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A major process in any organisation is managing Procure to Pay cycle. Organisations spend large portion of their budgets in implementing Procure to Pay cycle. The cost is in form of cost of technology and cost of human resources .Even after spending hundreds of thousands of dollars, organisations fail to manage Procure to Pay cycles effectively.

There is plethora of articles available on internet regarding Procure to Pay cycle. A lot of software, apps, and training videos are available. Then why most of organisations still have problems, difficulties, unnoticed errors, incorrect or unreliable reports and data? Does installing software solve the big problem? There are issues related to unauthorized purchases, excess inventories, lost discounts, distorted cash flows due to unplanned or ineffective purchases, overrunning job budgets, and so on.

This is the first article In the series of “Improve profitability by managing Procure to Pay cycle.” – An overview of process.

Meaning

The procure-to-pay process is the coordinated and integrated actions taken to fulfill a requirement for goods or services in a timely manner at a reasonable price. It involves a number of sequential stages, ranging from need identification to vendor payment. Steps in a procure-to-pay cycle need to be executed in a strict order.

Process

Depending upon size and organisation structure, a single person may handle more than one of following steps or more than one person are involved in each step. Regardless of organisational structure, software or manual procedures adopted, following steps must be performed to gain maximum cost advantage wile procuring goods or services.

Step 1 Identify needs for material or service purchases and creation of Procurement requisition Form

Procure to Pay process starts from recognition of needs of material or services. Project Managers, Site Supervisors, Manufacturing Heads or Warehouse In Charge are some of designations who identify needs and specify quality, description, terms of delivery, etc.. After finalizing the specifications, a formal Procurement Requisition is generated. A requester submits the filled out Procurement Requisition Form. Requisitions can be created for any type of procurement from standard purchases to subcontracts and services.

Step 2 Creation of Purchase Order / Spot Buy

Usually, Purchase Orders are generated from approved purchase requisitions. However, if the requested goods/services have characteristics such as one-time unique purchases, or low-value commodities, then a spot buy can be performed.

Step 3 Approval of Purchase Order

Purchase Orders are then sent for approval to ensure legitimacy and accuracy of specifications. Approved purchase orders are then sent to vendors. After reviewing the purchase order vendors can approve or reject PO, or start a negotiation. When the vendor approves a purchase order and sends a confirmation, a legally binding contract is activated.

Step 4 Receipt of Goods at Main location or Project Site or Execution of Services

Once the supplier delivers the promised goods/services, the respective requisiter inspects the delivered goods or services to ensure that it is in agreement with the PO. The goods receipt is then approved or rejected based on the standards specified in the purchase order.

Step 5 Verification of Vendor Performance

The vendor’s performance is evaluated based upon a number of factors, such as quality, on-time delivery, service, contract compliance, responsiveness, and total cost of goods. Non-performance is flagged in existing information systems for future reference.

 

Step 6 Purchase Bill Approval

Once a goods receipt is approved, a three-way match between the purchase order, the vendor invoice, and the goods receipt is performed. If there are no discrepancies found, the invoice is approved and forwarded to the finance team for payment disbursement. In the case of inaccuracies, the invoice is rejected back to the vendor with a reason for rejection.

Step 7 Processing Vendor Payment

Upon receiving an approved invoice, the finance team will process payments according to the contract terms. Any contract changes will be taken into account. A payment made to a supplier usually falls into one of the five types: advance, partial, progress or installment, final, and retention payments.