An Introduction to Source to Pay (S2P) in Procurement

Optimizing procurement is key to successful purchasing and supply chain management. This involves understanding how supplier connections affect pricing and performance and updating your vendor list to meet standards. Companies aiming to cut costs invest significant time in improving their source to pay processes and finding the finest suppliers.

How much should strategic sourcing influence your buying? How do you evaluate vendors to get the best deals?

Learn about the source-to-pay process, how it differs from other procurement management methods, and how procurement software can help you reach strategic sourcing goals.

Definition of source-to-pay (S2P) procurement.

S2P covers all procurement project aspects. Identifying and evaluating new suppliers, purchasing, contract lifecycle management, supplier performance review, spend analysis, and accounts payable.

To always secure the best supplier terms and pricing, source-to-pay is vital. Source-to-pay helps companies evaluate vendors. They then purchase and pay for products, services, and software.

What distinguishes S2P from P2P?

Simply put, procure-to-pay is part of source-to-pay. P2P focuses on purchase requisitions to final payment, while S2P starts with supplier management. S2P covers the crucial period between discovering a need and contracting with a supplier.

Strategic sourcing helps companies maximise budgets. It assures they acquire the greatest pricing for goods, services, and software to advance the company.

8 source-to-pay steps

Successful procurement requires a repeatable procedure. Each S2P project follows the same processes to get the right goods at the right price on time. Individual organisational processes may differ, but S2P normally follows:

1. Identify a need: The stakeholder needs a product or substance. The stakeholder first sets project needs, including dates and specifics for the optimum result. The stakeholder completes a requisition or intake form to start sourcing in some organisations.
2. Shortlist vendors: Strategic sourcing involves the stakeholder identifying numerous providers based on the above criteria. New vendors will be evaluated for S2P. P2P vendors may be partners or on a recommended vendor list.
3. Send RFPs or e-auctions: After selecting a vendor shortlist, a buyer initiates research using an RFP, RFQ, or e-auction. (E-auctions are explained below.)
4. Negotiate the contract: After selecting a provider, the buyer negotiates the contract. The buyer undertakes due diligence and negotiates price, payment, and delivery terms with the provider.
5. Purchase order: After agreeing on conditions, the buyer sends the supplier a formal purchase order. Supplier fulfils contract purchase order and delivers items for inspection and acceptance.
6. Goods delivery/acceptance: After receiving items, the buyer checks for compliance and quality issues. Buyers accept and pay for satisfactory goods.
7. Payment: After accepting products, the buyer pays according to the contract and purchase order. To prevent errors and fraud, document-matching ensures that orders, deliveries, and contracts match. The “three-way” matching method matches the purchase order, invoice, and goods receipt. Your company’s procurement solutions may automate three-way matching and payment on a single platform.
8. Evaluation of vendors: Despite not being part of the payment process, post-purchase review is crucial to strategic sourcing. The supplier should be evaluated for pricing benchmarks, compliance, delivery exceptions, and quality issues during the agreement. The review should include any information needed for future supplier performance management, as current performance indicators may determine future supplier opportunities and preferred vendor lists.

Defining e-auction

E-auctions (e-actions) quickly match customers with the finest suppliers. Instead of waiting for RFQ responses, the buyer directly contacts various suppliers through an electronic clearinghouse. Suppliers compete for business in reverse auctions, lowering prices.

There are various types of electronic auctioning:

Reverse English: In a reverse English auction, all bidders know their competitive position. The item’s price is lowered by repeated bids until a winner is chosen. English auctions close “hard” or “soft”. In a hard close, bidding ends at a set time. A soft close (sometimes called a “dynamic” close) ends bidding after a defined time.

Reverse Vickrey: One-round lowest-and-best bidding. Several providers submitted electronic bids concurrently without knowing each other. Buyers choose the bid that best meets their needs.

Reverse Dutch: A “step” auction where the price rises over time. Initial bids are modest, then raised until a bidder takes the contract. First to accept contract price wins auction. Suppliers accept the best price before a competitor accepts the contract is encouraged.

Reverse Japanese: Another round-based “step” auction. The buyer sets a high price and gradually lowers it over a given number of intervals to find the lowest bid. At each stage, suppliers can accept or reject bids. After a certain amount of rejections, the provider is removed from auctions. This continues until one bidder remains, giving the buyer the lowest price.

S2P benefits

Strategic sourcing improves procurement through cost reductions and spend optimisation. Top S2P benefits include:

Better sourcing strategy: An outdated list of recommended suppliers misses out on opportunity. Organisations can adapt to shifting procurement conditions by benchmarking pricing and assessing providers. This maintains vendor and price competition.

E-auctions enable faster fulfilment: E-auctions streamline supplier searches into a time-saving many-to-one process. More efficient order fulfilment results from faster and easier supplier selection.

Improved pricing and conditions: Competitive suppliers offer eager buyers better terms and pricing. Strategic sourcing (RFQ or e-auctions) motivates providers to win the contract. Better pricing stabilises cash flow and enhances spend control.

Better risk management: Evaluating new suppliers decreases organisational risk. A good supplier evaluation process uncovers issues and gives buyers a more detailed picture of the future partnership. Supplier evaluation assures regulatory and risk compliance and addresses cross-departmental requirements including contract wording, IT or InfoSec security minimums, and finance requirements.

Improved budgeting and forecasting: Understanding a deal’s financial components helps organisations comprehend its budgetary and practical effects. Knowing the best costs for commodities, services, and software helps stakeholders meet financial goals. Finance can use post-close reporting data to plan budgets, utilisation, and capacity.