Lean and Green Savings Using EDI
This section covers the metrics and savings that can be actualized through the implementation of the Vendor Management Program and electronic data interchange. The use of these tools requires a trusting relationship between the trading partners, but the return for both is significant. When a VMI vendor is added, that vendor needs to be on the same certification program. The VMI productivity increase is composed of three parts:
- The EDI savings on the Advance Ship Notice, Purchase Order, and Invoice
- The VMI Reduction of Inventory
Productivity Increase in
- SKU count, and
- Increased Service Level for Promotional and Seasonal Items
The following is a list of some of the important EDI automation savings used in VMI.
The Advance Ship Notice (ASN) transaction set 856 offers a view of the contents of the goods arriving on the carrier in advance of the delivery date. Using this document alone has allowed Do it Best Corp. to realize a 15% increase in labor productivity in the Receiving Department and a labor savings of 7 people × .15 = 1.05 person labor hours. At $18 per hour and with additional benefits of 25%, direct labor savings is $46,800 per year. This assumes the need for one less person in receiving.
The ASN can replace the Purchase Order (PO) when the vendor is doing the planning for the customer as in VMI. The ASN shows what is coming in, and this document can be used to pay the invoice. Payment is made through the ASN. The Supply Management Handbook says, “It often costs organizations more than $100 in administrative expenses to generate a purchase order” and adds, “In many firms, the cost of managing and generating a purchase order can exceed $200 per transaction.” The analysis conducted by Do it Best Corp. found that paper purchase orders can range from a cost of $50 per manual paper purchase order to $1.50 electronically. The solution to their success was to integrate as many transactions with the supplier as possible.
(Note: The tables in Chapter 4, “Transportation Management System (TMS),” are used in the following analysis.)
There were 1,625 × 9 = 14,625 purchase orders per month. The average PO is three pages. This is 14,625 × 3 = 43,875 pages per month or 526,500 pages per year. Normally 500 sheets weigh five pounds, which means that 5,265 pounds of paper were consumed per year. A tree produces roughly 800 pounds of paper. So performing the calculation:
shows that the purchase order process consumed seven trees per year (see Table 4-4 in Chapter 4). There are 175,500 pages of invoices per year. The invoice has miscellaneous credit memos and other explanatory pages with and following the invoice statement. In estimation, the number of pages in the invoice process is about the same as in the PO process. Knowing this, we can calculate that seven additional trees are consumed in the invoice process. The total savings is 7 + 7 = 14 trees per year for automating both the PO and the invoice process.
In manufacturing paper, the wood is turned into pulp. The yield is about 50%—about half of the tree is knots, lignin, and other material not used to make paper. Therefore, a pine tree yields about 805 pounds of paper. A ream of photocopier paper weighs about 5 pounds and contains 500 sheets (paper is often seen described as “20-pound stock” or “24-pound stock”—which is the weight of 500 sheets of 17″ × 22″ paper). Using these measurements, a tree would produce (805 / 5 × 500) = 80,500 sheets of paper (see Table 4-4).
Lean and Green EDI Savings of the Advance Ship Notice, Purchase Order, and Invoice
Using the ASN to replace the purchase order and invoice for the VMI vendor results in Lean Savings:
- The electronic purchase order system saves $525,500 per year compared to the manual purchase order procedure.
- The electronic invoice system saves $1,228,500 per year compared to the manual invoice procedure.
- The ASN allows a 15% increase in labor productivity in the Receiving Department. This is a labor savings of 7 × .15 = 1.05 person labor hours. This means reducing the number of employees needed by one. At $18 per hour and with additional benefits of 25%, direct labor savings is 1 × 1.25 × 40 × 52 × $18 = $46,800 per year.
- The Lean Savings is ($525,500 + $1,228,500 + $46,800) = $1,800,800 per year.
- The Green Savings amounts to 14 trees per year being saved. Using Table 4-7, we can see that 14 trees equates to 910 pounds of CO2 saved per year.
- Total savings so far is $1,800,800 per year + 14 trees + 910 pounds of CO2 saved per year.
These savings can be used as productivity metrics for personnel or management. Visual Supply Management increases the productivity of personnel, using better and timelier information from the suppliers. For instance, in the past, it took all day for a purchase agent to review a very large vendor manually for all nine of the Do it Best Corp. warehouses. It can now be reviewed in 5 minutes. The only things to review on the VMI vendors are the turns and service levels for each warehouse. As long as the turns and service levels are increasing, they are increasing profit and sales for the company. This also shows that the supplier is doing a better job of demand forecasting if the turns are going up (more sales for less inventory) and the out of stocks are going down (more revenue with less inventory). The increase in labor efficiency is 400% using the collaborative electronic system. Employees can be deployed to more profitable jobs. Installing a VMI system does not create success by itself. Other processes are needed to enable the technology. These processes include the technologies discussed throughout this book.
Eight people are involved in the purchasing/invoice system. With a 400% increase in productivity, two are currently required. 3,060 kWh × $0.16 = $490 dollars were saved in electricity usage by reduction of computer usage for the purchasing group. Similar productivity improvements allow for the creation of a company with 50% fewer personnel than the competition.
VMI collaborative metrics for the supply chain include a 400% increase in staff productivity. There is also a 30% to 50% increase in turns. If there exists a $300 million inventory, assuming a 35% increase in turns, $78 million in inventory dollars are freed to be invested elsewhere. Using this method, Do it Best Corp. created a sales increase of 3.5% with no increase in inventory levels, a 25% increase in SKU count with no increase in warehouse space, and customer service levels of 97% or more on promotional and seasonal items, as well as significantly reduced paper-handling costs.
Do it Best Corp. originally had three turns with $300 million average inventory and $900 million in sales. At 35% increase in turns, the new number of turns, after VMI, is 4.05. With average sales of $900 million for the VMI vendors, the new inventory figure would be $900 million / 4.05 = $222 million ($78 million in reduced inventory). There was an increase of 3.5% in sales without an increase in inventory. This was possible only with a long-term partnership with suppliers who are now able to work with the customer on better selling categories, new promotions, and new items. It becomes essential for the supplier that the customer succeeds as well. The trend for DBI took approximately five years to develop. So the learning curve was five years.
The savings to Damaged and Obsolescence is 9.75% of inventory. Do it Best Corp. obtained the savings through VMI. Calculations show a 9.75% of $78 million, or $7.606 million, savings in Damaged and Obsolescence costs.
With the 400% increase in productivity and the 35% increase in turns, the calculations shown in the following section are now possible.
Lean and Green Savings of VMI Reduction of Inventory
The Lean Savings of VMI Reduction of Inventory:
- Starting Inventory is $300,000,000.
- Starting Sales are $900,000,000.
- Starting Turns are 3.00.
- A 35% increase in turns, allowing an inventory reduction of $78,000,000.
- The New Inventory using VMI is $300,000,000 − $78,000,000 = $222,000,000.
- The new turns are 4.05.
- Carrying cost of 26.66% savings yields a $20,720,000 reduction.
- Freed-up cost of capital is .02 × $78,000,000 = $1,560,000.
- Total Lean Savings from VMI Reduction of Inventory is $22,280,000.
The Green Savings of VMI Reduction of Inventory:
- $490 saved in electricity usage for the Purchasing area.
- $7.606 million per year in landfill savings.
- Total Lean and Green Savings for VMI Reduction of Inventory is $29,886,490.
The Green Savings is as shown here:
A new warehouse (now unnecessary) would cost $14 million in inventory and $10 million in the building cost. The VMI initiative would save:
- $3.517 million in additional infrastructure cost.
- An additional 3 to 6.5 million with an average of 4.75 million in furnishing, equipment, racking, and automation equipment will not be needed.
- This totals to $14 million in inventory dollars + $3.517 million + $4.75 million equals a total cost of $22,260,000.
- Without the existing improvement in technology, it would be necessary to increase the size of the warehouse by 35%. The increase would represent additional costs of 35% × $22,260,000 = $7.791 million.
- The added cost of utilities would be computed as $0.5717 a square foot annually. This is dependent on the amount of automated equipment in the warehouse. For a 450,000-square-foot warehouse the average is 450,000 × $0.57170 = $256,500 spent annually on electricity. Total savings in utility costs is .35 × $256,500 × 9 = $807,975.
The last three categories of savings are Green Savings. The savings are a 25% increase in SKU count with no increase in inventory space, a cost savings of $807,975 saved in electrical usage generation, and finally a sales increase of 3.5% without additional resource expenditures.
- The Lean Savings is the added sales = 1.035 × $900,000,000 = $931,000,000. This is a $31,000,000 increase in sales. With a profit margin of 18%, this represents an increase in profits of $5,580,000.
- The new turns are 931,000,000 / $222,000,000 = 4.19 turns.
- The Green Savings erases the need to spend an additional $7.791 million in added warehouse infrastructure costs to accommodate the 3.5% sales increase and the 25% addition in SKU count. This is considered Green Savings because raw materials for warehouse expansion are unnecessary.
- The added cost of utilities would be computed as $0.5717 a square foot annually. This is dependent on the amount of automated equipment in the warehouse. For a 450,000-square-foot warehouse, the average is 450,000 × $0.57170 = $256,500 spent annually on electricity.
The Total Lean for the three categories is the increased profits from an increase of 3.5% of sales = $5,580,000; company turns are 4.19, sales are $931 million, and inventory is $222 million.
The Total Green for the three categories is the decrease in infrastructure cost = $7,791,000; the decrease in utilities cost = $807,975; and the total Green Cost = $8,598,975.
The total savings for the entire VMI & EDI program including all the preceding steps is as shown here:
- Lean Savings of $29,660,800 +
- Green Savings of $16,205,465 =
- Total Savings of $45,866,265