Home / Glossary / What is source-to-pay?

What is source-to-pay?

Source-to-pay (or S2P) is the process that outlines how organizations fulfill their sourcing and procurement needs. It begins with the identification of demand for a product or service, encompasses steps including supplier selection, contract management, and requisition, and ends with a payment being made.

It can be split into two composite sections: source-to-contract and procure-to-pay. The former entails the entire sourcing process, resulting in the onboarding of a contracted supplier. The latter covers the purchasing process, ending with goods or services being delivered and payment being made.

In full, the source-to-pay process essentially describes the entire procurement life cycle. It is therefore a central concept in day-to-day operations for the vast majority of businesses, providing a template through which procurement needs can be fulfilled efficiently.

Increasingly, businesses are making use of technology to optimize steps in the source-to-pay process – reaping the benefits of data and automation to bring about operational efficiency.

The source-to-pay process

Although the exact details may vary from business to business, the source-to-pay process can generally be broken down into a series of individual steps. They are typically represented as:

Demand identification

Kicking off the source-to-pay process is the very first step in any procurement journey – the identification of a need for a product or service. This could be anything from raw materials for manufacturing to a new software solution.

Alternatively, the demand that’s been identified might relate to the need for a new supplier to replace or act as a redundancy option for an existing supplier.

Supplier sourcing

With the need for a product or service identified, the process moves on to sourcing suppliers who can realistically and appropriately meet the demand. In this step, potential vendors are located, typically using supply chain software to aid the search, and subsequently shortlisted.

Supplier selection

After a shortlist of potential suppliers has been created, the next step is to evaluate their suitability and make a selection. The principles of strategic procurement are typically followed to ensure that the supplier who is selected matches the business’s goals and can reliably meet the forecasted ongoing demand.

This is also the stage of the process where supplier risk is assessed. Suppliers can pose a variety of risks to the buyer business, from financial risks that revolve around their capacity to maintain healthy operations to reputational risks that relate to their compliance with ESG principles.

Contract management

Once one or more suppliers have been selected as the best candidates to meet the demand for the required product or service, negotiation can begin to establish the terms of the contract. When both parties are satisfied, the contract can be signed, and the buyer-supplier relationship formally begins.

Supplier onboarding

Next, it’s time to onboard the now contracted supplier to a vendor database. The supplier onboarding process involves collecting all the necessary information, including payment and contact details, which is typically uploaded to a centralized digital supplier management database. Suppliers can also be prompted to self-serve at this stage, uploading their own information to the supplier management system to ensure its accuracy.

The supplier being officially onboarded marks the end of the source-to-contract process.

Requisition

Requisition is the start of the procure-to-pay process and the first stage of the source-to-pay cycle that is typically handled by the procurement department. It involves creating a requisition order that generally requires internal approval before the purchase can move ahead.

Purchase order issuance

With the purchase approved, a purchase order that contains information about the products or services required, the quantity needed, the purchase price, and delivery information is created and sent to the supplier.

Delivery and the accounts payable process

After receiving the purchase order, the supplier will meet their end of the deal by fulfilling the order as outlined. The order contents will be delivered to the buyer, who will typically check the delivery against the purchase order to ensure it’s been fulfilled accurately.

Once receipt of the delivery has been confirmed by the buyer, the supplier will send the invoice for the order to the accounts payable department. This starts the accounts payable process, which is increasingly handled through dedicated accounts payable automation software, resulting in the final payment being sent to the supplier.

Challenges in the source-to-pay process

The source-to-pay process is an essential part of day-to-day operations for any business that has a need for goods or services from external suppliers. Accordingly, any challenges present in the process should be considered as considerable threats to operational efficiency.

Some of the most common challenges businesses face in this area of operation include:

  • Inter-departmental friction. Since the source-to-pay process involves several internal departments, friction can arise in the transitory steps and cause delays or errors.
  • Labor-intensive processes. Many steps involved in the source-to-pay process are labor-intensive, requiring significant manual input and taking time away from pursuing other opportunities.
  • Data management. Sourcing suppliers, managing contractual negotiations, and completing the onboarding process all necessitate data being centrally available for stakeholders to find.
  • Supplier risk identification. The significant threat that various supplier risks can pose to buyer businesses makes risk identification hugely important, but it’s a complicated process.

However, a report by McKinsey found that almost 60% of regular activities contained in the source-to-pay process can be fully or significantly automated. The potential for efficiency improvements through automation is one of the key opportunities for businesses to be aware of when tackling the common challenges in source-to-pay activities.

One method that an increasing number of businesses are using to implement automation throughout the process is the use of source-to-pay software. These solutions typically involve a series of modules that digitize the supplier selection process, contract management, supplier management, and the accounts payable process.

These systems also often contain additional features that can enhance cash flow management and contribute to building a better working capital position, including supply chain finance and dynamic discounting products.

Difference between source-to-pay and procure-to-pay

Source-to-pay overlaps significantly with another process – procure-to-pay. However, there is one key difference between the two, which is that the source-to-pay process begins much earlier than the procure-to-pay process.

Procure-to-pay is the term used to describe everything that follows a supplier being onboarded – namely the process from requisition of goods or services to the final payment being made.

They are both processes that will be familiar to sourcing, procurement, and accounts payable departments, but the source-to-pay process is used when demand can’t be fulfilled by existing suppliers while procure-to-pay is used when demand can be met by an existing supplier relationship.

Cash flow measures money entering and leaving a business. Learn everything you need to know about this important metric in our glossary post.
Read our full guide to sustainability in supply chain management, covering what a sustainable supply chain actually means and how it can benefit a business.
Supply chain resilience is a supply chain’s ability to withstand and recover from disruption. Learn more in our full glossary post.
Accounts receivable automation (or AR automation) is the practice of automating parts of the accounts receivable process in a business. Learn more here.
Flexible Funding is a feature for Taulia Payables that allows buyer organizations to use the right funding at the right time. It gives corporate treasurers options to meet their short-term cash flow needs without restricting the liquidity suppliers rely on.
A working capital funding gap is the difference between short term assets and short-term liabilities. Learn everything you need to know about funding gaps here.
The accounts receivable (AR) process is the series of actions businesses carry out to collect their accounts receivable. Learn more about it here.
The accounts receivable (AR) process is the series of actions businesses carry out to collect their accounts receivable. Learn more about it here.
Accounts receivable factoring is a way for businesses to secure financing by selling their unpaid invoices for cash. Learn more in our glossary post.
Debt financing allows businesses to borrow money to fund their short-term needs. Get a full definition and explanation in our guide to debt finance.
Working capital funding, also known as working capital financing, is a method of business financing. Learn more about the types of working capital funding here.
Integrated ERP systems refers to the combination of an ERP with integrated modules that can help you manage diverse business processes from one platform.
Lean supply chains are designed to maximize efficiency. Learn all about the principles of lean supply chain management in our glossary entry.
Learn everything you need to know about supplier segmentation, including what supplier segmentation model to use and how to tackle the process, in our guide.
What is ESG? ESG stands for environmental, social and governance. Together, these three principles form a framework that’s used to measure how sustainably, ethically, and responsibly an organization is acting. ESG is most often used to describe the efforts companies take to mitigate the potential negative outcomes of their operations. It also refers to a…
What is supply chain management? Supply chain management (SCM) describes the process businesses use to manage the flow of goods, data, and payments throughout a supply chain. Effective supply chain management is instrumental in ensuring every element of the supply chain works towards achieving broader business objectives, whether that’s cost-efficiency, resilience, quick order fulfillment, or…
What is supply chain optimization? Supply chain optimization is the process of refining the structure and operation of a supply chain. It aims to make the best use of resources and technology to extract greater efficiency and performance from the supply chain network. Well-optimized supply chains enable businesses to meet their broader objectives, whether that’s…
What is accounts receivable? Accounts receivable (AR) is the term used to describe money owed to a business by its customers for purchases made on credit. It’s listed as a current asset on the balance sheet, representing the total value of outstanding invoices for products or services sold but not yet paid for. Total accounts…
What is cash flow management? Cash flow management is the process of optimizing the flow of money in and out of a business to achieve a specific operational aim. Effective cash flow management enables businesses to use their working capital better and fuel growth or build resilience. It involves using several levers, including the approach…
What is strategic sourcing? Strategic sourcing is the term used to describe a strategic approach to the sourcing process. It involves the same fundamental steps – research, analysis, negotiation, contracting, and onboarding of new suppliers to fulfill demand for goods or services – but is oriented to contribute to broader business objectives. It also often…
What is automated spend analysis? Automated spend analysis is an automatic digital process that captures, consolidates, and interprets spend data across an organization. It’s used to provide insights into spend efficiency and effectiveness, informing sourcing and purchasing decisions. It’s typically facilitated through dedicated automated spend analysis software, usually integrated with a wider enterprise resource planning…
What is the new FASB accounting treatment for supply chain finance? In September 2022, the Financial Accounting Standards Board (FASB) — the governing body for accounting standards in the United States — updated its standards to include a requirement for SCF disclosure on company financial statements. For most organizations, disclosure of an existing SCF program…
What is spend visibility? Spend visibility refers to how well a company can understand and track how, where, and why capital is used in their business operations. Spend visibility increases when finance teams can more accurately see where company money is being spent. Low spend visibility is defined by difficulties tracking spend comprehensively or accurately….
What is 2/10 net 30? 2/10 net 30 is a trade credit often offered by suppliers to buyers. It represents an agreement that the buyer will receive a 2% discount on the net invoice amount if they pay within 10 days. Otherwise, the full invoice amount is due within 30 days. It’s one of the…
What is working capital ratio? Working capital ratio is a measurement that shows a business’s current assets as a proportion of its liabilities. It’s a metric that provides an overview of financial health and liquidity, indicating whether current liabilities can be paid by existing assets. In the case of working capital ratio, assets are typically…
What is a virtual card? A virtual card is a payment method that is virtual rather than physical. It functions similarly to a traditional credit card but takes the form of a single-use 16-digit number and three-digit CVV code generated online, instead of a plastic or metal card that is received through the post. Virtual…
What is e-procurement? E-procurement refers to the set of digital processes that dictate B2B buyer-supplier relationships in the supply chain. Utilizing technology, e-procurement aims to centralize the workflows involved in purchasing goods or services and bring about efficiency improvements. It’s essentially the digitization of the standard procurement process. E-procurement, short for electronic procurement, replaces traditional…
What is source-to-pay? Source-to-pay (or S2P) is the process that outlines how organizations fulfill their sourcing and procurement needs. It begins with the identification of demand for a product or service, encompasses steps including supplier selection, contract management, and requisition, and ends with a payment being made. It can be split into two composite sections:…
What is supplier relationship management? Supplier relationship management is the set of processes that organizations use to build, manage, and maintain relationships with their suppliers, or vendors. A supplier relationship management strategy is essential to ensure that relationships are built productively, with a view to increasing the overall effectiveness and resilience of the supply chain….
What is supplier information management? Supplier information management (SIM) refers to the set of processes or the system that organizations use to collect, store, access, and update important data about their suppliers. From contact details to contractual documentation, the data involved in supplier information management is essential in the broader process of vendor management. A…
What is AP automation? AP automation, short for accounts payable automation, is the use of software to automate part or all of the accounts payable process. It aims to create efficiency in the accounts payable workflow by digitizing how vendor invoices are received, processed, and stored. In removing manual processes and the need for paper-based…
What is accounts payable? Accounts payable (AP) represents the amount that a company owes to its creditors and suppliers (also referred to as a current liability account). Accounts payable is recorded on the balance sheet under current liabilities. When a business purchases goods or services from a supplier on credit, payment isn’t made straight away,…
What is accounts receivable (AR) financing? Accounts receivable or AR financing is a type of financing arrangement which is based on a company receiving financing capital in return for a chosen portion of its accounts receivable. An AR financing arrangement can be structured in several ways, including as an asset sale or a loan. Essentially,…
What is the cash conversion cycle (CCC)? The cash conversion cycle (CCC) – also known as the cash cycle – is a metric expressing how many days it takes a company to convert the cash it spends on inventory back into cash by selling its product. The shorter a company’s CCC, the less time it…
What is cash flow forecasting? Cash flow forecasting, also known as cash forecasting, estimates the expected flow of cash coming in and out of your business, across all areas, over a given period of time. A short-term cash forecast may cover the next 30 days and can be used to identify any funding needs or…
What is Days Inventory Outstanding? (DIO) Days inventory outstanding (DIO) is a working capital management ratio that measures the average number of days that a company holds inventory for before turning it into sales. The lower the figure, the shorter the period that cash is tied up in inventory and the lower the risk that…
What is Days Payable Outstanding? (DPO) Days payable outstanding (DPO) is a useful working capital ratio used in finance departments that measures how many days, on average, it takes a company to pay its suppliers. As such, DPO is an important consideration when it comes to managing a company’s accounts payable – in other words,…
What is Days Sales Outstanding? (DSO) Days sales outstanding (DSO) is a working capital ratio which measures the number of days that a company takes, on average, to collect its accounts receivable. The shorter the DSO, the faster the company collects payment from its customers – and the sooner it is able to make use…
What is dynamic discounting? Dynamic discounting is a solution that provides suppliers with the option of receiving early payment in exchange for a discount on their invoice. As a result, suppliers can typically access lower cost funding than they might otherwise receive, while harnessing working capital in order to invest in growth and innovation. Buyers, meanwhile,…
What is an early payment discount? An early payment discount is a form of trade finance, allowing buyers to pay a discounted amount to suppliers in exchange for settling invoices before their maturity date. Also known as a prompt payment discount or early settlement discount, it’s typically calculated as a percentage of the goods and…
What is inventory management? Inventory management is a systematic approach to sourcing, storing, and selling inventory. Effective inventory management involves optimizing the flow of goods within an organization, from purchase right through to sale, always ensuring that an appropriate quantity is available in the right place and at the right time to meet customer demand. Inventory in…
What is invoice processing? Invoice processing is a business function that involves managing incoming invoices from initial receipt through to payment. It’s carried out by the accounts payable department and is a critical component of the procure-to-pay process as the final step of any procurement activity. The invoice processing cycle is made up of several composite…
What is inventory cycle time? Inventory cycle time is the amount of time it takes to produce and deliver an order from a customer, usually measured in days. It essentially measures the speed at which a company can complete the manufacturing or assembly process from start to end, turning raw materials or components into a…
What is procure-to-pay? (P2P) Procure-to-pay is a term that encompasses the processes which take place when a company purchases, receives and pays for goods and services. The activities that make up the procure-to-pay process range from identifying the initial need for procurement of goods or services to the final steps of approving invoices and paying…
What is the procurement life cycle? The procurement cycle is the process businesses use to find and obtain goods. It involves multiple steps, including identifying the need for a good or service, finding the right supplier, negotiating terms, creating a purchase order, and receiving the delivery. It’s also known as the procurement life cycle or,…
What is receivables finance? Receivables finance, or receivables financing, is a trade finance method businesses can use to receive funding matching the amounts owed to it by its customers in outstanding invoices. These amounts are known as trade receivables or accounts receivable. By financing its receivables, a business can receive payments earlier, meaning it can…
What is reverse factoring? Reverse factoring is a type of supplier finance solution that companies can use to offer early payments to their suppliers based on approved invoices. Suppliers participating in a reverse factoring program can request early payment on invoices from the bank or other finance provider, with the buyer sending payment to the…
What is trade finance? Trade finance is the term used to describe the tools, techniques, and instruments that facilitate trade and protect both buyers and sellers from trade-related risks. The purpose of trade finance is to make it easier for businesses to transact with each other. It also helps to reduce the risks involved in…
What are trade receivables? Trade receivables are defined as the amount owed to a business by its customers following the sale of products or services on credit. Also known as accounts receivable, trade receivables are classified as current assets on the balance sheet. Most companies allow their customers to use credit on purchases of goods…
What is strategic procurement? Strategic procurement, or procurement strategy, is the process businesses use to acquire goods or services of the right quality, at the right price, and in time to meet customer demand. It brings procurement activities in-line with a company’s broader objectives, while also reducing supply chain risk. Strategic procurement is a long-term, organization-wide…
What is supply chain finance? Supply chain finance, also known as supplier finance or reverse factoring, is a financing solution in which suppliers can receive early payment on their invoices. Supply chain finance reduces the risk of supply chain disruption and enables both buyers and suppliers to optimize their working capital. Unlike other receivables finance…
What is vendor management? Vendor management is a term that describes the processes organizations use to manage their suppliers, who are also known as vendors. Vendor management includes activities such as selecting vendors, negotiating contracts, controlling costs, reducing vendor-related risks and ensuring service delivery. The vendors used by a company will vary considerably depending on…
What is working capital management? Working capital management is a business process that helps companies make effective use of their current assets and optimize cash flow. It’s oriented around ensuring short-term financial obligations and expenses can be met, while also contributing towards longer-term business objectives. The goal of working capital management is to maximize operational…