EDI (electronic data interchange) allows for instant, computer-to-computer communication of business data. One computer calls another and transmits the data. They "converse" with each other via transmission of standard business transactions sent and received. For example, one company's computer may ask for the latest inventory figures by sending an inventory inquiry transaction, and the other may answer the inquiry by returning an inventory response transaction. (See Figure 18-1.)
Phyllis Sokol is a leading authority on EDI, and her book (EDI: The Competitive Edge, McGraw-Hill Intertext, 1989) has been highly praised.
Because EDI is transmitted in a prearranged, structured data format, EDI is machine-readable and can be fed directly into a computer application. EDI data are exchanged virtually instantly over high-speed telephone lines. Both EDI communication sessions and EDI processing can be completely automated, eliminating the need for and costs associated with people. EDI is particularly useful for high-volume transactions used frequently in day-to-day business such as purchase orders, invoices, and shipping documents.
General Motors orders via EDI about 90 percent of the production materials it uses in the manufacture of its automobiles. Likewise, Ford's computer network links over 4800 of its dealers and over 3000 of its production material suppliers to its corporate data center. IBM is connecting 2000 of its largest suppliers worldwide via its EDI network. Sears Roebuck's EDI network has 135,000 terminals in 7000 locations (now doubling) and at over 800 Sears suppliers. The network also reaches Allstate Insurance, Dean Witter Reynolds, the Discover card, and other Sears subsidiaries. Walmart connects close to 2000 trading partners via EDI.
A big-company approach to EDI will usually start with connections with the firm's largest suppliers, then big customers, and finally smaller customers and supplier trading partners. The plan is usually to continue bringing in trading partners until most of the important trading partners are actively sending and receiving EDI transactions.
In spite of the high up-front costs, EDI eventually saves big money and increases productivity. The use of EDI technology is growing fast in virtually every industry around the world. EDI has been particularly successful in the chemical, banking, pharmaceutical, and grocery industries_90 percent of purchases of pharmaceuticals by wholesalers from manufacturers are made via EDI. EDI use is emerging in the insurance, communications, and health care industries.
To set up an EDI network, most companies purchase an EDI translator for somewhere between $2000 for a PC and $30,000 for a mainframe. (The cost of each continues to decrease.) Then the companies spend some money on application programming, training, and other expenses. Then they usually use a public network, as do 80 percent of EDI network users. Prices for third-party services are minimal, mostly based on volume of data being transmitted. Those companies that use their own communication networks already had networks that were being underutilized, including Sears and Walmart.
EDI, once set up correctly, virtually eliminates the clerical costs associated with the keying in and processing of incoming orders, shipping documents, and invoices. EDI eliminates the costs of paper materials such as envelopes, paper forms, and stamps, and cuts out the errors resulting from misunderstanding or incorrect key entry. A sales manager can distribute increases in product prices to 3000 people in minutes. A company can reduce the cost of issuing a purchase order by up to 90 percent. Even small-to medium-size companies can save from tens to hundreds of thousands of dollars by reducing their inventory and safety stock requirements. Large companies can save over $100 million.
With EDI, manufacturers and distributors can use incoming orders to monitor customer demand; EDI's fast and accurate information allows these companies to forecast for their own manufacture or purchases more accurately and be better prepared to respond more quickly to unexpected surges in product demand. EDI makes just-in-time manufacturing schedules possible. Customers send more frequent, smaller orders based on their actual forecasts; their suppliers receive the orders, process them, and deliver product faster. All in all, EDI improves the relationship between trading partners while also streamlining the way they do business together.
However, data transmitted by EDI must conform to highly structured standard data format. Although there is room in the standard for all the information a company will need to send or receive, EDI is much more effective when the data are codified rather than sent in a narrative form. This may be a challenge to do. Sometimes, accompanying data either are sent outside of the EDI transmission, as, for example, a contract or CadCam drawings, or are augmented with telephone calls. You can send the purchase order but not always more detailed information about the order. However, some flexibility can be built into EDI beforehand. EDI combined with some phone or fax contact allows more flexibility.
Successful EDI largely depends on the standard data format. Various standards are being used, but no one is universally accepted. However, the American National Standards Institute (ANSI) X12 standard is very widely accepted in North American EDI transmissions currently. By supporting this standard, both large and small companies can conduct electronic trade with one another, regardless of the size of the computer they use to implement EDI.
EDI is not for daily wheeling and dealing. Price negotiation takes place beforehand. Participation requires cooperation, a joint-venture attitude, a partnership relationship. With EDI, business cannot be adversarial. Customers can't effectively use EDI to make sudden demands for instant delivery of a product never discussed, and EDI is not a way for vendors to avoid adhering to rigid delivery dates. It requires much mutual confidence and working together.
Prior to setting up an EDI relationship, the business customer and supplier must meet. A good, working, business relationship should be established first. A detailed agreement is made. Ongoing customer needs of certain models, sizes, or colors in whatever quantities are determined. A probable stocking program is agreed upon. Further sales expectations are discussed. There's a lot of up-front work, preparation, and debugging needed.
An interesting EDI application being used by some companies today is for the supplier to generate its own orders by using either inventory or point-of-sale information from the customer. Algorithms that control the replenishment of stock are agreed to by both customer and supplier and usually cover basic stock items. Fad and seasonal items are rarely handled this way because their demand is more volatile.
After merchandise is shipped, the bill can be transmitted via EDI. Payment can be transmitted by check or EFT (electronic funds transfer). Either may be accompanied by EDI payment remittance information.
Even though EDI transmissions can be conducted totally unaided by people, EDI is not a passive system. Business users constantly monitor transmission and receipt of important business transactions. Some large companies set up an internal post office to pick up from and route EDI data to various company locations.
In a five-month test at four J. C. Penney stores, sales of Penney brand suits went up 59 percent after the stores linked via EDI with the apparel supplier. EDI made it possible to replenish supplies quickly enough to meet the season's demand.
SuperValu stores handle 200 vendor-promotion announcements per week on EDI to take advantage of vendor promotions. The vendor or broker puts promotional screens into SuperValu EDI files with the buyer's approval. The computer program recognizes a promotion opportunity, places the order, and then calculates and passes on allowances to the individual stores. This creates new sales and profits for both SuperValu and the vendor.
The retail fashion business is seeing a trend to introducing a new style each month rather than one per season. Liz Claiborne, Inc., Milliken & Co., Hagar, Dillard's Department Stores, and Levi Strauss & Co. lead in EDI. Wrangler in Greensboro, N.C., calls its EDI program the Wrangler Wire. Wrangler's retail partners scan bar-coded inventory weekly with a handheld scanner. Upon receipt of the data, Wrangler's EDI system automatically generates orders, taking into account what is in transit, unshipped, or already received.
The use of EDI by small companies to increase export sales is an important trend. EDI greatly reduces the crushing volume of required paperwork for export. This is happening because EDI networks are being connected worldwide between and with members of the European Economic community, in the Far East, and in Eastern Europe. Jerome Dreyer, past president of the EDI association, says
The enormous paperwork of export has shut out most small businesses. But EDI is the great equalizer, allowing even small businesses the opportunity to find niches in world markets. It may be the only means a small firm can get in on export for a big share of its sales.