Source to Pay (S2P) is an end-to-end process comprising all procurement activities, from strategic sourcing and determining business needs to finalizing the vendor payments. S2P ensures a strategic approach to procurement by including key elements, such as market analysis, vendor selection, and contract management.

Importance in procurement

The S2P process integrates strategic sourcing and transactional activities, offering a comprehensive method for managing the procurement lifecycle. With efficient S2P practices, businesses can identify their needs, assess and choose suitable vendors, negotiate contracts, and manage vendor relationships effectively.

Aligning sourcing strategies with procurement activities can optimize costs, improve supplier performance, and ensure compliance with regulatory and contract requirements. It also improves decision-making with data-driven insights, driving value in procurement activities.

Elements of S2P

• Sourcing: This component involves all sourcing activities, such as analyzing the market to identify the best vendors, soliciting their information and quotes, and assessing them based on a scoring matrix to choose the best one.

• Procurement: Procurement involves creating and approving purchase orders (POs), submitting them to vendors to formalize agreements, and ensuring the accuracy and quality of the supplied goods or services.

• Accounts payable: Accounts payable is the final component of S2P where the vendor’s invoice is processed, verified, and paid.

Step-by-step process

Step 1: Identify business needs

The first step is to consult with internal stakeholders and identify your business needs. Draft detailed specifications for the goods and terms of reference (ToR) for services and submit a purchase requisition (PR) form for review and approval.

Step 2: Assess the market

After approval, the sourcing team conducts market research to find the most suitable candidates for the goods or services needed. Researching industry trends, market conditions, organizational needs, and competitor practices is crucial to understanding pricing benchmarks, emerging technologies, and evolving supplier capabilities.

After identifying potential suppliers, the team issues Requests for Information (RFIs) to gather preliminary details, and Requests for Proposals (RFPs) or Requests for Quotations (RFQs) to obtain more detailed bids.

Step 3: Choose a vendor

The sourcing team will then assess these proposals based on specific criteria, such as cost, quality, and delivery capabilities. They may engage with the suppliers through meetings or site visits if necessary. This comprehensive approach ensures that the business selects the most suitable supplier. 

Step 4: Finalize the contract

This involves finalizing and negotiating the terms and conditions with the selected vendor. It’s important to outline the payment terms, quality standards, and provisions for dispute resolution, confidentiality, and compliance to ensure clarity and mutual understanding.

Step 5: Submit the purchase order

The procurement team drafts the PO based on the finalized contract terms. This includes details such as the item descriptions, quantities, prices, delivery dates, and payment terms. The document undergoes an internal approval process to ensure alignment with budget constraints and organizational policies.

After approval, the PO is submitted to the chosen vendor who agrees to deliver the order per the specified terms.

Step 6: Receive and inspect the goods

After the vendor’s delivery, the receiving department inspects the goods to ensure compliance with the requirements and terms. In case of any discrepancies, they notify the supplier and request a resolution.

Step 7: Process the invoice

The receiving department forwards the details to the accounts payable department, which performs a three-way match by comparing the PO, vendor’s invoice, and goods receipt. They assess the supplier based on quality, adherence to delivery times, compliance with requirements and terms, communication, and the total cost of ownership (TCO) and record these details for future reference. The invoice is approved once all criteria are met.

Step 8: Submit the payment

After approval of the invoice, the accounts payable department schedules the payment to the vendor according to the terms.

Benefits of S2P

• Process efficiency: S2P streamlines procurement and logistics activities, reducing supply chain fragmentation, expediting order fulfillment, and shortening lead times.

• Stronger compliance: It involves built-in controls, detailed record-keeping, and automated checks to simplify audit procedures and ensure that procurement activities meet regulatory and internal standards.

• Cost savings: By combining ordering processes, companies can leverage their total purchasing volume to negotiate better terms and discounts. Consolidated orders reduce the frequency of purchases, which can lower transaction costs and administrative expenses.

• Better collaboration: The S2P process centralizes sourcing and procurement activities, allowing internal stakeholders to work collaboratively and share information. Regular performance reviews convey expectations to suppliers, fostering productive partnerships.

• Improved vendor assessments: Through standardized evaluation criteria and a structured scoring system, S2P ensures that evaluations are objective and based on measurable factors.

Key technologies for S2P

Procurement software

Procurement software streamlines the entire procurement process, from identifying needs to processing the payment. It provides real-time visibility into spending, supplier performance, and inventory levels, improving operational efficiency and reducing costs.

Automation and AI

Automation and AI tools enhance S2P by automating repetitive tasks and providing predictive insights. Automation simplifies the creation of POs, invoice processing, and order management, while AI informs decision-making by analyzing market conditions and contract terms, and suggesting optimal pricing strategies during negotiations.

Data analytics

Data analytics tools convert procurement data into actionable insights by tracking supplier KPIs, such as on-time delivery rates, competitive quotes, quality of goods and services, and response times. They also enable businesses to monitor spending patterns and market trends, facilitating informed decision-making and optimizing procurement strategies.

Differences between S2P and Procure to Pay (P2P)

• S2P encompasses all procurement tasks, from needs identification to vendor payment, while P2P is more concerned with transactional steps.

• S2P comprises strategic activities, such as market research, vendor assessment, and contract negotiation, while P2P is more focused on operational tasks, such as ordering, receiving goods, and making payments.

• S2P requires AI and analytics tools for advanced vendor assessment and market analysis, in addition to the payment processing, PO management, and invoicing tools used in P2P.

• S2P shapes the overall business strategy by guiding how resources are sourced and managed, while P2P has a limited impact on strategic goals, focusing more on procurement efficiency.