Purchasing has recently been in the spotlight as organizations have sought to manage spend tightly during the economic downturn. One aspect of the purchasing activity that is frequently fraught with internal conflict and misunderstanding is the actual process of purchasing and paying for goods and services, typically referred to as the Purchase-to-Pay (P2P) process.
The P2P process is poorly understood partly because different organizations adopt different practices for different types of spend. However, the fundamentals of an effective P2P process are straightforward. Here we outline a basic structure of the P2P process and examine some of the relevant issues.
Purchase Requisitions
An effective P2P process involves the core steps shown. It starts with a requisition raised by the person who has a supply requirement, or someone specifically nominated to raise requisitions. Requisitioning is the means by which the organization formally stipulates a need for the purchase of goods or services.
Next, the manager responsible for the cost centre (budget-holder) must approve the requisition. This approval signifies that the person who “owns” the budget from which the goods or services will be paid for is happy for the purchase to proceed.
This is the point at which the organization, in effect, approves the commitment of finances for the purchase. A widely-accepted best practice here is the use of Delegated Financial Authorities (DFAs) to allocate appropriate levels of financial approval to managers or budget-holders in line with organizational hierarchies or responsibilities.
It is appropriate that requisitions are created and financially-approved by departments in the organization as they are the users of the goods and services to be procured. Procurement may play a supportive role in developing the specification for the requirement.
Sourcing and Ordering
Once the requisition is approved sourcing can begin. Sourcing is a critical area where Procurement can demonstrate its value-add to any organization. Unfortunately far too many people have tried to overcomplicate this rudimentary purchasing activity. Sourcing is quite simply finding the right “source” (right supplier, right quality and right price) for the required goods or services—a key responsibility for Procurement.
An effective Procurement function should be leveraging its functional expertise to ensure the organization gets value-for-money from supply markets. Such expertise includes working closely with “internal customers” to better understand their current and future requirements, aggregating requirements across the organization to leverage total spend, and maintaining robust knowledge of supply markets to augment successful negotiation of optimal sourcing arrangements.
Sometimes it may be appropriate for Procurement to involve internal stakeholders in the sourcing activity, e.g., supplier selection for very specialist services. While such collaboration can be effective, ultimate responsibility for sourcing must lie with the Procurement function. Cost-effective sourcing arrangements are a core Procurement functional deliverable.
In some situations sourcing may have been completed up-front, the first time the item was purchased. In this case the purchasing activity is limited to ensuring that goods and services are procured in line with the pre-defined sourcing arrangements, e.g., ordering only from the approved suppliers or ordering at the pre-agreed prices.
Ordering goods and services from suppliers is best done using formal purchase orders (POs). And issuing POs electronically is most-effective as this creates an audit trail which is available for query if problems subsequently occur. Electronic means of ordering range from basic facsimile to electronic data interchange (EDI) and supplier extranets.
As custodians of third-party expenditure Procurement must control sourcing and ordering. Enforcement of this control is best done through a Delegated Purchasing Authority (DPA) mechanism which sets out the specific levels and categories of purchasing spend which individual Procurement personnel can approve. DPAs are usually set to reflect organizational hierarchies within the Procurement function, and may include the Finance Director and CEO who must approve certain spend in addition to Procurement.
Effective DPA mechanisms are structured such that most expenditure is approved within Procurement. Only exceptionally-high levels of spend or exceptional requirements need further approval beyond Procurement.
Delivery and Receipting
A supplier can deliver the required goods or services after a PO is received. Once the goods or services have been delivered the recipient within the organization must accurately reflect receipt of the items, including any relevant ERP transactions. The recipient may be a dedicated person who has been allocated responsibility for goods receipting such as a storeman.
Invoicing and Payment
Suppliers should send their invoices as early as possible after the goods and services have been delivered, except where the pre-agreed sourcing arrangements include specified timings for supplier invoicing, e.g., on a specific day each month. Supplier invoices must include accurate information such as the relevant PO number.
Suppliers should only be paid after invoices have been accurately reconciled against pertinent purchasing information, e.g., the invoice quantity must match the received quantity. Invoice reconciliation, or approval for payment, is usually best done by the personnel who received the goods or services.
The Accounts Payable function in Finance is responsible for paying suppliers. Payments must only be made against invoices that have been approved. Supplier payments should be done via formal transactions such as cheques, BACS or CHAPS, but never by cash. This ensures audit traceability and minimizes the risk of fraud.
On-going SPRM
Supplier Performance and Relationship Management (SPRM) is an integral part of the purchasing spectrum, but sadly it is one that many organizations ignore. Managing suppliers proactively ensures an organization’s supply pipeline is more effective and cost-efficient.
Process Issues and Challenges
Some of the challenges organizations usually face around the purchasing process include lack of clarity, ineffectiveness and misunderstanding of process responsibilities. As the process owner Procurement must ensure the process is documented and communicated to relevant stakeholders. Also, automating as much of the transactional elements as possible, e.g., through an ERP or workflow system, helps improve the reliability of the process.
The purchasing process inherently entails financial expenditure. Thus clarification of process responsibilities is critical to avoid maverick or fraudulent activities. Internal stakeholders of the process fall into four groups—users, budget-holders, buyers, and payers. The later three should never be the same person. In particular, there must be clear segregation of responsibilities between buyers and payers; Procurement must always do the “buying” and Finance must always do the “paying”.
Even where the process is clear and robust it may still be possible for maverick spend to occur. In such instances the organization must indicate the importance of process compliance by enforcing any relevant elements of the purchasing policy, e.g., refusing to pay suppliers who supply without POs or sanctioning employees who breach the process. Like any governance framework, the effectiveness of the purchasing process is strongly dependent on its enforcement.
