P2P Process

INTRODUCTION (PROCURE TO PAY PROCESS)

All enterprises and corporate aspire to improve their bottom line. Basically,
there are two ways to do it, either to increase the top line or reducing the
cost. Increasing the top line or the revenues in today’s competitive markets
is not a very good option. That’s why, now a day’s the sourcing and
procurement functions are being examined, by the companies, in order to
find ways to cut costs and control spending. Thus, for all such enterprises
the procurement process is very important, so here in this article we will try
to focus on the P2P process of an enterprise.

STEP 1: IDENTIFICATION OF REQUIREMENT

This is the first stage, at which the user department (say, Maintenance,
Production, Sales and distribution, administration, accounts etc) identifies
their requirements, that is what are the items they require and based upon
which they create a document called as the Purchase requisition /Purchase
request (PR). This document normally contains description of material,
quantity, approx cost, material requirement date, preferred or standard
vendor etc.

STEP 2: AUTHORIZATION OF PR
Then, the PR is to be first approved by the head or the senior authority of
the user department. At this stage, the authority may return the PR to the
originator for modification or can approve it.

STEP 3: FINAL APPROVAL OF PR/ROLE OF INVENTORY

CONTROLLER
Once the PR has been authorised by user department then it is available to
the inventory controller, or the materials management department, who are
responsible for handling all the materials in the organization. Inventory
controller shall review the PR and shall check the open Purchase Orders
(PO), any other scheduled or planned delivery for the material. If there is
any planned delivery or any existing open PO then Inventory controller can
return the PR or request the user department to revise the quantity of the
material (if required). After the approval of Inventory controller, the
approved PR is available to the Procurement department.

STEP 4: PROCUREMENT
After final authorization of PR, that it is found out that there is no planned
delivery of such a material, it is available to procurement department. The
department shall check for any existing contract for the material. If any
contract exists then a call-off shall be generated and shall be sent to the
existing supplier. In case no contract exists then the procurement
department shall initiate supplier search and floating enquiries.

STEP 5: IDENTIFICATION OF SUPPLIERS

If no pre-contracted supplier exists, then the procurement department shall
interact with the user for the possible suppliers or search on the internet or
use referrals or search data base, etc. to identify the suppliers for the said
material.

STEP 6: FLOATING OF ENQUIRIES

Once the suppliers are identified, procurement department shall send the
Request For Quotations/Proposal (RFQ/RFP) to the supplier, based upon the
PR. RFQ normally contains description, technical specifications of the
material, quantity of the material, term and conditions, delivery date of the
material, date of submission of the RFQ, quality standards, validity of the
suppliers offer, etc.

STEP 7: RECEIPT OF TECHNICAL QUOTATIONS

After sending the RFQ/RFP to vendors, the procurement department shall
receive the quotations from the suppliers. These technical quotations
contain the information pertaining to the technical specifications of the
material, if there are any. Normally, vendors are instructed to send their
quotation in a sealed envelope, mentioning only RFQ reference number on
it. Quotations are normally opened and signed by two or more persons of the
procurement department.

STEP 8: TECHNICAL EVALUATION OF QUOTATIONS

Quotations are sent to technical department for technical evaluations of the
quotations. Here, technical department shall shortlist the quotations based
on the technical specifications.

STEP 9: RECEIPT OF COMMERCIAL QUOTATIONS

Once the technical evaluation is over, the procurement department shall
send the advice to shortlisted suppliers for commercial quotations. These
commercial quotation will contain details about the payment terms,
discounts etc. After receiving the commercial quotations, these shall be
opened by two people. Quotation comparison statement is prepared by the
procurement department to compare all the quotations of the supplies and
suppliers are short listed for negotiations.

STEP 10: NEGOTIATION

Based upon the commercial quotation, the procurement department will
short list the suppliers and will invite then for negotiations. The negotiation
can happen on various grounds like, reduction in the prices of the materials,
quantity and price breaks, delivery terms and conditions, freight charges,
payment terms etc.

STEP 11: SELECTION OF THE VENDOR

After negotiations with all the selected vendors, the revised quotations are
prepared and vendor is finalized for award of contract based on the
weightage to the commecial, technical parameters, previous performance of
the vendor, delivery dates of the material, etc.

STEP 12: AWARD OF CONTRACT

After the vendor is finalized, LOI (Letter of Intent) can be sent to him and he
may be asked to deposit security or bank guaranty before signing the
agreement. Agreement can be of Fixed or Blanket (the same can be
mentioned in the RFQ).

STEP 13: PURCHASE ORDER (PO)

The procurement department then shall raise the purchase order against the
contracts and then is send to the supplier.

STEP 14: PO ACKNOWLEDGEMENT

After receiving the PO the supplier sends the acknowledgement to
procurement department and they record the acknowledgement. If any ERP
is being used for procurement functions then supplier can remotely
download purchase orders and can acknowledge the PO.

STEP 15: ADVANCE SHIPMENT NOTE (ASN)

The supplier sends the Advance Shipment to procurement department as
soon as he ships the material to the buying organization. This note normally
contains shipping date, transporter’s name, airway bill number, number of
packages, weight of the packages, receiving location address, description of
goods, etc.

STEP 16: GOODS RECEIPT

When the goods are received at the warehouse of the organization, the
receiving staffs checks the delivery note, PO number etc and acknowledges
the receipt of material. After the material is received the same is checked
for quantity in case of discrepancy the same is reported to the vendor. After
the quantity verification the material is kept at inspection locations and
material inspector is called for inspection of material. If material is rejected
by the inspector the same is sent back to the vendor or the vendor is asked
for the rectification at the site. The sound material is moved to respective
warehouse locations.
(i)GOODS RECEIPT – ACCOUNTING ENTRY
RECEIVING INVENTORY A/C Dr.
To GR-IR A/C
(Note: With this entry, the goods are received in the organization, hence the
inventory has to debited, but since the invoice is not received yet, thus the
vendor cannot be credited, and thus a clearing account is used as GR-IR A/C
i.e. Goods Receipt-Invoice Receipt A/C)
(ii) GOODS ISSUED TO THE DEPARTMENT - ACCOUNTING
ENTRY
(Note: As the inventory department issues the goods to the user
department, the accounting entry should be passed on, on the basis of the
nature of the material and the use of it.)
(a)If goods are used in consumption:
EXPENSE A/C Dr.
To RECEIVING INVENTORY A/C
(b)or,if goods are used as assets:
ASSET A/C Dr.
To RECEIVING INVENTORY A/C

STEP 17: INVOICE RECORDING

Vendor sends the invoice to accounts department of buying organization for
claiming payment. This invoice is entered in to the system.
(i) INVOICE RECORDING - ACCOUNTING ENTRY
GR-IR A/C Dr
To VENDOR a/c
(Note: Since now the invoice is received, thus the vendor is credited, and
the clearing account ‘GR-IR A/C i.e. Goods Receipt-Invoice Receipt A/C’ gets
cleared)

STEP 18: PAYMENT TO SUPPLIER

And in the last the supplier is paid as the terms of the payments and the
invoice.
(i) PAYMENT TO SUPPLIER - ACCOUNTING ENTRY
VENDOR A/C Dr
To BANK A/C

CONCLUSION
The very processes and documents in procure to pay cycle may differ from
company to company, but a generic process more or less remains the same.
During the process we have seen various documents being created and the
accounting entries that happen (if any). These documents and the
accounting entries and name of the accounts used may differ from various
ERP or accounting systems, but the basic things remain the same. Here, we
have seen how the accounting entry happens in SAP-FI and the integration
points between FI & MM. To conclude, refer to the image below to
understand the flow of the things in a P2P process.