Overview of Procure to Pay Cycle

Procure to Pay cycle in Oracle is the cycle which is concerned with the cycle of procurement of raw materials, parts and products which the the business needs to manufacture its end products. Procure to Pay cycle is concerned with the procurement of the raw materials from suppliers to prepare the finished goods to the step of payment to the supplier for the goods purchased. The procure to Pay cycle like the Order to Cash one has certain steps involved.

1. Create Purchase Requisition
2. Create Purchase Order
3. Receive the PO
4. Enter Invoice
5. Pay

1. Purchase Requisition

     

     The first step in initiating the purchase of goods is the creation of a purchase requisition. A purchase requisition is a formal requisition to buy something. Purchase requisition represents a demand for a good in the business

Purchase Requisition represents demand for materials either through Work in Progress,Inventory , Materials requirement planning or Order Management.

A requisition might be internal or external

Internal Requisition : An internal requisition is generally prepared in case of inter organization transfer

Purchase Requisition: A purchase requisition is generally created when the business needs to procure materials from external sources ie its suppliers to fulfill the requirements raised by Inventory,Work in Progress, Materials Requirement Planning or Order Management

In simple terms we can say that a requisition refers to a purchase request initiated by the various department people when the business has certain material requirements

2. Purchase Order

     After the purchase requisition has been created and approved , the next step is the creation of purchase order. 

The purchase order is the document having details of the materials which need to be procured, supplier details, this document is shared with the supplier in order to procure the required materials.

When a PO is created in the system the status of the PO is generally incomplete, before we can progress with the PO the PO needs to be approved by the approvers setup in the system so that it can be sent across to the suppliers and then received. 

Depending on the business Requirements, a purchase order can be of different types:

1] Standard: Create standard purchase orders for one-time purchases of various items. You create standard purchase orders when you know the details of the goods or services you require, estimated costs, quantities, delivery schedules, and accounting distributions.

2] Blanket: Create blanket purchase agreements when you know the detail of the goods or services you plan to buy from a specific supplier in a period, but you do not yet know the detail of your delivery schedules.

3] Contract: Create contract purchase agreements with your suppliers to agree on specific terms and conditions without indicating the goods and services that you will be purchasing.

4] Planned: A planned purchase order is a long-term agreement committing to buy items or services from a single source. You must specify tentative delivery schedules and all details for goods or services that you want to buy, including charge account, quantities, and estimated cost.

3. Receiving

   After the Purchase Order has been sent across to the supplier the supplier will deliver the goods to the specified warehouse where the task of receiving has to be performed.

When the shipping details of the goods are received by the supplier receipts are created in the system.

The receipt creation and the receiving mechanism can differ based on the Routing mechanism set up in the system. We will discuss the Routing mechanism in the upcoming post.

After the receiving is performed , the onhand for the items are increased in the system and the goods are available to fulfill the business demands.

4. Invoice

Once the goods have been received the business needs to pay for the procured goods. Payables invoices are created in the system for the Purchase orders to pay off the outstanding amount.

• Invoices can be created either individually or through invoice batches
• System can setup a recurring invoice creation faciltiy to create invoices at periodic intervals
• Invoices can be created electronically via EDI

After the Invoices are created the invoices need to be validated with the purchase order or the the Purchase Receipt to match for the quantity and pricing. Invoices need to be validated before they can be paid off.

5. Payment

Once the invoices have been validated they are eligible for payment. Payments for the invoices can be done individually or payment batch can be created which pay off groups of Invoices.

Invoices can be paid off by a variety of mechanisms including checks, manual payments, wire transfers, EDI payments, bank drafts, and electronic funds transfer.

This is how a Procure to Pay ( P2P) cycle works in Oracle.We have not covered much of the details but just given a brief overview of the cycle in Oracle.