The Procure-to-Pay Process in Distribution: Best Practices and Common Pitfalls

For distributors, simplifying complicated processes is critically important to safeguarding margins and ensuring excellent service levels for customers. A prime place for this simplification is the procure-to-pay (P2P) cycle: the multi-step procedure for sourcing, purchasing, and paying for operational resources.

In the distribution industry, rapid fulfillment, tight inventory turns, and intense competition require you to have an efficient and effective procure-to-pay process that provides end-to-end visibility, incorporates risk controls, and, in most cases, requires automation. Today, we’ll define P2P, examine the P2P cycle, and discuss how best to manage it while avoiding common pitfalls.

Understanding Procure-to-Pay in the Distribution Context

To fully grasp the P2P cycle, we must first define what procurement means.

Procurement Definition

Simply put, procurement is the process of acquiring supplies and resources a business does not produce on its own, and procurement management is the process of controlling these acquisitions. But procurement is just one part of P2P.

P2P Definition (and Benefits)

P2P integrates purchasing and accounts payable activities. That is, it covers the full procurement workflow across four distinct stages:

1. Requisition and Approval: Determining what goods and/or services you need.
2. Sourcing and Purchase Order Creation: Ensuring compliance and implementing a structured ordering process.
3. Receiving and Inspection: Receiving requisitioned items from the vendor and making sure you’ve got what you ordered.
4. Invoice Processing and Payment: Receiving invoices, paying the vendor, and ensuring transaction records are accurate.

When optimized and automated, the P2P cycle increases efficiency, streamlines processes, and eases risk management while boosting cash flow visibility and securing strong margins.

The P2P cycle may look slightly different for different types of distributors, but regardless of your distribution methodology and processes, your P2P cycle will still consist of the four core stages listed above. Let’s dig a bit deeper into each.

Core Stages of the Distribution P2P Cycle

1.      Requisition and Approval

Somehow (e.g., by demand signals, sales forecasts, minimum/maximum inventory triggers, etc.) you learn that your business is in need of supplies or resources and, based on that information, you’ll take one of two paths.

If the items/services you need are things you commonly source, you can bypass the requisition and approval process and skip straight to creating the purchase order (PO)—a contractual document that lays out the purchase details (e.g., quantity, price, delivery dates, etc.). The buyers themselves create the PO when they place an order with you.

If, however, the items/services you need are new to your business, if they are not things you commonly source, or if the order is a special or exceptionally large one, you’ll need to create an internal purchase requisition request form (which covers item descriptions, quantities, and specifications) for approval. This requisition request will be submitted to the relevant person/department for review. The requisition is then either rejected or approved according to your company’s procurement policies. If rejected, it should be revised to meet the necessary criteria, and, if approved, you’ll move on to Stage 2.

A workflow diagram for managing purchase requisition and inventory process within an organization

2.      Sourcing and Purchase Order Creation

If your purchase has required a requisition request, and if that request has been approved, the requisition form is handed to the procurement team, whose members are responsible for selecting suppliers and vetting their costs, reliability, and quality of service.

The selected supplier (or suppliers) will need a PO for the items purchased.

If you continually order a specific item from the same supplier, you can use business management software to set up blanket POs (more on these below) to automatically manage recurring SKUs, reducing human errors and saving yourself time, effort, and money.

3.      Receiving and Inspection

Once the supplier’s shipment arrives, your receiving team may inspect the goods to verify that the correct items and quantities were delivered as ordered.

While some distributors may bypass this inspection, others—like food, pharmaceutical, and chemical distributors—routinely inspect and quality test the orders they receive to make sure they are safe and up to regulatory standards.

4.      Invoice Processing and Payment

Upon receipt of a verified invoice, the accounts payable (AP) department processes the invoice and pays the supplier.

Automation with technology can help your business much at this stage, with features like AI-powered document recognition tools that can automatically process vendor invoices and prepare them for payment.

An efficient P2P cycle that enables you to pay your suppliers quickly and accurately keeps your supply chain relationships strong while boosting profitability.

Best Practices for Efficiency and Compliance

Because the P2P process involves so many people and moving parts, it can be challenging if you lack standardized policies, automated workflows, and real-time analytics. Consider the following best practices to help increase efficiency and simplify compliance—both with internal policies and with external regulatory and vendor requirements.

1.      Automate and Integrate Systems

Today’s digital world requires businesses of all sizes to use modern technology with AI-powered capabilities—like enterprise resource planning (ERP) solutions—to manage operations and remain competitive.

Technology automates and standardizes manual processes, speeding up tasks and reducing employee fatigue. Integrating multiple systems into a centralized, advanced solution allows you to connect your procurement and financial management information with your inventory data, giving you visibility and insight into every aspect of your business and helping you streamline your P2P process workflows.

2.      Strengthen Controls and Compliance

With an integrated ERP solution, you can set up comprehensive controls over your procurement cycle. Data analytics and real-time visibility will empower you to track tasks within each step of the P2P process, audit performance and spending on purchases, and optimize procedures by identifying and correcting issues (e.g., three-way matching, segregation of duties, etc.).

Connecting financials and procurement ensures that you make fact-based decisions. It also helps you be confident that your budget, transactions, and processes comply with applicable legal/industry regulations and vendor requirements.

These requirements can vary greatly across borders and among vendors. Some of these differences may be significant, while others (like varying electronic data interchange [EDI] requirements between suppliers) can be more nuanced, with the differences in the details. But they all have to be upheld for your business to remain in operation and in good standing with all stakeholders. A modern ERP solution provides a single, consolidated space through which to streamline and automate compliance management, so you can focus on piloting your business, not just on keeping it afloat in a sea of regulations.

3.      Collaborate with Suppliers

Collaborating with suppliers can help smooth the P2P process. For example, you can provide a self-service portal for suppliers that offers 24/7 access, helps them resolve issues without delay, and provides additional resources that help you work better together. Additionally, you may set up a joint replenishment agreement to ensure that inventory is replenished based on an agreed amount, which streamlines inventory management and reduces potential stockouts.

Blanket purchase orders (BPOs) are another important method of collaboration. BPOs consolidate multiple purchases of the same item or service under one agreement. For your suppliers, BPOs mean that you are committed to purchasing from them in the long term, which can improve price negotiations for your business and help your suppliers predict demand for their products over time. BPOs can greatly benefit everyone involved.

Common Pitfalls Distributors Face and How Technology & Automation Help Overcome Them

Distributors who lean into these best practices, including implementing a comprehensive business management solution with built-in P2P capabilities, are well on their way to becoming thriving, efficient businesses. For those who have yet to embrace these practices, there are a few pitfalls to avoid, such as maverick spend (employees making unauthorized purchases outside the approved vendor list) and policy drift (gradual changes in how company policies are applied over time).

Other pitfalls include data silos and manual processes, which can lead to such complications as duplicate SKU records or delayed goods-receipt posting, and weak matching controls, which may result in expensive chargebacks and supplier disputes. Poor visibility into customer demands is another possible pitfall. If you don’t know what customers may order, you will have a hard time figuring out what to buy, how much to buy, and when to place the order. This is especially true for distributors of seasonal products or products with long lead times.

The good news?

The right technology equips you with the tools, resources, and features to help you automate and transform your P2P process. Examples of these technological aids include:

• AI capabilities designed for extracting data, detecting anomalies, handling exceptions, and forecasting demand.
• AI analytics for predictive demand and risk scoring.
• Cloud-based suites that allow users to access business-wide data on any device, at any time, and deliver scalability, rapid deployment, and continuous updates.

KPIs and Continuous Improvement

Measuring and refining P2P performance is critical for continuously improving operations and can be done through key performance indicators (KPIs). Modern business management technology, like a cloud-based ERP system, can help you manage, collect data from, and make decisions based on these critical procurement KPIs, such as:

• PO Cycle Time: The time it takes to complete a PO from beginning to end.
• First-pass Match Rate: The percentage of invoices that match the corresponding PO and receipt on the first attempt.
• On-time Payment Percentage: The percentage of payments that your business makes on time.
• Cost Per Invoice: The total cost of processing a single invoice through the AP department.
• Vendor Performance: A measure showing whether vendors have fulfilled what they promised. It compares realized delivery dates and real-life product quality to promised delivery dates and expected product quality.

Tapping Acumatica for Your Procure-to-Pay Process Needs

The procure-to-pay cycle for distributors can be effectively managed by a single, specialized solution that automates the process and connects your business with your suppliers for increased agility and productivity. With Acumatica, you have the business intelligence, machine learning, and configurable workflows you need to make your P2P process streamlined and efficient.

Acumatica’s configurable workflows and automation can be tailored to fit your specific requirements. Acumatica also delivers advanced supplier management, which allows you to easily track both vendors and corresponding vendor payments.

“If I didn’t update customers and salespeople every week, they wouldn’t know what estimated due dates were, and for me to update them every week, it would take me a week to do it….[Now], when a container leaves the Far East or wherever it’s coming from, we upload the whole container with everything on that purchase order. We put in an estimated ship date when it’s due because once it goes on the water, we know within three days when it’s due in the country. When a container comes, all we have to do is hit ‘received,’ and you’re done.” – Edward Cohen, CEO, Boca Terry

With Acumatica’s automated invoice capture, paper bills can be scanned with optical character recognition (OCR) and added to the recognition engine for processing. From those scans, the system automatically identifies the vendor, terms, currency, line items, amounts, and other details on the bills and connects this information with your accounts payable records.

“Now [our paperwork is] automatically done each day. Acumatica has brought us so much more control over our business. There were times before when invoices were missed [altogether] and that just doesn’t happen anymore.” – Chad Treadwell, Vice President of Operations, FSC Lighting

Automated bank feeds with Advanced Expense Management streamline the process of reconciling corporate credit card purchases, generating receipts from transactions, and prompting employees to manage the receipt reconciliation process.

“I honestly don’t know how I would do it without a 360-degree ERP. Before we implemented the inventory and procurement side of Acumatica, I was doing it all with Excel. The company was much smaller then, but I was still going insane trying to keep everything in sync. Today, it’s absolutely critical to have the procurement data that we have with Acumatica with works dates, promised-on dates, purchase receipts, and our MRP functionality. It’s the backbone of what my department does.” – Kai Earthsong, VP of Supply Chain Management, Happy Valley

This is just a small sampling, with real-life cases, of how Acumatica’s procure-to-pay capabilities can serve your distribution business. To learn more, check out our eBook, Automate Procure-to-Pay with Acumatica, and contact our experts today with any questions.