An Overview of the Source-to-Pay (S2P) Cycle
The quick guide for Source-to-Pay professionals
There's a certain ambiguity in definitions of procurement cycles - Source-to-Pay, Source-to-Contract, Procure-to-Pay.
This post is a simplified guide for procurement professionals on the main attributes of the Source-to-Pay cycle and its role in controlling sourcing costs.
The definition of the Source-to-Pay cycle
Source-to-pay (S2P) is a process that starts with finding, negotiating with, and contracting the suppliers of goods and results in requisition and payment for those goods.
It is a part of the larger Plan-to-Pay cycle covering the end-to-end procurement value chain originating from the spend planning and spreading to contract and vendor management.
The S2P cycle comprises of Source-to-Contract and Procure-to-Pay sub-cycles.
Main tasks in the Source-to-Pay cycle
The S2P cycle carries out mostly operational tasks, i.e.
- transparent and effective strategic sourcing process based on the realization of category sourcing strategies;
- leveraging existing and developing new buying channels;
- contract lifecycle management;
- delivery of goods and services, including incoming control for quality and completeness;
- addressable benefit (cost-savings and efficiencies) realization;
- billing and payment of contract orders.
- sourcing project management,
- supply risk management,
- supplier information management (part of SRM)
- cashflow planning for procurement contracts,
- procurement cost control.
The last point may escape attention, while it is indeed the critical element of the entire Plan-to-Pay cycle.
Procurement cost control
Cost information flows from the origin till the end of the Plan-to-Pay cycle. Hence, procurement must use multiple cost control points to ensure:
- the adequacy of budgeting costs,
- the fairness of pre-tender cost evaluation,
- the achievement of best-value bids during the tender,
- the accurate translation of bid prices into approved contracts and purchase orders.
The last three points fall precisely under the remit of the S2P cycle.
Cost budgeting
The traditional estimate of the budgetary cost of a product or service is based on historical prices adjusted to erosion or inflation ratios.
What about new requirements where the price benchmark is not
readily available?
These might be thrown into buckets of program budgets. Those tend to be reviewed and adjusted multiple times during the fiscal year,
as the price analysis precision could be extremely low.
Procurement managers must collaborate with internal stakeholders to work out some actionable price estimates;
otherwise, budget revision at a later stage is inevitable.
The procurement cost database is the best-practice approach adopted at this early procurement planning stage.
Cost estimating.
While category managers approach stakeholders to initiate a cross-functional sourcing project, internal stakeholders may once again complain about challenges to
conducting cost analysis for new requirements where the historical price
benchmark is not applicable.
In that case, procurement needs to step up to
provide benchmarks from open sources, industry databases, or
subscription-based price repositories. For material expenditures, the
involvement of external cost consultants could be helpful.
The best practice at this stage assumes the application of any of these methods or a mix thereof:
- market price benchmarking
- from open sources, e.g., public procurement portals, customs databases,
- by competitive bidding,
- historical price comparison,
- the use of government-regulated price databases and market indicators,
- the leveraging of industry price indicators, i.e.,
- commodity price indexes (e.g., Platts)
- commodity exchange intelligence (e.g., London Metal Exchange)
- local market commodity experts,
- price indicators in the nearest hubs (e.g., European Gas Hubs.)
- centralized or locally-adopted cost calculation methods, e.g., the government guidance on construction work estimation.
Generally, a sourcing project should not be initiated with a blank price estimate.
The risk of poorly estimated procurement costs is multiple:
- overestimation leads to buying at above the market price;
- underestimation leads to restriction or an absence of competition;
- lack of the cost estimate assumes the inability to aggregate and control procurement benefits. Generally, this situation disables educated negotiation.
Cost approval (upon supplier selection.)
This is the most common stage of the S2P workflow where the price analysis occurs because the business case needs to be adjusted based on the outcome of procurement activities.
The best and final cost proposed by the preferred bidder must be compared with the initial budget or business case estimates. Based on that, procurement will identify the value of benefits (cash savings, cost avoidance, and other types) and start tracking the actual realization based on Purchase Orders.
Streamlining the cost control before the contract award is advised based on the methods indicated in stage 2 above. This is especially useful for commodities, where the pricing is highly dynamic and tends to change during the RFP.
Cost approval (upon a Purchase Order placement.)
Once again, the cost analysis could be streamlined at this stage, especially for volatile commodities.
The process could be a default based on standardized formula pricing (fossil fuels,
electricity, metal products, etc.)
Procurement will record actual savings based on each PO, applied later for approvals of end-user budget revisions.
PO-based actual savings is the only way the estimated savings would become the real cash economy.
It is also advisable to revise the price based on contractual order volumes, significant market price fluctuations, or vendor-specific events, e.g., mergers and acquisitions (M&A), production volume ramp-up, or new market
entry.
Therefore, category specialists must monitor such changes and seek price revision opportunities.
A cost control process could occur in
multiple steps of the S2P cycle and beyond and must be adequately owned and managed by
procurement.
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