What is Procurement? Understanding the P2P Process and its Challenges

Procurement is the process of acquiring goods, services, or raw materials from external sources to fulfill the needs of an organization. The primary goal of procurement is to obtain the required resources at the right quality, quantity, and price to support an organization's objectives. Efficient procurement practices are vital for optimizing the overall performance and competitiveness of an organization. 

What is Procurement?  

Procurement can be defined as the strategic approach of sourcing, negotiating, and acquiring goods and services required by an organization. Procurement encompasses identifying suppliers, evaluating and selecting vendors, negotiating contracts, and managing the supply chain. Effective procurement often leads to optimized cost, improved quality, reduced risks, and enhanced supplier relationships. To effectively manage procurement, organizations often follow a specific process called "Procure to Pay" or commonly called P2P. 

What is Procure to Pay or P2P?  

The procure-to-pay process, also referred to as purchase-to-pay or P2P, is a structured sequence of actions that organizations employ to oversee the acquisition of products and services from external suppliers. This process encompasses multiple phases, starting with recognizing the need for products or services and closing with the payment to suppliers. It is a crucial business procedure that facilitates the optimization of procurement operations, cost management, and the effective administration of vendor relationships. Depending on specific organizational needs and the context of the situation, procurement teams may opt to execute the most pertinent stages of the procure-to-pay process.  

Steps in the Procurement or procure-to-pay process:  

• Recognizing Requirements: The first stage of the procurement as defined in the procure-to-pay process involves identifying and specifying business needs in collaboration with various departments or often described as USERS. Once valid needs are determined, the procurement team outlines general product through a or service specifications, terms of reference (TOR) for services, and statements of work (SOW).  
• Generating Purchase Requests: An official purchase requisition is generated after identifying requirements. A requester submits a completed purchase requisition form, ensuring all necessary administrative requirements are met. Purchase requisitions can be created for a wide range of procurement needs, from standard purchases to subcontracting and consignment arrangements.  
• Approving Purchase Requisitions: Submitted purchase requisitions undergo review by department heads or procurement officers. Approvers evaluate the need, verify the budget availability, and validate the purchase requisition form before either approving or rejecting it. Incomplete purchase requisitions are sent back to the initiator for correction and resubmission.  
• Creating Purchase Orders or Spot Buys: Depending on the characteristics of the requested goods/products, such as unmanaged category purchases, one-time unique acquisitions, or low-value commodities, a spot buy may be performed. Otherwise, purchase orders are generated from approved purchase requisitions.  
• Approval of Purchase Orders: Purchase orders go through an approval process to ensure the accuracy of specifications and legitimacy. Approved purchase orders are then sent to vendors. Vendors can review the purchase orders and choose to approve, reject, or initiate negotiations. When a purchase order is approved, it becomes a legally binding contract.  
• Receipt of Goods: Once the supplier delivers the agreed-upon goods or services, the buyer inspects the delivered products or services to ensure compliance with the contract terms. The goods receipt is approved or rejected based on the standards outlined in the purchasing contract or purchase order.  
• Approval of Invoices: After approving the goods receipt, a three-way match is conducted to compare the purchase order, vendor invoice, and goods receipt. If no discrepancies are found, the invoice is approved and sent to the finance team for payment processing. In cases of inaccuracies, the invoice is returned to the vendor with an explanation for the rejection.  
• Vendor Payments: The finance team initiates payments according to the contract terms upon receiving an approved invoice. Any contract adjustments or reviews of financial security are considered. Supplier payments fall into five categories: advance, partial, progress or installment, final, and holdback/retention payments.  
• Evaluating Supplier Performance: The supplier's performance is assessed based on data gathered in the previous step. Evaluation factors include quality, on-time delivery, service quality, contract adherence, responsiveness, and Total Cost of Ownership (TCO). Non-performance is documented in existing rosters and information systems for future references.

Procure to Pay process challenges    

Without any effective procurement system, an organization can face some of the following challenges:     

• Disorganized supplier/vendor base: The procurement process includes engagement with multiple suppliers/vendors from various categories and places. Dealing with an unorganized supplier/vendor base isn't the single source of information for all the teams. It can lead to inconsistent service levels, complex contract management, and difficulty leveraging volume-based discounts or negotiations.   
•  Visibility: If there is no visibility in the procurement process, tracking and analyzing the expenditures can be challenging. It can interfere with cost control efforts and impede budgeting and strategic planning.  
• Time-consuming process: If we are dependent on Manual procurement processes, which heavily rely on paper and manual tasks like purchase requisitions, approvals, and invoice handling, can consume a lot of time, are prone to mistakes, and can reduce efficiency. These manual processes are labor-intensive, impacting productivity and increasing the chances of errors.  
•  Compliance and risk management: Dealing with compliance and risk management in procurement, including internal policies, legal requirements, and supplier agreements, can be difficult and time-critical. Managing compliance and reducing risks, such as supplier non-compliance and data breaches, presents challenges.  
•  Limitations in strategic focus: Procurement often needs to be more involved in transactional tasks, emphasizing operational needs rather than strategic value. This can make it hard to identify cost-saving opportunities, consolidate suppliers, and establish strategic partnerships.  

To address these issues, organizations must adopt efficient procurement processes along with vendor management software that enhances data visibility, encourage stakeholder collaboration, and implement strategic sourcing practices to optimize procurement operations. The P2P process provides a structured approach to procurement, encompassing all stages from requisitioning to payment. Understanding the intricacies of procurement and the P2P process is essential for organizations to optimize their operations and achieve cost savings. It can all be done only by implementing efficient procurement practices, where businesses can enhance their competitiveness and drive sustainable growth. 

Partner Portal, a cloud-based vendor management system, is a centralized and automated solution for the procurement process. It offers features of easy onboarding, generating purchase orders and invoices, tracking shipments in real-time, and automated billing solution. With Partner Portal, businesses can automate end-to-end procurement and scale it up or down to meet their needs.