This article comes from one of our partners, SPS Commerce, experts in EDI solutions.
Retailers that haven’t engaged an Electronic Data Interchange (EDI) may be spending more than they need to, both on staff time and shipping charges. It can take a lot of time and many people to find, prepare and compare documentation to confirm the purchase order information matches the warehouse or store receiving papers and the invoice from the vendor.
Three-way match with EDI automation
In a system that isn’t automated, retailers' accounts payable teams hand-match the purchase order and receiving advice to the invoice when it arrives. This is referred to as three-way match.
Depending on how the systems within the business are used and connected, three-way match can be very time-consuming to find this information even within an organization. They may be tracking down an email in someone’s personal inbox or looking for a fax in a folder on someone’s desk. Perhaps hundreds of invoices have to be reviewed, looking for discrepancies in pricing, quantity and shipping charges.
In one real life, first-hand example, the Operations Manager at a major retailer oversaw a department of 15 people whose day-to-day included manually reconciling every transaction before payments could be issued. Most of them were correct, but the time and work still had to be put in to make sure that was the case.
After they started doing EDI, it was discovered that 70 percent of the invoices had no issues. With the bulk of the transactions reconciled by automated three-way match via EDI, they were able to redirect staff members to focus on the 30 percent that didn’t match. Then they were able to start identifying the problems in that 30 percent that had been rejected.
It turned out that most of their invoices had pricing problems, many had quantity issues, and a smaller minority weren’t following payment terms, such as adhering to when a payment must be scheduled, or the cash discounts were different from the original order agreement. They were able to work on getting better compliance from their vendors for even fewer reconciliation issues.
Simply automating this process set off a domino effect of other positive forces within the company. Because fewer payments had to be processed by hand, the company reallocated its staff resources to other functions within the business. They were better able to take advantage of cash discounts for on-time payments and other special offers from vendors. The cash they saved was further invested into growing the company. EDI ended up being a big boost to the total profits of the business.
EDI facilitates better shipping rates & payments
Once EDI automation for the payment process is in place, it opens up the possibilities for more precision in order fulfillment efficiency and shipping costs.
There are three typical ways for retailers to fulfill online orders - from the retailer’s inventory, drop-shipped directly from a vendor or fulfilled and shipped via a 3PL.
EDI can integrate with a number of systems to help determine the least expensive way to fulfill orders, depending on various factors, including price, excess inventory in a store or distribution center and geographic location in relation to the delivery address, among others.
Additionally, retailers can use EDI to help them save on shipping costs. Third-party logistics providers (carriers) often provide volume discounts to retailers and suppliers that ship large quantities of products. Since many retailers ship to their brick and mortar retail stores, along with direct to consumers, they can capitalize on the carriers’ lower shipping rates.
When a retailer’s shipping rates are lower than a vendor’s, the retailer can include their account number for the carrier in the EDI transaction. This can happen when working with smaller vendors that don’t have the order volume to achieve better rates. Rather than paying the supplier’s shipping rate, the retailer pays its negotiated shipping rate, which can often save a few dollars on every shipment. If shipping rates were a barrier to making more purchases from the vendor, this arrangement can increase your volumes to drive even better pricing.
EDI automation can help solve a number of problems for retailers regarding payment and pricing problems, both with vendors and for shipping. Such a system could easily and quickly pay for itself within a few months of implementation and still continue to provide cost savings well into the future.