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Understanding EDI

DCS Has Your EDI Needs Covered

An Introduction to EDI

Electronic Data Interchange (EDI) is the computer-to-computer exchange of routine business documents such as Purchase Orders, Shipment Notices, Invoices, and Remittance Advices. The exchange occurs without human intervention. Data moves from your customer’s computer system to your computer system securely through the internet. However, someone such as a Customer Service person must still review some documents, such as the created orders, before they are accepted.

EDI is widely used by large companies around the world. The documents and transmission conform to standards and are independent of the business application used. EDI utilizes a tightly structured data format which allows the data to be processed directly in either the originating or receiving company’s application. Typically, EDI first occurs with key customers and then later with vendors and carriers.

An example of an inbound document is the 850 – Purchase Order. The typical first encounter a Customer Service Rep has with the order is being alerted that it arrived in the ERP or accounting system and has been suspended due to an incorrect price or part number. The data entry step has been eliminated and time is saved as the CSR only needs to deal with exceptions. An outbound document example is an 810 – Invoice.  These are created after orders have been closed, they send automatically so there is no printing and mailing of invoices.

Customers not requiring EDI use WebForms, which are also used for lower volume transactions such as a freight claim for damaged goods.

Read a description of the typical Order-to-Payment cycle for Customers.
Read a description of the typical Order-to-Payment cycle for Vendors.

Frequently Asked Questions

Common Terms:

  • Trading Partner (another company such as a customer)
  • Transaction Set (a document such as a Purchase Order, an 850)
  • Segment (a record, for example a line in a PO)
  • Element (a data field, such as a Purchase Order Number)
  • AS2, a communications method for secure Internet data transmission
  • X12, AIAG, Uniform Code Council – standards setting bodies

Proven Advantages of EDI

  • Wider shipment windows
  • Greater security
  • Fewer errors
  • Better cross-department organization
  • Lower administrative costs
  • Faster order-to-cash cycles

Process Automation
CFOs searching for process automation savings should look to their existing Electronic Data Interchange and E-Commerce tools. Adding more customers, carriers, and/or vendors can be done economically using existing systems.

Managers have long sought to boost productivity by replacing manual with automated processes. EDI allows your data entry staff to better utilize their time, minimizes data entry errors and should be combined with immediate exception reporting.

The best results occur when changes are implemented incrementally. An example is gradually setting more links between customers and your ERP system. This typically includes receiving more data for better customer order management or adding more customers. These tasks are incremental. The changes are small enough that the ROI can be calculated accurately.

There are six key means to improve process automation the CFO should pursue:

  1. Add more customers or add more documents
  2. Add carriers to your EDI processes
  3. Add key vendors
  4. Make data transmission secure
  5. Automate price sheets
  6. Automate WebForm data

Lower Business Operating Costs
Most direct savings occur from the reduction to Customer Service staff and/or hours. Orders arrive electronically and are processed automatically, in a fraction of seconds. This means your CSRs have more time to do other things.  You won’t need to increase staff as you add new trading partners. Staff reduction is usually achieved through attrition.

Other savings are lower inventory levels and better utilization of cash. This results from better tracking of customer sales, enabling quick changes to production quantities for “hot” or “slow” movers. As EDI matures, the “organization” forced by automation also lowers administrative costs. More fulfillment time is available due to faster data flow. All of the investments in EDI become permanent productivity boosters.

Ensuring Reliable and Secure Data Processes
Reliability: EDI systems must be as reliable as payroll systems. This is because key customers are involved (and eager to levy chargebacks for mistakes). Your EDI needs to be easily modified since customer requirements are continually changing. For example, customer orders have seasonal discounts that must be reflected on the invoice.

A solid system and thorough exception reports are needed to achieve reliability. Acceptable reliability levels must by written and enforced by the CFO. They are achieved through positive cooperation among the Sales, Customer Service, Accounts Payable, IT, and other departments.

Security: Data sent from your company must be as secure as patient medical records or data exchanged with the Department of Defense. This is a reasonable level of security. The consequence of an error is an embarrassing disclosure or a legal remedy caused by disclosing key customers’ prices and information.

The standard you should use is the standard specified by the federal Departments of Human Services and Defense (EDI INT AS2). Fortunately it is also the standard supported by most industry leaders such as Wal-Mart, General Motors, Intel, and DuPont and most industry trade groups.

Failure typically occurs due to inexperience or time constraints. If an I.T. technician makes an incorrect setting, failure is possible.

Security is achieved by attention to the components. When used with a properly configured firewall, AS2 meets the standard. Fortunately, the cost of an AS2 utility is low and the monitoring of its performance is automated.

Calculating a Return on Your Investment

The return can be calculated using these expense categories, which are segmented into launch costs and then annual costs for years one, two, and three. A first and approximate calculation is recommended to learn if the proposal has merit.

Following is a list of initial and recurring costs that can be used to calculate the return. (If depreciating, spread the one-time costs over 3 years):
One-time Costs
Systems

  • EDI System
  • AS2 System

Services

  • EDI Integration
  • ERP Configuration
  • Testing – Internal
  • Testing – Trading Partner
  • Documentation
  • Training – IT Department
  • Training – Users

Platform and Environment Setup

  • Server
  • Installation and Testing

Personnel Cost

  • Planning Time
  • Implementation Time (some services above will be performed by your company others by DCS)
  • Project Management Time

Other

  • Taxes
  • Supplies
  • Contingency

Annual Costs (Years 1 – 2 – 3)
Systems

  • EDI System maintenance fee
  • AS2 System maintenance fee

Services

  • EDI changes (customer driven)
  • IT monitoring and support
  • DCS technical support

Platform and Environment Setup

  • Server maintenance

Personnel Cost

  • Maintenance time
  • Training of any new employees

Other

  • Taxes
  • Supplies
  • Contingency

DCS has been very successful in identifying potential savings. Please ask us as you evaluate. Perhaps our no-cost assessment and task list will light-up hidden savings.

EDI Benefits for ROI Calculation

The primary and immediate benefit is Customer Support staff reduction, plus an allowance for wider fulfillment window and greater accuracy. Faster and more accurate information to the sales staff will also reduce the number of information requests. This means fewer marketing employees needed to support the sales staff either through a reduction in Customer Service staff or an increase in the company size while the staff remains constant.

Here are specific benefits you may wish to consider when calculating your ROI:

  1. Wider fulfillment window through elimination of data entry time and delays. This means Customer Service has more time for Sales Order checks, resulting in less costly re-work and fewer expedited shipments.
  2. Lower operating cost through elimination of data entry wages and repetitive steps. (Also Reduces errors and re-work.)
  3. Adjust for global customers’ different time zones.
  4. Reduce deductions and chargebacks with timely Shipment Notices (ASNs).
  5. Faster payments when shipping and invoicing are electronic. Funds are transferred directly from the customer to your bank.
  6. Improves business controls.
  7. Lowers inventory levels and contributes to better in-stock positions.
  8. Lowers freight costs.
  9. Improves business processes.
  10. A preferred way of doing business among Fortune 500 companies.

Calculation of benefits is more difficult, but essential. Most can readily calculate the amount of time saved, but are uncertain about what fully loaded hourly cost to use. DCS suggests you start at $20 hourly for non-salaried employees, $30 for salaried, and later ask the CFO for a corrected rate. Keep in mind that cost reductions such as reduced paper and postage or reduced staff salary are recurring naturally and should be included as savings for each year.