Purchase-to-Pay vs. Source-to-Pay: Understanding the Differences and Choosing the Right Approach
Published on:4 December 2024
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When it comes to managing procurement processes, two terms often come up:
Purchase-to-Pay (P2P) and Source-to-Pay (S2P).
Although they are sometimes used interchangeably, these processes have distinct differences that significantly impact how businesses handle procurement and payment workflows.
In this article, we will break down the key differences between Purchase-to-Pay and Source-to-Pay and help you decide which approach is best suited to your business needs.
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Definitions: Purchase-to-Pay vs. Source-to-Pay
What is Purchase-to-Pay?
Purchase-to-Pay, also known as Procure-to-Pay, refers to the process that starts with purchasing goods or services and ends with payment to the supplier.
It focuses on operational steps related to purchasing, such as issuing purchase orders (POs), receiving goods or services, approving invoices, and executing payments.
Key Components of Purchase-to-Pay:
- Purchase Order Creation: Generating an official order for goods or services.
- Goods Receipt: Ensuring the delivered items match the purchase order.
- Invoice Automation and Payment: Automating supplier invoices and ensuring payments are processed on time.
Purchase-to-Pay is a straightforward approach, ideal for managing the operational aspects of purchasing and payments, providing companies with increased control over expenses, improved invoice accuracy, and reduced paperwork.
Further reading: 10 Common Purchase-to-Pay Challenges (and How to Overcome Them)
What is Source-to-Pay?
Source-to-Pay (S2P) encompasses a broader scope that starts even earlier in the procurement lifecycle. It includes not just the purchasing and payment activities but also the strategic sourcing stages, such as identifying suppliers, negotiating contracts, and managing supplier compliance.
The Source-to-Pay process offers a more comprehensive approach to procurement, beginning with strategic sourcing and extending all the way through to issuing payments.
Key Components of Source-to-Pay:
- Supplier Sourcing and Evaluation: Finding suitable suppliers and evaluating them based on reliability, quality, and pricing.
- Contract Management: Negotiating contracts and ensuring compliance with agreed terms.
- Purchase Order and Payment Execution: Similar to Purchase-to-Pay, this includes generating POs, receiving goods, automating invoice handling and paying suppliers.
The Source-to-Pay process is more strategic in nature, involving both the purchasing aspects and the management of supplier relationships, ensuring procurement aligns with overall company objectives.
This approach supports organizations looking for a full-spectrum procurement solution that goes beyond simple transactional efficiency.
To understand how these procurement processes fit into a business context, it’s important to distinguish between the two types of purchases they manage – direct and indirect purchases.
This distinction is key to tailoring procurement strategies that align with your operational goals and cost-saving initiatives.
Basics of Indirect Purchases and Direct Purchases
Understanding the difference between indirect and direct purchases is important for choosing the right procurement approach for your business.
- Direct Purchases refer to items directly tied to the production of goods or services. This includes raw materials, components, and other essentials directly contributing to the end product. Managing direct purchases efficiently is key to maintaining production quality and consistency.
- Indirect Purchases, on the other hand, encompass goods and services that are not directly related to production but are necessary for daily operations. This includes office supplies, maintenance services, and IT equipment. Indirect purchases often present a higher risk of “rogue spending” where purchases deviate from company policies.
Process Differences Between Purchase-to-Pay and Source-to-Pay
1. Procurement Activities
While Purchase-to-Pay emphasizes purchasing and payment transactions, Source-to-Pay starts at the very beginning of the procurement cycle.
This includes sourcing suppliers, evaluating vendor bids, negotiating contracts, and managing compliance. Source-to-Pay extends beyond just making purchases – it ensures that the supplier relationship is strategic, aligning with the company’s needs for quality, cost-effectiveness, and compliance.
For instance, in the healthcare industry, Purchase-to-Pay may focus on acquiring necessary medical supplies and paying for them promptly.
However, Source-to-Pay involves evaluating potential suppliers, negotiating optimal contracts, and managing long-term relationships to maintain consistency in supply and quality.
Further reading: How Purchase-to-Pay Automation Improves Procurement in the Healthcare Industry
2. Automation Differences
Automation tools are used differently in Purchase-to-Pay and Source-to-Pay processes.
P2P automation typically focuses on streamlining tasks such as purchasing through item catalogs and web shops, invoice automation, and payment execution. The goal is to eliminate manual steps, reduce errors, and increase efficiency.
Source-to-Pay automation, on the other hand, includes advanced features like bidding tools, supplier evaluation, contract compliance, sourcing analytics, supplier performance evaluations and life-cycle management.
This level of automation improves operational efficiency and provides strategic insights that help companies make data-driven procurement decisions.
S2P tools enable deeper analytics and enhanced decision-making capabilities, transforming procurement from an administrative task into a strategic advantage.
Advantages of Each Approach
Purchase-to-Pay for Simplicity
If your primary goal is to streamline purchasing and payment operations, Purchase-to-Pay is the ideal approach.
It’s best suited for companies looking to that:
- Cost Savings: Automate indirect purchases to achieve significant cost reductions, often ranging from millions to tens of millions annually.
- Control Over Spending: Gain control of indirect spending by ensuring employees buy from approved vendors at agreed-upon prices, minimizing rogue spending.
- Approval Before Purchase: Establish an approval workflow before purchases are made, preventing unapproved buying and reducing unnecessary costs from post-purchase invoices without prior authorization.
Purchase-to-Pay is perfect for businesses wanting to reduce manual data entry, avoid payment delays, and improve overall accounts payable efficiency.
Source-to-Pay for Strategic Sourcing
Source-to-Pay offers a broader scope and is ideal for businesses needing strategic procurement management. This approach is beneficial if your company:
- Wants to build strong supplier relationships and negotiate favorable contracts.
- Needs better control over compliance, contract management, and supplier evaluation.
- Operates in industries where procurement plays a key strategic role, such as manufacturing or healthcare.
The additional procurement steps make Source-to-Pay particularly useful for large organizations managing complex supplier networks or those needing to align procurement activities with broader business strategies.
For example, by transforming your finance department into a data-driven operation, it’s possible to achieve 20%-30% cost reductions throughout the source-to-pay process, making it an optimal choice for companies seeking strategic control and efficiency gains.
How to Choose the Right Approach for Your Business
Choosing the right approach between Purchase-to-Pay and Source-to-Pay depends on several factors, such as company size, industry, the complexity of supplier networks, and procurement needs.
1. Company Size and Industry
If you’re a small to mid-sized company with a limited supplier network, Purchase-to-Pay is likely sufficient to efficiently manage procurement needs.
For larger businesses, where procurement is vital for maintaining quality, compliance, and cost controls, a Source-to-Pay system may be more appropriate.
2. Complexity of Supplier Networks
Companies with complex supply chains involving multiple vendors and intricate contract terms benefit significantly from Source-to-Pay.
S2P helps maintain oversight, ensure compliance, and manage supplier relationships. Timely payments are crucial for maintaining healthy supplier relationships—66% of respondents cite late payments as their primary accounts receivable concern.
10. Data Silos Across Departments
Data silos occur when information is stored in different systems across departments, leading to fragmented insights and miscommunication.
How to Overcome It
This one’s easy.
Integrate P2P systems with your existing ERP or accounting systems to ensure a seamless flow of data. Real-time integration helps prevent duplicate entries, ensures data accuracy, and supports cross-departmental collaboration.
Implementing a Source-to-Pay system helps mitigate these risks by improving visibility, streamlining workflows, and ensuring payments are made on time.
3. Strategic Procurement Needs
If procurement is a critical function influencing product quality, cost savings, and overall business strategy, Source-to-Pay is the right choice for your business.
Purchase-to-Pay, by contrast, is suitable for companies looking for a streamlined purchasing process without the added complexity of sourcing and strategic supplier management.
Conclusion
Understanding the differences between Purchase-to-Pay and Source-to-Pay is key to optimizing your procurement strategy.
Purchase-to-Pay is perfect for companies seeking a simpler, transactional solution focused on purchasing and payment, while Source-to-Pay is geared toward those needing a broader strategic approach that includes sourcing, compliance, and supplier management.
By evaluating your company’s size, industry, and procurement complexity, you can choose the approach that best aligns with your business goals.
Regardless of the path you take, implementing payment automation—whether P2P or S2P – is a surefire way to improve efficiency, reduce manual work, and drive better results.
Automate Your P2P Process with Rillion
Rillion is an accounts payable (AP) automation platform and we help mid-market businesses improve invoice management, automate approval workflows, and optimize payment processes.
Whether you need a streamlined purchasing system or a complete procurement solution, we’ve got you covered.
Book a demo to learn more about the Rillion platform and how it can benefit your organization. One of our experts will guide you through Rillion Prime and discuss solutions tailored to your needs.
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