Conceptually – Procure to Pay Cycle – P2P

Procure to pay (purchase to pay or P2P) is the process of obtaining and managing the raw materials needed for manufacturing a product or providing a service. It involves the transactional flow of data that is sent to a supplier as well as the data that surrounds the fulfillment of the actual order and payment for the product or service.

The Typical Procure-to-Pay Cycle

These steps are usually involved in your typical procure to pay cycle:

  • Identification of Requirement
  • Authorization of Purchase Request
  • Final Approval of Purchase Request
  • Procurement
  • Identification of Suppliers
  • Inquiries
  • Receipt of the Quotation
  • Negotiation
  • Selection of the Vendor
  • Purchase Order Acknowledgement
  • Advance Shipment Notice
  • Goods Receipt
  • Invoice Recording
  • 3 Way Match
  • Payment to Supplier

Identification of requirement: At this stage the team member of user department (Maintenance, Production, Sales and distribution, administration etc) identifies the requirement and raises the Purchase requisition /Purchase request (PR). This document normally contains description of material, quantity, approx cost, material requirement date, preferred or Standard vendor etc

Authorisation of Purchase Request/ Purchase Requisition : If the purchasing value of the PR is higher than that of approval limit of originator then this document is sent to the next higher level (normally immediate supervisor of the originator) for approval. At this stage, the supervisor may return the PR to the originator for modification or can approve it.

Final Approval of PR/Role of Inventory Controller: Once the PR has been authorised by user department then it is available to the inventory controller. Inventory controller shall review the PR and shall check the Open Purchase orders (PO), any other scheduled or planned delivery for the material. If there is any planned delivery or any existing open PO then Inventory controller can return the PR or request the user department to revise the quantity of the material. After the approval of Inventory controller, the approved PR is available to the Procurement department

Procurement: After final authorization of PR, it is available to Buyer. Buyer shall check for any existing Annual Rate Contract or any other contract for the material. If any contract exists then a Call-Off shall be generated and shall be sent to the supplier. In case no contract exists then the Buyer shall initiate supplier search and floating enquiries.

Identification of Suppliers: Buyer shall interact with the user for the possible suppliers, search on the Internet, use referrals, search data base, etc. to identify the suppliers for the material.
Floating of Enquiries: Once the suppliers are identified, Buyer shall send the Request For Quotations/Proposal ( RFQ/RFP) to the supplies. RFQ normally contains Description, Technical Specifications of the material, quantity of the material, term and conditions, delivery date of the material, date of submission of the RFQ,Quality standards, Validity of the suppliers offer, etc.

Receipt of Technical Quotations: After sending the RFQ/RFP to vendors , the buyer shall receive the quotations from the suppliers. Normally, vendors are instructed to send their quotation in a sealed envelope, mentioning only RFQ reference no on it. Quotations are normally opened and signed by 2 or more persons of the department.

Technical Evaluation of Quotations : Quotations are sent to technical department for technical evaluations of the quotations. Here, technical department shall shortlist the quotationsa based on the technical specifications
Receipt of Commercial Quotations: Once the Technical Evaluation is over, the buyer shall send the advice to shortlisted suppliers for commercial quotations, After receiving the commercial quotations, these shall be opened by two people. Quotation comparison statement is prepared by the buyer to compare all the quotations of the supplies and suppliers are short listed for negotiations.

Negotiation: Short listed suppliers are invited for negotiations. In negotiation buyer can negotiate with the supplier for :
Reduction in the prices of the materials
Year on year reduction in prices
Quantity and Price breaks
Delivery Terms and conditions
Year on year improvement in the quality
Quality i.e. reduction in the nos of defects per lot etc
Freight charges
Insurance charges
Payment terms—for extended payment terms

Selection of the Vendor: After negotiations with all the selected vendors revised quotations are prepared and vendor is finalized for award of contract based on the weightage to the commecial, technical parameters, previous performance of the vendor, delivery dates of the material, etc.

Award of Contract : After the vendor is finalized LOI can be sent to him and he may be asked to deposit security or bank guaranty before signing the agreement. Agreement can be of Fixed or Blanket (the same can be mentioned in the RFQ)

Purchase Order : The buyer shall raise the call offs against contracts (Fixed or Blanket). If the value of the PO is more than that of his approval limit he shall forward it to his supervisor for approval else he shall approve and send the purchase order to the supplier.

PO acknowledgement: After receiving the PO the supplier send the acknowledgement to buyer and buyer records the acknowledgement. If any ERP is being used for procurement functions then supplier can remotely download purchase orders and can acknowledge the PO

Advance Shipment Note : The supplier sends the Advance Shipment to buyer as soon as he ships the material to the buying organization. This note normally contains Ship Date, Transporter’s name , Airway Bill No, No of packages, weight of the packages, receiving location address, PO No, description of goods, etc

Goods Receipt : When the goods are received at the warehouse of buyer organization, the receiving staff checks the delivery note, PO no etc and acknowledges the receipt of material. After the material is received the same is checked for quantity in case of discrepancy the same is reported to the vendor.
After the quantity verification the material is kept at inspection locations and material inspector is called for inspection of material. If material is rejected by the inspector the same is sent back to the vendor or the vendor is asked for the rectification at the site. The sound material is moved to respective warehouse locations.

If the buying organization is usingERP then stock account gets debited and liability account gets credited.

Invoice Recording : Vendor send the invoice to accounts department of buying organization for claiming payment. This invoice is entered in to the system, After the entry of invoice in the system, supplier account gets credited and liability account gets debited.

Payment to Supplier : After the supplier account gets credited the payment is released to the vendor

Thanks – Shivmohan Purohit

Procure to Pay Process Flow

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