Unlocking Performance in Procure-to-Pay (P2P): The KPIs We Need to Know
- Abuzar Talibov
- Apr 6, 2023
- 3 min read
Updated: Oct 29, 2023
The Procure-to-Pay (P2P) or Purchase-to-Pay process can be complicated and might need regular improvement. This is because the technologies used may become outdated, policies and requirements may change, and external factors (micro/macroeconomics) can affect the supply chain, affecting both upstream and downstream processes.
Activities of the P2P Process
As mentioned above the P2P process is quite complex, in this short post we are going into too much detail and skip many aspects. Additionally, to make our assumptions simple and targeted as a type of procurement we consider external procurement.
The definition of the Procure-to-Pay process might differ from company to company, and even be combined with the initial stage of the process and be taken as Source-to-Pay (S2P).
If we name the activities of the sole P2P process, taking into account market standards and systems (SAP S4/HANA) then it consists of more or less of the below-given points.
Identification of needs for goods or services: The process begins by recognizing the organization's requirement for a product or service.
Creation of a purchase requisition: When the need for goods or services is identified, the department or individual responsible creates a purchase requisition. This document specifies the details of the requested product or service, including the quantity, price, and delivery date. The step can also be automatically determined by the relevant system run (e.g. SAP MRP run).
Approval of the purchase requisition: The requisitions are then checked and approved by the appropriate individuals or departments in the organization before creating any purchase order.
Creation and processing of a purchase order: After the purchase requisition has been approved, a purchase order is created and sent to the supplier, as mentioned above our assumption is for the external procurement. The purchase order contains the details of the needed product or service, including price, order quantity, delivery date, payment terms and the delivery destination.
Goods Receipts: After receiving the purchase order, the supplier will deliver the goods or services to the organization. The organization will then inspect the delivered goods or services to ensure that they meet the specified requirements (e.g. quantity and quality check).
Invoice verification: The organization will verify the invoice to ensure that it matches the purchase order and the goods or services received. Once the invoice is confirmed, it undergoes approval for payment by the relevant department or individual within the organization.
Payment: Once the organization agrees on the payment terms, they will proceed to make the payment to the supplier.
KPIs of the P2P Process
In order to make feasible and quick decisions, the complete supply chain should be closely tracked. Today, we have a variety of capabilities to capture data with the help of new technologies like RFID, advanced ERP systems, Barcoding systems, Blockchain technology (related post: Can Blockchain Technology Help Supply Chain to Become Transparent and Traceable?), GPS technology etc.
Once the proper data is captured, or generated from quantitative or qualitative sources, there are many KPIs that can be created based on the needs of management. The below-given KPIs basically used widely:
Purchase Order Cycle Time: Most probably one of the important KPIs in the P2P process is Cycle Time. This KPI seems to be interpreted differently based on side research, meaning that companies consider sometimes from the purchase order requisition step to the order confirmation step, sometimes even further to the goods receipt step.
Purchase Order Accuracy: Purchase order errors may lead to many issues during the information and merchandise flow, causing significantly high unexpected/unplanned extra costs for the company.
Average Cost of Processing a Purchase Order (or Productivity per FTE): This metric might consider every step in terms of the working hours of employees.
Invoice accuracy: With the help of these metrics we can analyse our relationship with the suppliers and how are we handling arising disputes.
Invoice Processing Time: It basically defines the speed of reviewing the invoices sent from the suppliers.
Supplier Performance: The performance of suppliers can be tracked based on the reaction time, delivery time, quality of goods and services, compliance with the company's requirements etc.
First-Time Match Rate (FTMR): Basically measures if the accounting/customs department can match all the required documents without delays.
Spend Under Management: This is mainly important to check to understand if the executives are concerned about the decreased revenue and increased spending ignoring their long-term liabilities.
Realized savings: The metric identifies if the P2P process is properly supported to purchase the products/material from suppliers with the agreed discount terms.
The KPIs in the P2P process are not limited to the above-given numbers, but depending on the industry, transparency of the data or also the activities defined under the P2P process can be expanded. However, the efficiency in terms of targeted usage of the KPIs is also crucial.
Based on results arising from the KPIs, management might decide to reconsider their available technologies (mentioned above - ERP, RFID etc.) to capture the data effectively, their analytical systems, their relationship/policies towards suppliers, the productivity of employees, automatisation of processes and so on.
Sources
Planergy: Procure-to-Pay KPIs You Should Be Tracking
SAP: Procure-to-pay process overview
Simfoni: Procure to Pay
