When executives with Owens Corning calculated their spend for handling paper invoices, orders and acknowledgments in 2001, the sum was staggering. Personnel costs topped $4 for each of 40,000 invoices the company received each month. Their situation was not unique; less than one percent of companies today rely on electronic data interchange (EDI) to digitally replace supply chain paper flow.
When electronically connecting with its vendors became the goal, Owens Corning, the Toledo, Ohio-based building products company, realized it lacked requisite infrastructure and staffing skills sets. More importantly, recalls John Hutchinson, eCommerce and EDI leader, "We recognized that converting to EDI meant we would have to streamline our internal buying processes." In looking at solutions, they determined that outsourcing the EDI initiative would be the best way to put efficiencies around those processes and the fastest way to get their vendors to sign on to the program.
Better, Cheaper Faster - Not Just Mantra
Because they turned to Advanced Data Exchange (ADX), a Newark, California, provider of outsourced EDI and XML translation services, the outsourcing solution turned out to have two additional major benefits - both unanticipated.
"We originally thought we would have to spend around $100,000 - $200,000 a year for outsourced services," Hutchinson says. But the ADX business model, with a performance-based fee structure, requires only an upfront fee (in the neighborhood of $40,000 for a company like Owens Corning) from the buyer. The remainder of the provider's compensation relies on monthly fees paid by the buyer's vendors who opt in to the EDI program. Moreover, if ADX - which is solely responsible for marketing the program to the vendors - does not meet Owens Corning's minimal target of connectivity (80 percent of its 1500 vendors), the provider will rebate part of the set-up fee.
Anticipating vendor resistance to the changeover to EDI, Owens Corning especially appreciated the outsourcer's experience in successfully converting vendors. ADX handled the entire process with vendors while Owens Corning focused on mapping and defining processes. "We didn't have to look like the bad guy to our vendors," Hutchinson says.
As a "carrot," Owens had already planned to pay its vendors' first six months' subscription fees, an incentive for them to convert. After consulting with ADX, it was clear that other companies' successful programs used both a carrot-and-stick approach. The stick would be a $50 penalty per paper invoice sent to Owens Corning after the deadline date for signing up for the EDI program.
ADX reviewed Owens Corning's existing infrastructure, created a network translation engine to convert electronic documents going to and from vendors, then started converting the vendors. Despite anticipated vendor resistance, Hutchinson reports the provider's expertise approached and converted vendors even faster than Owens Corning was able to complete training its internal buyers (who generate purchase orders) as to how the new system operates.
Web-based Platforms Attract Smaller Vendors
According to Ken Vollmer, research director for B2B Integration with Giga Information Group in Cambridge, Massachusetts, EDI transactions are growing at 10 percent to 15 percent a year, mostly driven by small firm adoption. Web-based platforms, such as ADX offers, allow smaller vendors to conduct EDI transactions without implementing expensive hardware or internal IT support.
ADX was also the ideal solution for SCP Pool Corporation, the world's largest wholesale distributor of swimming pool supplies, headquartered in Louisiana. The pool company wanted to reduce the amount of manual entry for processing nearly 250,000 purchase orders and invoices sent by mail or fax (at that time, in 1999), but it didn't want to invest in an entire EDI department of its own. Also, Mark Alvarez, special projects director, says it had been difficult to get middle-tier vendors to buy into an EDI initiative. Outsourcing to ADX was attractive, he says, "because they have a method to get vendors to contract with them in a hub."
Alvarez says they also like the ADX interface presentation. It allows vendors to get all their purchase orders on one page, click on the ones they want, and then print or perform another action with the selected items.
Of SCP's 120 vendors, 40 are larger companies that already had their own EDI infrastructure. The other 80 vendors are now electronically connected via ADX, resulting in significant reduced operational costs. Seventy-five percent of the purchase orders and 60 percent of invoices now go to SCP via EDI.
SCP has saved money in another way because of the initiative. "We've doubled in size since this initiative," claims Alvarez, "but because we've outsourced, we haven't had to add any bodies in accounts payable."
Replacing paper with digital documents eliminates manual data input (and associated errors) and the process is faster. The automated transmission of a purchase order receipt lets the customer know the request has been received, eliminating the need for a follow-up confirmation call or email. But acquiring and installing an EDI translator can run $50,000, a cost that's prohibitive to most small and mid-size vendors. For the vendors working with companies outsourcing their EDI functions to ADX, the vendor cost for using the Web-based ADX network and services is only $59 per month for 25 transactions.
Today, around 275 Fortune 1000 companies outsource to ADX as an intermediary to their small and medium market suppliers, says the ADX CEO. He says the application comes in a desktop client or a Web-based service, and vendor sign-up is a simple eight-step process akin to signing up for AOL.
Lessons from the Outsourcing Journal:
- By outsourcing to a provider using a Web-based platform, the buyer's small and mid-size vendors can convert to EDI transactions without acquiring and implementing expensive hardware.
- Because vendors often initially resist the changeover to EDI, outsourcing to a provider with experience in successful conversions mitigates the buyer's risks and cost.
- Converting to EDI involves changing the buyer's internal processes. Outsourcing is the best way to put efficiencies around those processes.