EDI makes money

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MAKE YOUR EDI INVESTMENT PROFITABLEFor you and your partners

The trend of electronic commerce as the primary means of conducting business continues to prove that B2B integration makes companies money.

Retailers, distributors, and manufacturers have leveraged EDI to achieve financial gain, resulting in inventory optimization.

B2B integration isn’t sexy. People don’t wake up every morning excited to get to work to see their EDI engine run. I’ve never seen an EDI bumper sticker or a blimp at a sporting event promoting B2B integration. However, you can’t deny the fact that hundreds of billions (many reports in the trillions) of dollars are transacted each year electroni-

cally, and the percent of transactions that occur electronically grow each year. The reason for this is because it satisfies a simple, basic business condition: make more money by growing rev-enue or cutting expense.

The retailer’s vantage point……

For decades, EDI has been the dominant commerce platform for procurement professionals. For manufacturers, retailers, and distributors, B2B (business-to-business) inte-gration has driven efficiency in their procure-to-pay cycle. However, today B2B integration is not simply about trans-mitting POs, but the holistic means of interacting with their supply chain trading partners. Not only are their systems for procurement and receiving tied into their back-end

systems in order to drive efficient processes internally, but they also use electronic integration with their trading part-ners to establish and maintain competitive advantage. They use electronic transactions to assess their suppliers’ inven-tory positions, identify the most aggressive pricing across competitors, shop the best freight rates, and gauge market share across merchandise categories and products.

Retailers, distributors, and manufacturers are gener-ally ahead of their sup-ply chain partners when it comes to embracing B2B integration. They are the ones establishing the supply chain require-ments that they expect will drive efficiency within their organizations. To be clear, their strategy for EDI is relatively straightforward: reduce or minimize their most expensive investment – inventory. For them, the real rainmaker is shifting responsibility of servicing inventory to the supplier. They make suppliers responsible for providing the inven-tory, only when needed, often right up to the point of sale or consumption. Buzzwords of “JIT” (just-in-time), “quick response,” “floor-ready” or “lean” describe the efficacy of an organization’s inventory management philosophy.



Many of the financial gains are not only in reduced inventory costs and margin dollars, but in operational efficiencies.

In practice, suppliers are expected to conform to these requirements or they lose the business. Doing this today is next to impossible without an electronic relationship.

By shifting inventory responsibility to the supplier, retail-ers and distributors achieve a number of tangible financial goals. It improves inventory turn which is a key barometer for determining the return on invested capital, often the largest outlay of funds the company has. It minimizes the risk of carrying aged inventory and the covenants required to accrue obsolescence. For companies on a retail-based method of accounting, it enables reduction of markdown or discount budgets and improves the potential for more open-to-buy budget dollars. It tends to generate greater liquidity, reducing payables float; the time to sell goods is closer to or less than the number of days to pay for the inventory. Not least of all, the company benefits from reducing the expense of warehousing inventory, measured in distribution facilities and related personnel and materials. For organizations with complex terms and a large number of distribution points, it enables systemic cost reductions in the procurement order, such as new store discounts and COOP advertising. When integrated with a host’s traffic management system, organizations can achieve reductions in freight charges when providing electronic shipping and allocation instructions to suppliers. Electronic warehouse management documents to third-party logistics (3PLs) firms help to offset or outsource distribution and fulfillment where the retailer finds it is cost-effective to do so.

Although more difficult to quantify, there are a num-ber of operational benefits that drive bottom line gains to organizations pur-chasing inventory.

Studies show the costs of processing purchase orders and invoices dramatically decline when those documents are traded electronically. These studies show that the cost of processing these transactions can be cut in half when properly traded with partners and integrated into their back office systems. Duplication of entry, reduction of errors, and the administrative burden of clerical filing and remit-tance are reduced, benefitting both the purchasing opera-tions and accounts payable functions. For companies with large assortments from many suppliers, electronic product

synchronization helps to improve data integrity and reduce costs associated with maintaining the catalog or SKU master record. Advance shipment notifications, or ASNs, help to drive distribution efficiency in both inbound and outbound processes.

The supplier’s vantage point……

As a supplier, have you received that dreaded letter from your largest customer requesting you consider commu-nicating with them electronically? Guess what, it’s not a request! What happens next is an all-out blitz to get a B2B relationship in place, the company’s owner breathing down everyone’s necks in that ready-fire-aim approach to trans-form complete processes in a matter of weeks. Another letter follows in a month or so with a slightly different tone suggesting that failure to get the integration done in a timely manner will result in chargebacks – fighting words, but what happens next is nothing short of hell breaking loose to get the electronic relationship in place. Truth be told, retailers would prefer to have no chargebacks at all. Retailers view chargebacks as a primary lever to ensure suppliers meet their supply chain requirements. Arguably, half of these requirements are simply meeting the elec-tronic document exchange need. However, suppliers that fight this battle almost always lose. Conversely, suppliers that operate in advance of this need by establishing B2B capabilities often get to bend a customer’s integration point to meet its standard when there are slight or modest differences.

EDI capabilities give a supplier a relationship with a customer that they wouldn’t otherwise have.



The “brass ring” of financial gain for all parties is collaborative planning, forecasting, and replenishment.

Having electronic B2B exchanges with a supplier’s custom-er may not be the preference of the supplier. More often than not, it’s the customer’s policy that must be followed, regardless of the supplier’s preference. This said, the most obvious benefit the supplier has is the opportunity to do business with a customer that wouldn’t otherwise be had without an electronic relationship. It’s not the largest companies such as Wal-Mart, Ford, DuPont, or FedEx that require an electronic document to conduct business, but a growing percentage in the small/medium marketplace that also mandate an electronic relationship. A supplier’s ability to penetrate new markets, acquire new customers, or sometimes simply extend or expand an assortment or grow an existing product line increasingly finds barriers to execution without B2B integration. Moreover, the invest-ment to do this pays back in multiples. It’s often not the one customer gained, but many.

For suppliers, there are a number of tangible benefits B2B integration provides. Margin erosion due to a lack of systemic price controls can be reduced by sharing elec-tronic catalog data and enabling price list management for inbound electronic POs. Challenges of revenue recognition in high-volume environments that include consignment, buybacks, FOB, and returns can be reduced or eliminated where electronic documents are exchanged. In addition to reducing the manual burden of paper-based invoices, electronic invoices help to reduce latencies associated with

getting paid, improving the supplier’s A/R float. For suppli-ers that have traditionally relied on paper-based catalogs and related “glossy” materials, they can quickly and easily post their products online, eliminating the duplication of print expenses when pricing or products change. And, of course, the most obvious benefit when B2B documents are properly integrated into a supplier’s back-end system is the reduction or elimination of repetitive tasks performed by clerical or customer service staffs.

The advent of innovative channels of distribution such as Amazon, QVC and eBay has created new competition and a higher level of convenience in the marketplace. Online markets have made it easier for customers to source competing products from many suppliers, once serviced by few. For suppliers to compete it’s not simply about sell-ing a product. You have to sell on your ability to deliver, to keep your customers in stock, and meet the supply chain requirements your customers impose. Your company’s infrastructure is something you can also sell. Certainly visible to your customers, a significant portion of this infrastructure is the supplier’s ability to trade documents electronically. Buyers are much more likely to invest in a relationship with a supplier that can not only meet the needs of today’s buy, but can consistently and automati-cally do so in the future. Sometimes, the more risk-adverse buyers are willing to give some margin dollars if they feel the relationship is long-term, unique, strategic, with a buying experience that is easy and can be reproduced on demand. Smart buyers know that companies which are systems-driven and integrated are performing more efficiently, thus providing a product at a lower cost and delivering more efficiently.

Many of a supplier’s custom-ers, namely the successful ones, plan their business. They produce top-down financial forecasts and bottom-up inventory plans, driving both sales goals and open-to-buy budgets. The more successful business relationships are formed where these forecasts are shared with suppliers. Often, these forecasts are subsidized with actual sales data from the retailer’s point-of-sale and current inventory position. This



enables a supplier to better meet the demands of their customer, more likely to be in-stock when needed without overstocking to guard against guesswork. The supplier can measure both its sell-in and sell-through to custom-ers. This provides a means for the supplier to optimize its own inventory and understand how to better engage the customer for future sales. For some industry segments, the supplier can even subscribe to data that helps it under-stand the market share it has with its customers and better understand what its customers are doing. Additionally, a trend-line of forecast accuracy from the customer can provide some cover, or an occasional get-out-of-jail-free card, when the customer’s forecast accuracy consistently proves to be substantially off. It goes without saying that trading partners have different and often competing

priorities and motivational factors. However, it’s proven that organizations that have collaborative relationships leverage the data traded for greater returns. Of course, this data is almost exclusive-ly exchanged electronically.

Many suppliers feel they need high touch-points with customers, otherwise they run the risk of lost opportunity or market share. Air travel, in-transit loss of productivity, lodging, wine-and-dine expenses are real costs suppli-ers incur, often plowed directly into the supplier’s SG&A P&L line item. Sometimes this is necessary and is often rewarded. However, today as a supplier, how you want to communicate with your customers may not be how your customers want to communicate with you. A differ-ent, more “plugged-in” workforce with a younger group of decision-makers may prefer a more sanitized form of communication, one that they feel doesn’t unnecessar-ily intrude on what they consider already overtaxed work. This generally includes developing a reliance on electronic document exchange, minimizing face-time. As a supplier, re-evaluating how you communicate and interact with your customers may save real expenses in addition to providing greater client satisfaction.

As is the case for any investment, what you get out of it should be greater than what you put in. Otherwise, it wouldn’t make sense to do it. EDI and B2B inte-gration are no exception. When evaluating how EDI can help your business make money, you obviously have to measure the investment you make in EDI and B2B integration. It used to be that EDI was a rather expensive initiative requiring system hardware, software, and tech-nical staff to make it work. Today, implementation and execution of EDI is much cheaper, only the largest compa-nies make relatively significant investments in EDI. Many companies have turned their B2B integration needs to out-sourced EDI providers that can leverage their “ecosystem” and investments to provide a low-cost alternative. Most companies with basic B2B integration needs and require-ments can often find an ROI in well under 12 months.

Understanding the financial benefits of B2B integration may not make you an EDI enthusiast, but it will make you a smarter business person. It’s important to understand not only how you will benefit from EDI, but how your trading partner also benefits from the electronic relationship. And who knows, maybe your favorite ad next Superbowl will be an EDI commercial.

Suppliers should ask how their customers prefer to communicate. They may be surprised by the opportunity for cost savings.

Like any other investment, you will get out of EDI what you put into it. Make sure you have plans to leverage the strategy to get more out of it.

EDI makes money

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