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When it comes to defining priorities for the next year, digital transformation initiatives such as reducing the number of systems used, modernizing the technology your business is run on and streamlining costly processes may be at the top of your list. It is likely through this search that you took notice of your procurement department, and more specifically, that your team overlooks indirect procurement processes. Now that you’ve pinpointed an opportunity for improvement, it’s time to define what a successful P2P process looks like and begin identifying potential solutions. A study from Deloitte, suggests that process issues turned into efficiency results in up to 50% gains and EBIT improvement of up to 5%.
Read on to learn more about how to optimize your procure-to-pay process, and some of the frugally innovative solutions your business might be interested in considering.
Procure to Pay Cycle in SAP with Tcodes
Procure-to-pay (P2P) is a process containing a coordinated set of steps with the end goal to purchase a good or service. Understanding the steps of the procure-to-pay cycle in SAP with tcodes is the first step to process optimization. The steps are outlined as follows:
Create a Purchase Requisition
The first step in the procure to pay process is to define the business requirement, and the product or service that you are hoping to purchase to solve it. Depending on the product's cost upon identifying the need, you will likely require a statement of work (SOW) or detailed quote from a vendor if you aren’t selecting something from an existing catalogue or reordering something based on a previous agreement. Following this step, your team will need to create a formal purchase requisition. The purchase requisition will need to follow all administrative requirements and include any necessary attachments outlined by your business. It is important to note that this is not the same as a purchase order (which we will define in the steps to follow).
Common questions asked in this step include:
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What should I be typing in the header note?
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Which document type, material ID, quantity delivery, plant code, storage location and requisitioner IF do I need to select or complete?
SAP Tcode: ME51N
To access: Logistic -> Material Management -> Purchasing -> Purchase Requisition -> Create
Purchase Requisition Approvals
Once a purchase requisition is submitted, the procurement department reviews it and determines whether they will approve, reject or request more information.
Create a Purchase Order
After the necessary information has been approved, the procurement department will then create a formal purchase order with the goods or services details. In most cases, this is also the step in the procure-to-pay process where the contract is signed.
Your purchasing department may run into complex policies leading them to ask questions such as:
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How should a vendor be entered?
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How should a material number be entered?
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Does the Unit of Measurement (UoM) need to be entered?
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Is there a Purchase Record I should know about?
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Where can I find the payment terms?
SAP Tcode: ME21N
To access: Logistic -> Material Management -> Purchasing -> Purchase Order -> Create -> ME21N – Vendor/Supplying Plant Known
How to Edit a Purchase Requisition in SAP
SAP Tcode: ME52N
If edits need to be made to a purchase requisition, the tcode ME52N can be typed into the command field. It is important to note that not all fields are editable after the purchase requisition has been created. Fields like the material and plant must be deleted and added as a new line item, while quantity, delivery date and other similar values can be adjusted using this function. To complete edits once the tab opens;
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Users can click on the “Other Purchase Requisition” button
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In the “Select Document” pop up users will need to enter the purchase requisition number from the previous ME51N transaction
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Select other document
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Click on the display change button
Once updated, an informational message will pop up stating the purchase requisition has been changed.
How to Approve a Purchase Requisition in SAP
SAP Tcode: ME54N
If all the information required by the organization is completed properly, the approver can process the purchase requisition in SAP as follows. If information is missing, they will need to contact the department or individual who submitted the purchase requisition for additional details.
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Log into your SAP Portal
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Select the Materials Management tab
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Click on the Purchase Requisition Approval tab
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This tab will open a list of purchase requisitions awaiting approval. Details can be viewed by clicking on the display inbox item button
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Click on the release button to approve each requisition
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Select “Return on Business Inbox” when you are done reviewing the purchase requisition
Alternatively, users looking to approve (or release) a specific purchase requisition and already know the number can execute using the tcode.
Purchase Order Approval
Purchase orders (POs) are then sent for approval internally. The approval hierarchy will differ depending on how your business is structured and how many controls are in place. In some cases, this means approvals will be made internally following the purchase requisition, following the purchase order or both.
Once approved internally, purchase orders will require vendor approval. Vendor approvals create a legally binding contract that includes the materials or services requested and under what conditions the services will be used. The vendor may choose to accept, reject or use the purchase order as a starting point for negotiation.
Goods Receipts and Service Entry Sheets
After the vendor has approved the PO and delivered the goods or provided the specified services, a goods receipt (GR) is created for accounting and inventory purposes. The GR acts as a check to see if the goods and services meet the contract's requirements. The information recorded in this document can also be used to return goods if there are any issues.
SAP Tcode (Goods Receipt): MIGO
To access: Logistic -> Material Management -> Inventory Management -> Goods Movement -> MIGO
SAP Tcode (Service Entry Sheet): ML81N
To access: Logistic -> Material Management -> Service Entry Sheet -> ML81N Maintain
Evaluated Receipt Settlement
Invoices might already be a modernized experience when compared to cheques. To further transform these processes, your business might do away with invoices in favour of evaluated receipt settlements (ERS). Using an ERS, goods purchased using your own records, can be set to automatically create an “invoice” so the vendor doesn’t need to create and submit one, accelerating payment. In these cases, a two-way match replaces the previously known three-way match.
SAP Tcode: MRR
Invoice Approval
Next, a three-way match is conducted (comparing prices, quantities and products matched on the purchase order, goods receipt, and vendor invoice). The project manager can then approve the invoice. Once approved, the invoice is sent to the financial team. If errors exist, the invoice is sent back to the vendor for review.
SAP Tcode: MIRO/MIR7
To access: Logistic -> Material Management -> Logistics Invoice Verification -> MIRO/MIR7 Enter Invoice
Vendor Payment
The last step in the procure-to-pay process is, of course, the payment. According to the payment terms outlined in the invoice, the finance team will process payments, and the vendor will get paid either in whole or in part over a predetermined period.
SAP: Automatic Payment Run
In addition to not losing cheques in the mail, there are several other compelling reasons to modernize your payment processes. What you might not know is that cheques have been around since the 9th century (according to Wikipedia) and invoices since the Mesopotamia era. Let’s just say paper payment processes are so 12 centuries ago!
This process might sound lengthy and complicated. However, implementing procure-to-pay solutions, maintaining transparency throughout the process, and storing all information in one central source are all proven tactics to optimize your business's procurement process.
Comparing Procure to Pay Solutions
In traditional procurement, organizations use paper and other manual methods to track purchasing. However, as organizations are looking to improve agility and optimize processes, procure-to-pay software has continued to prove its optimization abilities by integrating all the steps involved. As a result, purchasing departments have greater control, insight and automation over how items are purchased and maintain full visibility into their orders' lifecycle.
This is a process, not a technology; this means that there are several procure-to-pay solutions that are available to streamline your purchasing process. When looking for answers, it is essential to note that there are both specialized e-procurement vendors and ERP vendors that will have offerings that account for the major phases of the procure-to-pay process.
In SAP, the purchasing or procurement part of the procure-to-pay process is completed within the materials management function. The payment portion is a part of SAP Financial Accounting (SAP FI). These options are worthwhile for businesses looking to consolidate data and get a more holistic view of how their business is performing. This is because using an SAP system might also unlock faster insights using analytics tools like SAP Analytics Cloud which will help to track overall business performance.
However, even with these tools efficiency can be lost due to lack of adoption by end-users resulting in human errors and other conflicts, lack of compliance which is enough to give your CPO a headache and your procurement department becoming a cost-generating centre.
Step by Step Procure to Pay Optimization
Our previous post touched on the impact that focusing on key areas within the indirect procurement process could have on your business transformation. From there, we determined that the creation of a purchase requisition, the first event in the procure to pay process was one area that was often overlooked. To conclude this three-part series, we also wanted to highlight the five considerations your business should consider when optimizing your procure-to-pay process.
1. Determine how your current procure-to-pay process works by performing an audit of the actual steps your team follows when completing each of the steps. Some considerations should include:
- Percentage of paper invoices received by Accounts Payable team
- How clear and fast is it for team members to requisition products or services needed
- Roadblocks and delays in process approvals
- Range in cost to complete each step in the procure to pay process (to account for simple vs. complex transactions)
- Range in cycle time to complete each step in the procure to pay process (to account for simple vs. complex transactions)
- Compliance to standard (company policy/business procedures, processes)
2. Focus on key steps in the process that require improvement and determine which will have the highest ROI. Some of the most overlooked opportunities to achieve a high return on investment include:
- ERS often sees a high return since invoices are avoided completely for purchases
- Vendors submitted goods and services receipt that are submitted for review and approval internally
- Automation and mobilization of approvals
- Clarity in requisitioning
- Scanning for Goods Receipts
3. Require purchase requisition reference. A purchase requisition is what kick starts the whole procure to pay cycle, so capturing the information correctly the first time ensures all checks and approvals are in place.
4. Create specific business controls such as guided workflows and mobile approvals to ensure audit compliance and improved usability and introduce automation wherever possible.
5. Make critical information mandatory. When requiring employees to input data, guided processes ensure no data is missing.
To begin optimizing this process, we encourage you to check out our ultimate guide to Operational Procurement.
