In working to reduce the 40,000 paper invoices it receives from its supply base every month, Owens Corning has learned that the three most important elements of automating data exchange with suppliers are process, process and process.
[From Supply & Demand Chain Executive, June/July 2004] When you are a $5 billion company working with about 17,000 different suppliers, you are bound to receive a few hardcopy invoices every month, but that does not make it any easier to swallow the cost of processing that steady flow of paper. In fact, as far as James Hawkins is concerned, the business case for eliminating most of those paper invoices by automating data exchange with suppliers is pretty straightforward: taking paper out of the transaction helps reduce a company's non-value-added costs.
Hawkins is e-sourcing process leader with Toledo, Ohio-based Owens Corning — a manufacturer of a variety of composites and building materials — and he is quick to point out the costs associated with the traditional accounts payable paper chase, as well as the potential benefit of reducing the number of invoices that a company receives from its suppliers. "We were processing somewhere in the area of 40,000 invoices [per month] at somewhere around $4 a pop," he recalls. "If you cut that in half, then you've wiped out 20,000 invoices at $4 a piece." Assuming that the cost of automating those invoices is less than the $80,000 in savings per month, Hawkins concludes, "this must be a good idea."
Narrowing the List of Targeted Suppliers
The first step in this process, of course, was deciding with whom the company should transact via EDI. After reviewing transaction histories for its supply base, the company used two criteria to narrow down the list of suppliers with which it wanted to connect via EDI. First, Owens Corning identified the top suppliers based on the number of transactions that the company did with each supplier, verifying that the transactions were regular in nature and represented an ongoing relationship with the company.
Then they checked that each of the targeted suppliers represented at least $50,000 in business annually with Owens Corning. The result of this process was an initial list of several hundred suppliers that the company would target, representing a variety of services and indirect and direct materials.
The next challenge, naturally enough, was figuring out exactly how to set up that EDI connection. The crux of this challenge was that not all the company's targeted suppliers were set up to do EDI. And, given a cost of as much as $75,000 to $150,000 to establish EDI capabilities, any number of the suppliers were likely to balk at the necessary investment just to do EDI with Owens Corning.
Fortunately, several solution providers have stepped forward in recent years to offer B2B connectivity services that let large corporations exchange EDI messages with their non-EDI-enabled suppliers through transaction networks and translation services. Owens Corning looked at several of these providers before settling on Advanced Data Exchange (ADX), an outsourced EDI and XML translation service based in Newark, Calif. According to Hawkins, the choice fell to ADX because the provider had experience with, and was able to handle, the full range of documents that Owens Corning wanted to exchange with its suppliers.
The Cell-phone Plan
Founded some six years ago, ADX operates a network that links large enterprises with their suppliers to exchange documents. The large enterprises can send, for instance, a purchase order intended for a supplier in EDI to ADX, which translates the document into a format that the supplier is capable of receiving. ADX then either sends the file directly into the supplier's back-end systems or allows the supplier to receive and respond to the document using a Web browser interface based on an e-mail paradigm.
Finally, the supplier responds back to the large enterprise through the network.
ADX typically charges a transaction fee to the enterprise's suppliers. The fees usually get rolled into a cell phone-like plan: A "starter plan" could run $69 per month for 25 transactions, plus $3 per transaction over that limit. Andy Duncan, CEO of ADX, says that the plan fee covers the entire cost of doing business with the solution provider, and ADX charges no additional fees for software, connecting to additional trading partners or support fees.
For those Owens Corning suppliers that were not already EDI capable, the company enlisted ADX to recruit and get them on the network. The company initially went after its top 200 suppliers, based on the number of invoices that they sent to Owens Corning, and this group was up and running by early 2002. By the end of 2003, a total of 425 suppliers were connected to the network, along with 200 doing traditional EDI, and in 2004 Owens Corning was aiming to connect with a total of 2,000 suppliers via ADX or EDI, representing 80 percent of its total previous volume of paper invoices.
Tweaking the Business Model
Certainly ADX's revenue model was attractive from Owens Corning's perspective, at least initially, since the company just had to pay a small fee to get connected to ADX, and then its suppliers would pick up the subsequent costs. But, according to Hawkins, while some larger suppliers were willing to sign onto the initiative, the transaction fee structure presented a problem for other vendors, who balked at covering the fees. Their concerns also made it more difficult for Owens Corning's category managers and commodity leaders to sell the idea of signing onto the ADX network, which affected the overall effort to fully engage the company's buying community in promoting the project to the supply base.
Ultimately, in order to meet its broader objective of e-enabling a large portion of its supply base, Owens Corning realized it would need to take a different tack. Explains Hawkins: "Essentially what we wound up doing is changing [the business model] so that the supplier pays a monthly subscription fee, which handles their support, and then we pick up each of the transaction fees for documents going back and forth."
By sharing the costs, Owens Corning was able to demonstrate the value for the suppliers in signing onto the program. And Hawkins says that suppliers do, in fact, enjoy benefits from joining the network. "We've already had suppliers comment on their payment being more consistent because we're better able to handle their invoices," he says. With the exchange of documents automated, Owens Corning employees also have better visibility into incoming invoices, purchase order acknowledgements and ASNs.
The Process Focus
Perhaps the most significant benefit for Owens Corning has been that it has had to focus on its own internal processes and how it handles each of the documents it was seeking to e-enable. For example, the company's efforts to automate the process of managing freight has lead to more education for the buying and accounts payable communities to drive consistency in how freight is handled.
With a target to automate 80 percent of its invoices this year, Owens Corning will still be left with some 10,000 paper invoices to process manually. However, the company figures it has achieved cost reductions through the project with ADX in both savings from automating invoice-related processes and from eliminating manual processes for handling PO acknowledgements and ASNs. But Hawkins emphasizes that a primary benefit of the project has been in improving the company's processes. "It's a good way to pull out the flashlight, find out what the processes are, clean them up and automate them," he concludes.