Whether you’re new to the world of procurement and supply chain management, or a seasoned veteran; whether you work in a major manufacturing industry, a university, or a medium-sized clinical research organization, you may find procurement jargon rather confusing. The bulk of this confusion is caused by only have a partial view of the total process and where we fit into it. Or alternatively, as senior managers we only see the end results of procurement as figures on a spreadsheet or a financial statement, with little awareness of how they are arrived at and how they can be improved. 

To understand what’s really going on we need, first, to step back and get a holistic view of the end-to-end process. Second, we need to break it down into its constituent parts. This is where three bits of jargon can help rather than hinder: Source to Pay (S2P), Source to Contract (S2C) and Procure to Pay (P2P). 

 Starting the transformation journey ?

Many organizations are aware they must transform their procurement function, but for a variety of reasons (inertia, fear, focus on business as usual, internal politics etc.) there’s never an optimal time to start the journey.  

When deciding to move forward, companies then often fall into one of two traps: 

1. The Waterfall Trap: Rushing to deploy exorbitantly expensive solutions that claim to fix everything in one go. Sometimes referred to as the ‘big bang’ or ‘waterfall’ approach, in which each project phase must be completed before the next. These projects aim for perfection, and as we all know, perfection is the enemy of progress, so they usually fall short of expectations. 

1. The a la Carte Trap: Acquiring ‘quick fixes’ or a whole bunch of niche apps that only address specific areas (typically bottlenecks, perceived or actual). These typically do not work together and therefore only minimally improve processes.  

The best advice to avoid these traps, both strategically and tactically, is to get a 30,000-foot view of procurement without getting bogged down in the minutiae of where you are now. This is where Source-to-Pay (S2P) comes in. Next, you need to break this down into its constituent parts. Source-to-Contract (S2C) is the big chunk that is the upstream half of procurement. The downstream chunk is Procure-to-Pay (P2P). 

The art of successful digital transformation then consists in addressing parts of this continuum a bit at a time but without ever losing sight of the whole. Counter-intuitively, this has proved time and time again to be the most rapid path to success. 

So let’s look at each in turn.  

What is Source-to-Pay? 

Source-to-Pay refers to a broad strategic approach that encompasses not only the transactional end of procurement but also strategic sourcing, contract management, supplier relationship management, spend visibility, and procurement analytics. S2P takes a holistic view of the entire procurement lifecycle, aiming to optimize sourcing strategies, enhance supplier collaboration, mitigate risks, and drive cost savings across the organization. S2P integrates various functions and technologies to streamline operations, improve decision-making, and foster continuous improvement in procurement practices. The Chief Procurement Officer (CPO) should prioritize effectiveness and efficiency across Source-to-Pay in its entirety. The broader view offered by S2P enhances not only cost savings but also agility and resilience in procurement, particularly relevant in today’s volatile supply chain environment. 

What is Source-to-Contract? 

Okay, so let’s break things down a bit at a time. Source-to-Contract (S2C) is the term we use to describe all the upstream activities in procurement. The non-transactional part. At the end of the S2C process, conceptually at least, no orders have been placed and no money has changed hands. Source-to-pay is strategic in nature, emphasizing the importance of identifying the best suppliers and negotiating the best terms but also supplier collaboration, cost optimization, risk management, and innovation. These will all drive performance that will reveal itself in P2P. Source-to-Contract breaks down into four main activity areas: 

Spend management: To optimize, you must measure and monitor. Gartner describes spend management as ‘a set of practices that ensure organizations make procurement and sourcing decisions in the interests of both the bottom line and company efficiency. Spend management is about maximizing value from company spend while decreasing costs, mitigating financial risk and improving supplier relationships […] Spend management software helps chief procurement officers and chief financial officers maintain spend visibility.’ 

Category management: Over recent years, category management, which involves managing similar areas of spend, has taken on increasing importance. Although procurement must take the lead in category management, it is cross-functional because different departments and parts of the organization usually or often buy the same categories of goods. A procurement category is a logical group of products or services with similar characteristics, supply and demand drivers, and suppliers. Categories vary according to industry and a firm’s own organizational structure, spend profiles, and the external marketplace. Many firms define their own product classifications, sometimes called a taxonomy, while others rely on global standards (e.g., the United Nations Standard Products and Services Code). Category management identifies opportunities for business value and consolidation. It is a systematic, holistic way of managing categories for the whole lifecycle of goods and services. In this respect it differs from, but informs strategic sourcing. Some categories, such as logistics and packaging, are inherently complex because an abundance of non-price information must be considered, and suppliers are not directly comparable. 

Strategic sourcing: This is a process of developing a channel of supply for products or services with the best supplier(s) at the lowest total cost of ownership (TCO) or best value (as opposed to the lowest price). It involves identifying, evaluating, and selecting potential suppliers based on various criteria such as quality, cost, risk, and innovation. The sourcing and supply management team must also define strategies (single vendor, multivendor, potential future vendors etc.) to optimize cost savings and risks. For optimum results, the sourcing function must therefore analyze market trends, supplier capabilities, and internal requirements to develop sourcing strategies that align with organizational objectives, which today increasingly include meeting environmental, social and governance (ESG) targets. 

Contract management: Once suppliers have been selected, contracts are negotiated and awarded to formalize the terms and conditions of the relationship. Contract management should also be viewed as a lifecycle activity. Contracts are stored and contract clauses are constantly referred to when monitoring supplier performance to ensure compliance with contractual obligations, and mitigating risks associated with the supplier relationship. Effective contract management further ensures that contracts come up for timely periodic reviews, followed by renegotiation and renewal or termination. 

In short: S2C optimizes supplier relationships and sets the foundation for cost savings and other benefits in downstream procurement. 

What is Procure-to-Pay? 

P2P is essentially the transactional end of the process: day-to-day interactions with suppliers. P2P also breaks down into four main activity areas: 

eProcurement: eProcurement enables online requisitioning and ordering of goods and services through purchase orders, linked to upstream processes to ensure purchases align with contracts. More importantly, through linkage to the upstream processes, eProcurement ensures that these goods and services are purchased on contract. Buyers access hosted catalogs, punchouts, and internal inventory in a unified platform, viewing and comparing items in a guided shopping experience. 

Supplier collaboration: This refers to the joint efforts between a company and its suppliers to achieve common goals that benefit both parties. It involves sharing information, resources, and expertise to create synergies that lead to mutual benefits. This collaborative approach can take various forms, from co-developing new products to jointly managing risks and ensuring sustainability in the supply chain. 

Invoicing: The supplier sends an invoice for the goods or services rendered. This invoice is compared against the purchase order and receiving documents to ensure accuracy. Today, this process can be largely digitized and automated, only requiring manual intervention for exceptions. 

Payments: Once the invoice is validated, approved, and processed, payment is initiated based on the agreed-upon terms and payment methods. A modern P2P solution accounts payable (AP) is also fully automated and integrated with ERP accounting systems. 

Conclusion: strategic and transactional 

Broadly speaking, we can summarize by saying that S2P is the upstream, strategic part of S2C, and P2P is the downstream, transactional part. However, strategy can be found throughout the procurement process. For example, an effective supplier collaboration strategy delivers long-term benefits to both buyers and suppliers. Before starting on a procurement digital transformation project, it is essential to embrace and retain this broad view before tackling the implementation of software modules. The ideal strategy will take several iterative phases, some of which can run in parallel, but never in isolation. An agile approach avoids the pitfalls of the waterfall and quick-fix approaches.  

Moreover, to function optimally S2C needs to be supported end-to-end by comprehensive, current and integrated data about suppliers (‘supplier intelligence’). The entire solution suite must also be underpinned by platform orchestration. This provides that 30,000-foot vision, even while constructing individual components of modules.  The quality of technology in providing integration and process efficiencies will determine long-term benefits and competitive advantages in your procurement function.