Procure to Pay (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 easy 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. For ease of understanding I have kept the language of the whole article very simple and specific to the topic.
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, approximated 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 authorized 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-out 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 inquires.
STEP 5: IDENTIFICATION OF SUPPLIERS
If no already 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 INQUIRES
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. 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 commercial, 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. This PO is prepared in reference of the initial document prepared in the process i.e. PR.
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
INDIRECT TAX 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