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Recently a trade association representing a group of independent distributors conducted a survey among their 146 member companies. These distributors and wholesalers ranged from $16 to $142 million in annual sales. When asked about the supply side of their businesses, over 70% of the respondents said they received between 100-250 invoices a month from suppliers. The troubling statistic was that almost 90% of the respondents said that 20% of the invoices they receive do not match the original PO’s (Table 1). When you consider all the paper that must be matched and reconciled to process these invoices, not to mention the ones that do not match, the work can be staggering. One manufacturer looked at the time their purchasing group spent processing PO’s, receipt documents, bills of lading and invoices and calculated that it cost an average of $42 to process an invoice. In order to better understand what is driving these costs, the survey also explored the reasons behind the matching and reconciliation problems. The most prevalent cause of mismatches was pricing differences (Table 2). The fact that many of the raw materials for these manufacturers are based on volatile commodity prices makes price increases a standard business practice in this industry. But the price mismatching had more to do with the flood of paper and out of sync databases, than with the frequency of the updates. Without an efficient process and easy to use systems, purchasing departments simply cannot keep up with the pace of communications from their suppliers.
Taking a closer look. To better understand what’s behind the paper problem, we did some further interviews with a typical distributor. This wire and cable distributor has annual sales of more than $6 million, and receives
between 250 and 500 paper invoices each month from suppliers, flowing in from as many as 20 or more sources. When invoices are coupled with the number of other paper offerings, such as product submittals, acknowledgements, proof of delivery, miscellaneous changes to blanket orders, and monthly statements, the
amount of paper handled by their back office is staggering. Evidence of this workload are the stacks of paper in accounting that are being hand-matched back to purchase orders (POs), along with copies of faxes and other miscellaneous scraps of paper.
“The problem is with shuffling so much paper, it causes us to make mistakes, adds additional phone calls, and delays payments that cause ‘summit’ meetings with our suppliers to resolve disputes…” says the head of A/P.
Her boss adds, “Manually handling paper adds up to time being used that we don’t make money on.”
These paper-based processes result in inefficiencies on the business side of the house. To try and offset some of these challenges, more than 56% of the distributors surveyed said they’ve implemented some sort of EDI capabilities.
Many of the suppliers we spoke to felt that implementing EDI did little to stem the flood of paper between them and their suppliers. Depending on how the technology is implemented, and how the key data elements are synchronized, EDI may not save anyone much time at all.
Where the flood begins. Let’s look more closely at the processes of the distributor we mentioned earlier. A good portion of their business originates from RFQs received from electrical contractors or builders. The customer service department responds to 200-300 RFQs per week, most of which are received via fax or email. All quotes are entered into the distributor’s core inventory/accounting system to be priced, and a sales order will be generated if the bid is accepted. The purchasing department constantly monitors inventory levels, customer orders, promise dates, and supplier lead times to determine when to place replenishment orders with suppliers. Although the purchase orders to suppliers are generated from the purchasing system, in most cases they are printed and faxed to suppliers. In some cases, the PO’s are emailed, but under either scenario, the suppliers , in turn, re-printthe PO and manually enter it into their order entry system. Two years ago, this distributor invested approximately $70,000 in hardware and software to enable EDI communications with 5 of their largest suppliers.
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