Dr. M. Theodore Farris II, Ph.D.
Dr. M. Theodore Farris II, Ph.D., Professor, University of South Alabama, Mobile, AL 36688, (334) 460-7911
The paper offers an overview of opportunities utilizing Electronic Data Interchange (EDI) technology to support purchasing operations. It is oriented toward purchasing professionals interested in learning the basic concepts of Electronic Data Interchange and gaining an understanding of potential applications. Estimated start-up and operating costs are identified as are areas of potential cost savings. An implementation plan is recommended to help the professional quick-start an EDI program with key suppliers and reduce installation problems. The paper goes beyond traditional EDI applications supporting purchasing activities by recommending EDI applications linking other functional areas in the company to enhance purchasing support.
What Is EDI? Electronic Data Interchange (EDI) is often initially (and incorrectly) viewed as external e-mail. It is defined as the electronic linkage of one's own company's computer system to another company's computer system through a third party network. Initial users of EDI tend to start by sending simple text messages to suppliers similar to e-mail messages many of us are used to sending within our company. This is just the tip of the iceberg as the full utilization of EDI capabilities extends opportunities much further.
How EDI Works.
EDI is the electronic linkage of your company's computer system to another company's computer system through a third party network. This differs from facsimile and direct modem-to-modem connection. Sending a facsimile serves the purpose of transmitting information between parties but requires interpretation and input on the part of the receiving party. The information transmitted does not automatically enter into the receiver's computer systems. A direct modem-to-modem connection solves this problem and allows the receiving party to automatically begin utilizing the information through its computer systems as soon as it is received. There are inherent disadvantages to direct modem-to-modem connection. A sending modem and receiving modem must both be available to exchange signals tying up equipment on both sides, multiple equipment may be required or transmission scheduling priorities must be designated; and transmissions likely utilize proprietary format to enable immediate input into the receiver's computer.
The use of a third party and a common translatable format such as ANSI X.12 resolves both issues. A third party network can be viewed as a middleman offering secure electronic mailboxes. The sender may connect to the third party network at its convenience and with a single connection electronically transmit business information into the electronic mailbox of as many receivers as it desires. The receivers may link into the third party network at their convenience to retrieve message from multiple senders. A commonly defined format for exchanging business information is utilized to translate the information in to and out of the communication pipeline. The sender and receiver can readily purchase translation software following the common ANSI X.12 format to bridge any information into their proprietary computer systems.
What about using the Internet? The current control measures on the Internet make it too risky for most EDI users to send valuable business information into cyberspace. Third party networks continue to offer the protection, flexibility, and security needed for this type of information.
Reasons For Using EDI. The greatest advantage of EDI is the avoidance of work duplication. Approximately seventy percent of what one puts into one's computer came from another computer. Linking one's computer system with supplier and customer computers will eliminate dual entry. The precise requirements input on your purchase order are what are used for in the receiver's manufacturing system. The information you provide can be used through the entire process and ultimately come back, word for word, on the shipping and invoicing documents. Electronically linking the purchase order throughout the supplier's process means it is less likely that there will be input errors. Less redundant processing by humans can translate into a twenty-five percent reduction in administrative costs.
Costs And Savings.
As with any new process, the implementation must consider the tradeoff between measurable savings and costs to implement and maintain the process. Most companies have found the benefits of EDI far outweigh the additional costs.
Potential Reduction In Costs. Many of the cost reductions will be specific to a company and will be based on salaries and overhead. These cost reductions may include:
Increase in Costs.
Improving efficiency does not come without a preliminary investment or modification of some of the costs of doing business. Implementing EDI will result in an increase in costs for the following areas:
Types of Operations Best Suited for EDI.
Many times we tend to be short-sighted in exploring all of the opportunities a process may be used for. Many firms have limited their EDI applications to communication and purchase orders. Doing so ignores the ability to add further applications at a marginal cost.
So what types of applications are suited for EDI and are likely candidates to be incorporated into the daily business transaction? Consider the flow of information required to determine a need, define the need and specifications, identify how many units are required and when they are required, place a request for quote, place the order, receive a shipment, receive and pay an invoice, provide quality information, and give timely feedback to suppliers. Each type of these communications has a specific format in ANSI X.12. Your company is limited only by the time it takes to implement an application, the level of managerial support, and internal company controls and empire-building. Common types of information exchanged include e-mail, purchase orders, request for quotes, invoices, electronic payments, blueprints, JIT Pull Requests, statistical data, and common software files (word processing, spreadsheet). In short, any "envelope" of data can be electronically transmitted.
The costs to implement an EDI system can be viewed as being very similar to installing a telephone. Costs are dependent on what type and size of equipment you choose to operate, the number of applications to be run, and the number of users. Keep in mind both senders and receivers must have a connection in place but do not have to utilize identical equipment. It is the role of the third party network to ensure connectivity with a variety of different types of systems.
The lowest level hardware which may be used for EDI is a personal computer. The unit does not have to be dedicated to the use of EDI, rather EDI can be one of many uses for the equipment. Most suppliers already have at least a personal computer which may be utilized. It is necessary to have a modem as part of the personal computer equipment. In many cases, adding a $100 modem to existing equipment is the only hardware upgrade necessary. Larger corporations will often connect their mid-size or main-frame computers to the same third party networks utilized by personal computers.
The type of translation software used should match the type of equipment and applications involved in the EDI process. Key to the purchase of a translation software is the ability to use it to help add more capability to your EDI program and to translate multiple release levels of ANSI X.12. Andersen Consulting publishes an annual software guide(1) through the Council of Logistics Management which does a very complete job of identifying possible software packages. Minimum software costs start at $149.
Each third party network offers an account which may include a variety of services. The account is similar to a business telephone with a monthly existence fee. In addition to security services and your own electronic mailbox, third party networks remain competitive by offering connections to all other third party networks. Doing so increases the potential reach of your EDI program. One third party network recently charged $40 per month for a company and allowed up to 2,000 separate IDs for the account. Approximate annual fees start at $480 per year.
Similar to a telephone, charges are based on usage. Prices may vary depending on the time of day transmissions take place. Approximate costs run between $40 and $80 per megabyte of data transmitted. Experience has shown a text message averages 2,000 bytes which will cost approximately 27 cents to send. One client determined its cost to send a purchase order averaged 40 cents per transmission. Large scale files such as CADCAM blueprint files typically average $3 to $15 to send. The more applications utilizing EDI, the higher your monthly transmission bill. Be sure to include these considerations when conducting your business case.
A final word on the cost of EDI.
Some futurists claim in twenty years EDI will be as common in the workplace as a business telephone. Imagine the cost of conducting business without a telephone. The message becomes quite clear for the future...No EDI, No Business!
Suggested Quick Start Implementation Plan.
The best way to start up your EDI program with your suppliers is to ask suppliers and customers if they are already utilizing EDI. Avoid re-inventing the wheel if you can join efforts with another company further along than you. As a part of your program business case, ask suppliers and customer if they are interested in utilizing EDI business communication with you. Find out if they are already EDI capable, what their current and planned capabilities are. Identify any special incentives offered (or expected) by these companies if you utilize EDI. Ask a number of employees at the organization what their perception of EDI is, who their third party network of choice is, and what they would do differently if they could have started over. Take advantage of the wealth of "learned" experience in your business community as you decide how best to implement EDI connections.
Your implementation plan should allow you to crawl before you walk. This may be accomplished by starting out slowly with a few number of EDI connections and one or two basic types of electronic business transactions.
Increase the Number of Users.
Start by connecting with your "A" suppliers and customers who are already utilizing EDI and can serve as a test program. Once you are comfortable with your abilities, follow up by connecting all other suppliers and customers who are currently using EDI. Typically this involves exchanging an electronic address and identifying which types of applications both sides have the ability to process. Next, consider asking your remaining "A" suppliers and customers to join your effort. Finally, consider sending out an "open availability" letter informing all suppliers and customers you are "EDI-capable".
Increase the Number of Applications.
Grow your EDI program by increasing the number of applications as well as increasing the number of users. Doing so avoids the "chicken or egg" syndrome where customers and suppliers will only connect with you if you are running significant applications, but you cannot justify starting up the applications until you have enough customers and suppliers connected. Plan on increasing both in parallel. It is not unusual to find yourself swamped with EDI Application requests from within your company as the news travels from experienced users. The joy of an EDI administrator is to have too many requests to fill.
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Operate a Dual System. When you first start out you may find it useful to designate a specific time period to conduct a dual system sending both hard copy and electronic notification. A dual system will help convince employees used to "the old way" that nothing has changed except for the method of sending the information. Avoid a critical mistake one company made and make sure both sides are aware you are operating a dual system. One supplier was overjoyed when he received twice as many orders as normal from his best customer!
Finally, consider making EDI a standard in conducting business with your company. All new sourcing should include a phrase requesting the supplier will implement "EDI Capability if requested." Setting this groundrule at the start of business allows you to bring all suppliers into your EDI program when the time is right without changing the rules of doing business with you. (1) Andersen Logistics Software 1995. Richard C. Haverty, editor. Available from the Council of Logistics Management, 2803 Butterfield Road, Oak Brook, IL 60521-1156 (708) 574-0985, Fax (708) 574-0989.