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.
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.
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,
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.
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.
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.
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.
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.
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.
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.
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.
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Source-to-Pay (S2P) |
Procure-to-Pay (P2P) |
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The objective is to optimize spend and build strategic supplier relationships |
Goal for procure to pay is to streamline and optimize purchasing process and improve operational efficiency |
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The process includes with sourcing, contracts, purchasing, invoice processing, supplier management, and spend analysis |
It excludes sourcing and supplier management. Focuses on purchase requisition, purchase order management, goods receipts, and invoice processing |
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Source to pay is more complex as spend analysis, sourcing, and contracts typically involves multiple stakeholders and strategic decision making |
It is simple compared to S2P as it involves only the transactional activities like approving requisition, creating orders, invoice matching, and processing payments |
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.
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.
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.
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.
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.