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:
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.
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.
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.
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.
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 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.