It may sound illogical, but outsourcing the procurement can be very profitable for a company. In matter of fact, a lot of multinational companies already outsource parts of their procurement and taking advantage of the benefits of outsourcing. Is your company already familiar with outsourcing the procurement and terms like procure to pay and source to pay? Which form suits your company? In this article we’ll explain the difference between procure to pay and source to pay.
The difference between direct procurement and indirect procurement
The procurement can be divided in two parts:
- Direct procurement
- Indirect procurement
Direct procurement is the procurement of goods and services which are indispensable for the company core business. Without these supplies the company can’t produce the products. For a company like Phillips, who produce lightbulbs, tv’s and medical equipment, micro-chips are necessary for the production of the medical equipment. Without these micro-chips these products can’t be sold. These micro-chips therefore are important for the core activities of the company. That’s why the procurement department of Phillips orders those micro-chips themselves at the suppliers they already have the best prices and conditions with.
Indirect procurement is the procurement of goods which are not directly important for the core business of a company and therefore indirect procurement are most of the time not that high on the company’s agenda. Office supplies like tea and coffe cups are good examples of indirect procurements. Every company needs them for their employees, but it won’t directly harm the production. Therefore, the importance of indirect procurement is often neglected. Most of the time the suppliers of indirect goods are so-called c-suppliers. C-suppliers are suppliers where you only order once and probably not order frequently. For the procurement and financial department these one-time suppliers are very time-consuming and therefor expensive. For each single supplier, you’ll receive a different invoice with different payment terms and conditions. Controlling the invoices and paying the suppliers according their terms. For every new supplier they have to create a creditor. Most of these creditors in the supplier base are the suppliers of indirect goods.
Outsourcing the indirect procurement
For a lot companies indirect procurement can be a hidden treasure. Because of the lack of interest of the company. There is a lot of savings possible with indirect procurement. By outsourcing the indirect procurement, a company can save a lot on the internal costs. Instead of invoices from every c-supplier, the company will receive one total invoice from one point of contact. This will reduce your supplier base up to 80%. And you don’t have to monitor, control and pay all those different invoices anymore, but just have to control one total invoice.
Procure to pay and Source to pay
Procure-to-Pay (P2P) and Source-to-Pay (S2P) are parts of the procurement process which often are outsourced. The procurement process has different phases. First the company specifies their needs, secondly the company ask for multiple quotes. This called tendering. After receiving the quotes, the company selects the best suppliers and place and order at the best supplier with the best conditions. After the order is placed, the order will be shipped and delivered. Monitoring this process is called tracing. Once the order is delivered, the invoice has to be paid for completing the procurement process.
Procure to pay
With outsourcing procure to pay a company itself is still responsible for the tendering and selecting process. So, the company is assured that the order will be placed at suppliers the company wants. The ordering, trace, deliver and payment is outsourced to specialized companies.
Source to pay
With outsourcing source to pay the company goes a step further and outsource the selecting and tendering too. By outsourcing these phases in the procurement process, the tendering and selecting process will be performed by a specialized company. This can reduce the supplier base up to 80% and can save the company up to 21% on internal costs.
What suits your company? Procure to pay or source to pay?