How can the benefits of EDI be translated into a positive ROI?

The benefits of implementing EDI can be both strategic and operational. EDI can strategically benefit your organization by strengthening relationships with customers and vendors, resulting in a greater advantage against the competition. EDI benefits operational processes by reducing both the time and personnel required to complete order entry, and reducing strain on other resources. The following sections discuss how achieving gains in these areas can have a positive effect on the return on investment (ROI) of your firm.

Strategic ROI

Is the ability to meet customer and vendor demands and requirements a driving factor in your business, perhaps even more a factor than pricing? Is the timing and accuracy of the delivery of goods and services critical to your customers and vendors? Could a 30% faster delivery time to your customers and vendors be turned into a competitive advantage? Will being "EDI enabled" allow your firm to penetrate new markets or find new suppliers? Are customer loyalty and long term alliances a high priority for your firm? Would an EDI-enabled A/P and A/R system favorably affect your payment terms and agreements with customers and suppliers? All these areas can directly affect the perceived value of your firm, resulting in a positive ROI.

As an example of the strategic benefits of EDI, the Gartner Group reports that gross sales for a supplier firm to a major retailer increased 18% after the company implemented an EDI program (Gartner Group, 1996).

Tactical ROI

With an EDI system in place, most companies realize a substantial amount of time and cost reduction in processing and executing customer orders. Studies show that it takes up to five times as long to process a purchase order manually as it does electronically. With EDI, since specific working requirements and terms have been agreed upon between each partner, documents such as Purchase Orders and Invoices are no longer individually created, mailed, entered, and then processed. Instead, these documents are processed electronically and accurately, reducing processing time and the number of staff needed to complete each data entry. The following is a list of key tactical areas in which a positive ROI may be realized by an EDI program implementation.

• Administrative cost reduction:

  Studies suggest that it costs an average of Rs.30 to manually process a customer order, whereas implementing an EDI-enabled order entry program would reduce that cost to Rs.10 per customer order.

  Calculate the number of purchase orders your firm processes annually, then multiply that figure by Rs.20 each to estimate cost savings. Enter the amount below.

  Rs

• Personnel reduction:

  A standard EDI implementation will significantly reduce labor time and cost in the following key administrative task areas:

  • document preparation
  • error detection and correction
  • reconciliation
  • mail preparation
  • telephone calling
  • data entry
  • overtime
  • supervision expenses

  Studies have shown as much as a 50% reduction in required staff can result from a fully functional EDI implementation (Price Waterhouse, 1995).

  If your firm reduced the staff responsible for processing purchase orders and invoices by an average of 30%, enter the annual dollar value of those personnel cost savings below.

  Rs

• Cycle time reduction:

  Cycle time refers to the amount of time necessary for a customer to receive an order after it is placed. Companies shorten order cycle time to increase competitive advantage, decrease carrying costs, decrease shrinkage costs, and improve cash flow. In a case study involving the Pfaltzgraff Company (a supplier) and Best Products (a retailer), a 50% reduction in order cycle time was achieved after implementing an EDI program. (Gartner Group, 1995).

  Assume your company could reduce order cycle time by an average of 25 %, and that your resulting competitive advantage increased sales orders by 15%. If your company has a 5% profit margin, enter the profit increase resulting from the 15% increase in sales below.

  Rs

• Inventory reduction:

  EDI can reduce the expenses related to storing goods for a period of time. EDI-enabled customer-supplier relationships can provide your firm with more accurate demand forecasts, reduced cycle time, and more dependable supplier schedules. Reduction of inventory is calculated by multiplying the number of days by which order cycle-time is decreased by the amount of inventory on hand. For example, a firm might carry an eight-week supply of finished goods. If the firm became EDI enabled with its key customers and subsequently reduced cycle time by 25% from 30 days to 22.5 days, could the company reduce inventory accordingly? Because the firm could more accurately predict short-term demand with EDI, it may only be necessary to hold a six-week supply of finished goods. This would result in reduced costs including cost of goods, storage space, service, and risk (insurance).

  If your firm reduced inventory levels by 10% due to more accurate demand forecasting, how much money would your firm save annually in inventory carrying costs?

  Rs

• Cash flow improvement:

  Decreased operating expenses and improved accuracy in procurement areas are directly beneficial to a firm's financial cash flow. Electronically received orders, processed quickly and received on time by your customers, will also allow your firm to negotiate positive incentives such as more favorable payment terms, discounts, and long term contracts. For instance, many EDI enabled firms report a lower number of open account receivables. Although this area is difficult to quantify, most accounting departments can attest to the numerous benefits of improved corporate cash flow.

  If your firm recovered cash savings from reduced carrying costs, improved payment terms, and overall transaction accuracy, how much money could your firm place in cash reserves?

  Rs

• Improved order fulfillment:

  EDI-based reporting provides managers with access to data and process-status information, which enables them to make more accurate and informed business decisions. EDI-based reporting can also improve the analysis of pricing changes and promotional ties. Most importantly, it can maximize product availability despite shifting demand by enabling faster analysis and recognition of demand trends. The Gartner Group (1995) reports an average inventory reduction of 10% at EDI-enabled manufacturing firms.

  If your firm reduced stock outs and backorders by 10% due to more accurate reporting and demand forecasting, enter the resulting increase in sales volume in annual dollars below:

  Rs

Implementation Costs

The following sections discuss the major costs of implementing an EDI program. You can then compare implementation costs with the annual savings figures from the previous section to arrive at your company's projected ROI.

• Purchase price of EDI software:

  Most companies depreciate the cost of EDI software, training, and implementation as a capital expenditure over a 5-year period. Use the purchase price quoted by your EDI software supplier to calculate depreciation.

  If your firm depreciated the cost of the EDI purchase, training, and implementation, enter the annual amount of depreciation below:

  Rs

• Maintenance expense of EDI software:

  EDI software support and updates are generally expended at 18% of their purchase price per year. Due to the changing nature of standards and operating system upgrades, most EDI clients annually renew their maintenance terms.

  If your firm expensed 15% of the purchase price of the EDI software annually, enter that amount below. If purchase price is unknown, enter Rs 8,000 (the industry average).

  Rs

• VAN expenses:

  The cost of communication with your trading partners is a recurring monthly expense for an EDI program. These charges are generally based on the volume of data sent monthly; average VAN service costs for a low volume EDI operation are Rs 1,500 per month.

  If your firm began its EDI program with a low volume VAN expense of Rs 12,000 (12 x Rs 1,000) per year, enter that amount below.

  Rs

• EDI personnel:

  Most companies will target one employee to focus on EDI implementation and ongoing program support. Support and maintenance for an average EDI program will comprise approximately 50% of that employee's work week.

  If your firm devoted 50% of the time of one employee to EDI coordination, enter the annual personnel cost here.

  Rs

Click Calculate and then scroll down to see your results.

ROI Balance Sheet