When the economy is up, it's up, and, for those who are able to partake of the wealth, that also means expendable income for the nicer things in life, like a new car or a welcome vacation & or a pool. SCP Pool Corp., based in Covington, La., took advantage of the sunny skies that seemed to stretch endlessly over the American economy in recent years (despite the downturn) with aggressive steps to increase its sales and market share in the enlarging swimming pool supply industry. Such steps have been met with great success, and while Americans lounged by their new pools, SCP has grown considerably.
Today, SCP is the world's largest distributor of swimming pool supplies and related-products. Through 169 service centers in the United States and Europe the firm distributes more than 60,000 national brand and private label products to 40,000 customers, like Clearwater Pools, Burton Construction and Aqua Pools. Over 500 suppliers help SCP serve this diverse customer base, which includes pool builders and remodelers, retail pool stores, and pool repair and service firms.
In 2000, SCP achieved an 18 percent sales increase over the previous year, reaching revenues of nearly $670 million. During the same period, its gross profits grew 21 percent to almost $162 million. Despite a slowing economy, the firm had another record sales year for 2001. Better trading partner communications, stronger supplier relationships and the improved use of internal resources have all contributed to this growth.
Traditionally, SCP used mail and fax machines to exchange such business documents as purchase orders (POs) and invoices with the bulk of its trading partners. As part of a business improvement initiative, however, SCP's corporate leadership recognized the limitations of paper-based exchanges and began to explore alternatives to communicate more efficiently with its suppliers.
The recognition of this need to move away from paper-based processes began as the firm experienced its rapid growth. The inefficiencies associated with mail and fax transactions, like re-keying transactions, the potential for human error and slower business operations, were costly. To address these inefficiencies, SCP began using electronic data interchange (EDI) in 1998 to connect with several of its largest, most technically advanced suppliers. According to Mark Alvarez, SCP's special projects director, the results were immediately apparent in the accounts payable (AP) department with regard to the time saved, and SCP concluded that expanding its EDI communications with other suppliers was a strategic imperative. However, the company soon ran into adoption obstacles because of its suppliers' fears of EDI.
The bulk of SCP's more than 500 suppliers are small and midsize firms. According to SCP, most of these companies believed that the cost and complexity of implementing traditional EDI solutions outweighed the associated benefits. This is not surprising considering that the cost of a traditional EDI solution is often compounded by mapping fees, translators, consulting services, value-added network (VAN) charges, annual upgrades, licensing fees and maintenance requirements. As Alvarez explains, We were in a tough spot. Most companies in the swimming supply industry have limited technical resources. We were able to convince a dozen or so of our largest suppliers to connect with us via traditional EDI, but persuading mid-tier and smaller suppliers to adopt traditional EDI solutions proved to be a hard sell.
And that hard sell was drastically affecting SCP. The firm was experiencing rapid growth, but the demands of manually processing 400,000 to 500,000 transaction documents per year led to increasing operational frustrations. According to Alvarez: As our sales increased, so did our already huge volume of business transaction paperwork. Manually processing growing numbers of POs, invoices and other documents forced SCP to hire additional staff and to dedicate trained employees to low-value tasks, such as data entry and faxing. These requirements, as well as inefficient communications within the supply chain, led to a variety of challenges.
The firm's finance team, for example, faced the labor-intensive task of processing the paper-based transactions exchanged with hundreds of small- and medium-sized suppliers. To accomplish this effort, SCP employed about two-dozen people in its accounts payable department in 1999. This group, which included invoice coders, data-entry clerks and discrepancy specialists, processed nearly 200,000 invoices received via mail and fax that same year. As sales continued to grow and its suppliers remained reluctant to adopt traditional EDI solutions, SCP was forced to hire additional staff to keep up with the mounting transaction volumes.
At the same time, SCP's financial team recognized that paper-based transactions typically have higher levels of incorrectly matched POs and invoices than those transactions that are enabled electronically. By late 1999, PO/invoice discrepancies were having a major impact on the firm's finance and purchasing departments. As Alvarez puts it, Between having to hire more staff to process paper-based transactions and the time required to resolve discrepancies, our accounts payable [AP] department was in danger of becoming clogged. We needed to ease the discrepancy burden on our purchasing staff, too.
Like many large enterprises, SCP was capable of generating outbound EDI-to-fax documents to push purchase orders to its non-EDI suppliers. The impact to companies like SCP, however, comes on the inbound document, which invariably results in a purchase order acknowledgement, advance ship notice or invoice coming back over the fax machine or in the mail. These paper transactions caused a wide range of problems for SCP in matching POs with corresponding invoices that resulted in manual reconciliation, like incorrect pricing information, split shipments or data-entry errors.
While the causes of discrepancies and the necessary steps to resolve them vary widely, SCP's AP department estimates that, on average, resolving a typical paper-based PO/invoice mismatch takes approximately 70 minutes total between the finance and purchasing departments, which translates to a corporate cost of about $18 per discrepancy. SCP had tens of thousands of discrepancies in 1999 alone. Combined with the fact that paper-based transactions are less efficient in this regard and that transaction volumes were increasing, this factor was of significant concern to SCP management.
Meanwhile, the purchasing department was faced with other challenges. Since very few of SCP's trading partners were EDI-enabled prior to 2000, regional- and service-center-location buyers typically faxed POs to suppliers. SCP purchasing staff reports that, in 1999, they spent an average of 1.75 hours per day printing and faxing dozens of purchase orders to small suppliers. Jeff Johnson, regional buyer for SCP, said, This aspect of the job was a frustrating and monotonous task. To save time and avoid interruptions to our other efforts, we usually printed and faxed POs to suppliers in batches. Between paper jams, busy signals and printers being out of ink, this chore took up a significant portion of the workday. In addition, SCP buyers also spent roughly one hour per week following up with suppliers after they had faxed the POs just to confirm that the order was legible and had been received. On a few occasions, SCP was forced to hire temporary workers to help keep up with the workload. Taking into account that SCP has over 30 regional buyers alone, these administrative chores represented a substantial expense to the purchasing department.
In short, SCP senior management recognized challenges across the company and saw the strong need to cost-effectively improve business transaction communications with its partners. In late 1999, SCP faced inefficient communications within the supply chain and internal operational stumbling blocks. Company officials realized that if a solution wasn't found and quickly customer/supplier relationships, sales and profitability would all be affected.
A Break in the Storm
In response to the many problems SCP was facing and the need to accelerate supplier adoption of electronic business document exchanges, the company's senior management spearheaded a business improvement initiative to drive EDI to as many of its suppliers as possible. SCP was determined to improve internal operating efficiencies, work more effectively with its suppliers, ease the need to hire additional staff and strengthen its bottom line.
Following a thorough review of other solutions, SCP selected Advanced Data Exchange (ADX) for its corporate-wide Internet EDI solution in late 1999. Founded in 1996, California-based ADX provides an outsourced EDI and eXtensible Markup Language (XML) translation service that enables companies to exchange business documents, such as purchase orders, advanced shipping notices (ASNs) and invoices, electronically with their suppliers and customers.
Alvarez says that SCP had done some research into the companies that either provided EDI software solutions or could facilitate the EDI process with SCP's suppliers, but there were two things that made ADX stand out. First, ADX was already working with some of SCP's suppliers. Second, ADX presented a teachable and professional product. "We're distribution and distribution is already a little behind with regard to technological sophistication, but swimming pool distribution is way behind hardware and electrical and things like that," explains Alvarez. "We knew we needed something our suppliers could easily understand, because we couldn't talk with them in terms of EDI. My suppliers still don't know how their POs get to them."
SCP, working closely with ADX, then began contacting its suppliers in late 1999 to encourage them to use ADX's outsourced Internet EDI solution. Was partnering with ADX before having complete buy-in from its suppliers a leap of faith for SCP? In a way it was, since the purchase, installation and customization of EDI software is truly beyond the capabilities of most mid-size companies, let alone coaxing and convincing not-so-tech-savvy suppliers to begin using EDI. However, according to Andy Duncan, ADX's CEO, the ADX service was appealing to SCP because it provides an outsourced solution that includes campaign management resources to manage and enroll suppliers, train, and assist with the initial matching and trading process.
"SCP's team reasoned that they could 'sell' the ADX service concept to SCP's supply chain because outsourcing is fast, easy to deploy, and vastly less expensive than managing in-house software," says Duncan. And it seems to have worked. As of March 2002, SCP has successfully connected with 120 of its top suppliers on the ADX Network, which cost the company approximately an additional $3,000 total for internal IT coordination. And Alvarez says that 2003 will probably be its last transition year for EDI. After that time, it will cease to do business with suppliers that have not signed on with the ADX service.
On average, each of the EDI-enabled suppliers uses the ADX Network to exchange an average of 50 documents, including POs, invoices and ASNs, per month with SCP. Alvarez advises other companies that are looking to do the same with their suppliers to think about the POs and invoices from their suppliers' perspective. "If your suppliers are not EDI savvy, you really have to make sure you have an EDI map and get a real good template for them to view your POs, so that they'll see on the screen what they are going to get," he says.
As for the actual implementation process, Alvarez said, Implementing ADX's solution was very straightforward. It took us roughly four hours total over two days to finalize the initial mapping and testing. Beyond that we only spend, on average, about one hour total over a single week to map and test document exchanges with each of our trading partners on the ADX Network. In contrast, the firm reports that establishing electronic document exchange capability with suppliers using traditional EDI solutions takes about two to four hours total over the span of three weeks.
Additionally, departments across SCP are realizing considerable benefits as the company and its suppliers continue to move steadily from mail and fax exchanges to ADX/EDI-enabled transactions. As mentioned earlier, the company increased its sales from almost $570 million in 1999 to nearly $670 million in 2000 and had another record year in 2001. During this same period, the number of employees in its AP department held steady at just over two dozen. Connie Boe, SCP's AP supervisor, reports that, without ADX, the firm would have definitely had to hire additional staff because manually processing mail and fax supplier transactions requires significant dedicated resources. However, electronic transactions have far fewer error rates and, consequently, they require far fewer resources dedicated to reconciliation.
Beyond the avoided cost of hiring additional staff, SCP has been able to cut PO/invoice discrepancies. The firm estimates that for the year 2000 its increased usage of electronic transactions resulted in approximately 14,200 fewer PO/invoice discrepancies. The comparable figure for 2001 is roughly 17,500, and the firm projects that this will reach about 20,900 in 2002. Over this three-year period, SCP calculates that improved matching of these documents will save its finance and purchasing departments an average of nearly 20,500 hours per year, translating to over $321,000 in annual cost savings.
SCP's increased use of EDI has also resulted in major benefits for its purchasing department. Since early 2000, SCP buyers spend less than 30 minutes per day printing and faxing orders to non-EDI-enabled suppliers, as opposed to nearly two hours per day in 1999. This time savings, along with fewer follow-up calls to suppliers and reduced reliance on temporary clerical staff, have resulted in annual cost savings of over $310,000.
Both directly and indirectly, ADX has helped SCP shift dramatically from paper-based to electronic transactions. In 2001, ADX-enabled transactions grew to account for 24 percent of total invoices that SCP received. Combined with traditional EDI solution exchanges, SCP received over 51 percent of its 2001 invoices electronically. As ADX and traditional EDI transactions continue to increase, SCP projects that the combined figure will reach 80 percent in 2002. SCP's Alvarez explains, Without ADX, it would have been impossible for us even to approach this level of electronic integration with our supply chain. We found that traditional EDI solutions are typically too expensive and complicated for our small- and mid-tier suppliers. ADX's low-cost, straightforward solution makes it easy for them to exchange EDI documents with us.
SCP's realized and projected finance and purchasing department cost savings for 2000 to 2002 total nearly $1.9 million. Based on its share of SCP's total EDI transactions, ADX directly accounts for 53 percent, or just over $1.0 million, of this total. In deploying the ADX solution as an early adopter, SCP had one-time costs of $22,612. SCP may have been swimming against the current when it came to trying to get its suppliers to become EDI enabled, but Duncan says, "SCP's total commitment to support the ADX solution was they key to its excellent results. SCP was focused on its end result, and communicated the key benefits of its project to its suppliers convincingly."
Obviously with this technology and business process match, SCP is positioned for that next stretch of sunny skies in the economy.