Understanding the True Cost of Working Manually with Your Trading Partners
Companies make significant investments in business-to-business software and connectivity to automate business transactions with their trading partners. With most, the primary focus is to drive efficiencies with large trading partners; leaving the smaller trading partners unchanged - and a lot of money on the table.
This trend is driven by the misconception that it's expensive and complex to electronically enable business processes with the lower transaction trading partners. It is more likely, however, that companies don't fully understand the true cost of manual transactions - and the impact that has on customer satisfaction, margin erosion, visibility, and cycle times.
The Trading Partner Network
Trading communities are usually made up of customers, suppliers, financial institutions and logistics providers; all of which vary in size and electronic trading capabilities. Often times, these partners are identified in tiers and grouped by common criteria to create a segmentation strategy.
The following diagram demonstrates a standard B2B segmentation strategy. Most companies stop integration efforts at the Tier 1 level, connecting occasionally to Tier 2 partners, but ignoring the largest segment of trading partners (those below the dotted line) - Tier 3 and Tier 4 partners - believing it is not worth the time, money, or effort to integrate with these smaller partners.
Understand What Your Manual Processes Are Costing You
To understand the value of electronically enabling your smaller partners, you need to determine your manual processing costs. Since most companies do not have access to this information, Sterling Commerce (News - Alert)created a B2B Automation Savings Calculator as a tool for understanding the costs. By entering information regarding a company's manual trading partners, the calculator applies formulas against industry averages for manual document processing costs, error rates, and error reconciliation rates, to get the estimated monthly manual processing costs.
- Orders - median value of $10.10
- Invoices - median value of $12.35
- Remittances - median value of $12.35
- Estimated manual document errors - 10 percent
- Error reconciliation costs - Median cost of $53.50 (including $33.50 in labor and $20.00 in materials)
When determining your strategy, it's important to consider two areas of change: partner behavior and processes. Ask yourself the following key questions:
- Will your solution require a behavior change, and will you use incentives, mandates, or formal requests for compliance?
- Will you focus on suppliers or customers, and which of the two would be more willing to change their business processing behavior for you?
- Will you focus on a particular document, or automating a particular communication method, such as e-mail or fax?
Behaviors will change when you offer something of value as encouragement. What behavioral change do you want your small manual partners to make, and is the change beneficial to them? The more change you request from your partners, the greater the associated benefit you need to provide. Some successful benefits include:
- Discounts for electronic orders
- Better payment terms for customers or faster payment to suppliers
- Improved or guaranteed delivery/promise dates
- Increased visibility into the larger order/supply chain
- Improved supplier ratings
Customers are often less likely to make changes. In this situation, small changes are easy to implement, and can mean big savings for you. For example, asking a customer who faxes orders to switch to a fax-to-EDI conversion service is a small change. They just have to put a new number in their fax machine memory, and change their fax form. For you, it eliminates the costly and time-consuming manual processing.
If behavioral changes are unlikely, process changes could provide the benefits your partners strive for. Process changes can help you increase efficiency, minimize error and streamline operations. The key to successfully implementing these changes is in identifying your priorities and opportunities for electronic enablement. Knowing your priorities will lead you to the technologies that can enable the process changes.
When evaluating which processes to change, you should begin by understanding your reasons for electronic enablement…ordering efficiency, purchasing efficiency, transaction cost reduction? For example, if order efficiency is a priority, purchase orders and invoices have the highest cost to manually process and often contain the greatest number of errors. For that reason, they are usually the first documents to be automated.
In the area of purchasing efficiency, consider automating processes with partners who send and receive faxes with a fax conversion service. With this effort, their behavior is not impacted, yet you receive the benefits. This service converts inbound fax orders from your customers to EDI, or have your outbound orders converted from EDI to fax, and delivered to your suppliers. Either way, impact is low and you reap the savings from automation.
If transaction cost reduction is a priority, evaluate what your partners are already doing electronically to investigate opportunities for improvement. Are they are sending you electronic purchase orders, but you are mailing them invoices? For example, customers who exchange documents by e-mail have Internet access. They may be willing to use Web forms instead of e-mail. By automating these processes, you can choreograph the ordering process to reduce errors, or implement business rules that result in greater accuracy and shorter cycle times.
Best Practices for Success
In order to be successful in automating your partner processes, start with the smallest change that your partner can make to a behavior or process that will help you meet your goals of automation. Know what's in it for them. Offer a compelling benefit that answers 'why should I change the way I do business?' Technology enables small behavior changes on the customer and supplier side to feed into automated processes.
Educate your partners. Let them know what you want to do, why you want to do it, and how it will benefit them. Walk them through the process. By making it as easy as possible for your trading partners, and offering them a value-driven business reason to change, you can implement automation, and make things easier for everyone.
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Edited by Michael Dinan