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Calculating the ROI for EDI

For large organizations, e.g. in high tech, automotive or retail, EDI is as clear as it is for airlines to use electronic tickets. Issuing flight tickets manually is just too expensive because of high volumes and labor costs. Same goes with EDI – EDI replaces manual processes and brings many direct and indirect benefits to companies.

IDC Manufacturing Insights 2013 asked from customers and suppliers about “What percentage of your business partners (suppliers or customers) you trade with electronically?” As one can see there is still a lot of improvement for electronic trade.

Same IDC survey asked “What are the business drivers that lead your organization (are leading) your organization investing in achieving better B2B integration?”

So it is clear that most of the pressure comes from customers towards suppliers. Higher ROI is in second place. For SME suppliers this can be tricky.  Big customer sets EDI as mandatory requirement to do business but technical understanding what EDI means practically and what the benefits of using EDI are not clear.

Principle of ROI

The principle of ROI is simple. On the other hand, this simplicity is also dangerous because you can decide the parameters when calculating the cost or profit. Cost side is typically simpler but on the profit side one should stick to easily measureable factors.

So what kind of factors there are on the profit side? It depends if you are on a selling or buying position.

  1. Minimizing manual work by automating the trade with EDI. This is direct saving on the labor costs (FTE). E.g. orders processing is at least five times faster when using EDI.
  2. Supplier using EDI will increase the speed of order-to-cash process as well as having more satisfied customers due fewer errors in order handling compared to manual process. These indirect savings might be difficult to calculate.
  3. For buyer it can mean inventory turnover rate optimization = less money tied to stock.
  4. Faster delivery times are once again indirect benefit.
  5. More sales when EDI is in use for specific customer (studies back up this but hard to calculate).
  6. More secure trading partner relationship, once again indirect and difficult to define monetary value.

Where to start?

First of all you need to know the scope:

  1. How many of your trading partners will be using EDI next year?
  2. Can you increase the number of EDI partners following two years time and how much? Obviously you should pick the most important partners first?
  3. What volume those targeted EDI trading partners represent in counting orders and invoices?

Set the scope for year-0, number of trading partners and number of transactions.

Now you can concentrate on costs

There are two ways of implementing EDI: in-house or to use EDI-service provider.

Implementing in-house EDI means costs for software and skilled people making mappings and translators for EDI messages that trading partners require.

Service provider typically charges one time implementation for ERP integration and connection implementations, including mappings, translators, data connection and transaction costs.

If you have limited number of trading partners and your trading partners don’t change too often, it is worthwhile to consider in-house EDI. Otherwise you may save up to 30-40% when outsourcing this to EDI-service provider.

One could measure the real FTE savings but I personally like simplistic way. Based on our workshops for customers in Scandinavia the average transaction cost for manual processing of P2P/O2C processes is between 8€ to 12€ for orders and invoices. You can of course do your own calculations.

ROI calculation

I take the EDI service provider model here for obvious reasons – we in OpusCapita represent one.

Let’s assume that as a SME company you want to implement EDI for 10 trading partners, with orders and invoices transactions volume being 6000 annually. For year-0 ROI you need to include the implementation costs as well as transaction costs. Let’s assume that the year-0 cost in total is 20k€ including transactions.

You will get 3,3€ cost per transaction. Following years you have only transaction costs which in this case we have cost of 0,5€/transaction which brings us 3k€ annual transaction cost.

Current cost for the manual process is: 6000 transactions * 10€ (average cost for manual handling of orders & invoices) = 60k€

The formula of ROI  = (profit from investment – cost of investment) / cost of investment

For year-0 profit by using EDI would be: 60k€ (manual process cost) – 20k€ (investment for EDI & transactions) = 40k€
Following years profit is: 60k€ (manual process cost) – 3k€ (transactions) = 57k€

ROI for year-0 would be (40k€ [profit] – 20k€ [investment])/20k€ [investment] = 1
ROI for following years would be (57k€ [profit] – 3k€ [investment])/3k€ [investment] = 18

This is just a simplistic example which doesn’t cover all costs since implementation phase requires some work inside company as well as there is still need to have some people to work with order handling and invoicing  when using EDI in P2P or O2C processes.

The pitfall here is that once you specify the scope for to-be EDI partners and do the calculation based on that, you must really be sure that if you use EDI service operator, they have proper trading partner onboarding program to ensure that the selected partners will turn to EDI and the estimated transaction levels will be automated using EDI.

 

Hannu Holm
Product Manager
B2B Integration
Involved with EDI product management since 2004


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2 Comments


  1. Dear Mr. Hannu

    Thanks for article – it’s great. I would like to discuss only one not very important moment

    ROI for year-0 would be (40k€ [profit] – 20k€ [investment])/20k€ [investment] = 1

    I’m not sure about this method of ROI-calculation…

    ————————————————————————–

    I would calculate it:

    ROI for year-0 would be (60k€ [profit] – 20k€ [investment])/20k€ [investment] = 2

  2. PS

    Let’s calculate together.

    Let’s imagine (for a moment) that current cost for the manual process is (only) 20k€, ok?

    In my calculation we’ll have:

    ROI for year-0 would be (20k€ [profit] – 20k€ [investment])/20k€ [investment] = 0

    Zero – it’s no any return on investment. It’s clear.
    ——————————————————–

    But you calculate ROI in different way:

    For year-0 profit by using EDI would be: 20k€ (manual process cost) – 20k€ (investment for EDI & transactions) = 0k€

    After that:

    ROI for year-0 would be (0k€ [profit] – 20k€ [investment])/20k€ [investment] = -1

    What does it mean “-1”? There is no any clear economical sense in “-1″…
    A bit sophisticated result, I suppose.