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What is Source to Pay? Definition, Process, and Improvement opportunities
With inflation showing little sign of, well, deflating, cost savings are a top priority across industries. Companies are looking inward and outward to find opportunities to save money. And many of the biggest opportunities are hiding in the Source to Pay (S2P) process. So, let’s answer the important questions around Source to Pay, why it matters, and how you can improve it.
What is Source to Pay?
Source to Pay is the end-to-end Procurement process – from sourcing suppliers to negotiation of contracts, to making payment. Source to Pay usually comes into play when businesses need to source new goods that none of their current suppliers offer, when they need to find vendors that offer better terms and conditions, or when contracts expire.
It can be broken down into two sub-processes: Source to Contract and Procure to Pay. These can then also be broken down even further into processes like Strategic Sourcing, Vendor Management, Spend Management, Master Data Management, and Accounts Payable.
Which steps are part of the S2P process?
Source to Pay springs into action as soon as there is a demand for a new material or better contract conditions, which might be triggered by difficult trading conditions, for instance. Typically, you end up with five general process steps:
Sourcing: Searching for new or alternative suppliers
Evaluation: Vetting vendors and negotiating offers before making a decision
Contract management: Setting up, sending out, and managing new contracts
Procurement: Creating a purchase request, completing a purchase order, and receiving the goods/services
Payment: Invoice processing and making payment via Accounts Payable
Why is S2P important?
Source to Pay is directly linked to the amount of money you pay your suppliers. No one wants to pay more than they need to and by optimizing S2P, companies create a ton of opportunities to make savings. This starts with finding suppliers and negotiating the best conditions with them. It also extends to areas like making sure you use cash discounts, preventing duplicate payments, or ensuring the best contracts are used.
And all these things not only impact money, but also compliance and efficiency. Good Source to Pay is a safeguard against compliance violations. Afterall, when you have clear processes in place it’s much easier to spot and tackle workarounds and deviations such as maverick buying or rogue spending.
Then there is the issue of resilience and flexibility. Next to price volatility and inflation, Deloitte lists resource shortages as the biggest challenge for companies in the next twelve months. That means companies are increasingly trying to diversify their supplier portfolio to better prevent shortages and looking for ways to improve demand and inventory forecasting. And this all comes back to sourcing, contracting and building relationships with a growing stack of suppliers.
To sum it up: Getting S2P right directly translates into cost-savings, better forecasting and budgeting, more strategic sourcing, strong compliance, higher efficiency, and many more advantages across all the involved departments.
What are the challenges to improving S2P?
But it’s a double-edged sword. S2P is often ridden with inefficiencies that let cost creep into a business. Why the difficulty? Because it's extremely challenging to streamline and improve Source-to-Pay since it spans so many teams and processes.
The end-to-end Procurement process is a chain of disparate tasks and potential knowledge silos. Finding suitable suppliers, negotiating agreements, and sending contracts takes up a huge amount of time for Procurement teams. On top of that they need to coordinate with Accounts Payable, the Legal department, and Finance teams. Every step is dependent on what happens up and down the stream.
With so many different teams and touchpoints, there is a lot of room for errors to creep in – different compliance standards, departmental data inconsistencies, various systems operating in isolation – to name a few. Source to Pay is an extremely connected process and yet everyone involved can end up working in their own little bubble. And without visibility into the process, and especially the touch points between departments, it’s nearly impossible to find all these instances where your company is losing money.
How can you improve Source to Pay?
Reducing cost and increasing efficiency are the top priorities for Procurement leaders in 2023, according to the latest Global CPO survey by Deloitte. The same survey finds that, in response, CPOs are taking an increasingly proactive role in driving strategic initiatives to achieve these goals. In creating real-time transparency across Source to Pay, CPOs can unlock a hidden treasure chamber full of opportunities to save cost and increase efficiency.
You need to understand how all your sub-processes work, interact, and influence each other, so you can pull the right levers for optimization. In the past that was a near impossible task, attempted through interviews, workshops, and process modeling of ideal workflows. But now, thanks to technology like process mining, it’s much easier to visualize your processes in all their interconnected complexity. By bringing data from all your relevant systems and tools together in one centralized view, you can see how your processes really run, understand how they are connected , spot and evaluate value opportunities, and identify the best optimization measures.
With real-time transparency in place, you can tackle the top five optimization measures in S2P:
1. Break down information silos
Airtight Source to Pay requires a single source of truth. Only with the data and knowledge from all teams and departments coming together in one single data repository can you really start to optimize Source to Pay. How else would you know where to start or what the biggest opportunities are? Technology that layers on top of your existing systems and acts as a single source of truth can help you break down information silos between departments. You essentially create a common knowledge pool for all departments to draw from.
Paired with full process transparency based on real-time data you establish a common ground for all the teams to make better decisions based on facts, and enable better collaboration and communication.
2. Improve strategic sourcing and contract use
With transparency into existing contracts and supplier performance, CPOs can ensure orders only go to the suppliers with the best conditions a.k.a. the ones with the best payment terms, existing discounts, and track record of keeping to delivery dates.
This is a massive improvement from a traditional list of preferred customers as it takes historic and recent developments, supplier performance, and supply chain disruptions into account.
Plus knowing which contracts, terms, conditions, and suppliers you already have in place helps with evaluating and negotiating with new suppliers.
3. Spot automation opportunities
When you understand how your teams get work done, it’s much easier to automate tasks that don’t need human intervention. The result is more efficient ways of working, which will rapidly translate into cost savings.
Take blocked payments as an example. Some of them might be blocked for good reason, but many are not. And while they sit there waiting to be reviewed, you're losing out on cash discounts.
You can remove order blocks with automation, by defining the rules for when and why blocked orders require a pair of human eyes. That’s what Deutsche Telekom did to secure €40M of additional savings per year.
4. Ensure compliance across departments
Compliance requirements can be different across departments. Just because Procurement’s requirements are met doesn’t mean Finance will feel the same. Plus there’s the many different ways people violate compliance and control measures, such as maverick buying or split invoices.
With visibility across all departments and a centralized, single source of truth you can make sure everyone is aware of all compliance requirements, has the latest info on supplier performance, and insights into inventory. So no one spends money on unnecessary resources and with high-risk vendors that don’t stick to the contract.
5. Better forecasting and spend analysis
Imagine if you could only spend money on the things you need at the exact right time.. What a CPO superpower that would be. Now stop imagining.
The single source of truth above is this superpower. When you have a place for all the different departments involved in Source to Pay to know what the others are doing together, you have all the insights you need to improve demand forecasting and spend. You can compare incoming requests to historic data, recent developments, budgeting constraints, vendor performance and timeframes. And you can even use this data to predict likely developments and adjust demand forecasting and spend accordingly.
Want to know more about how we can help you get full transparency into your Source to Pay process? Talk to us.
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