

With stronger agreements made at the initial phases of the procurement process, an establishment of a stronger rapport with the supplier takes place. Hence, vendor relationship management becomes an easy task. 

Reduced administrative and processing costs

When the entire process is automated, the manual interventions are drastically reduced. Hence, the administrative and processing costs are reduced significantly.  

Improved compliance

Automated solutions for procurement can manage and maintain compliance with all the regulations of the contracts made.

Increased agility

The source-to-pay process can make organizational procurement more scalable and can easily adapt and be responsive to the changing trends in the market.

Disadvantages of Source-to-Pay

Higher costs

The implementation cost source-to-pay solution can be expensive and most organizations may need help to afford it. Furthermore, this might also require the reengineering of the business processes. 

Inflexibility

The source-to-pay can sometimes be rigid and might not help all types of organizations with the procurement process. The process can be difficult to mold to specific needs.

Source-to-pay vs. Procure-to-pay: The Key Differences

Aspects	Source-to-Pay	Procure-to-Pay
Process	The S2P process entails the complete sourcing lifecycle of supplier management.	The P2P process primarily focuses on the procurement aspect, that is, from the realization of the demand to the supplier selection.
Purpose	This is an end-to-end approach that focuses on strategic sourcing and management.  This method offers to find the most suitable suppliers or vendors to supply goods/services.  The process promotes strict compliance and promises accurate payments.	The ultimate aim of the method is to integrate the procurement and accounts payable processes.  This process also improves compliance and payment accuracy.
Scope	The scope of the process is broader.	The scope of the process is narrower.
Emphasis	The emphasis of the process is being strategic and long-term.	The emphasis of the process is being operational and cost-efficient.
Involvement	The process can be cross-functional.	The process is department-focused.
Advantages	The process improves compliance. This method enhances the overall cost savings. The process offers greater visibility and control over spend management.  Improves the efficiency of the procurement process.	This process eliminates any errors in the manual invoice processing. The process offers clarity of the spending patterns. The process improves the efficiency of the procurement process.
Disadvantages	The implementation of software or solutions is expensive. The process can be difficult to customize.	The implementation of software or solutions is expensive. It is often difficult to have control over suppliers and the goods procured.

The two methods of operation are similar in the aspect of integrating procurement and accounts payable. Yet the difference lies in their scope. 

P2P is specifically designed to cater to the integration of the two processes. The process entails the complete life cycle of organizations’ activities when they buy goods and services from a supplier. On the other hand, the source-to-pay starts much before the P2P process. It is seen as a prelude to the P2P and is like an extended version of the same. It also encompasses identifying, sourcing, preparing the bid, and assessing the available suppliers, followed by price negotiation, contract management, procurement, processing of invoices, and the final payment. Organizations can go from P2P to S2P when they need to find new suppliers for a particular procurement process.

Firstly, a notable difference is the way both methods begin. The initial steps of both methods differ, the procure-to-pay process begins with requisitioning any particular need such as raw materials, goods, or services. On the contrary, the source-to-pay process starts much earlier when the business searches for new suppliers. 

Secondly, a major difference lies in where the vendor has to be selected, from the process stage changes. In S2P, the organization looks for different vendors and carries out a detailed evaluation based on the predetermined set of criteria. After evaluation, the most apt suppliers are shortlisted. This is called strategic sourcing which is the stand-out quality of source-to-pay. 

Having a clear understanding of the difference between the two methods of procurement is essential to align the requirements, find the right partnership with the vendors, and also build the right strategy for the procurement. Organizations can practice the P2P method and enable the shift to S2P when they require new vendors.

How Source-to-pay Benefits a Business?

The greatest advantage a source-to-pay offers is that it reduces the dependence of the organization on a list of preferred suppliers. Less dependency stimulates healthy competition among the suppliers and also encourages them to offer better dealings to organizations. This will help in evaluating and benchmarking them. The P2P method is best suited for organizations that have a fixed set of suppliers. The S2P, on the other hand, is best suited for organizations that are looking for new suppliers. 

So how can this be done? Implementing S2P software can take over the process and automate it. Automating a process brings in a lot of changes to the performance. The efficiency is boosted and also encourages cost-effective practices. The process is transformed by reducing the paperwork and eliminating any manual work that has the potential to affect the pace of the operation. 

If you are looking forward to a successful source-to-pay implementation, developing robust change and leadership management is ideal. These can be achieved through effective organizational buy-in and support created between all the business operations, as it involves the impact on both the organization and the supplier base. 

Advantages of using an Automate Source-to-pay and Procure-to-pay Suite

Procure approaches can revolutionize the procurement process for you. With the implementation of P2P and S2P, these are the following benefits:

• It ensures the organization is partnered with the right and reliable suppliers who are legitimate and hold valid credentials. The method also ensures that the suppliers comply with industry standards as well. 
• It streamlines the purchase order and invoice processing making it efficient and swift. The automated process is optimized to boost the supply and management of products/services and vendors.
• These methods also ensure that the supplier partnerships formed are more strategic and long-term mainly focusing on better deals, discounts, and prices. This also facilitates collaboration and communication. 
• It helps in developing a healthy vendor relationship that promotes priority service and support to each other.
• The strategic plan and execution help in making smart and viable investments and simultaneously make cost-saving decisions. This is made possible with detailed monitoring and analysis of the expenses.
• Since the entire process can be automated using automation software, human involvement can be reduced to a great extent. When processes like the creation of the purchase order and invoices are highly expensive. Hence, automation is a viable solution that can process these instantly and reduce the cost. 
• With a properly devised strategy, there is a significant reduction in risks. Such situations can be detected early and tactically be avoided. 

Why Should You Automate Source-to-pay and Procure-to-pay?

Here is a comparison between the procurement process before and after the automation of source-to-pay and procure-to-pay approaches. 

Processes Before	Processes After
Are siloed and disconnected	Are integrated and centralized and are silos-free
Are repetitive and performed manually having human errors and redundancies.	Are automated hence saving time, enhancing communication, and reducing errors.
Find it difficult to track and manage data on documents like invoices and contracts and demand manual processing.	Have more control and visibility throughout the process of document management.
Have less visibility on the process, supplier, and financial performance.	Are built on strategic sourcing, better finance management, compliance, and effective risk management.
Have to face financial losses and improper relationships with suppliers.	Offers efficient supplier relationships which consist of faster request and approval cycles, fewer implementation costs, and faster installation.

Procure-to-pay vs Source-to-Settle: The Two-way Step Test for Choosing the Right Approach

Classify the Suppliers

The suppliers for your organization can be classified into three sections, namely, strategic vendors, tactical vendors, and one-off vendors. 

• Strategic Vendors: these are the suppliers who aid in getting the raw materials and other services that are required by the business. 
• Tactical Vendors: These are the vendors that you contact when an immediate need is raised by the stakeholder or any case of emergency. 
• One-off Vendors: these are the vendors curated for special needs where they are needed for consultation like the quality analysis. 

Once this classification has been done, either of the following approaches can be followed for procurement. 

• If the spending is going towards the strategic vendors then it is ideal to retain the current vendors and the procurement process with the procure-to-pay solution.
• If the spending is going towards several strategic vendors and that too with short-term contracts requiring frequent negotiations, then shifting to S2P is a better option for your organization. This approach will allow complete dealing with a single vendor that can be better negotiated. 

It is important to note here that, if your organization is spending on tactical and off-vendors, it has to be understood that you need strategic vendors for a better procurement process. 

Consider the Sector

Two things to consider here are the nature of the materials and the competitiveness of your industry.

• Certain materials like chemicals require authorized dealers. This is where the S2P method can help diversify the suppliers and bring in only cost-effective dealers. 
• For the IT industry, it is ideal to use the S2P method that has the ability to be flexible to the changing standards. 
• For industries like healthcare and retail that operate with readily available materials. Therefore, regular suppliers are a must. In such a situation, a P2P solution is all that is needed to simplify the procurement process.

Source-to-settle vs. Procure-to-pay: Key business processes supported by P2P and S2P

It is beneficial to know and understand what all business operations can be supported by procure-to-pay and source-to-pay solutions. Not all the solutions offer payment processing functionality, however, the S2P suite offers all P2P functionalities with additional qualities like sourcing, analytics and reports, and contract management. Here are the business processes that are supported by P2P and S2P approaches. 

Procure-to-pay Solutions

1. e-Purchasing

Using procure-to-pay, online shopping can be effectively carried out through the organization’s sanctioned supplier group. In this process, the purchase request has to be submitted for approval, followed by the predefined workflow navigating the approval process further and finally generating the purchase order. 

2. Accounts payable automation

Once the invoice has been generated and approved, the invoice processing is automatically carried out by capturing the details from the supplier invoice. A three-way matching is performed against the purchase order, and invoice. In case there is no purchase order, these can be legitimized using a pre-built approval workflow. 

3. Payment

The organization can use various payment methods to easily pay all the suppliers. An important point to note here is that all P2P solutions do not offer a payment processing solution. Organizations that practice P2P solutions mostly opt to deploy external payment processing functionality. 

Source-to-pay Solutions

1. E-sourcing

Through e-sourcing, businesses are opened to a pool of suppliers/vendors and can easily find and build contracts with new vendors by sending proposals to potential ones. This is followed by taking quotations, analyzing, comparing the prices, and finalizing the vendor. 

2. Spend Analytics

A source-to-pay lets you and your organization know all the expenditures and provide you with deep insights into the spending patterns. This will help in making informed and sound decisions Even if your organization is going to opt for the P2P method, it is ideal to check for the feature that would analyze the spending pattern and generate a report. 

3. Contract Management

The solution is potential enough to optimize and streamline contract management. The solutions take care of the process from the creation, execution, and renewal or termination depending on the performance. Most often organizations tend to have a contract management tool that is specifically designed for this purpose through integration with the procurement process software. 

Procure-to-pay vs Source-to-pay: Can Source-to-pay and Procure-to-pay be Used Together?

Source-to-pay and procure-to-pay can be effectively used together. It is ideal for an organization to go for a collaboration of the two solutions. Both can exist as the formal procurement process of the organization and enhance its efficiency. Why use both together? 

The integration of both approaches offers the advantage of providing the process with extra security and visibility that are highly essential for the process. The source-to-pay method does this by making use of a strategic sourcing process that will ensure potential negotiation between the buyer and the suppliers and also help in detecting areas of improvement. The procure-to-pay on the other hand can be used to integrate the purchasing and accounts payable and completely eliminate payment errors. 

A Hybrid P2P and S2P Model

A hybrid of source-to-pay and procure-to-pay is the best option to have a formal process for procurement, instead of using two different approaches together. This can offer better control over the suppliers and the complete procurement process. All the inefficiencies can be successfully revived using a hybrid solution.

Are there any disadvantages associated with the hybrid model?

The hybrid model makes use of the best features and specialties from both processes. However, it is crucial to be mindful of some of the disadvantages of this model and take steps to overcome them. These disadvantages are rooted in limitations associated with each of the procurement methods itself. One notable one is that, in a P2P solution, tracking expenses can be difficult. The major reason is that with several procurements initiated, the process becomes decentralized, and multiple invoices have to be tracked. A second major concern is with the S2p process. The source-to-pay method can be time-consuming since it involves more stages in the process.

The Cflow Procurement Advantage

Cflow is the best option for your procurement process. As one of the most robust workflow automation software, Cflow can take over the procurement process by transforming it into efficiency. Our platform seamlessly integrates all the tasks and activities in the procurement effectively. Procurement is one of the special business operations that Cflow handles effortlessly. The platform is flexible and user-friendly and can be deployed as both source-to-pay and procure-to-pay software tools. 

With its simple feature of drag-and-drop workflow creation, the users are enabled to create any complex workflow patterns with easy and limited steps. Integration is yet another fascinating feature that empowers the users to integrate several external systems into the process. Some of the essential features that Cflow offers are: 

• The platform is the best for sourcing and capturing all the potential vendors. 
• Payment approvals are made seamless with simple invoice generation and approval of requests.
• It enables the users to create, store, and review receipts, purchase orders, and invoices instantly whenever and wherever they wish to.
• The users are empowered to simultaneously keep track of all your transactions, dealers/vendors, and payment receipts.
• The platform guarantees a spotless review and approval of purchase orders without any delays.
• It lets you integrate with other platforms to effectively bring out the expected outcome. 
• The tool can generate invoices without errors and make payments with systematic and easy functions.
• Complete removal of fraud and duplication from invoice approvals.
• Maintain a rapport with vendors and suppliers, with automated features like sourcing vendors, contract negotiation, cost control, dealing with vendor risks, and contract renewal.

To Conclude

Procurement is not an easy agenda. A lot of planning and management tasks go behind it. Taking this into account, Cflow is here to make that task easy for you. Our platform has the potential to revolutionize the procurement process and transform it into an efficient and automated one. Important parameters like transparency, visibility, accuracy, reduced paperwork, collaboration, vendor management, cost control, compliance, and seamless audit trails can all be achieved with ease and comfort. To know more about Cflow, sign up now!

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