Optimizing the procurement process is essential to ensuring the best purchasing and supply chain management outcomes. This includes understanding how supplier relationships affect pricing & performance and continually refining your vendor list to meet pricing benchmarks. Companies intent on controlling spending will therefore invest considerable time in sourcing the best suppliers for the job.
How much should strategic sourcing play into your purchasing process? What steps are involved in evaluating suppliers to procure goods under the best terms?
Let’s explore the source-to-pay process—the differences between S2P and other forms of procurement management, the steps to a successful source-to-pay process, and how procurement software can help you achieve strategic sourcing goals more easily.
What is source-to-pay (S2P) procurement?
The S2P process covers the entire scope of a procurement project. This includes: identifying and evaluating a new supplier, purchasing, contract lifecycle management, supplier performance evaluation, spend analysis, and accounts payable functions.
Establishing a source-to-pay practice is essential to get the best terms and pricing from suppliers continually. Organizations find and evaluate vendors using the source-to-pay process. They then buy (and pay for) the materials, services, and software they need.
What is the difference between S2P and procure to pay (P2P)?
In simple terms, procure-to-pay is a segment of the entire source-to-pay infrastructure. While P2P focuses on what happens between purchase requisitions and the final payment, S2P considers supplier management from its earliest stage. S2P covers the critical period between identifying a need and committing to a purchase with a specific supplier.
Engaging in strategic sourcing is one way organizations make the most of their budgets. It ensures they get the best price for goods, services, and software needed to move the organization forward.
The 8 steps of S2P
A repeatable process is essential to manage procurement successfully. Therefore, each S2P project follows the same steps to secure the correct goods at the ideal price—and do so on time. While individual processes within an organization may vary, S2P typically proceeds as follows:
- Identify a need: The stakeholder recognizes the need for a specific product or material. As a preliminary step, the stakeholder outlines the requirements for the project (including timelines or specifics necessary for the best outcome). In some organizations the stakeholder completes a requisition or intake form to kick off the sourcing process.
- Create a vendor shortlist: As part of strategic sourcing practices, the stakeholder identifies several potential suppliers based on the above criteria. In the case of S2P, these will be new vendors under evaluation. For comparison, in a P2P process, the vendors may be current partners or part of an established preferred vendor list.
- Issue RFPs or e-auctions: Once a buyer identifies the vendor shortlist, the research process begins with a request for proposal (RFP), a request for quote (RFQ), or an e-auction. (We discuss e-auctions in more detail below.)
- Negotiate the contract: In an RFP scenario, the buyer identifies a successful supplier and begins the negotiation process. During this process, the buyer conducts due diligence and works with the supplier to arrange agreeable terms for the price, payment, and delivery of goods.
- Submit purchase order: Once satisfactory terms are established, the buyer transmits a formal purchase order to the supplier. The supplier fulfills the purchase order as outlined in the contract and delivers the goods for inspection and acceptance.
- Goods delivery/acceptance: Upon delivery of goods, the buyer evaluates the delivery, noting any issues with compliance or product quality. If the goods are deemed satisfactory, the buyer accepts them and prepares to transmit payment.
- Payment: Once goods are accepted, the buyer arranges payment according to the terms outlined in the contract and purchase order. The document-matching process ensures that what is ordered, delivered, and contracted match up to eliminate errors and safeguard against fraud. This is called the “three-way” matching process because it matches the purchase order, invoice, and receipt of goods. Depending on the procurement solutions in place at your company, three-way matching and payment can be automated within a single platform, eliminating the need to handle this process manually.
- Vendor evaluation: Though not strictly part of the payment process, post-purchase evaluation is essential to a strategic sourcing practice. This process should look at how closely the supplier met pricing benchmarks, how well they followed compliance requirements, and whether delivery exceptions or quality issues occurred during the deal. The evaluation should make note of any information needed for future supplier performance management—current performance indicators may dictate future opportunities with a specific supplier and inclusion on future preferred vendor lists.
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What is an e-auction?
Electronic auctions (e-actions) are a type of e-procurement where buyers are quickly paired with the best possible suppliers for their needs. Instead of waiting for information from RFQ responses, the buyer cuts to the chase by engaging directly with several potential suppliers at once through an electronic clearinghouse. Using reverse auctions, suppliers compete for business, driving down the cost of goods and services.
There are several common varieties of electronic auctioning:
Reverse English: In a reverse English auction, all bidders know their competitive position in the auction. Bidders drive down the price on the item through successive bids until a final winning bid is declared. English auctions feature either a “hard” or “soft” close. In a hard close, bidding concludes at a predetermined time. In a soft close (also referred to as a “dynamic” close) bidding concludes when a set time interval elapses following the most recent bid.
Reverse Vickrey: This features a lowest-and-best bidding structure, conducted in a single round. Several suppliers put in electronic bids simultaneously and without knowledge of the other bids. The buyer then selects the bid most closely aligned to their needs.
Reverse Dutch: This is a “step” auction, in which the price steps up as time goes on. The auction begins with a low price, which is incrementally increased until a bidder accepts the contract. The first to accept the contract price wins the auction. This encourages suppliers to accept the best price before a competitor can accept the contract.
Reverse Japanese: Another “step” auction option conducted in rounds. The buyer sets a high price, incrementally decreasing it over a specified number of intervals to determine the lowest acceptable bid. Suppliers can accept or reject the bid at each stage. After a set number of rejections the supplier is excluded from auction participation. This continues until only one bidder remains, resulting in the lowest possible price for the buyer.
Benefits of S2P
Integrating strategic sourcing into your procurement process offers cost savings and spend optimization benefits. Some of the top benefits of S2P include:
Better strategic sourcing: Relying on a static list of preferred suppliers leaves opportunity on the table. By continuously benchmarking prices and evaluating suppliers, organizations can better respond to the ever-changing procurement landscape. This ensures vendors and pricing remain competitive.
Faster fulfillment with e-auctions: E-auctions centralize the supplier search, distilling it into a many-to-one exercise that saves time. With faster and easier supplier selection, orders are fulfilled faster and more efficiently.
Improved pricing and terms: When suppliers are incentivized to be competitive, they will extend advantageous terms and pricing to ready buyers. Engaging in strategic sourcing (via either RFQ or e-auctions) encourages suppliers to do as much as they can to win the contract. Getting better pricing stabilizes cash flow and improves an organization’s spend management.
More effective risk management: Taking the time to evaluate new suppliers reduces organizational risk. A well-crafted evaluation process explores areas of concern regarding a supplier, and gives buyers a more complete picture of the future supplier relationship. The supplier evaluation process ensures regulatory and risk compliance, and addresses cross-departmental prerequisites such as: required contract language, IT or InfoSec security minimums, and finance-related requirements.
Improved budgeting and forecasting: A granular understanding of the financial components of a deal positions organizations to better understand the budgetary and tangible impacts of a purchase. Knowing the best prices for goods, services, and software helps stakeholders align with financial goals. The data generated in post-close reporting allows finance to make data-driven decisions about future budgets, utilization, and capacity planning.
Using technology to streamline S2P
With the right S2P software, the above features and benefits are fully realized and easily integrated into your current procurement practice. Intelligent procurement streamlines the process using the power of automation, approval workflows, and integrated pay solutions. It also simplifies contract management and improves spend visibility.
You can evaluate how a specific platform meets your needs and increases the effectiveness of your current procurement process using Order’s Procurement Technology Decision Matrix.