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Electronic Data Interchange (EDI): E-Business as We (Used to) Know It

The idea of e-business has been around for a quarter of a century.40 In the mid-1970s, the UPC bar codes, as described in the preceding section, began to revolutionize the way grocers and manufacturers did business, supplemented in the 1980s by Electronic Data Interchange (EDI). Both technologies are in wide use today. If these technologies have established themselves in the world of business, why do we need the new web-based forms of e-business, such as XML?

Bar codes have become a pervasive technology, but EDI has had considerably less penetration, inhibited in many ways by the overwhelming success of fax and email transmissions. With EDI, the information exchanged between trading partners is organized into transaction sets, as they're called by X12. The definition of EDI according to Accredited Standards Committee X12, the standards body responsible for EDI in North America is as follows:

EDI is the computer-to-computer exchange of business data in standard formats. In EDI, information is organized according to a specified format set by both parties, allowing a "hands off" computer transaction that requires no human intervention or re-keying on either end. The information contained in an EDI transaction set is, for the most part, the same as on a conventionally printed document.41

Transaction sets, as the X12 definition above suggests (called messages in international EDI standards and XML specifications), serve as electronic equivalents of hardcopy business documents, and in most cases use the same names, such as purchase order, invoice, shipping notice, or healthcare claim.

EDI itself began in the transportation industry. The Transportation Data Coordinating Committee (TDCC) devised an electronic railroad bill of lading in 1975 and went on to establish a whole suite of electronic documents for rail, motor, ocean, and air freight. Individual companies and industries began developing their own means of exchanging data, which raised the prospect of splintering and conflicting documents that created more work for the users rather than less. The result, in 1979, was the United States Electronic Data Interchange standard, which became accredited under the American National Standards Institute as the X12 committee.42 X12 incorporated the work of TDCC into its standard in the early 1990s.

The X12 standard had over 300 transaction sets in version 4040, released in December 2000. When the standard first began its development, X12 focused on general business documents such as the invoice. In recent years, however, the standard has released more new transaction sets for individual industries, especially in healthcare.

In 1996, the U.S. Congress passed the Health Insurance Portability and Accountability Act (HIPAA, Public Law 104-91). One of HIPAA's provisions, called administrative simplification, requires healthcare providers (health maintenance organizations and hospitals) and insurance companies to use standard electronic documents rather than their own hardcopy forms. In August 2000, the U.S. Department of Health and Human Services issued its rules interpreting the law to specify the X12 standard for these common electronic documents.43 As a result, healthcare and insurance have become the single largest and fastest-growing part of the X12 Committee.

As Figure 1.2 shows, X12 transaction sets break down into data segments, which are collections of related data elements, many of which are interchangeable among transaction sets. This reusable data element is an important feature of EDI that offers opportunities for interoperability among applications.

For example, the X12 date/time data segment found in most transaction sets consists of the following data elements:44

Date/time qualifier, a code indicating the type of date or time, such as date of the transaction or time of delivery

  • Date, in CCYYMMDD format

  • Time, in 24-hour format

  • Time code or zones

  • A date/time period format qualifier, indicating the date and time format—various combinations of century, year, month, date, hours, minutes, and seconds

  • Date/time period, an expression of one or a range of dates and times

The data elements in the data segments can be either simple or composite elements. Simple data elements, as the name implies, are single stand-alone parent items. The date/time elements just listed are simple data elements.

Composite data elements are groups of related elements, but not with enough reason to stand alone as parent data segments. For example, a measurement element in X12 consists of related sub-elements for unit of measure and tolerances, among others. Elements can come in various types, including identifier elements consisting of codes. Some of these code lists have become voluminous as increasing numbers of industries add their own special terminologies. Code lists are quintessential to the EDI process. Each industry defines its own code lists to describe the context of a particular parent segment and its children. Understanding the context of use is therefore key to unscrambling the particular implementation of an EDI transaction, such as a purchase order, which is used across every industry and therefore has myriad of flavors driven off code-list values.

Many of the companies that have successfully implemented EDI have realized significant benefits, particularly over previous use of hardcopy forms. Using forms requires people—usually many people—to handle and input the data into company systems, which is painfully slow and invariably results in errors. Not only does EDI reduce or eliminate this direct overhead, it encourages companies to use the data captured electronically to improve business processes.45

Some of these process improvements have resulted in significant productivity improvements. A practice called evaluated receipts settlements (ERS) is a good example. ERS lets trading partners do business without an invoice. Perhaps cutting out one document doesn't seem like an earthshaking achievement, but doing without an invoice means you can also use in much better ways the many people processing the documents on either end of the partnership.

ERS works where the trading partners use EDI. If the electronic purchase order provides price and desired quantity, the shipping notice provides the items shipped, and a receiving advice offers the goods accepted into inventory, an invoice (with all of the same data) becomes redundant. The receiving staff needs the authority to inspect the goods and check the received shipment against the shipping notice and purchase order; if everything matches, they authorize payment to the vendor. This is a process now used in the steel industry, for example.46

In many other industries, suppliers manage the inventories for their major customers. The suppliers keep close tabs on inventory levels and provide replenishment quantities when they reach predefined levels. Here again, EDI, usually with bar codes on items, keeps track of inventory levels. In some trading partnerships, the companies establish blanket purchase orders from which the buyer issues releases. The blanket order specifies the basic terms, items covered, quantity limits, locations, and prices. Agreeing to these conditions in advance and referencing them in the release keeps the actual data exchanged to a minimum.

Kodak Canada began a vendor-managed inventory program with Wal-Mart's stores in Canada, in what Kodak calls co-managed inventories. Kodak and Wal-Mart jointly forecast future sales and tracks demand levels, which reduces the number of individual orders placed. The program enables Kodak to get a better idea of Wal-Mart's needs and provide better service.47

Experience with process improvements such as ERS and vendor-managed inventories led Wal-Mart and other companies in the retail industry to begin work on a more comprehensive approach to squeeze as much lagging inventory as possible from the supply chain. This approach, called Collaborative Planning, Forecasting, and Replenishment (CPFR), recognized that eliminating inventories at the retail level alone would not solve the problem of dislocations in the supply chain. In fact, it often forced the manufacturers or distributors to stockpile inventories to be prepared for sudden demands from the retailers. These stockpiles just moved the problem upstream, and the costs for this stockpiling would eventually find their way back to the retailer.

The CPFR project discovered that by sharing information on production and promotional plans early in the process, as well as detailed sales forecasts that reflect those plans, all parties in the supply chain can better coordinate their activities, reducing expensive inventories and costs. In response to this need for better planning and forecasting data, X12 developed the Planning Schedule with Release Capability transaction set, which enables the trading partners to exchange forecasts for specified periods of time (weeks, months, quarters). It also allows for the most current period to act as a blanket order release—refer to the earlier discussion of vendor-managed inventories—that eliminates the need for a separate purchase order.48

CPFR started with pilot tests in 1997, but has started attracting more attention. A survey conducted for the Voluntary Inter-industry Commerce Standards Association in late 1999 and early 2000 found more than 100 companies participating in the planning, design, or actual conduct of CPFR programs with their trading partners. Over half of the retailers plan to roll out CPFR to 25 or more trading partners within the next two years. About a quarter of the respondents have a CPFR pilot underway or planned in the next six months. Those that have started pilot projects report some impressive results:49

An 80% increase in business with CPFR trading partners

  • A $9 million increase in combined total sales

  • Simultaneous sales growth and inventory reductions of at least 10%

  • Improved fill rates with less inventory

  • A 100% service level with almost 40 inventory turns a year

If EDI provides such significant benefits, why isn't it used more widely in business? Rachel Foerster, an EDI veteran and leading consultant in e-business, cites statistics showing that 95% of the Fortune 1000 companies use EDI, but only 5% of smaller enterprises.50 The reasons indicated by Foerster and others for this lack of penetration in small business are discussed below.

Companies trying to implement EDI have run into a number of obstacles, the greatest being the high cost of systems and the extended times needed to integrate EDI into a company's overall business operations. EDI software rarely costs under $1,000 and often comes with annual maintenance fees. These high prices result from the complexity of EDI standards; see for example the earlier discussion of dates in EDI and the six different data elements needed for their representation in an EDI message. In its defense, the X12 standard covers all industries using EDI, and as a result the standard needs the flexibility to represent the wide array of business conditions. But this flexibility comes at a cost, which finds its way into the price tags for EDI products or services.

The X12 standard also changes every year. Each year, X12 adds new transaction sets, as well as additions to code lists and changes to data segments and elements. These standards changes mean that the software supporting the standards also needs to change, which requires annual updates and maintenance fees.

Because the X12 standard needs to cover all industries using EDI and because it changes every year, industry groups have stepped in to write implementation guides for their member companies. These implementation guides usually pick out the several transaction sets needed by trading partners in those industries, as well as the segments, elements, and codes needed for those exchanges. The industry guidelines also last for a few years, which gives companies some assurance of stability that enables them to develop EDI systems. But the implementation guidelines add more levels to the learning curve needed to get started, as well as increased costs to the already high price for standards, software, and networks.51

Another problem with using EDI is the lack of integration with a company's other business systems. EDI transactions use a neutral and efficient syntax, but one that doesn't mesh with database languages used in business. Since EDI transactions go from one trading partner's mailbox to another, systems at either end of the exchange need to translate the data to and from their native formats into the EDI syntax. The transactions carry only the data, with no instructions or routines to perform these integration steps. It's not unusual to have some companies, particularly smaller companies, finding it more economical to print and re-key the EDI data into their systems, rather than spending money or time on software development.

If companies do business internationally, they run into still another problem, one that readers may have already surmised. Two sets of EDI standards have emerged, the X12 standard for North America and the UN/EDIFACT standard for elsewhere in the world.52 While the two standards have a similar basic design, they're not identical, and companies in the international marketplace exchanging EDI messages must support both standards, adding even further to the cost and complexity.

The accumulated effect of these obstacles is to put the whole idea of EDI out of reach of smaller companies. According to the U.S. Census Bureau's 1997 Census of U.S. Business (the latest year with available statistics), companies with 20 or more employees numbered 583,277 out of a total of 5,541,918 firms, or 10.5% of the total. Those with 500 or more employees, the traditional cutoff between larger companies and small or medium-size companies, numbered 16,079, or barely 0.3% of the total.53

Smaller companies, however, appear primed and ready for e-business (see Figure 1.3). According to IDC, in April 2000, less than a quarter (23.3%) of small businesses in the U.S. had web sites hosted by an Internet service provider, spending nearly $20 billion to develop and maintain a presence on the web. IDC also expects the number of small businesses engaging in business over the web to grow from about 400,000 in 1998 to almost 2.8 million by 2003, an annual increase of 47%. IDC says that "...the major distinguishing feature of small businesses that have advanced down the e-commerce track is their attitude toward technology. These small businesses already have in place much of the infrastructure to support e-commerce."54

What happens when small companies try to do business with EDI? A case study provides an illustration. A few years ago, Arctic Fisheries Ltd., an importer of fish and seafood from Iceland that serves stores and restaurants across the U.S., received a request from a leading supermarket chain in upstate New York—a potential major customer—to exchange purchase orders and invoices with EDI. Arctic Fisheries has nine employees, with the company's vice president doubling as the systems manager.

The supermarket chain used its own flavor of X12 and offered to sell its client software for $500, a cost that Arctic Fisheries found difficult to swallow for supporting one customer; an overly aggressive software vendor didn't help the situation, either. After Arctic Fisheries asked to continue sending hardcopy documents, the chain hit Arctic Fisheries with a $50 fine for each transaction, a price Arctic Fisheries was reluctantly willing to pay. Michael Kotok, the vice president of the company, says, "I personally felt that at the time, we would be better off waiting for an alternative on the Net that would have been no/low cost." Arctic Fisheries and the supermarket chain no longer do business, but not as a function of the EDI issue.55

Nonetheless, 25 years of EDI transactions offers some lessons that any web-based e-business technology like XML would be well advised to heed, as described in the following sections.

Aim to Improve the Business Process

Companies exchange data—including EDI data—_for a reason, and more often than not those reasons involve improving the way business is conducted. If you can tie the time and effort of building e-business systems into innovations such as vendor-managed inventories, the payoff gets magnified many times over.

Sweat the Details

The more detail you can include with business messages, the more valuable the data will be to your trading partners. As seen with CPFR, identifying individual products down to a fine level of granularity allows for better planning and forecasting data. If a company is now identifying product at the skid level, try identifying cartons on the skids. If it gives you another few days of inventory before restocking and more turns, it's well worth the effort.

Aim for Interoperability

Include all of your business partners in the solution, including the sometimes invisible partners such as transportation companies. The OpenTravel Alliance has begun defining a travel customer's needs to include all the various services needed on a journey, in addition to the traditional airlines, hotels, and car rentals. Pet owners, for example, often need kennel services for their pets when they travel. Look at the potential business opportunity for enterprising travel services to include these auxiliary services in their package of service to travelers.

Link to Other Technologies

Consider the success that EDI has had in inventory control when combined with bar codes. Related emerging technologies, such as biometrics (authentication based on human physical characteristics), smart cards, and radio frequency technology have yet to be integrated on any scale with e-business. Again, great potential opportunities await the enterprising businesses that can make it happen.56

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