Clicky

How to Calculate Your ROI When You Adopt EDI

 
edi

As an SME company, you want to implement EDI and enjoy its various benefits, including higher ROI. While the principle of ROI is simple, it can also be risky because the parameters of calculating cost and profit are variable. The cost side is simpler while the profit side depends on measurable factors, such as indirect savings from decreased manual work and optimized inventory turnover rate.

You can calculate your own ROI using this formula:

(profit from investment – cost of investment)

cost of investment

Let us assume that you have 15 trading partners with 10,000 orders and invoices per year. For year 0, you need to include the implementation costs and transaction costs. Let’s say year 0 cost is $30,000 including transaction costs. This means that you will have $3 cost per transaction. The following years you will only have transaction costs, which in this case is $0.5 per transaction. This brings you $5,000 transaction costs per year.

  • First, calculate the current cost for manual process by multiplying the average cost for manual handling of invoices and orders by the number of transactions: $10 x 10,000 transactions = $100,000.
  • Then, calculate the year 0 profit using EDI by subtracting investment for EDI and transactions from manual process: $100,000 – $30,000 = $70,000.
  • To calculate your profits for the following years, subtract your transaction costs from your manual process costs: $100,000 – $5,000 – $95,000.

Using the formula above to calculate your ROI for year 0:

Current cost for manual process – $100,000

Year 0 profit using EDI – $70,000

Profits for the following years – $95,000 

[$70,000 (profit) – $30,000 (investment)]

$30,000 (investment)                                    = 1

To calculate your ROI for the following years:

profits from the following years – annual transaction cost

annual transaction cost

$95,000 – $5,000              =  18

$5,000

This is a simplified example. This does not cover all costs. To start calculating your ROI, make sure you have the right trading partner program.

Sign up for our weekly blog summary and newsletter!

Charlie Alsmiller

Throughout his career, Charlie Alsmiller has focused on customer problems in difficult industries such as Energy and Telecommunications. Prior to starting Appterra in 2005, Alsmiller was VP of Global Operations for Allegro Development, a leading provider of software for the energy sector. He has also served as president of OmniSpace Technologies, a leading SaaS provider that he founded in 1999. He spent over 10 years in the consulting world with Price Waterhouse and Deloitte Consulting, where he participated in a wide variety of projects for very high profile clients. Mr. Alsmiller holds a BBA from Baylor University in Management and Information Systems and a MBA from the University of Dallas in International Business. Specialties: Technology ventures, Enterprise Software, Contract Negotiation, International Operations, Private Equity, Product Management, Strategic Alliances, Software Implementation, Software Development

Related articles

Cutting Supply Chain Costs through B2B Electronic Integration

B2B electronic integration has been around for over decades now. Some industries implement them, while others don’t. Organizations that invest…

placeholder

AGXML and Appterra: Pushing B2B Interactions Online

Ag-XML is a consortium of businesses that develop standards to bring efficient e-business in the oilseed, biofuel, grain and other…

The Internet of Things’ Impact to the Supply Chain

Companies closer to their customers have already started to use IoT data to streamline their supply chains and get to…


no comments


Leave a comment

Your email address will not be published. Required fields are marked *