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Competition is fiercer than ever in today’s business environment. It forces businesses to find new ways to operate. Leaders must always search for new techniques that help to facilitate their businesses so they can run more efficiently and at a better price than before. The goal is for your business to run faster in order to save time and money.
The issue with so many approaches is that they involve having to exchange one objective for another. When you cut costs in your operation, it can increase the time it takes to provide service to a client. When you reduce costs it has be to be done cautiously so it doesn’t result in creating an inferior product.
Electronic Data Interchange, or EDI, is an important tool that enables you to reach exceptional improvements in all three objectives. EDI has the ability to increase many business functions, while reducing costs in many areas. By eliminating the amount of delays that are no longer needed, you will have more time to create an improved product. You will be able to provide your customers with better service.
In our modern, competitive society speed is essential. It serves as a powerful weapon against our competitors. Increasing the speed of the product or service that your business offers will help to keep your sales up against competitors.
To accurately describe what EDI is, we must first explain what it is not. EDI not does not depend on one technology and it is not new. Although EDI may seem like it is new, it has been around since the late 1960’s.
EDI has gone through huge advances in technology, but it does not depend on technology. There are different ways to include EDI in your business, but some methods are preferred. You have to choose the method which is best for your specific needs, rather than a certain implementation or technology.
What exactly is Electronic Data Interchange?
EDI is a paperless document that can be sent between companies. What constitutes as a document? A document is any form of communication, normally paper, which can be transferred between two companies. Examples include:
- Purchase Orders
- Shipping Notices
- Export/Import Information
- Carrier-to carrier waybills
- Funds Transfers
- Design Specifications
- Health Insurance Claims
EDI is a data processing concept which is independent of communication protocols or transmission media. EDI stands apart from the standard computerization seen in businesses in the last few decades. EDI is an electronic communication between departments in a business, which allows them the ability to communicate with other businesses and trading partners.
EDI involves computer-to-computer communication. When you compare this to other types of communications like Electronic mail. E-mail involves communicating with another person through a computer. It is similar to creating a text message which can be sent to another person. An E-mail is an electronic form of communication which still requires someone to interpret the message.
EDI replaces paper or electronic documents that are read by people with machine readable documents. A computer that sends a message with EDI can be interpreted without a person having to read it.
For example, a standard business transaction, a sales order, and identify the ways that EDI plays a role in your business. Without EDI present it would look like this:
- The Customer decides when an item needs to be purchased and creates a purchase order document. These documents can be produced by a computer.
- The PO is sent to the supplier via Post Office, Express mail, Electronic Mail or Fax.
- Someone at the supplier must receive and interpret the order that was purchased.
- The PO is then transcribed into the supplier’s computerized order system.
An EDI implementation simplifies the process to:
- The customer’s computer system creates and sends the electronic PO.
- The supplier’s computer receives the PO and places the order directly into its system.
What is clear by the example is that you can save time by eliminating the post office and the cost of people. You can save money when there are less errors. Errors cost more money. How much would it cost if the order entry clerk added an additional zero to the quantity field?
There are many more benefits to be discussed in greater detail later. Let’s take a look at the history of EDI first.
Since the 1960s, numerous companies developed in-house computer systems and internal networks to streamline business functions. An order processing system, can process customer’s orders faster. A business can reply much faster now with other members of the company or the customers. Still, the speed in which communication can be reached with the use of a post office or telephone is still slow and costly.
Business executives worked on ways to shortcut every-day’s communication link. Electronic communications were highly considered in circumventing paperwork and telephone issues. It was clear that communicating with other businesses electronically had one huge issue, the information format.
Not many companies use the same paper document format. Every purchase order looks different for each company. This is the same for computer systems. The data stored in one company’s computer system can be completely different than those required by others.
People can deal with format problems with relative ease. When an order processing clerk receives a purchase order form in an unfamiliar format, it’s not a difficult task to analyze the new form and interpret the required information. Computers are not capable of doing this and must process data in a specific format and in the right order. Your trading partner’s purchase order should not be confused with the quantity ordered. If two companies don’t agree on a format this could easily be confused.
A supplier that serves one customer should follow that customer’s formats and rules for EDI. Issues occur when one supplier has to deal with different rules from different customers. Systems can be created for Company A to interpret an electronic transaction differently from Company B. This can be very expensive to develop and keep up with. It also does not resolve the issue with Company C wanting to do business electronically. A smarter approach would be to support standards that all customers and suppliers could take on.
EDI standards involve formats and protocols that trading patterns can communicate with each other in. A good comparison can be seen in the airline industry. There are airlines and airports all over the world. Even though English is required by all aircraft and control tower staff, the pilots and crew members can speak in their mother tongue. It would be terribly confusing if companies and businesses could not follow one standard language.
The Transportation Data Coordinating Committee
The Transportation Industry recognized the need for industry standards early on and formed the Transportation Data Coordinating Committee in 1968. The TDCC was formed as a non-profit organization in Washington DC and organizes data standards, formats codes, and protocols for the transportation industry. The TDCC began ground rules for standard development like:
- The EDI interface must be insensitive to computer equipment internal architecture.
- The EDI interface should be responsive to end users needs.
- EDI should leave the choice of communication speeds and services to the using parties.
Several hundred people formed teams to create these standards. These teams consisted of shippers, railroads, motor carriers, forwarders, ocean carriers, air carriers, and banks. It resulted in the publication of the TDCC Electronic Data Interchange Standards. These Standards were first practiced in the rail lines and later across motor carriers. TDCC estimates that 90% of all rail waybills were electronically interchanged between railroads by 1985. To this date, the usage of TDCC’s EDI standards include:
- Export/import information for international shipments carrier-to-carrier waybill exchange.
- Reservation or pickup request.
- Shipment information from shipper to carrier.
- Freight bill data, carrier to payer.
- Shipment tracking information.
- Payment data, payer to bank, bank to bank, bank to payee.
Private Company Standards
Major companies, such as General Motors and Kmart, charged into the EDI arena and formed their own standards. GM’s EDI participation was an outgrowth of their “Just-in-time” plant inventory approach. With Just-in-time inventory, each plant stocked only those parts required for one day’s production. Due to the low inventory levels, GM required a quick and efficient way to order parts so that they could be delivered at their loading docks just-in-time for assembly. This method permitted GM to save millions in inventory costs. Just-in-time inventory is not feasible with EDI as an enabling technology.
Yes, GM has saved millions but the inventory cost did not disappear. Rather, inventory became the responsibility of the suppliers. Although there were suppliers who could take on these costs, not all suppliers had the financial means to do so. This put many suppliers in difficult situations and GM required EDI connections for suppliers offering production material to Just-in-time plants.
Furthermore, to make things even more complicated, Ford and Chrysler took on similar plans, which caused confusion all over the Automotive Industry. In addition, many large suppliers, such as Rockwell, wanted to use EDI with their own suppliers. Whose standard they should use was the big question.
Private Industry Standards
When the Automotive Industry Action Group entered the auto industry there was a huge sense of relief. As a trade association for the industry suppliers and automakers had something more reliable to work with. They worked hard to develop an EDI standard for the auto industry.
Industries from other markets have followed in these footsteps. It became a mission to develop their own set of specific standards. Industry specific EDI Standards Development Associations include:
- Voluntary Interindustry Commerce Standards VICS
- American National Standards Institute ANSI
- Uniform Code Council UCC
- Automotive Industry Action Group
- General Trade Document Interchange
- National Automated Clearinghouse Association
- National Wholesale Druggist Association
- Transportation Data Coordinating Council
Many other industries are also developing EDI standards and many are using the TDCC standards as a base. The Grocery Industry’s Uniform Communications Standards and the Warehouse Information Network are examples of TDCC derivatives.
Some businesses operate in one industry, often collecting standards that are specific to an industry. As an example, a telephone manufacturer in the communication industry has to buy plastics from the chemical industry. The need for further standardization is necessary.
ANSI X12 Standards
The American National Standards Institute (ANSI) chartered a committee to develop inter-industry EDI standards. This committee, known as the x12 Business Data Interchange Committee, is using the TDCC standards as their base structure. The x12 committee has added many transactions to the list provided by the TDCC. The most common transactions are the purchase order and the invoice.
The TDCC is serving as the Secretariat for the X12 committee. All field names, types, formats, and lengths are defined in a data dictionary. The TDCC keeps this data dictionary available. Those supporting X12 standards know exactly which format each field or data element needs to be used. For example, The Purchase Order Number is defined as being from 2 to 30 characters in length. A 31 character PO number is not permitted.
Industries working with X12 standards include:
Telecommunications, electronics, chemical, auto, metals, textile, and aerospace are all included. Every industry might use a subset of the overall X12 standard. The format and meaning of the individual data elements remain the same, but other industries have chosen to implement some fields in a different order, or to eliminate certain data not appropriate for their industry.
Conversion from industry specific standards to X12 has not been easy. Once an industry has an investment in one method, covering to another does not have overnight, it can take some time. The grocery industry formulated their industry specific UCS standard in the early ‘80s and has been the most notable holdout from X12 acceptance. The motto in the grocery industry has been “If it’s not broken, don’t fix it.”
Even with X12 standards, numerous EDI trading partners are finding it imperative to translate documents from one X12 subset to another. Furthermore, as companies continue to move to X12, there is a bigger demand to translate their standard X12 transactions into industry specific standards. Conversion is often needed in order to communicate with trading partners that have not yet converted to X12. This translation of formats can occur either at the originator, the destination, or a 3rd party intermediary.
How does it work?
EDI is implemented in software and plays a conceptual role as the interface between the sender’s and the receiver’s internal computer programs. Company specific internal programs such as these, may be operating on different types of computers and may use different internal data structures. This interface between sender and receiver is implemented in at least the two trading partners systems, and many times in a third, intermediary.
Let’s demonstrate how this operates by using the transmission of a purchase order to illustrate how EDI functions. The buying party’s purchase order system forms a PO and transfers it to the EDI software. The EDI software changes the internal data structure into a standard EDI transaction with the mandatory fields supplied by the data dictionary. This transaction is then sent to the supplier whose EDI software converts (using the same data dictionary) the standard transaction into the format acceptable to their order processing system.
The TDCC and other vendors provide EDI software for mainframes, mini, and personal computers. The TDCC leases mainframe software written in ANSI COBOL and is shipped on 9 track tape. TDCC provides the COBOL source code since few mainframe COBOL systems are precisely the same. The user may be required to make some changes to the software to match their particular system.
The TDCC software is “table-driven.” What exactly does this mean? It demonstrates all translations between internal and standard data formats such as are defined in easily modifiable tables. COBOL programs for translation do not have to be altered. A part of the EDI software, referred to as the Set Generator, converts internal format records into standard transactions. These internal format records are produced by some internal system such as a Purchase Order System. The Set Generator reads these input records and translates it according to the parameter tables and the data in the dictionary.
Once the transactions are received by the destination EDI software, the receiver’s data dictionary and parameter tables are used by the Set Interpreter to begin the conversion. The standard format transaction is then converted into the desired internal format.
EDI specifications do not require any particular type of transport. There are 4 general methods to choose from:
Point-to-point Communications lines
Wal-Mart is a perfect example of a point-to-point communication. Vendors dial into Wal-Mart SNA network via bi-synchronous modem. By using standard communications protocols trading partners can establish point-to-point communications lines. This connection results in a leased or dial-up line. A leased line is purchased monthly and is always available for transmission.
A dial-up line is established as a regular telephone call. A call is made and the information gets transmitted every-time the sending party has data to transmit. When dial-up links are being used the senders’ transaction accumulates and makes the connection at specific given points.
The dial up method is much more affordable when the amount of data is low and occurring less often. An expensive leased line can actually help to cut costs if the number of transactions are high, and happening consistently throughout the day. In addition, faster line speed can be achieved with a leased line and there is no dial delay or need to batch transactions. With a leased line, the transaction can be transmitted the moment it is created. In certain cases some applications, immediate transmission and reply may be appropriate.
This is the most popular method. Samples of VAN (Value Added Networks) are IBM Information Exchange and Sterling Commerce Network. Point-to point links usually demonstrate a scheduling problem to trading partners. It is usually not appropriate for the receiver to get transactions when the sender decided to transmit them. A resolution to this problem is a value-added network that offers a store-and-forward mailbox service. Compuserve, Telenet, and Tymenet are examples of value added networks.
The sender must connect with the value-added network and then send its EDI transactions to the recipient’s mailbox where they are securely kept. The sender then disconnects from the service. When it becomes convenient, the recipient must connect to the network and receive those transactions from their mailbox. Using this approach, both sending and receiving parties must use the same EDI standard transactions.
EDI greatly enhances productivity and replaces the less efficient and error-prone human processes involved with inter-company communication. EDI offers benefits to the buyer such as:
- Lower Inventory Levels.
- Quick Order Acknowledgment: If a supplier can not provide the product desired, the buyer can seek an alternate supplier rather quickly.
- Reduction in the time spent matching invoices to purchase orders and re-keying invoices into an Accounts Payable System.
EDI is a productivity-enhancing tool that replaces the less efficient and error-prone human processes involved with inter-company communication. EDI provides the following benefits to the supplier:
- Elimination of problems and delays caused by order entry errors. Manual order entry can result in errors in as many as 50% of all documents. Errors in order entry mean missed ship dates, shipment of wrong items or quantity, and lower customer satisfaction.
- Personnel Reductions. There are estimates that as much as 70% of all computer output becomes computer input. With EDI, the supplier is relieved of the process of re-keying orders and verification of orders.
- Inventory Reductions. While EDI is often used in Just-in-time inventory approaches that place the burden of inventory on the supplier, it is also possible for the supplier to achieve reduced inventory levels. Production schedules can be tuned more closely to customer demand, to reduce inventory of goods.
- Improved Cash Flow. Time taken out of the invoicing/payment cycle increases the cash flow of the supplier.
- Improved Customer Service
- Improved Sales Tracking – Cost Savings. An added benefit to both buyer and supplier that can often be seen is cost savings. For example, a California Based Market research firm, recently published a survey of Fortune 1000 size businesses, universities, and public companies entitled The North American EDI Service. One of the results of the survey was a comparison of the cost of manually prepared and transferred document at about $40 with the EDI document cost at about $2.10.
That 10 fold savings per document is impressive and when you think about the millions of such documents generated in some companies, you can see why there is pressure to implement EDI.
The following are some examples of EDI usage.
A huge part of the automobile manufacturers business is the financing of car sales. Auto companies finance over 1/3 of all cars purchased in the U.S. General Motors Acceptance Corporation is one of the largest financial institutions in the world. To provide quicker, more responsive service to their customers, auto companies have implemented electronic links to credit bureaus such as TRW.
The usual process for the auto company is to request a credit history from the credit bureau via an EDI connection. The auto company’s computer system electronically receives and analyzes the credit report. Each report is scored and then credit approval is provided without human involvement.
This creates an opportunity to allow movement of the dealers direct transaction input. This transfers the personnel cost of data entry from the auto company to the dealer. It allows the dealer to respond to their customers better which is a huge advantage. It is possible to get back, instantaneous response to credit authorizations. Credit authorizations are often returned while the customer is still on the sales floor. The real payoff, in this example, is the extra competitive advantage the dealer has when he can offer immediate credit.
An EDI link between Wal-Mart and one of its suppliers, Seminole Manufacturing Co. diminish the delivery time of Seminole slacks by 50%. This causes a 31% sales increase of these slacks in the first 9 months after the link was created.
General Motors has implemented EDI Electronic funds transfer at 30% of its assembly plants. Shipping receipts are sent electronically from the GM plant to an Electronic Data System (EDS is subsidiary of GM) computer center where they are matched against electronic invoices and purchase orders. Suppliers group the shipping receipts, and one payment is made. This single payment may represent dozens of different shipments to different plants. These payments can also be completed electronically via Electronic Funds Transfers.
Sales of Stafford suits increased 59% after JC Penney paired up with their supplier Lanier Clothes. EDI permitted Penney to quickly replenish stock fast enough to meet demand while cutting their overall inventory of suits by 20%.
Rockwell, a major automotive supplier received design change notifications directly from the automakers via EDI. Rockwell has been able to reduce the inventory of finished goods while reacting faster to their customer’s constant design changes. Parts now bypass their warehouse and go straight from their production lines to their shipping docks.
The Textile industry is starting to fight back against Asian competition with EDI. While the US textile industry is determined to compete on a cost basis, EDI enables them to provide superior service. This makes it easier and faster to do business with a US supplier.
US Customs accepts electronic customs documentation, in advance of goods shipments. This greatly reduces port delays and provides a competitive advantage for those ports of entry that support EDI.
The Yankee Group, a research group based out of Boston, determined that approximately 4/5 of all business transactions will become electronic by 2010. The EDI survey, published by Input, discovered that 70% of Fortune 1000 sized businesses; universities, and Public companies are presently using EDI. An additional 20% are planning EDI implementations.
In addition, input forecasts that the EDI service market will increase to $28.2 billion by 2010. That’s an annual 25% per year growth rate from the 2000 market size of $3 billion.
The Yankee Group, a Boston based market research group, estimates that 4/5 of all business transactions will be electronic by 2010. The EDI survey, published by Input, found that 70% of Fortune 1000 sized businesses; universities, and Public companies are currently using EDI. An additional 20% are planning EDI implementations.
Input also forecasts that the EDI service market will grow to $28.2 billion by 2010. That’s an annual 25% per year growth rate from the 2000 market size of $3 billion.
What is causing the growth?
One of the main reasons the EDI service market has seen such a significant, explosive increase is that the business environment now contains all the pieces necessary to make EDI plausible. Standards are clearly a major factor. By 1986, there were over 150 standardized transaction types. Standard transaction development has a cascading affect. The Purchase Order begot the Invoice. The Invoice begot the Shipping Notification. This Shipping Receipt leads to the desire to make electronic payments, which spawns another batch of electronic transactions.
EDI has seen a huge growth due to the increase of computers and different types of software available on the market. The acceptance of the Personal Computer has been a stimulus to EDI. It is possible to create an EDI solution based on a Personal Computer with less than $1,000 hardware investment.
Another contributing factor is what one would call the “Domino Effect” within industries, where large companies in the center of an industry coerce their suppliers’ partners to adopt EDI. Soon, the second tier suppliers require EDI links to the third tier suppliers. An example of this can be seen in the automobile industry which is called the Domino Effect.
There are two ways to get supplier compliance; incentive and force. Some companies have offered incentives for electronic linkups.
The retail industry relied on force with deadlines and ultimatums. If you supplied production material to a retail store, lack of EDI support meant loss of business.
What could inhibit EDI implementation?
There are several factors:
- Less user-friendly and accessible EDI software.
- Difficulty in understanding the various options for implementation of EDI.
- Advertisement misinformation.
- Inability to understand the importance of EDI as a strategic tool for acquiring new business opportunities.
EDI is overcoming these obstacles to acceptance because it addresses a basic business goal within every company; the goal of reducing administrative overhead and starting new trading opportunities.
How to Proceed?
Develop a task force with broad company representation. EDI implementation is not only an Information Technology Group exercise, but rather affects the entire company. Select people across departmental boundaries to reduce operation gaps and resistance.
Decide on exactly when your task force must implement EDI. By setting the goal of when to implement EDI, you are acknowledging that almost every company is using EDI.
If you have a customer that is coercing you into electronic trading, you can certainly make a business case for doing it now. The threat of loss of your biggest customer can make the rest of the issues moot.
Educate task force members on EDI, and the internal operation of the business. Make sure everyone understands that the business is a system and EDI is an important tool that plays a critical role.
Decide what form of transport, or third part services are appropriate and select software and service vendors accordingly.
Determine the overall commitment to EDI within the organization. EDI can be implemented as a stand-alone process, where a workstation simply receives electronic orders and prints them on paper. The rest of the process is business as usual.
EDI can also be implemented by integrating it within the overall business operation. The second approach can completely transform the way you do business today. Based on your required volume, the integration may not be an option but a must do.
EDI is absolutely necessary in today’s world. By the end of the decade of the ‘90s, EDI was affecting almost every business in the U.S. The amount of standard transaction will increase over time. All areas of business-to-business transactions will be increasingly automated with EDI. You can expect your trading partner to exchange no less than three documents (Purchase Order, Invoice, Advance Ship Notice). Other documents like the ones that relate to electronic transfer of funds, PO automation, Inventory inquiries, shipment tracking, Item catalogs and more, are mandatory in many companies.
Further expansion will take place in multi-industry standards since few companies really operate in just one industry. The grocery stores, for example, sell many non-food items. EDI will continue to grow in all other industries as supply and demand changes over time.
If you’d like to learn more information, feel free to give us a call at our toll-free number 888-811-6487. We would be glad to offer you a free consultation in order to help you meet your business goals.