This is the fourth and final blog post in a series that discusses EDI and the benefits associated with using it for order-to-pay processes. (Start by reading part 1 here: There Has Never Been a Better Time to Revisit EDI).
Companies are beginning to focus on streamlining the Accounts Payable (AP) department to obtain further cost efficiencies and to improve visibility into financial performance. Eliminating the mountains of paper invoices and replacing them with electronic invoices is the first logical step to achieve these benefits.
Adding to the adoption of EDI use with AP, many countries are enacting legislation that now permits an electronic invoice to serve as the legal invoice for compliance or tax purposes, and some countries like Denmark, Sweden, and Finland, are about to demand the use of e-invoicing for government agencies. In addition, benchmark and case studies have shown that these electronic invoicing solutions are easier to use and decrease processing time, which is also helping EDI’s adoption.
EDI is one of the key technologies used by Best-In-Class companies to remove paper and eliminate error-prone manual processes. Below is a comparison of a typical manual/semi-automated invoicing process to an EDI-based invoice process.
Below are examples of how EDI enables companies to achieve these benefits:
- Invoice capture With EDI, all the invoice details flow into the accounts payable system, so significant labor costs are realized on the elimination of opening, sorting and scanning of paper invoices, or the error-prone re-keying of data.
- Remittance details High transaction buyer-supplier relationships present a big invoice- reconciliation challenge. Here are three activities that compound that challenge:
- A buyer consolidating multiple invoices into a single payment to reduce banking fees and simplify approval processes.
- Buyers debiting invoices for penalties due to lack of compliance with contract terms; non-performance against established service-level commitments; or credits outstanding from other transactions.
- A bank will notify its customer through a daily statement that a credit was received to their account in a specified amount from a particular customer, but the statement often lacks detail about the associated invoices.
Without EDI, the A/R department must then attempt to determine which invoices were associated with the payment transaction and what discounts were applied, all of which wastes time and labor.
Trade Discounts – Many suppliers are willing to offer a discount against their receivables in exchange for faster payment, but the mailing, sorting and re-keying of paper-based invoices add several days to the process, so it becomes harder to take advantage of the discounts. EDI invoices can be transmitted within seconds, validated quickly and approved within days, enabling buyers to realize early payment discounts, which can result in thousands or millions of dollars saved.
Eliminating the Invoice In order to entirely eliminate the burden of handling invoices from high-volume, trusted direct materials suppliers, many companies in the manufacturing industry have implemented the Evaluated Receipt Settlement (ERS) process. Here is a typical ERS scenario:
The buyer sends an EDI purchase order that includes the price for each item.
- The supplier ships the goods and sends an EDI Advance Ship Notice (ASN).
- The buyer receives the goods, calculates the amount due based on goods actually received and the price provided in the purchase order, and pays for the shipment.
With ERS there is no invoice, just a 2-way information match. This saves the buyer the time and cost associated with the traditional 3-way match, in which an invoice is also matched against the purchase order and goods received.