Source to Pay (S2P)

The source-to-pay process can be cumbersome and time-consuming without a cloud-based software platform to automate and track every step of the process. As a high-level overview, an end-to-end source-to-pay process typically includes the following steps:

1. Establishing Business Need

The organization makes a business case internally for requiring a service or a product.

2. Sourcing, Vetting, and Choosing Suppliers

Identification of potential suppliers is the second step in the S2P process. Finding the right supplier may require extensive research (though less if you have access to an online B2B e-commerce marketplace such as Tradeshift’s Marketplace.)

Potential suppliers are located and evaluated. This stage of supplier selection can be relatively straightforward or it can be highly complex depending on the product or service being sought. Finding a supplier to provide security for your office may be a simple selection but finding a source for something with more detailed requirements makes sourcing a harder task. Supplier selection may hinge on the supplier’s financial health or environmental credentials. Most companies just want the cheapest and fastest option – which is why B2B Marketplaces are a practical fit for most companies’ indirect spend.

3. Preparation: Document Gathering and Collation

For complex needs, the sourcing team may send out requests for information (RFIs), requests for proposals (RFPs), and possibly requests for quotes (RFQs) to potential suppliers. These RFx documents are assembled, responses are received from suppliers, and compared.
For simpler/smaller sourcing exercises, the Procurement Manager may perform something called 3 Bids and a Buy. In this case, all suppliers are already onboarded and the buyer wants something all three could provide. The suppliers are all invited to bid for the ‘job’ and one supplier is awarded the order.

4. Decision Making: Choosing a Supplier

The criteria to choose a given supplier over another one can be based on a complex weighting of different criteria or as simple as lowest price. When companies are sourcing direct materials or something else which could be considered ‘strategic’, then the evaluation process becomes more rigorous. When a shortlist of suppliers has been chosen, negotiation can begin. It has to be said, however, that in many situations, there is little to gain from an overly complex supplier selection process.

5. Negotiating & Contract Signing

The negotiating and contracting step of the source-to-pay process is an opportunity to lower purchasing price and/or negotiate for improved terms & conditions. For example, it may be possible to negotiate lower prices, better service, shorter delivery times or longer payment terms – all valuable to the buyer.

For many purchases of goods and services the overhead costs of a robust negotiation and contracting process will simply add cost and complexity to the whole process. This is where the value of a B2B marketplace is so clearly demonstrated.

6. Supplier Onboarding

Once the supplier has been selected and contracted, they must be onboarded. This process step is typically the supplier filling in a lot of forms covering everything from basic business data to certifications, banking info, payment terms, etc. Though contracting would have included what the supplier will sell and at what price, the ‘catalog’ still has be be provided to the buyer.

The supplier catalog can be pushed or pulled into the buyer’s catalog management system or alternatively, the buyer can punch out from their system to the supplier’s catalog. Both methods offer controlled spend.

7. Requisitioning and Ordering (Procurement)

Now that the supplier has been found, contracted, onboarded and their goods and services are available for purchase, we just need someone to have a need. The need comes in the form of a Requisitioner creating a requisition. Someone needs something so they go into the procurement system (essentially an online catalog of all the goods and services collectively offered by all the onboarded suppliers) and they make a requisition. This requisition goes through a workflow and is approved by someone and after approval is sent to the Buyer. Sometimes the requisition can be automatically ordered but in some cases, the ordering is manually done by the Purchasing department. The end result is the order being sent to the supplier.

8. Delivery and Receiving

Delivery of the goods or services will happen and someone (or a system) will need to record that the goods are delivered. This is called a goods receipt. The goods receipt is important because you should only pay for what you receive. The order may be for 10 hammers but if you only receive 7, you only want to pay for 7.

9. Invoice processing (Accounts Payable Automation)

All organizations from large to small need to manage their process for handling invoices. Invoices are sent from suppliers, they arrive and must be entered into the system and deemed to be authentic in relation to an approved supplier and goods or services already received. The costs have to be allocated and the invoice approved for payment.

10. Payment

The final step in the source-to-pay process is the payment. There are multiple methods to make a payment and typically this is agreed upon during contracting and the method selection entered into the system during supplier onboarding. Suppliers can be paid electronically or by check. Suppliers are paid according to agreed payment terms and this is important because an invoice may be approved for payment within 24 hours of it being received but if the payment terms are 30 days, then the payment will only be made at the 30 day market. Why is this important?

When consumers buy goods, they pay immediately. When businesses buy goods, they may only pay 30 or 45 or even 120 days later. These extended payment terms may make sense in some situations (long delivery times) but for most businesses, the supplier is forced to carry the cost of the goods well beyond the point when they have delivered them. Without going too much into the details of the cash-to-cash cycle, long payment terms hurt suppliers. The reason this is important is because with modern source-to-pay solutions, invoices can be approved quickly and payments can also be made quickly. In many cases, the supplier may be interested in accepting a discount for early payment. There are multiple methods of supply chain financing out there but approved payables financing or early payment discounts are some of the most prevalent.