Basic Procure To Pay (P2P) Cycle

Basic Procure To Pay (P2P) Cycle:

Procure To Pay (Purchase To Pay or P2P) is the process of procuring & managing the raw materials requirements for manufacturing a finished product or providing a service.

This is the basic P2P cycle process and may vary according to the business requirements.

Procure To Pay Cycle:

Steps involved in Procure To Pay Cycle are:

1. Requirement Identification: 

This is the Initial stage of P2P Cycle. This stage the member of user department (Maintenance, Production, Sales and distribution, administration etc..) identifies the requirement and raises the Purchase requisition (Req). This document normally consist of Item description, quantity requirement, cost involved (approx.) and requirement date, etc…

2. Purchase Requisition Authorization: 

Based on the Requisition value, the requisition is routed for approval and incase the Requisition value is higher than the fixed approval limit then the requisition is sent to the next approval level for approval. This stage, the next level approver may return the Requisition to the creator for corrections or approve it.

3. Purchase Requisition Approval: 

Once the Req is authorised by the user requirement department then it is forwarded to the inventory controller. Inventory controller shall review the Req and shall check the availability of 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 will return the Req to the user department to revise the quantity of the material. After the approval of Inventory controller, the approved req is forwarded to the Procurement department.

4. Suppliers Identification: 

Buyer will interact with the user department for the suppliers in the data base, to identify the suppliers for the material requirement.

5. Request For Quotation (RFQ): 

After the identification of the suppliers, Buyer will float the Request For Quotation (RFQ) to the suppliers. RFQ normally consist of Item Description, Technical Specifications of the material, quantity requirement, term and conditions, delivery date, date of submission of the RFQ, Quality standards, Validity of the offer, etc.

6. Receipt of Quotation:

After sending the RFQ to the suppliers, the buyer will receive the quotations from the suppliers. Normally, suppliers are instructed to send their quotation in a sealed envelope, mentioning only RFQ reference no on it.

Quotations are normally opened by the procurement committee for evaluation.

Technical Evaluation of Quotations: 

Quotations will be sent to the technical department for technical evaluations. Here, technical department will shortlist the quotations based on the technical specifications.
Receipt of Commercial Quotations: 

After completion of the technical evaluation, the buyer will follow with the shortlisted suppliers for commercial quotations. Quotation comparison statement is prepared by the buyer to compare all the commercial quotes of the supplies and suppliers are short listed for negotiations.

7. Quote Negotiation: 

Short listed suppliers are invited for negotiations. In negotiation buyer will negotiate with the supplier for:
1. Price Reduction of the materials
2. Price Breakup on year basis
3. Quantity and Price breaks
4. Delivery Terms and conditions
5. Quality Improvement
6. Freight & additional charges
7. Payment terms, Etc.

8. Supplier Selection: 

Based on the negotiations with the shortlisted suppliers, the revised quotations are prepared and supplier is finalized for award of contract based on the weightage to the commercial, technical parameters, previous performance of the supplier, delivery dates of the material, etc.

Award of Contract: 

After the supplier is finalized LOI 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)

Purchase Order:

The buyer shall raise the call offs against contracts (Fixed or Blanket). If the value of the PO is more than that of his approval limit he shall forward it to his supervisor for approval else he shall approve and send the purchase order to the supplier.

9. Purchase Order acknowledgement:

After receiving the PO the supplier send the acknowledgement to buyer and buyer records the acknowledgement. If any ERP is being used for procurement functions then supplier can remotely download purchase orders and can acknowledge the PO

10. Advance Shipment Note: 

Based on the PO, Supplier responds Advance Shipment to buyer as soon as the material is shipped to the buying organization. Advanced Shipment Note normally consist of Ship Date, Transporter’s name , Airway Bill No, No of packages, weight of the packages, receiving location address, PO No, description of goods, etc..

11. Goods Receipt: 

Once the goods are received at the receiving organization, the receiving staff checks the delivery note, PO no 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 supplier.

12. Invoice Entry: 

Supplier sends the invoice to accounts department of buying organization for claiming payment against the materials despatched.

13. Invoice Matching:

After the Invoice entry, the invoice is validated / matched with the materials received at the warehouse.

14. Pay the Supplier: 

After the invoice matching the payment is credited in supplier account.