Digital transformation promises to deliver positive results to companies large and small. Over the last year, more CIOs are actively sponsoring cross functional business transformation that includes numerous business units and IT as an enabler.1 Since 2017, many of these firms are achieving better gross profit margins, EBIDTA, and net income. 2
The cross functional efforts result in new business processes underpinned by information technology focused on empowering employees to be more productive, enriching relationships across the supply chain, and reducing the cost of operating the business. More importantly, companies that take stock in how the business is changing with customers, suppliers, partners, and employees will continuously be innovating to meet the demand of these constituents.
Changing IT Perspectives
The IT organization is a key enabler to help the business transform. IT needs to understand the business demand and identify valid technology options for the business to choose from. IT should also remain objective to newer approaches compared to historical experience. One of the notable changes in perspectives is the increasing adoption of Microsoft Dynamics 365 for sales, finance, operations, warehouse management, and a growing number of capabilities Microsoft committed to deliver. Several years ago, other ERP suppliers would have been more prevalent.
Another changing perspective is on electronic data interchange (EDI). A rising number of companies are insisting on tighter EDI integration with Dynamics 365 and parting ways with inefficient historical solutions. For example, a typical solution would use a service provider to transport messages around a network and provide the company with a portal. Users download and upload data from the portal, and use a variety of third-party tools, custom embedded software in the ERP, and manual steps to get data in and out of the ERP. A non-integrated EDI solution will inhibit digital transformation potential. Improving the digital supply chain in a competitive industry requires a better approach.
A better approach considers the value of trading relationships and how the business is organized to extract the most value from them. For example, customer value can be quantified as revenue, loyalty, and long-term commitments. Supplier value can be quantified as volume pricing, alignment with business demand, and on time delivery. Similarly, value should be defined for each type of trading relationship, and then determine if the business is ready to extract the maximum value.
Assessing Trading Relationship Readiness
Business readiness or how the business is organized to extract value from its trading relationships can be assessed through the readiness of people, efficient and effective processes, and IT systems to support people and processes. Getting this right and optimizing over time will get the most value out of trading relationships and depart from the “stop and go” approach of historical solutions. Below are a few questions to kick off the assessment.
- People readiness. Do users (i.e., non-IT personnel such as customer service representatives, sales representatives, procurement, others) have clear instructions from partners on how to trade with them? Do users have confidence in the trading transactions being completed? Is there transparency on the data flow from the initial PO to an invoice? Can users correct data errors on their own? How simple is it to ramp up users?
- Processes efficiency and effectiveness. Is the data available in the ERP to support the trading relationship? Do data flows have clear end points? Is the end to end data flow automated? Does the data flow result in clear actions at the end point?
- IT systems supporting the business. This is a broad topic, and the focus here will be on the EDI application. Can end point EDI data be mapped directly to tables in the ERP? Can the data be validated before forwarding to the end point or ERP? Can the application automatically pull and push data to and from the end points and ERP? How quickly can new trading partners be onboarded? Can problem resolution instructions be provided to users?
- Selling to Customers. Quote to Cash or Order to Cash includes the most common business process and data flows for companies. It starts with the receipt of a customer purchase order and progresses through the order fulfillment that ends with sending an invoice. To extract the most value from these relationships’ sales orders should be created automatically in the ERP. Users (e.g., customer service, sales representatives, etc.) progress the order in the ERP. For example, orders are confirmed, picking instructions are sent to the warehouse for shipment, and issuing the invoice. Users should be confident that the end to end lifecycle of the transactions is completed or can correct errant data that is preventing completion.
- Warehouse Execution. Getting products efficiently in and out of the warehouse is critical to the business. Companies seek solutions to reduce operating expenses and meet growing demands for fast delivery, easy returns, and transparency in the movement of goods. It is the target of many innovations from warehouse management systems, transportation management systems, artificial intelligence, scanning systems, stock control, space management, and many others.
Warehouse execution is done internally and with service providers, both of which should be viewed as end points that require comprehensive flow of data and resulting in clear actions. Some ERPs have unified warehouse execution capabilities with the core system that makes the processes execution easier. Others require integration to external systems that run the internal warehouse or integration to a service provider.
The integration to external systems has been a subject of industry research and standardization by European and North American non-profit organizations such as EDIFACT and ANSI and others respectively. These include messages for ship order (INSDES/940), ship order completed (DESADV/945), stock transfers (PREADV/943), stock transfer completed (RECADV/944), inventory status (INVRPT/846), and others. These messages provide a robust foundation for efficient and actionable communications to and from the warehouse. Moreover, compared to unique custom integrations, the standards approach provides the agility to move warehouse execution back in house or to a more promising service provider. See also Third Party Logistic Management with EDI.
- Buying From Suppliers. Procure to Pay (P2P) is another important set of processes that procurement departments seek to streamline. The key process and data flows start with sending a purchase order to the supplier, monitoring the receipt of supplier order confirmation, ship notifications, and finally the invoice. To extract the most value from supplier relationships, the data from outgoing and incoming messages should be automatically integrated with the ERP, and three-way validation should be done prior to posting for payment (PO, ship notification, invoice). Procurement should also be confident that the end to end life-cycle of the transactions is completed or can correct errant data that is preventing completion.
Companies buying from suppliers can standardize how to work with suppliers. This can be done by defining the data flows and EDI messages the company uses to trade with suppliers and providing an on-boarding methodology for the supplier to follow. This approach minimizes process variations and accelerates the on-boarding of suppliers. This approach should be adopted for direct materials, and where possible, indirect materials.
- Automating Flow of Goods. EDI can drive supply chain visibility inside the ERP system by integrating the movement of goods that are being purchased, transferred and sold throughout the process. Many supply chain tracking solutions work outside of the ERP that can cause data discrepancies and do not recognize the financial consequences of the movements. For example, a delivery by an overseas supplier to a freight forwarder may mean that the goods are now owned by the buyer. A good EDI solution would automatically receive the goods into in-transit inventory and update the ERP through the entire transport process - providing visibility of the goods to internal ERP stakeholders and maintaining an accurate single system of record.
- Beyond EDI. Beyond EDI means process integration between other systems that use non-standardized message protocols. This can be as straightforward as converting web-shop online orders to sales orders in the ERP, or as complex as integrating to manufacturing execution systems. For example, sending instructions to factory equipment to measure, mix, cut, weigh, and similar tasks that can be executed by modern and intelligent systems. Another example are inter-company purchasing and invoicing transactions between a parent and subsidiary that have different ERP systems. Utilizing a single platform that handles all integrations helps drive digital transformation in a consistent manner and is easier to manage than disparate systems.
Industry experience recommends organizing people, process, and technology to achieve the best digital transformation results on an ongoing basis. How to quickly realize business value comes to the forefront. Data Masons recommends understanding the trade-offs in the spectrum between ERP customizations and partnering with data transport providers. At one end of the spectrum ERP customizations can achieve desired results but the one-off nature of the effort will keep the company in a costly on-going development modus to support the dynamic nature of trading with business partners. At the other end, data transport providers offer attractive cost models but have little experience with ERP integration that can lead to hidden costs such as manual labor, “stop and go” data flows, and bespoke developments.
A better and more agile approach is a repeatable solution that quickly adapts to trading partner compliance requirements, leverages any data transport that renders the most economical efficiency, and is fully integrated to the ERP with no ERP customizations. When EDI projects are approached in this manner the results will be greater than the options at the opposite ends of the trade-off spectrum.
1 Brian Solis, Altimeter, Published 22 September 2019, “The State of Digital Transformation 2018 – 2019.”
2 Iansiti & Lakhani 2018, ‘The Digital Business Divide’, Microsoft White Paper, p. 3.
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