The procure to pay cycle has become a standardized process for both procurement practitioners and service providers alike. If you are involved in procurement at all, it’s a term you may have heard thrown around, but are you aware of the actual components of the cycle? Let’s break it down for you!
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
- Identification of Suppliers
- Receipt of the Quotation
- Selection of the Vendor
- Purchase Order Acknowledgement
- Advance Shipment Notice
- Goods Receipt
- Invoice Recording
- 3 Way Match
- Payment to Supplier
If following best practices and the cycle outlined above, when an employee working in a specific department (i.e., marketing, operations, sales, etc) wants to purchase something, they submit a purchase request to a manager (also considered an approver).
Authorization of Purchase Request
The purchase request is either approved or denied based factors such as the type of request, the cost, the product, and allowable budget. If the request is above the approval limit the particular approver is authorized to approve, it will be sent to the next most senior employee for revision (or approval).
Final Approval of Purchase Request
After the appropriate department has authorized the respective request, it will then be sent to the inventory controller. That person will review the other open purchase orders to identify if there are any similar orders from others in the company. After the approval of the inventory controller, the purchase request will be available to the procurement department. Note: often in smaller businesses, the approver, inventory controller, and buyer/procurement department may be the same individual.
The buyer (in the procurement department) will identify any existing contracts that may exist with suppliers. If there is such a contract, then a Call-Off will be generated and sent to the supplier. In the event no such contract exists, then the buyer will initiate a supplier search.
- Identification of Suppliers: The buyer may speak with the requester of the products, search on the Internet, use referrals, search databases, etc. to identify potential the suppliers of the requested material.
- Enquiries: Once the suppliers are identified, the buyer sends the request for quotation/proposal (RFP)
At this point, the supplier will send the quotes back to the buyer. The buyer will then send the quotes back to the department for a technical evaluation. Once reviewed, the buyer will send the changes and requests back to the supplier. Finally, the supplier sends the commercial quote to the buyer.
Short-listed suppliers are invited for negotiations. During the negotiation period, buyers and suppliers can negotiate various issues that will help maximize their businesses position. Some of the key negotiation topics include:
- Reduction in the prices of the materials
- Year-over-year reduction in prices
- Quantity price discounts
- Delivery terms and conditions
- Year-over-year improvement in quality
- Initial quality
- Freight charges
- Insurance charges
- Payment terms
Selection of the Vendor
After negotiations with all the selected vendors, one will be awarded the contract, according to the selection criteria. The contract is then awarded and the vendor will be sent the purchase order.
Purchase Order Acknowledgement
After receiving the purchase order, the supplier will send an acknowledgement to the buyer for their records. If any software is being used for procurement functions, the supplier can remotely download purchase orders and can acknowledge the PO.
Advance Shipment Note
The supplier can send an advance shipment note to the buyer as soon as they ship the material to the buying organization. This note normally contains the ship date, the transporter’s name, the tracking number, the number of packages, the weight of the packages, the receiving location address, the PO number and a description of goods.
Receipt of the Goods
When the goods are received at the warehouse of the buying organization, the receiving staff checks the delivery note, PO number etc. and acknowledges the receipt of the material. Quantity and quality are checked and any unfit items are rejected and sent back to the supplier.
Accounts payable will then process the invoice and enter it into the procurement system.
The accounts payable department receives the purchase order, invoice, and delivery documents such as packing slips. These three will be checked to ensure consistency in the order. Learn more about 3 way matching here.
Payment to Supplier
After the supplier account is credited, the payment is released to the vendor.
Managing these processes can seem overwhelming, but over time, as they are introduced and streamlined into your organization, they will feel like second nature. Taking the type now to add these processes can save you valuable time and money.