The lean operating model was conceptualized sometime around the fifteenth century, at the Arsenal of Venice. Venetian shipbuilders created an assembly line to standardize production and, in doing so, were able to build naval vessels faster and cheaper. As the centuries passed, the Venetians continuously sought to improve their operations and experimented with new ways of working. The quality of their vessels improved with each adaptation, and the shipbuilders made it into the history books.
Fast forward 500 years. Every business wants to emulate the core principles of a lean operating model: high customer value, with minimal or no waste. And they can, if they’re able to plug cash leaks and free up resources for continuous innovation.
A procurement plan can help you build a lean operating model so you can prevent cash leaks that come from wasteful spend.
At the organizational level, a procurement plan outlines what an organization plans to spend in a given time frame. It identifies specific needs, a budget for obtaining supplies, and approved vendors from whom to procure those supplies. A procurement plan requires you to think strategically about spend, but it shouldn’t be difficult to create. A spreadsheet works well enough.
Businesses that formulate a procurement plan can optimize their spend and empower employees to proactively look for cost efficiencies. Following are four ways these benefits can help curb wasteful spend.
1. Gives a holistic view of business needs so you can optimize spend
A procurement plan that outlines spend at the organizational level allows you to identify patterns and redundancies in your purchasing needs.
Budgets are often created and executed at the department or team level, which can lead to redundancies. Let’s say two employees from separate departments subscribe to the same software solution. A procurement plan would expose this redundancy and enable the organization to invest in a single team plan, reducing the overall subscription cost.
Or let’s say two departments know they will require a few hours of work from a freelance designer each week. A procurement plan makes it easy to see this overlapping need. Then, the two teams can coordinate to hire the freelancer by day instead of paying a higher hourly rate independently.
Planning a year’s spend in advance also creates opportunities to receive discounts. Many vendors will give discounts if you buy in bulk or commit to an ongoing order. Businesses should identify any recurring orders during their procurement planning and ask about these discounts.
The Complete Guide to Procurement Management KPIs
Dive deep into how your team can benefit from tracking procurement KPIs, the 15 most important KPIs to track, and a detailed worksheet to help you calculate which KPIs suit you!
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2. Reinforces your purchasing policy to prevent maverick spend
Procurement plans guard against spend that is over budget, unnecessary, or fraudulent by reminding employees of the company’s purchasing policy.
Two out of three employees haven’t read their company’s expense policy, according to AllStarCard. A procurement plan gives organizations a prime opportunity to tell employees, “This is how we intend to spend this year, and all of your purchases must map back to this plan. Purchases that don’t map back to this plan stand in the way of achieving our goals of X, Y, Z. And, by the way, if you don’t adhere to our policy, we won’t approve your expense report.”
Most employees want their business to achieve its goals. Employers need to articulate what those goals are and explain how maverick spend stands in the way of achieving them. Anyone who still fails to follow the purchasing policy should face repercussions.
3. Allows you to get a head start on ordering to prevent costly delays
Spending on an as-needed basis leaves too much room for error. A procurement plan helps you build a structure for employees, so they can submit orders early—or at least on time—as a matter of routine.
Late orders can be costly. If the supplies you need don’t arrive on time, someone from the team has to run out to the store to buy them. Let’s count the waste: employee time, duplicate purchase, purchase at a markup price. If you’re a coffee shop in need of milk, that amounts to about $20, if we figure an hour of an employee’s time, and $5 for the dairy. Quite the markup for something that should have cost $3.
But what if you’re a coffee shop, and your signature espresso doesn’t arrive on time? Now you have to tell customers you can’t sell them their favorite beverage, putting your sales in jeopardy until the espresso arrives.
You know if you place an order at the last minute, it’s going to take ages to ship. Establish a procurement plan so your team can either get ahead on purchasing or set up automatic reorders.
The Complete Guide to Procurement Management KPIs
Dive deep into how your team can benefit from tracking procurement KPIs, the 15 most important KPIs to track, and a detailed worksheet to help you calculate which KPIs suit you!
4. Gives employees visibility into spending goals
Like we said before, employees want their employer to succeed. Share your procurement plan with employees to give them transparency into spend across the organization. This way, employees can help the organization save cash when unexpected expenses arise.
Take the example above, where two employees from different teams were using the same software. Had the two employees known they were subscribing to the same software, they might have coordinated to purchase a team plan.
Additionally, a procurement plan allows team managers to set their budgets against the broader organizational goals and plan for spend when it is most convenient for the organization. This doesn’t necessarily cut costs in the long term, but it helps ensure that the business has enough capital at all times to achieve its value-add goals.
In essence, this type of budget planning keeps the company’s working capital, or the difference between a company’s current assets and liabilities, high. The significance of this feat shouldn’t be overlooked. According to a report from PwC, global firms could have freed up as much as €177 billion ($214 billion) in cash in 2017 to support growth and innovation if they had improved their working capital.
Plug cash leaks in 2021 with a clear procurement plan
“2020 went exactly as planned,” said no one ever. But don’t let the past year discourage you from planning.
We have a pretty good idea of what 2021 will look like (knock on wood). Offices will be closed, at least temporarily. The majority of employees will work from home. Spend will come from as many locations as you have employees.
You can prevent spending from becoming haphazard while your employees are dispersed. You just need to think a little bit more like a Venetian and create a clear procurement plan to ensure that all spending improves your bottom line.
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Automation and digital administration of the procurement process is advancing quickly. As technology advances, it is easier for businesses to see real-time pricing data and, as a result, gain more control over their spend management.
In fact, with the right strategy, your business could automate nearly half of the procurement process tasks currently bogging your team down. To maintain a competitive advantage, your procurement team must be at the forefront of these emerging technologies.
The potential upsides to automating your source-to-pay process are astonishing. Automation unlocks cost savings while freeing up time for your procurement team to hunt down new sources of value for your business.
In this article, we will break down key concepts regarding digitizing your source-to-pay process:
- What is the source-to-pay process?
- What are the benefits of source-to-pay automation?
- What are the steps in automating the sourcing-to-pay process?
- How do different technologies improve source to pay?
What is the source-to-pay process?
The source-to-pay procurement process is the workflow companies use to find suppliers, purchase goods, track procurement metrics, and manage procurement spending.
The importance of source-to-pay automation cannot be understated. Businesses that neglect budgetary control and spend management risk losing their competitive advantage. The first step is having clear insight into the emerging technologies that assist with all facets of procurement, such as supply chain management, sourcing, and contract management.
How is source to pay (S2P) different from procure to pay (P2P)?
The source-to-pay process differs in scope from procure to pay (also called purchase-to-pay). While P2P deals only with the purchase and payment of goods or services, S2P encompasses the entire procurement process, from vendor selection to payment remittance.
A P2P platform helps you input existing vendor information to manage the purchase and payment workflow. S2P further helps you discover and evaluate new potential vendors to work with.
The Complete Guide to Procurement Management KPIs
Dive deep into how your team can benefit from tracking procurement KPIs, the 15 most important KPIs to track, and a detailed worksheet to help you calculate which KPIs suit you!
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Benefits of the S2P process
Establishing a source-to-pay process improves the efficiency and cost-effectiveness of your procurement function. Using automation to enhance the process further extends its value.
Reduced cycle times: A streamlined process makes everything from approvals to payments go faster. This reduces the time to close on new purchases and takes the workload for closing deals off the plate of busy accounts payable professionals.
Better cash efficiency: Source-to-pay automation allows companies to find the best deals for the items they need and process purchases with less human intervention. This results in better direct and indirect savings and higher cash efficiency.
Fewer errors: Manual source-to-pay processes require significant work from your AP teams. When teams shoulder the burden of manual processing, errors naturally follow. Automating your source-to-pay process drastically reduces the exception rate in your purchases and invoice processing.
Steps in the source-to-pay process
A streamlined source-to-pay process follows a predictable pattern. It begins with an intake form from your stakeholder and proceeds through sourcing, selection, order, delivery, and payment. Ideally, the process works as follows:
- Intake: A stakeholder with a specific need fills out an intake form and routes the purchase requisition for approval. The intake form should include all the necessary information to make the purchase. Alternatively, a stakeholder whose organization uses a source-to-pay solution selects what they need from a curated catalog or list of vendors within the platform and goes from there.
- Approval: Procurement researches potential suppliers and creates a shortlist. Once a supplier is selected and price and terms are negotiated, procurement transmits a purchase order for fulfillment. This process is handled within a platform, so the approval process begins with an understanding that the purchase will occur with an approved vendor.
- Fulfillment: The supplier delivers the goods, and procurement (or accounting) reconciles the order against the purchase order and invoice. This is called three-way matching. A platform can handle most of this process automatically while your teams work on higher-value tasks.
- Payment and reconciliation: If everything matches, accounting pays the invoice. In a platform, payment may be automated directly through the system. After payment, Finance tracks the data and conducts spend management to ensure supplier performance and competitive agreements.
Refining your source-to-pay process
With so many complex new processes to consider, it may seem daunting to determine where to start automating your procurement process. Remember, the only thing you can do is start from where you are.
If you’re currently using multiple systems scattered across departmental silos, start there. Work toward tearing down the walls of the silos and coordinating each team’s efforts. Identify each step in your procurement process and estimate the value of closing the gaps you find. Your business will see a notable boost in productivity when placing and receiving orders and processing payments.
Projects of this magnitude require champions. Find a leader to serve as the torch-bearer for the project. Your champion project leader should identify your processes’ main pain points and bottlenecks. Then you can experiment with solutions for those areas.
Identifying the best, cheapest, and simplest solutions from the beginning goes a long way. It helps you avoid stumbling into pitfalls or burdening your IT team with a massively complex solution, only to find that it might not achieve the expected results.
The Complete Guide to Procurement Management KPIs
Dive deep into how your team can benefit from tracking procurement KPIs, the 15 most important KPIs to track, and a detailed worksheet to help you calculate which KPIs suit you!
How machine learning enables the source to pay process
Applications for machine learning in the procurement process handle complex rules. Machine learning requires some recognizable pattern to achieve peak performance at uncovering sourcing opportunities. For example, machine learning tools can handle spend analysis areas that traditionally require human judgment, such as assigning transactions to spend categories.
Automating this process leads to greater accuracy and wiser decision-making, thanks to real-time spend analysis information. Machine learning helps your business with supplier management by enabling you to examine in-depth information about supplier relationships. In turn, you significantly boost your strategic sourcing strategy.
Cognitive agents
Cognitive agents are synonymous with artificial intelligence in many ways. Drawing from complex master data, cognitive agents pull the information necessary to plan your sourcing strategy or determine the best course of action.
The best example of using cognitive agents is the process chatbots use. The chatbot system searches a database of the most common questions to provide predetermined answers.
In the procurement process, cognitive agents may soon be beneficial for more complex tasks, such as comparing cost, quality, and more with a database of similar products. Cognitive agents and machine learning tools handle highly complex areas, such as developing spend category strategies and identifying the most beneficial supplier relationships.
Robotic process automation (RPA)
This is a relatively new term in the procurement playing field. In contrast to machine learning, Robotic process automation (RPA) automates simple, repetitive tasks. Using bots, RPA accesses software the same way a human would. This eliminates the need to delve into software’s underlying code and saves a lot of time and resources. Robotic Process Automation easily handles many source-to-pay processes, such as invoice processing, ERP, and RFx.
Smart workflow
Traditionally, siloed departmental tasks contribute to wasted time and increased effort to be consolidated. Smart workflows link tasks performed by different people using different machines to streamline processes, such as risk management, and organize them around journeys. For example, tasks can be routed between the procurement and finance teams to simplify contract management.
Instead of making incremental gains by applying optimization efforts in each department silo, smart workflow processes produce tangible benefits for the entire organization. They begin closing the black holes caused by lag time and lack of coordination between tasks. As a result, businesses experience better forecasting, spend management, and cost savings.
Natural language processing (NLP)
Natural language processing is technology that allows computers to understand and respond to human speech in text or voice format. (If you’ve ever asked Siri or Google “Where is the nearest gas station?”, you’ve used NLP.)
Natural language processing, especially when combined with RPA, streamlines the procurement process by organizing unstructured data found in free-form text. It searches through suppliers’ information for specific terms and matches the order requirements, such as pricing, to groups of suppliers.
After automatically sending out requests for bids, a member of your team receives the bids and makes the final determination. NLP is most useful as a connection between human input and structured data that machines use.
Automation is an untapped source of value
The value generated by automating your source-to-pay process is shown in:
- Reducing the amount of work
- Reducing cycle times
- Improving compliance
- Creating significant cost savings
- Having better supplier management
By finding the right procurement software that mimics its human equivalent, your company streamlines business processes and contract management with ease.
Work smarter, not harder, to maintain your competitive advantage. Letting the machines do the repetitive tasks is definitely smarter. It frees up your team to focus on strategy. Plus, there’s an added benefit to procurement automation that is sometimes overlooked: employee happiness.
How Order.co supported ZeroCater’s source-to-pay automation
An employee calling a task “the bane of their existence” is your first clue that there’s an issue. If your accounts payable team is frequently asking what website employees are purchasing from, it’s time to investigate solutions to compliance issues seriously.
This question and sentiment alerted ZeroCater that they had serious issues within their procurement process. Lack of clarity in their approvals process led to rogue spend and inaccurate spend analysis—ultimately negatively impacting their cash flow.
After implementing Order.co, ZeroCater was able to:
- Significantly reduce their cycle times
- Streamline their payment process
- Get the entire team on board with a more efficient process
As a result, ZeroCater cut their invoices from around 200 per month down to three or four—a whopping 50x reduction. This freed their procurement and finance teams to identify new sources for creating additional value.
Order.co focuses on providing the best user experience with a single platform that streamlines every level of your procurement process. We provide an end-to-end purchasing and payment platform with intuitive functionality and solid integrations to help your procurement team’s onboarding go smoothly.
Request a demo of Order.co to see how procurement software centralizes and streamlines your source-to-pay process.
Get started
Schedule a demo to see how Order.co can simplify buying for your business.
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