Procure-to-pay (P2P) processes comprise various smaller processes that all lead to acquiring and purchasing goods for a health system at the most advantageous price. Purchasing and paying for items seems simple, but in large health systems and hospitals spanning various departments and locations, the process easily breaks down. It only takes one error or process gap in any part of the P2P process to have upstream and downstream consequences for all parties involved in the P2P ecosystem: Finance/Accounts Payable (AP), Supply Chain, Vendors, and the End-User.
What is the Procure to Pay Process?
The procure to pay process typically begins with a requisition for an item or service, goes through the purchasing and receiving of the good/service, and ends with payment for the good/service.
Over our 35+ years working exclusively with health systems in Supply Chain and AP, we have observed that the process initiates when the system enters a contract. While the P2P process usually excludes contract management, any minor error, such as missing an item, overlooking a discount, or mistyping a letter in a unit of measure (UoM), can cascade into financial losses later in the process.
In fact, at TAG, we look at over 50 categories that impact the P2P ecosystem and its outcomes. We break these categories into five focus areas that help to assess risk at each step of the P2P process for our healthcare clients.
Top P2P Focus Areas to Reduce Risk
1. Contacting
Why do we include contracting as our first focus area? As mentioned above, contracting involves much, from negotiating terms and conditions to entering contract data to managing expirations that affect actions downstream, costing lost funds and resource waste.
We also incorporate the contracting focus areas to reduce risk throughout the P2P ecosystem, including centralizing contracts within a health system, tracking spending for tiered pricing and rebates, gaining insight into opportunities to cut costs through pricing negotiations, and managing the item master.
Supply Chain assumes most of the responsibility in this focus area, including Sourcing, Procurement, Value Analysis, and more. However, the need for the good or service is identified by the end user, and they may have a say in the vendor chosen.
FYI: Our Discovery Review evaluates 25 categories under the contracting focus areas, including contract structure, item handling, and contract management.
2. Requisition, Approval, & PO Creation
The next focus area contains the traditional start of procure to pay: requisition. Beginning with the end user, this area also contains requisition approval and the creation of purchase orders (POs).
First, move the requisition into approval, reviewed, and approved or rejected. The approval decision often considers the need, how it fits into the budget, and validating the requisition. Ideally, the health system’s ERP automates the requisition and approval process allowing for easy and quick responses.
Deterrents to automation can result from errors in the previous focus area. For example, bad contract data, disordered item master, or disconnected computer systems can halt automated workflow from that point on in the procure to pay process.
3. Goods Received or Services Performed
The third focus area we advise on is receiving (and often the return) of goods, as well as the management of services. This area makes up 36% of P2P errors our team uncovers at health systems on average, resulting in a loss of over $7.6M in 2021 alone.*
Always review and log receiving documents to ensure they match the PO and contract terms.
Returned Goods
Returned goods is often a complicated process inside the larger P2P process, and there is no standard process that applies to all health systems.
Returning goods, tracking items, and ensuring credits are received requires multiple departments and the end user to ensure success. End users must initiate the return with the vendor through the health system’s purchasing department. They must ensure the items get to the correct receiving area or dock to be sent for return.
Purchasing then needs to ensure the correct vendor authorization is received and logged on the original PO. Receiving is responsible for getting the physical item back to the vendor and recording relevant tracking numbers. AP should follow up with the vendor expected credits and process them against the correct PO.
Purchased Services
Purchased service management within P2P is a complex process because not all services performed are witnessed by the appropriate hospital staff. As a result, you cannot always track your servicers. Very often, the vendor must performs and invoices many services such as landscaping, snow removal, and routine maintenance. leaving health systems to pay for services that were not performed or for poor-quality services.
The best way to avoid this is to create and manage a service log. The log needs to indicate when a service is performed and the work accomplished. Avoid having end-users or buyers mark a service “received” in the ERP system before verifying the service was completed.
4. Invoice Processing
As mentioned earlier, a PO is essential to reducing errors in the P2P process. It is in this P2P focus area that its importance comes into play. Invoice processing begins by matching the received invoice against the PO. This allows the ERP system to match the PO to the received status. When each of these documents aligns, a three-way match is successful, and the invoice can then be allowed to pay.
However, when there are matching errors or missing components, such as the PO, the invoices get flagged as exceptions (as mentioned above). This then begins the exception handling and reconciliation process.
The invoice processing focus area consists of the matching process and exception handling process. It also encompasses 14 categories TAG analyses, including invoice approvals and technology utilization, such as EDI (electronic delivery invoice), OCR, and ERP system controls.
We include an evaluation of the technology used as we recommend automating as much of the P2P process as possible. However, it is necessary to note that technology can be prone to errors just as humans can. For example, imaging software may scan incorrect characters, causing matching errors. Another example is when automation flags or prevents duplicate payments of the same invoice. However, manual entry may cause a human error by entering an incorrect character or date, and the ERP system will not be able to catch the duplicate entry.
5. Payment Issued
This focus area contains ten subcategories that impact the P2P process, even though issuing payment may seem self-explanatory.
Approval and a successful three-way match in the previous area can make payment simple. However, the payment method becomes a factor in reducing risk and speeding up days to pay.
Health systems must diligently enter credits to deduct them immediately on the next payment run. This process actively ensures that credits are not lost, misapplied, or left open on vendor accounts. Accurately managing and using credits also keeps cash in the health system.
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Considering all the processes and departments involved in P2P, understanding the responsibilities and actions is essential to success.
The only way to truly get a look at your unique P2P process is to document a detailed process map overlayed with spend analysis showing the flow of funds and actions through each area. We provide just that. Partner with our experts and put our 35+ years in healthcare to use at your organization. Reach out now to learn more.