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
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.