UNIT 1 INTRODUCTION TO PROCURE TO PAY Structure 1.0 Objectives 1.1 Introduction 1.2 Procure to pay 1.2.1 Overview of Procurement 1.2.2 Buying Process in an Organization 1.2.3. Brief Overview of the P2P Process 1.2.4 Description of the P2P Proce: 1.3 Importance of Procure to Pay 1.4 Let Us Sum Up 1.5 Key Words 1.6 Answers to Check Your Progress 1.7 Terminal Questions 1.0 OBJECTIVES Afier studying this unit, learner should be able to: ‘© describe an overview of the Procure to Pay (P2P) process; ‘© explain the significance of the P2P process for a business; © discuss the various stages in the P2P process; © describe the departments involved in the P2P process and their responsibilities and concerns; and # highlight the consequences of a poorly implemented/managed P2P process. 1.1. INTRODUCTION Procure to pay (commonly termed as P2P) is the process that begins with the decision to purchase a product or service and ends when the vendor who provided it has been paid for. It consists of 2 components. They are: Procurement process and Payment process. Any manufacturing business has some fundamental activities. It buys raw materials, adds value to it and then resells to retailers or customers. Similarly trading and services organizations buy goods or services and resell them by adding value in some form. Hence the P2P process is essential to any business entity. This course has been dedicated to the P2P process as it is a commonly outsourced F&A process. In this unit. we will learn a basic overview of thisProcure to Pay process and its importance. Subsequent units will go into greater detail of the processes. Like P2P process, there is another process which is commonly outsourced and that is - travel & expenses claim processing, commonly known as T &E claim process. This process is also involve 2 component (1) T &E claim submission by an employee and (2) Payment to reimbursed employee expenses. ‘There are many similarities between the 2 processes (P2P & T &E) as both of them involve payments. As a result, many companies treat the T &E claim process as a subset of the P2P process and outsource it accordingly. In this unit, we shall discuss the meaning, detailed description and roles & responsibilities of P2P. Further it prints out the consequences of a poorly managed P2P process. However, we will discuss the T&E claim process separately in Unit 13 & 14 of this course. 1.2_— PROCURE TO PAY 1.2.1 Overview of Procurement “Procure to Pay” is the process of obtaining raw material, consumables, s and assets for a business from external suppliers. A business needs to buy a lot of goods and services from outside for running its day-to-day operations smoothly and delivering goods or services to its customers. Incase of individual buying, an individual uses his mind frame to take a buying decision, therefore individual buying is simple buying process, however for a business buying there are multiple stages with various stake holders who are involved. Hence business buying is a complex procedure than an individual buying, Let us look at some examples of procurement: 1. A car maker needs automotive parts supplied to its assembly Ii time so that the cars can be assembled and sold. 2. Asoftware services provider needs computers and software to be able to provide its services to its customers. It will also need housekeeping services to maintain its offices and facilities. 3. Ahotel needs to buy furniture, linen. crockery and toiletries to provide a comfortable stay experience to its customers. 4, A transportation company needs to buy fuel and vehicle spare parts ona regular basis to keep its transportation fleet running. 5. A retailer needs to buy merchandise, so that it can be sold to the customers, 6. A factory manager needs services for repair & maintenance of machines from the machinery manufacturer to keep its machines in running condition, 7. ABPO service provider requires training agency to train its employee. Inalll the above cases, the firm or person who delivers these goods / servicesItis very crucial for the business to procure the correct quantity of these goods, at the correct place & time and at the expected quality standards. So a business strongly depends on its vendors to make sure that these supplies are received correctly. In return, the vendors who provide these goods and services to the business expect (o be paid fully in a timely manner. Let us now move to the details of how the buying process works in an organization. 1.2.2 Buying Process in an Organization ‘There is a difference between buying something for ourselves and the buying process followed in an organization, in case of individual, one single person takes the buying decision, buys and pays. Hence it is a simple process. However, the latter is quite a complex process as it involves various internal departments who collectively take a decision for procurement of any goods/services within an organization Essentially, there are four participating departments: 1. The User dept.: This is the department or individual who needs a product or service to meet their business objectives. They raise a purchase request (PR) with the items required and send it to the Procurement dept. 2. The Procurement dept.: his is sometimes termed as the Purchase or Sourcing dept. They identify the Accounts Payable vendor(s) who can supply the required items, negotiate with them on the lowest price, best payment terms and on the delivery time, Post this, they sign a contract with Dept. the short listed vendor and then place an order with Fig 1.1: Departments par in the P2P process them. 3. The Receiving dept.: They receive the goods at the buyer’s premises and verify the quantity and quality of the goods or service supplied. Receiving Department may be the same as the User dept. or a Stores dept. in a manufacturing plant. The receiving dept signs the vendor's delivery note confirming the receipt of the goods. This dept also creates a Goods Receipt Note (GRN) in the ERP confirming the receipt of items. Based on this, the vendor raises an invoice. 4, The Accounts Payable dept.: This team verifies how much goods were ordered & received and is responsible to make the payment to the vendor. They match the GRN from the Receiving dept. and the invoice and accordingly release payment to the vendor As discussed earlier, Procure to pay is one of most important functions in an organization. It has to be properly structured and managed to ensure the smooth functioning of the organization and its competitiveness in the marketplace. 1.2.3. Brief Overview of the P2P Process A user department having a need to buy a product or service reaches out to the Procurement dept to procure the item. This flags off the Procure to pay process. Receiving Introduction to Procure to PayProcure to Pay Fig. 1.2: Steps in a P2P process Sourcing a. The user dept identifies the requirement for the product or services and raises a request to the Procurement dept to procure them. This document is termed the Purchase Request (or PR), b. The Procurement dept shortlists vendors who can supply the required product or service and requests them to provide a quotation. c. The Procurement dept then negotiates with the vendors on the price and other commercial terms. 4. The Procurement dept then finalizes the best vendor(s) who will then supply the required material. Procurement a, The Procurement dept. receives the PR and then creates a purchase order (PO) then places the order for purchase, to the selected vendor. a. The User or Stores department receives the product or service. b. They verify the quality and quantity of items. Any items not meeting standards is returned a ejects. d. The Stores dept enters the received goods into the inventory Payment a. The Accounts Payable (AP) department receives and processes the vendors invoices. b. The AP department dispatches the payments to the vendors on time and updates the accounts. ©. The payment details are sent to the vendor by the AP department. d. Periodically, the AP department reconciles its record of payments with those of each of its vendors. This ensures there are no discrepa- neies e. The also answer any payment related queries made by vendors. There are some additional activities which are performed in all 4 stages ot the P2P cycle - reconciliation, control, audit and reporting 1.2.4 Description of the P2P Process The P2P process involve 5 different steps. Before discussing these steps in detail let us have a look at the following diagram,Introduction to Procure to Pay eet 1 41). User Dept, generates @ Procurement User Dept Requisition (PR) containing items required to the Procurement Dept 2) Procurement Dept shortlists a vendor negotiates on rates and places an order with tham using 5) Store Dept creates GRN ‘a Prohase Order (PO) a (confirming the receipt of ' ert we Senso AP Dog A / nati | - oe 3) Vendor delivers the seciing bag! torah Sores Resa Oot and get ai confirmation Spraueonte | __Dalivery Note 4) Vendor sends invoice to AP Dept, 6) Based on the invoice and GRN, the AP [ End Dept. makes the payment to vendor se Vendor Fig 1.3: The various players involved in the P2P process and their activities. Let us discuss the above diagram in detail Step I a. The User Dept. generates a Purchase Requisition (PR). b. This is a document that is initiated by any business users of the company who wants to buy any goods or service e.g, Stationery, note books, repair computer. ete. c. This PR is approved by the appropriate authority in the company and forwarded to the sourcing department Step 2 a, The Procurement dept. checks if there are existing vendor who can deliver this item. If not, they look for new vendors and requesting them to provide a quotation. b. The Procurement dept. then negotiates with them on rates and payment terms. They finally shortlist a vendor and sign a contract with them for their services. c. The dept. then places the order to buy with the vendor by sending them a Purchase Order (PO) document. Step 3 a. The vendor delivers the goods or services to the Receiving dept.Procure to Pay b. In the case of raw material delivered to a manufacturing plant, the Receiving dept. is the Stores dept. They will manage the inventory and issue the material to manufacturing based on requirements. For others, the receiving department could be the stores or the user department. c, The Receiving dept. will verify the quality and quantity of the goods and will return back any damaged items. They will sign the vendor’s delivery note to acknowledge delivery. Step 4 a, The vendor sends over the invoice to the AP dept. for payment. Step 5 a, The Receiving dept. prepares a good receipt note (GRN) in the ERP system, which will be accessed by the AP team to verify that the delivery was made by the vendor. b. The inventory records are also updated by the Re the new status of the inventory. Step 6 a, _ Invoice received from the vendor is processed by the Account payable clerk for payment, The payment is send to the vendor. civing dept. to reflect 1.3 _ IMPORTANCE OF PROCURE TO PAY The Procure to pay policy and process of an organization has a significant effect on the profitability and growth of the organization. This can be positive or adverse depending on its effectiveness Dimensions of an effective Procure to pay process An effective P2P process has to accomplish the following organizational objectives: © Timely delivery: It is critical that the delivery of goods and services is done at the scheduled time. Early delivery creates storage related challenges while being late may disrupt production © High quality: The received goods or services should be of the right quality and fit for the purpose for which it was purchased. © Competitive price: The procured items should be at the lowest cost so that the organization will have an edge over its competitors and to drive profitability, © Vendor relationships: It is important that an organization establishes good relationships with its vendor by making its payments on time, This will ensure that they are strongly aligned to the organization’s goal and give better discounts & payment terms. ‘The consequence of a poorly implemented P2P process ean result in: © The business not getting the required material in terms of the desired auality at the right time© The business paying higher costs for the purchase of goods than the Introduction to competition . In the absence of a good relationship with vendors, the Procure to Pay vendors will not give their best rates to the organization. © The business will be unable to meet the commitments it made to its customers. As a result, it can affect the customer relationships and ultimately sales too. © Poor supplier relationships resulting in a higher cost of purchase. © When an organization orders goods in excess of actual consumption resulting in a large inventory, then valuable working capital of the business gets locked up. ¢ Fraudulent transactions due to poor managerial control on the entire P2P process resulting in the business losing money. Cheek Your Progress A 1. Identify which stage the following activity belongs to: Sourcing, Procurement, Receiving or Payment. a. Raising a request to purchase some stationery items. b. Fi ing a suitable supplier for the stationery Negotiating with the supplier on the commercial terms. d. Placing the order to buy stationery items. e. Receiving the stationery items that are shipped by the supplier. f Sending a cheque for the stationery bought. 2. State whether the following statements are True or False: a, The User dept. is involved in negotiating the best possible commercial terms with the vendors. b. The procurement manager places the orders for the material required. ©. The receiving manager is responsible for updating the inventory records of the business when goods are received. 4. The AP manager is responsible for making sure that the material supplied was of good quality. 1.4 LETUSSUM UP A business enterprise needs to buy goods and services to run its day to day operations. The Procure-to-pay (P2P) process is used by the business to manage the purchase of various products or services. Itis increasingly common to see parts of the P2P process being outsourced to BPO service providers. The P2P cycle is divided into 4 main stages namely Sourcing, Procurement, Receiving and Payment with 4 key departments involved: the User dept.,Procure to Pay Purchase policy is an important decision/process within an organization. A well defined and implemented P2P process will have a number of benefits like timely receipts of goods, quality, prompt payment discounts, and competitive prices which will increase the profitability of the organization. A poorly implemented P2P process will create a variety of issues for the business from dissatisfied vendors, disrupted supplies to financial irregularities and fraud. 1.5 | KEYWORDS Accounts Payable: The amount due to the suppliers/vendors for the goods and services provided on credit Accounts Payable Dept.: It refers to the department within the organization that manages Accounts Payable activity. ERP: A large software application that is implemented across a corporation, which helps it to coordinate across the different processes in the enterprise. It consists of modules supporting each of the key processes in the corporation like order fulfillment, billing, supply chain, procurement, finance & accounting, ete. Invoice: Often termed a “bill” in colloquial speech. It is a commercial document issued by a seller to the buyer, indicating the item(s) bought with the quantity and agreed rate for the goods or services the seller has provided the buyer. An invoice specifies the amount that the buyer needs to pay the seller of the goods or service Procurement: The team/business function that is responsible for vendor selection/negotiation and placement of orders from the vendor. Purchase: {ee procurement. Receiving: The process of receiving products or services supplied by the vendor at the customer's premises. The receiving activities also include checking for the quantity and quality of the goods supplied. Sourcing: The process of identifying suitable vendors for supplying certain material/services. ‘Vendor: A person or a business which supplies/sells certain goods and services to the customers as per some pre-decided commercial terms. Requisitions: This activity relating to the request raised by the business users within the organization for purchase of any goods/services. Goods: Any tangible material or item that is purchased within an organization. Services: A service is the non material (tangible) counterpart of physical goods A service compromises sequence of activities, that doesn’t result in change in ownership of the outcome. E.g. Hiring a recruitment agency for recruiting employees in a company or a bus services vendor to manage staff transport,1.6 _/ ANSWERS TO CHECK YOUR PROGRESS a. Sourcing b. Sourcing ©. Sourcing 4. Procurement e. Receiving £. Payment 2. State whether the following statements are True or False: [Link] b. True c. True d. False 1.7 T URMINAL QUES IONS 1, What do you understand by P2P process? 2. What are the effects of a poorly implemented P2P process? 3. What are the various departments within a Procure to pay process? 4, Elaborate the importance of procure to pay in an organization? 5. What are the different stages in the Procure to pay? Introduction to Procure to Pay