Strategic Sourcing and Source to Pay
Implementing a source-to-pay process has a huge potential upside for your organization.The full end-to-end procurement process that organizations go through in order to source, order, and pay for goods and services is referred to as Strategic Sourcing, or Source to Pay (S2P). It is an integrated workflow that begins with the identification of suppliers and concludes with the payment of products and services, with many actions connecting these two endpoints.
McKinsey & Company provides an overall definition of S2P:
“Source to Pay is the end-to-end value stream that encompasses all the activities required for an organization to obtain and pay for goods and services from other entities. These activities start with the development of specific sourcing strategies to best obtain the goods and services an organization needs. They continue with the selection of specific suppliers, contracting with those suppliers, the placement of orders, the verification that appropriate goods and services have been delivered, and finally the authorization and release of payment. In addition to these core tasks, the overall value stream also includes the activities necessary to support the end-to-end process, such as vendor and master-data management.”
The illustration to the left gives an overview of the various steps that an S2P approach entails for a manufacturing company, from the initial supplier search all the way through to the supplier payment. The process begins with upstream source-to-contract activities—supplier search, design and engineering, and contract management.
Design and engineering play a big part in this early phase to ensure that you're manufacturing your products at the right level of cost and quality. Beyond source-to-contract, the downstream procure-to-pay (P2P) process includes supply planning, traditional procurement activities, compliance, and payment.
The S2P model is designed for organizations with complex procurement needs, who require a dedicated sourcing function, and who need to continually identify new vendors to meet demand. When executed effectively, an S2P model will save you money, reduce your risk, and create strategic advantages.
Source to Pay vs. Procure to Pay
What is the difference between source to pay and procure to pay? P2P and S2P share many similarities, but there is one main difference: S2P starts several steps earlier than P2P, with the initial supplier search and other strategic sourcing activities. The procure-to-pay process usually begins with ordering goods and services and ends when the accounts payable team pays the vendor. Source to pay goes one step further. With S2P, a more strategic approach is taken, ensuring that the best vendors are selected and promising a more closely integrated solution. This helps to optimize internal controls, enhance supply chain efficiency, and simplify vendor relationship management. More and more organizations are now turning to S2P, instead of P2P, to diversify their sourcing, enhance efficiency, and reduce costs.
Benefits of Source to Pay
There are numerous benefits to using an S2P process. Most importantly, when a company implements an S2P strategy, it gains true control of the procurement process and is able to meet demands more reliably. It gives organizations more visibility into the efficiency and effectiveness of procurement operations and allows you to make better decisions and save more money. Beyond cost savings, S2P also streamlines procurement, uses real-time data management, enables accurate analysis of spending, simplifies compliance efforts, improves forecasting accuracy, reduces risk, and expedites production. Over time, the entire supply chain management process experiences continuous improvement and optimization.
Automating Source to Pay
For the past 20+ years, most organizations still had S2P cycles that were primarily made up of manual processes and procedures. There has always been a high interest level in automation, but many companies were not willing or able to make the investment necessary to convert their S2P processes to a digital platform.
According to McKinsey, automating S2P processes can reduce spend by up to 3.5%. In addition to cost savings, there are a huge number of additional benefits to automating your S2P processes, including providing visibility into all your spending and suppliers, mitigating supply chain risk, diversifying suppliers, and improving productivity.
There are many approaches when it comes to automation. For years, organizations have favored the single-suite approach, relying on one technology provider to automate every step in the S2P process. Single-suite solutions centralize and automate processes covering the entire lifecycle in a single platform, including ongoing activities such as supplier management, risk management, and spend analysis. There are benefits to having a standardized user interface across the entire process, but suites can’t provide best-of-breed functionality across the entire spectrum, and usually involve a lengthy, complex and costly implementation process.
Many companies are now considering an ecosystem approach, made up of multiple best-of-breed solutions. This approach has multiple benefits: Organizations can utilize best-in-class solutions most suited to various portions of their S2P cycle, and they’re no longer reliant on a single technology provider.
Optimizing Source to Pay with Technology
Artificial Intelligence (AI) and Machine Learning
A recent Supply & Demand Chain Executive article shares perspective on how supply chain organizations are reacting to the effects of COVID-19:
“AI is often seen only as a tool for marketing or IT; however, according to the Gartner 2019 Supply Chain Technology User Wants and Needs Survey, 'through 2024, 50% of supply chain organizations will invest in applications that support artificial intelligence and advanced analytics capabilities. The COVID-19 pandemic amplified the need for supply chain organizations to seek tools that help them make better and more informed decisions faster.'”
AI and machine learning bring value through automated self-learning to improve operational efficiency, and high-speed processing of large quantities of data to provide insights.
There are several areas of S2P that can benefit from these technologies:
- Accounts Payable/Invoicing: AI can impact accounts payable by digitizing information processes and getting the resulting data into a unified electronic format, as well as eliminating manual processes. This would eliminate the need for keying in invoices, applying cost distribution to them, routing them to the correct approvers, and posting them for payment, as well as reconciling invoices and orders and updating inventory value.
- Post-Payment Recovery Audit Programs: With the right tools, most spending errors can be identified before payment and, in many cases, can be prevented altogether. AI and machine learning are transforming recovery audits from reactive, post-event audits to a preventive approach.
- Supplier Management: Machine learning can make this process more intuitive and expand existing supplier bases through analysis and recommendations. In addition, it can help classify spend data and capture new sources of relevant data during the sourcing phase.
Robotic Process Automation (RPA)
Robotic Process Automation (RPA) is designed to automate manual tasks that are repetitive in nature. RPA automation is most useful for transactional, highly manual activities in the S2P process (such as invoicing, contracting, and payments) that are performed in various systems and are frequently audited for compliance.
Internet of Things (IoT)
The data collected and shared by IoT devices is constantly monitored and analyzed to enable more informed decision-making. IoT applies in areas within the S2P process where visibility and predictability are essential, such as spend analysis and strategic sourcing. For example, IoT can be used to better manage and understand spending, as well as to forecast, budget, and negotiate more accurately.
Choosing a Partner to Optimize Your S2P Strategy
It’s clear that the benefits of implementing an S2P process for your organization have the potential for huge impact and significant savings. The challenge of S2P is that it can be very complex to implement without an experienced supply chain partner and without the appropriate software.
NMG has experience successfully helping manufacturing organizations manage their outsourcing, supply chain, and sourcing needs. We can help you implement an S2P process that will meet your procurement and sourcing goals.
About NMG
NMG has more than 85 years of experience partnering with organizations to bring their industrial, IoT, lighting, medical, telecommunications, consumer, and aerospace products to life. We solve your most complex challenges in engineering design, manufacturing, and supply chain management.
Follow NMG
Could your company use results like this?
We want to learn about your organization and understand your unique challenges.
Get in Touch
We can’t wait to create winning solutions with you.
For general inquiries, please fill out this form and our team will be in touch shortly.