Introduction to EDI - A Primer
3. THE BUSINESS OF EDI
THE NEED FOR SPEED AND ACCURACY
To remain competitive in today's global economy, businesses are being forced to re-evaluate the way the do business with their customers and their vendors. The focus of these relationships has moved relentlessly towards greater speed through shorter transaction cycles.
At the same time, however, there is a growing emphasis on flexibility, in being able to respond quickly to changes in consumer preference and demand. These two factors, together with the necessity of delivering high quality products to gain and maintain customer loyalty, while keeping rigidly controlling and/or reducing costs, define the significant challenge of business in the future.
With the dramatic increases in price/performance of computer technology, the impact of some of the drawbacks that led to limited implementation of EDI are being is being reduced. What used to require mainframe power (and specially conditioned environments) can now be handled on computers that fit conveniently on or under the desk, and can operate in the office, warehouse, or production floor.
There is a similar revolution going on in the software industry. The elapsed time from conception to deployment of new software is being dramatically reduced through such the implementation of object-oriented software design, increasingly powerful 4GL development tools, and rapid application development techniques. Software developers can now produce packages that can run on a variety of hardware platforms, allowing them concentrate on delivering greater functionality and flexibility to their core packages, rather than spending precious development time and dollars on customization for a specific platform.
This revolution in hardware speed, power and flexibility, combined with an increasingly robust selection of high-quality software products allows business to get a substantially higher return for each dollar they invest in computer technology. It has allowed business to solidify the information needs of their internal processes.
Even with dramatic improvements in internal processes, progress can come to a screeching halt if the supply and distribution chain is not similarly enhanced. So as the internal processes have been put under control, it has also forced management to focus on opportunities in their customer and supplier relationships - the areas traditional EDI ignored.
So the revolution in computer technology has led to another revolution: the replacement of dictatorial or adversarial relationships between customers and suppliers, with information partnerships. In fact, for some time in the lexicon of EDI, two businesses engaged in electronic trading of information have been referred to as "trading partners".
The problem was that it took management a long time to realize that partnership had to extend much further than just agreeing to trade electronic versions of paper documents. By breaking down the adversarial barriers between vendors and customers, another order of magnitude increase in speed and flexibility could be introduced.
The true value of EDI, and the significant return on the technology investment, comes when business can begin to trade or share core information. The traditional scenario of EDI implementation painted a picture where commonly used paper documents were replaced by electronic versions of the same documents. Purchase orders, shipment notifications, invoicing, and accounts payable began to participate in the process.
Now visualize the same scenario between a hypothetical distributor of automotive parts, called FastPart, and its retail outlets and suppliers.
FastPart receives regular daily updates from all of its retailer outlets, transmitted directly from the Point of Sale registers. An up-to-the minute inventory balance for its retail stores and distribution warehouses is maintained. On a nightly basis, inventory consumption of each supplier's products are transmitted directly to the manufacturers.
The manufacturer of a key component reviews the inventory consumption and identifies an increase in demand in one region. Accordingly they adjust their production schedules at a local plant to meet that demand. At the same time they electronically schedule transportation to pick up shipments and notify their FastPart of expected shipping dates, quantities, and carriers.
For larger shipments the manufacturer has agreed to ship directly to the retail outlet, rather than to FastPart's distribution centers. As the item is produced some of it is packaged per the specifications for shelf stocking and labeling specifications, while other portions of the shipment are packaged for bulk storage. As each shipment is loaded onto the carrier, the containers are scanned or otherwise automatically identified to verify the accuracy of the order. Shipping documents are then transmitted to FastPart, and an electronic invoice is sent.
As FastPart receives the electronic shipment notification, warehouse, routing tickets for the material are prepared in advance. Some material will be identified as needed for immediate shipment, and in order to expedite movement of this material, shipping labels will already be prepared, and outbound shipments will be scheduled.
When the shipment is received, it is scanned and routed automatically. Material scheduled for shipment is cross-docked, and the rest is delivered to pre-assigned inventory locations. Inventory is automatically updated, and the receipt triggers a payment authorization, which is sent to the central office. When the authorization is matched with the electronic invoice, an automatic funds transfer is authorized.
One must keep in mind, that in the scenario described above, FastPart is both a customer and a supplier. So on the outbound side of the process, moving material from the distribution center to the retail outlets, FastPart can apply the same steps.
As FastPart receives Point of Sale information, it will automatically schedule replenishment of the inventory consumed. Rather than shipping in "replenishment units" based on each stores basic operation shelf stock quantity, FastPart will replace exact quantities, adjusting them based on known inventory trends.
Shipment notifications will be sent to the retail outlets, and in the same manner that the vendors drop-shipped to retail outlets, the distribution center can place orders for large customers that can be shipped directly to the customer.
All of these steps are achievable and go a long way to defining the current environment of Electronic Commerce using EDI as an enabling technology.
This example has used a basic vendor/distributor/customer relationship. Another example from the food brokerage industry serves to highight the changes this enabling technology has made possible, and the extent to which document trading partnerships have become true business partnerships:
These are just a few examples of how companies can add speed and efficiency to their businesses by entering into information partnerships with their customers and suppliers. And without it, it is difficult to imagine how they will be achieve the levels of cost savings, quality, flexibility, and customer satisfaction necessary for survival in the competitive global market place.