A Step-by-Step Guide to Source to Pay

Need to learn about sourcing and source-to-pay? Congratulations on getting strategic. Sourcing is the first step on your strategic procurement journey. It helps you to deliver value from each dollar you spend through supplier negotiation, optimizing spend, and building strong supplier relationship. In this article, we will see what is source to pay, key steps involved in it, benefits of adoption sourcing as part of your procure-to-pay processes, and it's best practices. 

What is Source to Pay?

Source-to-Pay (S2P) is an end-to-end procurement process that spans the entire lifecycle of sourcing, procuring, and paying for goods and services. The S2P process begins with spend analysis, where procurement teams assess purchasing patterns and supplier performance to identify opportunities for cost savings and sourcing improvements. This is followed by the sourcing phase, where organizations identify suitable suppliers, request proposals, negotiate terms, and finalize contracts.

Once the contract is in place, the procurement phase involves requisitions, purchase order creation, and managing the internal approval process for purchases. After goods or services are delivered, the receiving and invoicing stage ensures that orders are accurate, verified, and matched with invoices before payment.

Finally, in the payment phase, validated invoices are processed, and payments are made according to agreed terms. Throughout the S2P process, there is an emphasis on supplier management, which includes onboarding, monitoring supplier performance, and mitigating risks.

Key steps in the Source to Pay process

As discussed, the S2P life cycle overarches the entire procurement process from identifying the need for goods or services to making payments to suppliers. It integrates sourcing, contracts, procurement, supplier management, and payment into a unified workflow. Here’s a detailed look at each stage,

Spend Analysis

Sourcing starts with spend analysis. Understanding the spend pattern is one of the primary tasks for a procurement team. It will give them visibility into supplier performance, top spent categories, supplier distribution for the key categories, and purchase categories without contracted suppliers. All these will help you to diagnose and identify sourcing opportunities.

Sourcing

In this stage, you use the insights from spend analysis and identify sourcing opportunities or needs from the business for specific goods or services. Sourcing includes market research, finding suppliers, creating requests for proposals (RFPs), evaluating supplier responses / quotes, and choosing one or multiple suppliers.

Contract Management

Once the supplier is awarded, the next step is to establish the contract. This phase includes drafting and creating contracts, negotiate prices and payment terms, and getting it approved. This is the point where strategic and operational processes intersect. This helps to define expectations and streamline the relationship with your supplier.

Procurement

At this stage, internal stakeholders create intake forms or purchase requisitions in order to get the necessary goods or services, or they use an internal ecommerce platform with pre-approved items for purchase. All these requests typically goes through an approval process. After approval, purchase orders are generated and sent to suppliers with need by date, item price and quantify, and shipping information.

Receiving and Invoice

Upon receiving the ordered goods or services from the supplier, they inspected to ensure they meet the specified requirements and quantities. Suppliers submit invoices and it is matched with the purchase orders and goods receipts for accuracy. During this process, discrepancies and disputes are addressed before sending it for payment.

Payment

Once the invoices are validated, payments are made, and funds are sent to the vendor according to the agreed payment terms. In this step, invoices are reconciled and ensured the payments are done on time and accurately.

Supplier Management

Managing supplier relationships is one of the fundamental aspects of Source-to-Pay, including supplier onboarding, information, risk, and performance management. Every aspect of the S2P process is linked to the supplier in some form and it is crucial to have a comprehensive view and ability to access supplier information.

Source to Pay vs. Procure to Pay: What’s the Difference?

S2P includes sourcing, and contracts which aren't part of the procure to pay process. The key difference is source to pay is strategic procurement while procure-to-pay is tactical or transactional.

Why you need a Source-to-Pay Process?

• It helps you to gain spend visibility as the first step of source to pay is review your purchasing data and understand your spend patterns.
• Through strategic sourcing and spend analysis, S2P helps procurement managers identify cost-saving opportunities, such as negotiating better terms with suppliers or consolidating spend.
• Source to pay helps to build better supplier relationships as the supplier management becomes more structured and transparent. It drives organisations to track supplier performance periodically and improve the supplier base for critical supplies.
• S2P helps enforce procurement policies and ensures adherence to legal and regulatory requirements. It ensure that purchases are made through pre-approve suppliers, contracts are followed, and reduce the risk of fraud and non compliance.

When do you Need a Sourcing Process?

By now, you likely understand the importance of sourcing, but it may not benefit every organization. In some cases, it can even be overwhelming, where you might end up spending more on sourcing than you save through it. To help you determine whether your procurement organization is matured to adopt sourcing, here are a few criteria to consider.

High Spend Volume

Growing companies with high procurement transaction and a wide range of purchasing categories can take advantage of S2P. It helps you to identify better suppliers, pricing, and contract terms by selecting suppliers through RFP process, instead of doing business with the first available supplier.

Cost Reduction Goals

You can achieve cost reduction through two ways: 1) savings through negotiations, 2) cost avoidance. Since sourcing typically begins with spend analysis, it will help you accomplish both by understanding your spending patterns.

Strategic Supplier Relationship

Building a strong supplier relationship begins with choosing the right suppliers. For that, you need to do sourcing. It helps you make informed decisions on selecting suppliers based on various factors, not just pure gut feeling. One trigger for a sourcing event is poor supplier performance, that means you constantly monitor supplier performance and give timely feedback to suppliers to get them on track.

Key Benefits of Source-to-Pay (S2P) Solutions

Adopting a Source-to-Pay (S2P) solution can significantly enhance the procurement process for businesses, providing a wide array of advantages ranging from improved spend management to enhanced supplier relationships. Below, we explore the key benefits businesses experience when implementing S2P solutions:

Reduced Maverick Spend and Compliance Risks

Maverick spend—when employees or departments bypass procurement processes to make purchases outside approved suppliers—can quickly escalate costs and reduce overall procurement efficiency. S2P solutions help reduce this risk by:

• Automating Procurement Workflows: By enforcing standardized purchasing procedures, S2P solutions make it harder for unauthorized purchasing to occur. Automated approvals and spend controls ensure that all purchases follow the established procurement guidelines, reducing the likelihood of maverick spend.
• Enforcing Supplier Compliance: S2P systems often integrate supplier contracts, ensuring that all purchases are made from pre-approved vendors with agreed-upon terms. This helps mitigate the risk of non-compliance with contractual obligations or regulatory requirements.
• Audit Trails: Detailed tracking of transactions creates a clear audit trail for every purchase, making it easier to review and ensure compliance. In case of disputes or audits, this transparency helps businesses avoid penalties and protect themselves from legal or financial risks.

For businesses, reducing maverick spend not only improves cost control but also ensures compliance with internal and external policies.

Greater Spend Visibility and Control

One of the most significant benefits of implementing an S2P solution is enhanced spend visibility. By consolidating procurement data into a single platform, businesses can:

• Track and Analyze Spending: S2P solutions provide real-time insights into procurement activities, allowing businesses to track spending by category, department, supplier, and more. This visibility enables procurement managers to identify trends, potential savings opportunities, and areas of overspending.
• Forecasting and Budgeting: With comprehensive data at their fingertips, businesses can better forecast future spending and allocate budgets more accurately. Predictive analytics help procurement teams anticipate demand and adjust procurement strategies accordingly.
• Control Over Payment Timing: S2P solutions can automate payment schedules, ensuring that invoices are paid on time, without unnecessary delays or early payments. This level of control helps businesses manage their cash flow more effectively.

Ultimately, the centralized data and analytics capabilities of S2P solutions empower businesses to monitor spending in real-time and make data-driven decisions to optimize procurement operations.

Improved Supplier Relationships and Strategic Sourcing

S2P solutions help strengthen supplier relationships by providing a more structured and collaborative approach to sourcing and supplier management:

• Supplier Performance Monitoring: With built-in supplier performance management tools, S2P systems allow businesses to evaluate suppliers based on criteria such as delivery time, quality, and pricing. This data enables companies to make informed decisions when selecting suppliers and negotiating terms, fostering better long-term relationships.
• Strategic Sourcing: By providing visibility into supplier capabilities and performance history, S2P platforms facilitate more strategic sourcing decisions. Businesses can identify the most reliable and cost-effective suppliers, creating a competitive procurement environment that drives both cost savings and innovation.
• Collaboration and Communication: Many S2P solutions include tools for better communication and collaboration between suppliers and procurement teams. Features like supplier portals and online catalogs simplify the ordering process, improve information sharing, and streamline vendor negotiations.

These improved supplier relationships ultimately lead to more favorable terms, enhanced service, and increased flexibility in sourcing decisions.

Automation of Administrative Tasks, Leading to Increased Efficiency

S2P solutions offer significant efficiency gains by automating many of the time-consuming administrative tasks traditionally associated with procurement:

• Automated Requisitions and Purchase Orders: By automating the requisition-to-order process, businesses can significantly reduce the manual work required to create and approve purchase orders. This saves time for procurement teams and minimizes errors, ensuring that purchases are processed quickly and accurately.
• Invoice Matching and Payment Processing: S2P solutions can automate the matching of invoices to purchase orders and receipts, reducing the need for manual reconciliation. This not only speeds up the invoice approval process but also reduces the risk of overpayment, fraud, or duplicate payments.
• Streamlined Reporting and Analytics: Automated reporting and analytics tools allow procurement teams to generate insights without manual data entry or complex Excel spreadsheets. These tools help businesses assess procurement performance, identify opportunities for improvement, and optimize future strategies.

By automating repetitive tasks, S2P systems free up procurement professionals to focus on more strategic activities, such as supplier negotiations and spend analysis, leading to greater overall efficiency.

Best Practices for Implementing an S2P Solution

Implementing a Source-to-Pay (S2P) solution can transform procurement operations, driving efficiency, cost savings, and greater supplier relationships. However, to ensure the successful deployment of an S2P system, businesses need to follow a structured approach. Below are best practices to guide the process:

1. Starting with a Clear Mapping of Current Procurement Processes

Before jumping into the implementation of an S2P system, it’s crucial to assess and map out your existing procurement processes. This initial step helps identify inefficiencies, bottlenecks, and areas of improvement that the new system should address.

• Process Mapping: Start by documenting each step in your procurement cycle, from supplier selection and requisitions to payment processing. Look at how data flows, where manual interventions occur, and where errors or delays are most frequent.
• Identify Pain Points: Pinpoint the most time-consuming or error-prone tasks that can benefit from automation, such as invoice approvals or purchase order creation. This mapping ensures that the S2P solution is tailored to solve real issues, not just replace outdated processes.
• Aligning Objectives: Establish clear objectives for your S2P system based on the current pain points. These could include improving spend visibility, enhancing supplier relationships, or streamlining approval processes.

A well-mapped current state ensures that the S2P implementation addresses specific needs and provides measurable improvements.

2. Ensuring System Integration Across Departments (Finance, IT, Legal, etc.)

For an S2P solution to be effective, it must integrate seamlessly with existing business systems across departments, including finance, IT, and legal.

• Finance Integration: Ensure that the S2P solution integrates with your financial software (e.g., ERP systems) to track spending, facilitate seamless invoicing, and manage payments. Integration with finance systems allows for better visibility into budgets and ensures compliance with accounting practices.
• IT Considerations: The IT department plays a critical role in the successful deployment of any technology. Ensure your S2P platform is compatible with existing IT infrastructure. Additionally, your IT team should be involved in ensuring data security, compliance with regulations, and smooth system updates.
• Legal and Compliance: Given that S2P often involves contracts and vendor relationships, it is essential to integrate with your legal team’s contract management systems. Automated workflows can streamline contract approvals, renewals, and compliance checks, reducing the risk of errors or legal disputes.

System integration ensures that your S2P solution works as a unified system across departments, providing real-time data, improving collaboration, and enhancing decision-making.

3. Choosing a Platform with Customizable Workflows to Adapt to Business Needs

A successful S2P solution must be flexible enough to adapt to your specific business needs. This is where choosing a platform with customizable workflows becomes essential.

• Tailored Workflows: No two businesses have the same procurement needs. Choose an S2P platform that allows you to create custom workflows based on your organization's structure, approval hierarchies, and compliance requirements. Customization helps ensure that the solution supports your business operations without forcing you to adjust your processes to fit the software.
• Scalability: As your business grows, your procurement needs may change. A scalable S2P platform can evolve with your business, supporting a growing number of users, suppliers, and complex procurement operations. This helps ensure that your procurement system remains efficient as your business expands.
• User-Friendly Interface: Select an intuitive platform that simplifies the user experience for procurement, finance, and other teams. Customizable dashboards and reporting tools allow each department to access the data relevant to their tasks, fostering greater efficiency.

By choosing a platform that aligns with your unique business structure, you can improve user adoption, streamline workflows, and maintain long-term flexibility.

4. Training and Involving Employees in the Adoption of the New System

Successful S2P implementation hinges on the ability of employees to effectively use the new system. Proper training and involvement from all key stakeholders are essential for ensuring smooth adoption.

• Comprehensive Training: Offer comprehensive training for all employees who will interact with the S2P system. This should cover basic functionality, such as how to create purchase requisitions or track invoices, as well as advanced features like data analytics and supplier performance monitoring. Training should be role-based to cater to the needs of different user groups (e.g., procurement, finance, IT).
• Change Management: Transitioning to an S2P system may face resistance, especially from those accustomed to legacy methods. It is crucial to have a clear change management strategy that communicates the benefits of the new system. Highlight how automation will reduce manual work, streamline approvals, and improve overall business efficiency.
• Involve Key Stakeholders Early: Engage key stakeholders, such as department heads, in the implementation process. This involvement helps ensure the solution is tailored to their needs and encourages buy-in across the organization. Regular feedback loops during the implementation phase will help identify any concerns early and make necessary adjustments.
• Ongoing Support and Training: Provide ongoing support and refresher training to employees post-implementation. As new features are rolled out, it’s crucial to offer continuous learning opportunities and ensure that users remain comfortable with the platform.

A well-executed training program ensures that employees can fully leverage the S2P solution, reducing mistakes and improving overall system effectiveness.

Embrace strategic procurement with sourcing

As we've seen sourcing is a fundamental element of strategic procurement, enabling organizations to drive value beyond cost reduction. It involves identifying and working with suppliers to optimize purchasing, secure competitive pricing, and build long-term partnerships. Through effective sourcing, businesses can leverage supplier expertise, improve supply chain efficiency, and ensure better quality and innovation in their goods and services.

Adopt sourcing as part of your procurement processes to take a proactive approach to purchasing, to deliver value while minimizing risks and enhancing supplier relationships.