101 EDI

101 EDI

In today's business environment, intense competition is forcing businesses to look at new ways of operating. Leaders are constantly looking for new methods that will allow their business to do things faster, cheaper, and better than before.

The problem with most approaches is that they often sacrifice one objective in favor of another. It's one thing to cut costs in your operation, but that often increases the time it takes to service the customer. Also, depending on how cost reductions are achieved, you end up providing an inferior product.

Electronic Data Interchange, or EDI, is a tool that allows you to achieve significant improvements in all three objectives. EDI can speed up many business functions, while cutting cost in a number of areas. By reducing unnecessary delays, you have more time to produce a better product and can provide your customers with improved service.

In today's competitive world, speed is a weapon you can use against the competition. By providing your product or service faster than the competition you can not only win increased business, but reduce sales loss due to price competition.

Before describing what EDI is, it is important to describe what it is not. EDI is not new and it is not dependent on any one technology. While the buzz-word, EDI, may sound new, EDI has been with us since the late 1960's.

While EDI has benefited enormously from advances in technology, EDI is not technology dependent. There are preferred ways to implement EDI in your business, but there are many approaches to choose from. The approach you choose should be driven by your business needs, not a particular implementation or technology.

So what is Electronic Data Interchange? EDI is paperless document transfer between companies. What's a Document? A document is any form of communication, usually paper, sent between two companies. Examples include:

* Purchase Orders
* Invoices
* Shipping Notices
* Export/Import Information
* Carrier-to carrier waybills
* Funds Transfers
* Design Specifications
* Health Insurance Claims

EDI is a data processing concept independent of communication protocols or transmission media. EDI is a logical outgrowth of the standard computerization going on within business for the last several decades. The type of electronic communication between departments within a business is now being extended to reach out to other business, or trading partners.

EDI is computer-to-computer communication. Contrast this with the other forms of communications like Electronic mail. E-mail is person-to person communications over a computer. A person creates a text message, which is sent to another person. While this form of communications is electronic, it still requires people to interpret the message.

EDI replaces human-readable, paper or electronic based documents with machine readable, electronically coded documents. With EDI the sending computer creates the message and the receiving computer interprets the message without human involvement.

Let's take a standard business transaction, a purchase order, and explore how and where EDI fits into the picture. Without EDI the process might look something like this:

* The Customer determines a need to purchase an item and creates a purchase order document. Often a computer produces these documents.
* The PO is sent to the supplier via either Post Office, Express mail, Electronic Mail or Fax.
* In all cases, it takes a person at the supplier to receive and interpret that purchase order
* 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 the time saved by eliminating the post office and the people cost saved in the process. What is perhaps a subtle area of savings is the cost due to errors. How much would it cost if the order entry clerk added an additional zero to the quantity field?

History

Since the 1960s, many companies developed in-house computer systems and internal networks to streamline business functions. A typical example is the order processing system, which can process customer's orders with greater speed. Still, the speed in which a business could respond was determined by the communication link between the company and its customers. That communication link consists of the postal service and the telephone, and remains a slow and costly process even today. Some business executives were working on methods to shortcut the conventional communication link. Electronic communications was a prime consideration in circumventing the paperwork/telephone problems. It soon became clear that linking up to other business electronically had one major initial problem, information format. Very few companies use the same paper document format. One company's Purchase Order form looks different from another. The same holds true with computer systems. Information stored in one company's computer system may be in a different format than that 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 do not have that ability and require information in a specific format and in an exact order. You do not want your system to interpret your trading partner's purchase order number as the quantity ordered. That could easily happen if the two companies do not agree on a format and sequence of information they exchange with one another. A supplier serving one customer can follow that customer's formats and rules for EDI. The problem arises when one supplier has to deal with different rules from different customers. Systems can be developed to interpret an electronic transaction from Company A differently from Company B. This approach, however, is extremely costly to develop and maintain and it doesn't solve the problem when Company C comes along and wants to do business electronically. A better approach would be support standards that all customers and suppliers could adopt. EDI standards are a set of formats and protocols, much like a language, that trading partners agree to communicate to each other in. A good analogy can be found in the airline industry. All over the world there are airlines and airports in different countries. Pilots and crew may converse in their native tongue, but English is required from all aircraft to control tower communications. Could you imagine the confusion if there was not one standard language? The Transportation Data Coordinating CommiteeThe 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 ground rules the TDCC began its standards development with were: 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 worked in teams to develop these standards. These teams consisted of shippers, railroads, motor carriers, forwarders, ocean carriers, air carriers, and banks. The end product was the publication of the TDCC Electronic Data Interchange Standards. These Standards were first used in the rail lines and later across motor carriers. TDCC estimates that 90% of all rail waybills were electronically interchanged between railroads by 1985. Today, 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 tracing information.Payment data, payer to bank, bank to bank, bank to payee.

Private Company Standards

A few major companies, such as General Motors and Kmart, charged into the EDI arena and developed their own standards. GM's EDI involvement 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. Because of the low inventory levels, GM needed a fast reliable way to order parts so that they arrived at their loading docks just-in-time for assembly. This approach allowed GM to save millions in inventory costs. EDI was the enabling technology without which Just-in-time inventory would not be possible.

We should note here that while GM saved millions, the inventory cost didn't disappear. The burden of inventory was shifted to the suppliers. Some of these suppliers were large enough to absorb these costs, but many were not. This put many suppliers in tough situations as GM was requiring EDI connections for suppliers providing production material to Just-in-time plants.

To complicate matters even more, Ford and Chrysler adopted similar plans, which led to confusion throughout the Automotive Industry. Also, several large suppliers, such as Rockwell, wanted to use EDI with their own suppliers. The question was whose standard should they use?

Private Industry Standards

Relief came to the auto industry in the form of the Automotive Industry Action Group, a trade association for the industry. The AIAG worked with the automakers and suppliers to develop an EDI standard for the entire Industry.

Other industries have taken the same approach of developing specific standards of their own. Industry specific EDI Standards Development Associations include: Voluntary Interindustry Commerce Standards VICSAmerican National Standards Institute ANSI Uniform Code Council UCCAutomotive Industry Action Group General Trade Document InterchangeNational Automated Clearinghouse AssociationNational 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.

Even the collection of industry specific standards is not enough since few businesses operate in a single industry. For example, a telephone manufacturer in the Communication Industry must buy plastics from the Chemical Industry. Once again, the need for further standardization exists.ANSI X12 StandardsThe 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.

Also, the TDCC is serving as the Secretariat for the X12 committee. All data field names, types, formats, and lengths are defined in a data dictionary. The TDCC keeps this data dictionary available. Everyone supporting X12 standards knows exactly what format each field or data element should use. For example, The Purchase Order Number is defined as being from 2 to 30 characters in length. A 31 character PO number is not allowed.

Industries working with X12 standards include:

Telecommunications, electronics, chemical, auto, metals, textile, and aerospace. Individual industries may use a subset of the overall X12 standard. The format and meaning of the individual data elements remains constant, but different industries have chosen to implement some fields in a different order, or to exclude certain information not appropriate for their industry.

Conversion from industry specific standards to X12 has not been easy. Once an industry has an investment in one approach, it takes time to convert to another. The grocery industry established their industry specific UCS standard in the early '80s and has been the most notable holdout from X12 acceptance. The approach in the grocery industry has been "If it's not broken, don't fix it."

Even with X12 standards, many EDI trading partners are finding it necessary to translate documents from one X12 subset to another. Additionally, as more companies move to X12, there is a great need to translate their standard X12 transactions into industry specific standards. Conversion is often required in order to communicate with trading partners that have not yet made the step 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 is conceptually an interface between the sender's and the receiver's internal computer programs. These company specific internal programs 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 often in a third, intermediary.

We'll use the transmission of a purchase order to illustrate how EDI works. The buying party's purchase order system generates a PO and passes it to the EDI software. The EDI software converts the internal data structure into a standard EDI transaction with the required fields supplied by the data dictionary. This transaction is then transported 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 because few mainframe COBOL systems are exactly alike. The user may need to make some changes to the software to match their particular system.

The TDCC software is "table-driven." This means that all translations between internal and standard data formats are defined in easily modifiable tables. You do not have to modify COBOL programs for translation. A portion of the EDI software, called 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 performs the translation according to the parameter tables and the information in the data dictionary.

When the transactions are received by the destination EDI software, the receiver's data dictionary and parameter tables are used by the Set Interpreter to convert the standard format transaction into the desired internal format.

Communication Alternatives

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 typical example of a point-to-point communication. Vendors dial into Wal-Mart SNA network via bisynchronous modem. Point-to-point communications lines can be established between the trading partners using standard communications protocols. This connection could either be a leased or a dial-up line. A leased line is purchased on a monthly basis and is always available for transmission. A dial-up line is established just like a normal telephone call. When the sending party has something to transmit, the call is made and the data is transmitted. When dialup links are used, senders typically batch up their transaction and at certain points make the connection and send the entire batch. The dial up approach is cheaper when the amount of data is low and sporadic. An expensive leased line can be more cost effective if the amount of transactions is high, and fairly constant throughout the day. Also, 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 as soon as it is created. For some applications, immediate transmission and reply may be appropriate. Value-added Networks This is the most widely use method. Samples of VAN (Value Added Networks) are IBM Information Exchange and Sterling Commerce Network. Point-to point links often present a scheduling problem to trading partners. Often, it is not convenient for the receiver to get transactions when the sender chooses to transmit them. The solution to this problem is a value-added network that provides a store-and-forward mailbox service. Compuserve, Telenet, and Tymenet are examples of value added networks. The sender connects with the value-added network and sends its EDI transactions to the recipient's mailbox where they are stored. The sender then disconnects from the service. At some point that is convenient, the recipient can connect to the network and receive those transactions from their mailbox. With this approach, both sending and receiving parties must use the same EDI standard transactions.Buyer Benefits
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 buyer: Lower Inventory Levels.

Quick Order Acknowledgment:

If a supplier can not provide the product desired, the buyer can quickly seek an alternate supplier.
Time spent matching invoices to purchase orders and re-keying invoices into an Accounts Payable System is reduced.

Supplier Benefits

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 possible for the supplier to achieve reduced inventory levels also. Production schedules can be tuned more closely to customer demand, to reduce goods inventory.
• Improved Cash Flow:
  
• Time taken out of the invoicing/payment cycle improves the cash flow of the supplier.
• Improved Customer Service
• Improved Sales Tracking - Cost Savings
• A common benefit to both buyer and supplier is cost savings. Input, 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.

Examples

The following are some examples of EDI usage.

Auto Loans
 A major part of the automobile manufacturers business is the financing of the sale of its vehicles. 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 be more responsive to their customers, auto companies have implemented electronic links to credit bureaus such as TRW.

The normal 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.

There is now movement to allow the dealers direct transaction input. This moves the personnel cost of data entry from the auto company to the dealer. This is also an advantage to the dealer as it allows them to better respond to their customers. 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. Wal-MartAn EDI link between Wal-Mart and one of its suppliers, Seminole Manufacturing Co. cut the delivery time of Seminole slacks by 50%. This resulted in a 31% sales increase of these slacks in the first 9 months after the link was established. General MotorsGeneral Motors has integrated 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 are also performed electronically via Electronic Funds Transfers. JC PenneySales of Stafford suits jumped 59% after JC Penney linked up with their supplier Lanier Clothes. EDI allowed Penney to quickly replenish stock fast enough to meet demand while cutting their overall inventory of suits by 20%. Rockwell Rockwell, a major automotive supplier received design change notifications directly from the automakers via EDI.

Rockwell has been able to react faster to their customer's constant design changes while reducing their inventory of finished goods. Parts now bypass their warehouse and go directly from their production lines to their shipping docks. Textile Industry The Textile industry is beginning to fight back against Asian competition with EDI. While the US textile industry is hard pressed to compete on a cost basis, EDI is helping them provide superior service. Service is making it easier and faster to do business with a US supplier. US Customs US Customs accepts electronic customs documentation, in advance of goods shipments. This reduces port delay and provides a competitive advantage for those ports of entry that support EDI. Market Outlook 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 for the explosive growth of the EDI service market is that the business environment finally contains all the pieces to make EDI possible. Clearly, standards are a major factor. By 1986, there were over 150 standardized transaction types. Standard transaction development has a cascading affect. The Purchase Order begat the Invoice. The Invoice begat the Shipping Notification. This Shipping Receipt leads to the desire to make electronic payments, which spawns another batch of electronic transactions.

The spread of computers and available software has been a factor in EDI growth. The acceptance of the Personal Computer has been a stimulus to EDI. It is possible to develop an EDI solution based on a Personal Computer with less than $1,000 hardware investment.

Another factor is what you could 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. The automobile industry is an example of the Domino Effect.

There are two approaches to getting 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 inhibite EDI implementation? There are several factors: Lack of ease of use 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 opening new trading opportunities.

How to Proceed?

Form a taskforce with broad company representation. EDI implementation is not simply an Information Technology Group exercise, but affects the entire company. Select people across departmental boundaries to reduce operation gaps and resistance. Set your taskforce's goal to determine when, not if, to 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 large 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 taskforce 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. Determine 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 totally change the way you do business today. Based on your required volume, the integration may not be an option but a must do.

Future

EDI is a must in today's environment. 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 steadily increase. 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 are mandatory in various companies like the ones that relate to electronic transfer of funds, PO automation, Inventory inquiries, shipment tracking, Item catalogs, etc. Further expansion will occur in multi-industry standards because few companies really operate in just one industry. The grocery stores, for example, sell many non-food items.