EDI

AN EVOLVING TECHNOLOGY

By

Robert E. Turbyfill

University of Maryland - European Division
Bowie State University
Graduate Program in Management Information Systems
INSS 690 - Term I
Submitted: October 9, 1999

Abstract

Electronic data interchange (EDI) has been with us, in concept, since the Berlin Airlift. Initial EDI developments were made by big businesses pursuing supply chain automation. Their hope was to develop more efficient operations with their trading partners as well streamline internal processes to make their own operations more efficient. Resulting systems were initially proprietary in nature, which proved to be problematic for suppliers who were expected to participate in EDI relationships with multiple trading partners. Initial attempts at EDI standardization met with success and developed into the American X12 EDI standard, which was initially published in 1984. In 1987, the international EDI standard (EDIFACT), which is based on X12, was published under the supervision of the Unite Nations. The two standards have differences yet with globalization, it is only time before a single standard will be developed.

EDI proved very profitable for businesses that properly implemented it, yet it was very costly to maintain the communications networks required to transmit EDI transactions to trading partners. Value added networks (VANs) evolved as separate businesses dedicated to supporting EDI and big business soon found it less costly to utilize VANs as EDI clearinghouses than to support their own EDI networks.

Traditionally, EDI was very expensive and required large investments in equipment, software, and transmission facilities. The price of EDI put it out of reach of small businesses without subsidies from their big trading partners. In addition to expensive, EDI was often difficult to implement because effective implementation required strategic integration of EDI into partner's business practices. These were major factors in keeping EDI from migrating down to smaller businesses.

Today, the Internet holds promise to lower EDI's costly barriers with inexpensive connectivity to trading partners. According to Forrest Research, about 100,000 businesses use EDI today and 2 million more companies with 10 or more employees have become prime EDI candidates thanks to the Internet.

There are several factors currently constraining EDI's full implementation over the Internet. Much of EDI has been developed to automate America's supply chain. EDI has allowed American business to adopt just-in-time inventory, which eliminates pre-production inventory and dramatically reduces product cycle time as long as suppliers' deliveries are made to manufacturing facilities on time. Timing is critical: for example, some automotive industry suppliers must deliver products to supply points within 15 minutes of the parts being ordered. The Internet currently does not provide the reliability to support such time-critical processes. Security is another issue that is repeatedly tested by the unscrupulous and many businesses will not move their processes outside the private networks provided by VANs. Standardization is another problem with Internet EDI since most X12 transactions are designed to support big business.

Companies are working very hard to overcome current Internet EDI constraints in a rush to move more trading partners on-line. Fortunately there are many non-critical business processes that can be moved on-line and many smaller American companies are finding ways to re-engineer their business processes to take advantage of EDI over the Internet.

Through all the hype, promises, and euphoria that the Internet's freedom brings to businesses, it is important to remember that even though the Internet's content is limited only by developer's imagination, the computers that make it all possible must strictly adhere to established protocols. EDI has been successful at re-engineering many of America's big businesses and it holds promise to help smaller businesses find new efficiencies too. Small business managers should not be too quick to jump for an Internet EDI salesman's pitch as Internet EDI standards are still developing. And like the Internet itself, EDI will only work for you if your computer is talking what the other computers can understand--established standards.

Introduction

Automation has made its way into almost every facet of American life. It helps us keep track of our busy schedules, balance our checkbooks, and send communiqués at the speed of light. In general, we enjoy a much higher standard of living with automation than we could without it. American business is operating at its highest level of efficiency in history and many experts attribute this directly to effective deployment of strategic information systems throughout the market. Federal Reserve Chairman Alan Greenspan provided opening remarks to the June 14th Congressional, Joint Economic Committee. "Innovations in information technology have altered the way we do business and create value for customers in ways not foreseeable even five years ago," Greenspan said. He went on to say the high-tech boom has enabled companies to "respond to finely-calibrated nuances in consumer demand." (Seeminero, 1999) Strategic information systems are found in every economic sector in America. Automation is exploited by banking, health care, farming, manufacturing, transportation, food service, retail, logistics, government, entertainment, science, defense, and the list goes on and on. Each sector represents different information system needs, yet very few businesses within these sectors operate solely within a single sector but must exchange information from a diverse pool of trading partners during the normal course of business.

As strategic information systems developed among industry leaders it became clear that integrating disparate systems from different economic sectors would be required to develop and enhance synergies among trading partners in an effort to strengthen their positions in chosen markets. Electronic Data Interchange (EDI) evolved to become the standardized avenue of electronic information interchange among trading partners.

EDI has been so effective at leveraging information systems into profits for trading partners that most large corporations mandate trading partners conduct business with them via EDI. This mandate, though it makes sense from the standpoint of the business that has EDI running, has met with mixed success due to numerous factors that will be disclosed throughout this paper. Traditional EDI defines standard transaction sets to address almost all standard business transactions ranging from purchase orders, to requests for proposals, to billing invoices, to accounts receivable payments. "Today, about 100,000 U.S. companies use some form of EDI; 2 million more companies with 10 or more employees have become prime EDI candidates because of the Internet's low barrier to entry, according to Forrest Research." (Frook, 1998)

EDI's strength came from its standardization of information packets, known as EDI transactions, which are exchanged by trading partners instead of paper documents. It is easy to see the superficial benefits of exchanging business data electronically rather than hand-scribing transaction information or even keying, and re-keying, information into separate business's information systems. EDI does provide superficial efficiencies by reducing the manual processes, and thus opportunity for human error, when completing business transactions. But EDI efficiencies go much deeper by integrating strategic processes among trading partners.

Big corporations developed EDI and nurtured it into what it is today. With market globalization so apparent today, as evidenced by the record number of yearly business acquisitions and mergers, anyone involved in strategic planning should understand EDI and the strategic advantage it brings to its users. What does this mean for the "average" American business: if you're not supporting EDI today, and you want to stay in business tomorrow, you will have to adopt some form of EDI or you will probably find yourself outside the trading constraints of your business partners. Small businesses have traditionally foregone EDI due to its expense. Today, if those businesses want to remain suppliers to big corporations they are adopting EDI or looking for new trading partners.

Research Scope

This paper investigates the concept of EDI; information interchange that takes place between trading partners. It does not address electronic commerce (E-commerce), which is evolving as a means for retailers to sell products to their customers, usually utilizing the Internet as the medium to conduct transactions. The kind of transactions EDI was invented for have little in common with today's typical E-commerce transaction. The companies that used EDI were usually quite large, and the transactions concerned critical supply-chain management. "A major airplane manufacturer, for instance, might form EDI relationships with its long-term suppliers, building a network that let it manage ordering and supply inventory for the specialized bolts, wing panels, and cockpit instruments that it needed to build its aircraft. If you wanted to become a supplier to the airplane manufacturer, your company would have to implement EDI." (Bloomenthal, 1998) The paper is intended to help the reader understand the current world of EDI: what it is, why it exists in the form it does today, and what may change its form in the future.

Intended Audience

The paper is directed at individuals who would like to know more about EDI. The scope of interest ranges from students to business managers. Traditional EDI has paid many dividends to large companies who have judiciously incorporated it into their strategic business processes. The Internet has changed the cost of EDI by providing an inexpensive data exchange medium. This advancement has brought the cost of EDI within reach of many smaller businesses, which has the potential to affect almost every business-supplier relationship in existence.

Preliminary Thesis

The concept of EDI has been developing for more than 50 years. It may change form in the future but EDI, as a concept, is with us to stay.

EDI Defined

An elementary definition for EDI states that electronic data interchange is a computer-to-computer electronic communication method whereby trading partners in two or more organizations exchange business transactions. The transactions consist of documents in structured formats that can be processed by the recipients' computer applications software. On the surface, EDI appears to be relatively easy to achieve, but upon further study, one quickly comes to the conclusion that EDI is much more than it first appears.

Why EDI?

Money! EDI implementation offers potential savings through the elimination of many manual business processes and their associated costs. Replacing manual processes with EDI also eliminates the possibility of human-induced errors that are inherent in those manual processes. In addition to passing business data between trading partners, EDI has also been creatively implemented to change the operational models of many businesses.

EDI has been the foundational technology supporting American manufacturing's transition from pre-production inventory to just-in-time (JIT) inventory. "EDI promises supply chain automation and just-in-time (JIT) inventory management that lowers inventory costs and delivers parts to customers as they are needed." (Ritter, 1998) JIT, when successfully implemented eliminates the need for manufacturing facilities to maintain pre-production inventory by shifting the responsibility of on-time parts delivery to suppliers. Eliminating inventory also eliminates the need for inventory storage facilities, inventory management personnel, and expenditures on inventory that will not immediately generate revenue.

EDI has also been utilized to improve efficiencies between fabless companies, that rely on outside fabrication and assembly firms for production, and their manufacturing suppliers. For example, Adaptec Inc. implemented an Extricity system to improve communications with one of its suppliers, Taiwan Semiconductor. According to Dolores Marciel, vice president of procurement at Adaptec, "The project cost about $1 million, including consulting fees, and immediately saved $9 million worth of reduction in inventory. The annual savings from eliminating manual processes and reducing carrying costs add up to $2 million." (Carr, 1999)

These are just two examples where EDI implementation resulted in lower operating costs and greater efficiency among trading partners. In addition to increase efficiency, businesses successfully integrating EDI into their business operations often find they can redirect resources from support functions, that have been automated through EDI, to their core business competencies making them more competitive in their chosen markets. Many EDI proponents would argue EDI was the enabling technology at the heart of the most recent restructuring of American big business. Bob Owens, director of information technology strategy and planning for the American Dental Association, offered the following advice. "If you cannot save at least 30 percent implementing EDI, even if you have a proprietary file format, then there's something wrong. Even considering that you'll have to buy hardware and you'll have to buy software, you should be able to save at least that much. You're not going to save 30 percent from day one, but your payback in most cases is not that significant from a time standpoint." (How You Can Position Your EDI Program for Success)

EDI’s History

The history of EDI is generally traced back to the Berlin Airlift in 1948 where Army logistic managers had a horrendous time keeping track of supplies moving into Berlin. The tight schedule of aircraft takeoffs and landings forced the planes to offload and take in cargo faster than the paperwork could be filled out and verified. Inventory lists were constantly out of date and the ordering and expediting lists quickly became obsolete and of little consequence. Edward A. Guilbert along with other logistical officers devised a way to use telex, radio-teletype, and telephones to track inventory and ordering independent of the method of delivery. Later, Mr. Guilbert known in EDI circles as the "Father of EDI" designed a system of electronic interchanges known as BUSAP (Business System Applications). This system was used to electronically interchange messages between EI Dupont Nemours and Chemical Leahman Tank Lines (Johnson Technologies – EDI Primer).

In 1968, a group of railroad companies concerned with the quality of inter-company exchanges of transportation data formed an organization to study the problem and improve it. This group of companies became known as the Transportation Data Coordinating Committee (TDCC). About the same time as the TDCC was forming, other individual companies, such as General Motors, Sears, and K-Mart were addressing inter-corporate document movement among their major trading partners. Each of these major businesses, however, addressed their information interchange needs with proprietary solutions. K-Mart, for example had more than 500 companies using its EPOS system by the mid 1980s (History of EDI).

Initially everyone had a different idea of how EDI should work and what part it should play in supporting their businesses which led to proprietary systems. Individuality among systems is understandable when one considers the expense of automation at the time these pioneers were developing computer systems to support their businesses. Even though use of electronic information interchange was growing rapidly among companies, their proprietary systems introduced a barrier to profitability for many of their suppliers in the form of supportability. A theoretical company doing business with GM, Sears, and K-Mart in those early, pre EDI, days would have to support three different system interfaces. In 1973 the TDCC decided to develop a set of standards for EDI between companies and to invent a so-called "living standard" that included standards on how to change the standards. In 1975 the TDCC released the first inter-industry EDI standard, which covered air, motor, ocean, rail, and some banking applications (History of EDI).

Interest in universal, cross-industry standards grew in the late 1970s and early 1980s. The American National Standards Institute (ANSI) chartered an Accredited Standards Committee (ASC), named X12, to develop such standards, which released an initial set of standards for EDI in the United States in 1984. These standards defined syntax, structure, and content of a handful of transaction sets. By 1989, this had grown to 50. Today, X12 has at least 187 different transaction sets (The Fundamentals of EDI: EDI’s Building Blocks). "The first company to implement an X12 transaction was Hewlett-Packard. On May 1, 1984, it transmitted a Planning Schedule/Material Release transaction to its trading partners. (This transaction set is now the 830.)" (The fundamentals of EDI: EDI’s building blocks).

X12 initiated EDI as we know it today in the United States, but international use remained a problem as many foreign businesses and governments were reluctant to adopt American standards. European development of TRADCOMS, ODETTE and JEDI started around 1984 (History of EDI). In 1985, the United States and European governments began discussion on creating an international EDI standard. This work was sanctioned by the United Nations and was released as the "EDI for the Facilitation of Administration, Commerce, and Transport: (EDIFACT) standard in 1987. The International Standards Organization (ISO) approved the syntax the same year as ISO 9735 (The Fundamentals of EDI: EDI’s Building Blocks).

EDI Standards

EDI standards define the content of traditional EDI transactions. There are opponents to EDI standards that call them too complex and too expensive to implement (Ritter, 1998). Regardless of opponent sentiment, these standards played an important role in EDI development and still accommodate its adoption into many different business models today.

X12 was the first EDI standard. Since X12 arrived, several other standards have emerged. The United Nations, wary of American EDI imperialism, in 1987 created the EDI for the Facilitation of Administration, Commerce and Transport (EDIFACT) standard, which is based on X12. Another is Tradacoms, a European EDI standard developed by the Article Numbering Association. In the United States, X12 is by far the most common standard, but other countries use X12. EDIFACT or Tradacoms, depending on the country and with whom they are trading (Dejesus, 1999).

This paper's purpose is to introduce EDI to the reader. It does not explore the nuances of different EDI standards but utilizes the X12 standard to explain the vital part that standardization plays in EDI.

Dan Tuten, vice president, global new product delivery, GE Information Services stated: "The reason for the ANSI X12 and EDIFACT standards around the world is that applications needed a standard way to present documents to each other in order to do electronic commerce in the first place," Tuten continued. "Now we've spent something like 15 years getting to the point of having the standards well defined for an enormous number of business transactions and applications that have been built to accommodate those standards." (The Future of Electronic Commerce: Will EDI Make the Cut?)

On the surface, standardized transaction sets may seem constraining to businesses but, in reality, they are the foundation for EDI’s universality. X12 gives developers the freedom to develop any end-user data format they desire as long as it properly translates data from/to the defined standard format for exchange with trading partners. X12 transactions are defined as follows:

Data Elements

Data elements make up the segments. Data elements are the most fundamental components of EDI messages. The X12 standard defines the permitted data elements, assigning each specific element a name and identifier. For example, an invoice (the 810 transaction set) contains the purchase order line number and given data element reference indicator IT101. Volume 2 of the X12 standard, the Data Element Dictionary, lists all of the X12 data elements. Fortunately, this information is of interest only to developers and other specialists in the internal workings of X12. Users can rely on the software to keep track of such minutia (The Fundamentals of EDI: EDI’s Building Blocks).

Segments

Segments are logically defined structures containing specific information. Segments are the building blocks of transaction sets (The Fundamentals of EDI: EDI’s Building Blocks).

The Transaction Set

The transaction set is the information required for a single, specific business transaction such as a purchase order or invoice. In X12, each transaction set carries a three-digit identification number. (e.g., a request for quotation is 840, the response is 843.) Users quickly adopted these numbers as EDI's slang. The initiated commonly refer to a purchase order as an "850", rather than the passé "P.O." (The Fundamentals of EDI: EDI’s Building Blocks)

Envelopes

Envelopes group one or more transaction sets for transmission. An envelope is another group of segments providing identification, addressing, control, and structure information about the contents. The envelopes provide this information at three levels: interchanges, which define an entire set of information moving between trading partners in a single session; functional groups, which contain the transaction sets of the same type within a session (e.g., all the purchase orders); and the individual transaction sets within a functional group. Again, the EDI software handles all these details for the user (The Fundamentals of EDI: EDI’s Building Blocks). Figure 1 displays the relationship between the constituent parts of an EDI transmission.

Figure 1. EDI Interchange Envelope (Source)

Listing 1 displays the contents of a fictitious purchase order for 100 Fuzzy Dice as it may appear in a company's procurement application. Listing 2 shows the content of the purchase order after translation into X12 mandated purchase order, transaction set format. The X12 form for purchase orders is the 850.

Listing 1. Typical Purchase Order (Listing 1: Plain purchase order)

Listing 2. ANSI X12 850 (Purchase Order) (Listing 2: Fragment of ANSI X12 transaction set 850 (PO) corresponding to listing 1).

EDI Architecture

EDI is implemented through a hub and spoke configuration. The main EDI site (hub) interconnects selected business data with that of business partners (spokes). This relationship provides the partners with direct access to each other's operations data that is maintained within systems connected to the EDI network, ensuring data currency. These electronic alliances can provide incredible strategic advantage to participating partners. For example, EDI can notify a supplier that one of their customer’s primary production lines has broken, which in-turn will affect the amount of product required from the supplier. The level of EDI integration between participants depends on the participant’s objectives. Some companies implement EDI to secure market position while others implement EDI to improve internal operating procedures. Generally, companies find greater return on investment with more, rather than less, EDI implementation. For example, Texas Instruments (TI) found very limited pay back from its EDI program initially, but the return on investment (ROI) took off as TI’s processes began to work together. TI’s large-scale integration included procurement, marketing, telecommunications, accounts payable and receivable, quality, treasury, benefits, payroll, and management information systems. Bringing all these functions together brought TI a considerable ROI (The Fundamentals of EDI; EDI Hardware and Software).

Figure 2. EDI's Hub and Spoke Architecture

Traditional EDI Data Communication Methods

Dependable and reliable transmission of data is essential for effective EDI implementation. EDI pioneers built their own communications networks to support their EDI efforts. These networks were very expensive to build, manage, and expand to new trading partners when the business wanted to extend its EDI footprint. As business-to-business data communications grew and big business re-focused on core business strengths, value-added networks (VANs) evolved to support EDI transactions. VANs are private networks that act as EDI clearinghouses for their clients. VANs are useful to both hub and spoke companies because they provide an essential communications link without the expense of maintaining an EDI network. According to Dataquest, EDI networks were a $794 million business in 1998. (Frook, 1998)

VANs do a lot more for their customers than just provide a conduit for EDI transactions.

- In addition to providing secure EDI transmissions, VANs act as a sort of EDI "postal system" by storing and forwarding messages for their clients allowing them to assimilate the EDI data into their business processes when it is needed, thus accommodating their clients' workflow management.

- VANs guarantee message delivery between trading partners and can provide auditing services certifying message delivery when requested by clients. This accountability is important to businesses especially when non-repudiation issues arise. (Internet EDI: Separating Hope from Hype)

- Retransmission of messages is an important service provided by VANs. Bob O'Malley, director of strategic planning, Sterling Software stated they receive 24,000 customer service calls per month, a full third of which are to restore EDI transmissions that customers picked up and then subsequently lost. Without the VAN, those requesting retransmission would have to go back to their trading partner and request retransmission (Internet EDI: Separating Hope from Hype).

- VANs often assist clients with converting their trading partners to EDI. This service also comes in different forms from introducing EDI data into the client's system which involves translating hard copy documents into EDI transactions (Utility Management Firm Uses EDI to Expand Business Opportunities) to providing all the implementation services at the new site. Craig Wilson, director of marketing at TranSettlements, another EDI and electronic commerce value-added service and software provider, said, "You may think you have an EDI program with 150 trading partners, but what you've really got is 150 EDI programs. One of our value-adds is that we do all the implementation services ... We'll handle anything anyone wants to throw at us." (Internet EDI: Separating Hope from Hype)

- Because VANs accommodate more than one customer, they are also a good place to find more enterprises with which to do EDI.

VANs also introduce constraints into EDI implementation. Cost has traditionally been the major constraint to utilizing VANs. VAN’s charge for their services on a pay-as-you-go basis which can become quite expensive for heavy users of EDI with a typical VAN charging $4,000 to transmit 1.5 megabits of data (Ritter, 1998). In addition, trading partners may wish to utilize different VANs which could incur added translation expenses between VANs or perhaps, even EDI implementation failure if competing VANs will not carry each other’s EDI traffic.

Developing Internet technologies appear that they may challenge the VANs livelihood by providing less expensive means to exchange transactions among businesses. VANs have built long-standing business relationships with their clients based on the services the provide, not just data transmission. Dan Petrosky, founding member and co-owner of EDI Partners. Ltd., states "Cost is not an issue, service is. There is enough inherent cost effectiveness and savings in the mature use of EDI that the cost of the services is not an issue." (Internet EDI: Separating Hope from Hype)

The VAN is arguably one of the most important components in an EDI implementation because if you cannot communicate with your trading partner, exchange transactions reliably, and with the assurance that no one is "listening in," then nothing else you do matters (The Fundamental of EDI: Value Added Networks). Figure 3 illustrates the part the VANs play in traditional EDI. The figure uses different line styles to depict transactions destined for different customers. The transactions between the Supplier and Customer 3 illustrate the circumstances where a customer utilizes a different VAN thus requiring collaboration between separate VANs to make EDI work.

Figure 3. VAN's Role in Traditional EDI

EDI Software

EDI standards are directed at the exchange of information among EDI participants; it does not address end-use of the data, which leaves almost any application candidate for inclusion in a company’s EDI implementation. However, because of EDI’s open nature, transaction sets must usually be translated into EDI format by the sender and then translated from the EDI format into the receiving application’s format. Mapping data to and from disparate applications may be difficult to achieve but, once in-place, proper data mapping enables free-flow of information between the applications. It is this free-flowing data between EDI participants that allows them to exploit EDI to their advantage.

EDI software I: Translators

Translation software is the most important one of the two major types of software involved in EDI. For it is the translation software that actually encapsulates raw data into the prescribed X12 standard format. The sender of an EDI transaction generally does not re-key transactions into their EDI software, instead they rely on EDI translators to convert the existing data into standard EDI transaction sets. The recipient reverses the process, extracting the necessary information from the sent EDI transaction for incorporation into their information systems. Transaction standardization is a must if transaction participants are to extract meaningful data from transaction sets. Standardization lets translation software know what information it needs, where to find it, and what to do with it. Some VANs offer translation services to clients and some don't; those who do not offer translation services usually publish lists of translators they support (The Fundamentals of EDI: EDI Hardware and Software).

EDI software II: Mapping

Mapping software is the other major branch of EDI software. It exchanges information between a company's EDI transactions and in house applications, such as accounting, inventory, and ordering. Many find mapping to be the hard part of EDI because it takes considerable skill and patience to map data successfully between disparate applications. Mapping is what makes EDI such a powerful business tool and mapping is only possible when the recipient's software understands the semantics of the transaction's data elements. Mapping allows businesses to exploit EDI's capabilities as trading partners can have different applications transparently feeding each other EDI transactions as long as data semantics remain common. This is where EDI's rigid standards shine. Without rigid standardization, companies would have to rewrite mapping software with every changing standard to maintain effective systems.

Figure 4. Block Diagram of EDI Mapping, Translation, and Transmittal

EDI Hardware

EDI is hardware independent. There are EDI applications for PCs, Macs, UNIX machines, and mainframes (The Fundamentals of EDI: EDI Hardware and Software). This independence permits EDI exchange among trading partners regardless of their system platforms. Hardware selection, however, can determine how EDI integrates with, complements, or impedes current and future operations.

Who is Using EDI?

The following paragraphs are intended to illustrate the pervasiveness of EDI in American business and its potential to increase business efficiencies when properly implemented into strategic business processes. It is not a comprehensive list of organizations utilizing EDI; it is merely a sampling of organizations that have successfully implemented EDI into their business processes and the benefits they are enjoying from EDI.

The Automotive Industry

The automotive industry has invested heavily in EDI, which has allowed them to take advantage of just-in-time (JIT) inventory to eliminate the overhead of pre-production parts inventory. In addition to eliminating inventory, EDI has allowed them to reduce their production cycle time considerably with the elimination of many manual processes previously required to produce vehicles. These advances, however, do not come without risk. The automotive industry has honed its EDI network into an efficient, high speed, machine that can be brought to a screeching halt by a single vendor missing their delivery window by as little as a few hours.

In his article, What to do about EDI, David Ritter states. "The automobile industry is the prime example. The Big Three (Ford, Chrysler [soon to be Daimler-Chrysler], and General Motors) have adopted EDI on a large scale to improve their inventory management and help facilitate outsourcing. More than 90 percent of transactions within the core automotive supply chain use EDI. Custom systems linking the assembly plants with the tier-one suppliers redefine the term "just-in-time (JIT) inventory." Some components are delivered to the plant with only 15 minutes of prior notification." This efficiency can only be maintained, however, if all suppliers make their deliveries to their supply bases on-time. "According to a Chrysler manager, if a company misses a parts delivery by more than a few hours, a plant could shut down, resulting in revenue lost forever." (Ritter, 1998)

"Despite the cast and complexity, manufacturers have a strong incentive to push ED! deeper into the supply chain. It currently takes up to six weeks for new requirements to make their way from Ford or GM down to their lower-level trading partners. A pilot project showed that full deployment of EDI to all involved parties could reduce this time to about one week, which could save the industry up to $71 per car manufactured -- a total savings of more than $1 billion per year." (Ritter, 1998)

"Johnson Controls, which makes building controls and components for the automotive industry, has seen its delivery time window with key manufacturers move from days to as little as two hours. "We have a very short window to receive an order and deliver it to our supply base," said William Berry, vice president and CIO of Johnson Controls. He said that not only does his company have to meet manufacturing demand, it also has to fit into increasingly fine-tuned assembly line procedures, making accuracy of delivery that much more important." (Real-World Issues, Real Challenge)

Banks

The banking industry has been heavily involved with developing EDI since its inception; as mentioned earlier, the original TDCC standards included banking applications. Moving large sums of money around has always presented problems for those charged with accountability for the exchanges. Automating large monetary transactions through secure communications offers security as well as convenience. One of the banking industry's greatest contributions to business automations has been Electronic Funds Transfer (EFT) as it eliminates the need for cash or checks in many business transactions. According to Michael Burns, "Electronic Funds Transfer (EFT) has been utilized to pass payment transactions between banks or between businesses and banks for over 20 years." (Security, ease of use improve for EDI/EFT)

Banking, being a service institution, sees automation as a way to reduce overhead while increasing the levels of support it can offer business customers. Building on the success of EFT, banking is quickly developing systems to accommodate all phases of financial transactions for their business customers. For example, "Walgreens Corporation made financial EDI history recently when it sent a single payment that carried 6.5 million bytes of remittance information to trading partner Hallmark Corporation over the EDIBANX system." (Walgreens Sends Record Volume of Data with EDIBANX Payment)

"The giant drug store chain combined the financial information from more than 2100 Walgreens stores and sent 66,000 invoice records with the payment through its EDIBANX member bank, Northern Trust. Northern Trust then routed the payment through the EDIBANX network to First Chicago NBD, Hallmark's EDIBANX member bank. First Chicago NBD then posted the payment to Hallmark's account and forwarded the remittance information in Hallmarks' format to enable the company to update its accounts." According to First Chicago NBD's Anne Shuttleworth, "We estimate that even in an efficient paper processing operation, key entering a transaction of this size could have taken 20 hours." (Walgreens Sends Record Volume of Data with EDIBANX Payment) Multiplying this 20 hour savings by two, to include both banking institutions, makes it is easy to see significant savings throughout this transaction chain.

Suppliers

Distributors of hard goods such as auto parts and electrical supplies began experiencing the benefits of EDI several years ago, says Scott Stratman, president of The Distribution Team, a consulting company in Colorado Springs. Stratman estimates that by lowering inventory levels and eliminating paperwork such as purchase orders and payment by check, such distributors have cut the time for order fulfillment from a range of 22 to 29 days to one of 14 to 17 days (Emigh, 1999).

The U.S. Government

The U.S. Government is one of the largest users of EDI. It uses it for procurement, sending out request for quotations via EDI; in addition to creating purchase orders for goods and services and authorizing payment via EFT. The government requires enterprises to pay tax installments and also requires them to provide certain regulatory information via EDI (DeJesus, 1999). On January 25, 1994, the 103rd Congress passed Senate Bill 1587, the Federal Acquisition Streamlining Act (FASA) of 1994, which was subsequently signed into law by President Clinton. The FASA radically changed the way the government does business (The Federal Acquisition Streamlining Act).

- FASA raises the "simplified acquisition threshold". Under the old small purchase process, regulations excused buyers from posting solicitations below $25,000 in the Commerce Business Daily (CBD). The regulations were good for small vendors as these contracts under $25,000 were set aside for small business. The FASA expanded the baseline for "small" purchases from $25,000 to $100,000 and renamed the purchase category "simplified". In addition, the FASA applied electronic commerce (EC) techniques to reduce paper (The Federal Acquisition Streamlining Act).

- FASA lifts the small business restriction on micro-purchases. In addition to redefining the small/simplified purchase category, the FASA set the micro-purchase threshold at $2,500. FASA exempts micro-purchases from small-purchase set-aside requirements and exempts micro-purchases from the "Buy American" Act. The bottom line is purchasers can go to any source for anything under $2,500; this includes large retailers, "super stores," even overseas sources (The Federal Acquisition Streamlining Act). In essence the FASA removes protections for small businesses doing business with the government. The importance of this action is that over 98% of individual government purchase actions are for less than $25,000, and most of those fall into the micro-purchase category of under $2,500 (The Federal Acquisition Streamlining Act).

- FASA offers simplified processes for purchases between $2,500 and $100,000 handled via EDI. In an effort to encourage government organizations to adopt the cost savings of EDI, the government has mandated buying activities must transmit 75% of its "eligible" transactions via EDI by December 31, 1999, to retain this threshold, without EDI compliance, the threshold falls back to $50,000 (The Federal Acquisition Streamlining Act).

- FASA lifts the requirement to publish announcements of upcoming solicitations between $25,000 and $100,000 in the CBD (The Federal Acquisition Streamlining Act).

- The Federal Government has setup the Federal Acquisition Computer Network (FACNET), a computer-based procurement network that it uses to support its procurement activities. FACNET features two entry points, one in Columbus, Ohio and one in Ogden, Utah. Merchants wanting to do business with the U.S. Government must utilize the FACNET to receive requests and to submit proposals for government contracts (The Federal Acquisition Streamlining Act).

- The government is heavily leveraging automation to streamline its acquisition activities. These initiatives may help lower government acquisition costs but it also mitigates small business protection measures that so many small businesses used to rely on for their livelihood. In essence, small businesses without EDI capabilities will find themselves outside the government procurement channel for their products.

Why isn't EDI Everywhere?

"EDI has been around for more than 20 years. Perhaps 1 percent of companies with more than 10 employees use EDI. Everyone talks about the advantages of supply chain automation, but nearly nobody's doing it effectively." (Ritter, 1998)

Available resources have greatly affected the proliferation of EDI among businesses. Traditional EDI is very expensive and it takes large-company resources to build and maintain EDI systems. It also takes economies of scale to overcome the initial startup costs for Traditional EDI. Communications medium expansion is limited, which directly limits EDI expansion capabilities. Limited communications expansion constrained large companies to extending EDI to suppliers promising the greatest return on investment. "Using today's network architecture, establishing the required connections to lower-tier suppliers would increase the number of dedicated lines by a factor of 10, creating a truly unmanageable situation." (Ritter, 1998)

Another reason for the slow implementation of EDI is the lack of attention for the exchange of basic product information among companies. About 10 years ago, companies started with exchanging simple orders electronically. Subsequently, suppliers began sending invoices, which was the first thing they wanted to automate anyway. As time went by, companies realized that EDI actually had to be the "encoded" transmission of data if it was to be automatically processed by the receiver. And therein lies the problem: in order to exchange encoded data, the code has to mean the same thing in both applications, which requires the synchronization of the information between companies. It seems as though companies were so eager to get the benefits from EDI in the past that they didn't take the trouble to first devote the necessary attention to exchanging the basic data. Companies are now starting to get bogged down in EDI exchanges due to that lack of product information in the internal applications. Only now is investment being made to make up for it (Raman, 1999).

In addition to data inconsistency, data reliability is also a problem. Arthur Smith, president and CEO of the EC Council of Canada referenced a study by consumer goods manufacturer Procter & Gamble, which found that more than 30 percent of all its electronic orders contained manual errors (Karpinski, 1999).

One final comment on EDI expansion constraints goes to competitive advantage. EDI bonds trading partners together and there must be trust among the participating partners for EDI to truly work. It seems many American businesses simply aren't willing to make long-term commitments to trading partners today. "Mark Whitney, principal for middleware services at Atlanta-based Delta Technology, says businesses are often looking not for a marriage but for a casual relationship, so "if they want to go deal with someone else, they can." But it's not just the up-front investment that puts firms off; it's the issue of trust, sometimes defined in terms of security concerns, and often, at bottom, a fear of vulnerability." (O'Donnell, 1998)

"You want to give your preferred suppliers advance notice when your schedule has changed, explains Edward Sitarski, vice president of R&D at Toronto-based Numetrix Ltd. But you have to put those sorts of goals in the broader business context: "Does it make sense in a collaborative universe to have customers book orders on your production lines?" asks Sitarski. "How do you stop them from booking 10 times what they need, only to drop back to what they really need the day before? With customers like that, you don't need competitors! And if you give suppliers too much information, they'll rip you off," he says. He gives the example of a retailer selling a highly undifferentiated product, like apples. "It's in your best interest to have four or five suppliers at your beck and call. You're not going to give them access to your delivery schedules or let them know your price points, because they'll use that information to negotiate lower margins for you." There are, he adds, "a lot of reasons to preserve competition amongst suppliers." On the other hand, with a highly differentiated product, such as semiconductors, "there are only a few chip suppliers in the world, and you have to book them years in advance; it makes sense to give them access to information, to make sure the chips are there when you're making boards." (O'Donnell, 1998)

The Internet and EDI

The Internet's ubiquitous presence offers data communications opportunities to virtually every American business. It has lowered the EDI cost barrier by eliminating the requirement for EDI transactions to traverse the private networks of VANs. It is important to remember, however, that VANs provide many services outside simple data communications to support EDI and these services directly support the business processes of their clients. Nevertheless, the Internet's omnipresence has rekindled interest in EDI implementation across the entire business spectrum.

Extranets

As the Internet grew, many companies recognized the opportunity it offered for cheap business-to-business communications. Companies quickly developed web-based applications to expand supply chain automation and business-to-business relationships. This opening of corporate intranets to external partners became known as extranets in web parlance. The extranets have been very successful in bringing trading partners on-line to conduct business.

It took Cessna aircraft company eight years to bring 71 of 4,000 suppliers on-line with traditional EDI. Today, the company has 1,300 suppliers, representing 95% of its purchase-order line items conducting business via the Internet. Fifty of the original 71 EDI suppliers also chose to switch to Internet based EDI which translates Internet forms into EDI based transactions. "Getting more suppliers to do EDI helped cut information cycle time with suppliers by 50%", said Dave Oppenheim, a supply chain manager and Cessna. Oppenheim also said there was no cost for Cessna's trading partners as the software was developed for them and it was designed to be simple and not require partners to have an IS department to support it (Silwa, 1999).

"The Boeing Co.'s rocket-engine division in Canoga Park, Calif., moved 371 suppliers -- 315 of them through the Web -- to electronic transactions, after getting only 35 onboard in the past. Similarly, Boeing's Mesa, Ariz., aircraft and missile systems division got about 1,300 suppliers onboard, including 1,100 through the Web, said Kim Carrell, a Boeing project manager." (Silwa, 1999)

"The Sherwin Williams Co., a paint maker in Cleveland, ramped up 150 suppliers to traditional EDI in about 18 months with help from its value-added network, Sterling Commerce Inc. in Dublin, Ohio. Sherwin Williams now plans to hire a service provider to get another 2,000 suppliers onboard via Web EDI." (Silwa, 1999)

XML

XML is seen by many as the enabling technology that can bring EDI to the masses through its ability to provide an inexpensive means of transmitting meaningful data between trading partners via the Internet.

The eXtensible Markup Language (XML) is a metalanguage specification published by the XML Working Group, which is a project of the World Wide Web Consortium (Craig, 1999) Computer Select record: 54 530 460) According to Robert Craig, "XML is important because it provides a platform-independent mechanism for sharing heterogeneous data between applications via the Web. If you plan to create an application that will use data from heterogeneous sources - including nonrelational databases - especially if it's going to work on the Web, then you should take a look at XML." (Craig, 1999)

XML encapsulates data definition into its documents by utilizing internal data tags to identify data elements. This ability for XML to describe what its content means is a leap forward from HTML, which delivers data but no definition of its constituent elements. XML's data definition is important to end-user applications that must retrieve data from XML documents and correctly map it to appropriate internal data elements. "Because XML documents describe content, information can easily be parsed into an object tree, then manipulated by both client-side and server-side scripting languages for a variety of uses. XML is particularly important in electronic commerce. The many proprietary mechanisms used in distributed computing are difficult to maintain, but this will soon change. XML allows developers to structure the same complex information in a simpler form. XML and its offspring promise to help simplify EDI and business-to-business automation and enable the Web to better handle transportable databases, making the language an important technology for the year 2000, as well." (Senna, 1999)

Listings 3 and 4 use the previous example of a purchase order to illustrate its translation from an end-user application into XML.

Listing 3. Typical Purchase Order (Listing 2: Fragment of ANSI X12 transaction set 850 (PO) corresponding to listing 1)

Listing 4. Purchase Order Translation to XML (Listing 3: XML Analog of X12 transaction set in listing 2)

VPNs

As the Internet grew, companies quickly recognized its capability to provide data communications among business partners at considerably less cost than private networks. One of the Internets shortcomings, however, was its open nature and lack of security. Security was one hurdle that had to be overcome before companies would agree to exchange business information over the Internet. Virtual Private Networks (VPNs) were the developed to provide secure communications over the Internet.

"In general, VPNs work at Layer 2 and Layer 3 of the OSI model. PPTP, L2F and L2TP encapsulate PPP into an IP packet for transmission across the Internet between a remote-access server or remote-access client and the terminating gateway on a remote network." (Fratto, 1999) VPN members utilize this encryption to "tunnel" their traffic through the Internet to other members of the VPN who have the appropriate facilities to decrypt the packets.

VPNs can also provide improved performance for clients through the use of data compression to minimize the amount of data actually being sent via the Internet.

VPNs are an essential part of implementing EDI on the Internet. Much of the data exchanged via EDI is sensitive and therefore requires the security provided by VPNs. In addition to security, VPNs' data compression technology helps EDI transactions get to their destinations faster.

Unfortunately, Internet security cannot supply the same level of security as the private networks of the VANs. "Don't be fooled into thinking that vendors' claims of IPSec compliance translate to International Computer Security Association (ICSA) certification. To date, only 18 vendors are certified by ICSA (IPSec Certified Products). In some instances, certification may be unimportant, as in the case of closed networks that will never communicate with trading partners. It becomes important, however, when building extranets because you often can't dictate others' network equipment. The ICSA certification program ensures some level of interoperability at the stated code revisions." (Fratto, 1999)

Is the Internet a Viable Alternative to VANs?

On the surface, the Internet seems like the answer to EDI implementers' dreams. Connectivity is cheap and it is available everywhere, XML eliminates the need for expensive EDI translation software, and VPNs add a performance boost to clients' Internet connection while securing the content of their transactions. Sound like the Internet will put VANs out of business? They don't think so, for a variety of reasons. However, they do see the Internet as an inexpensive way to support non-mission critical data exchange among their clients and many of them are rolling-out Internet services for their clients.

Current Internet Vulnerabilities

The Internet seems to be everywhere but it does not currently maintain the reliability levels to support mission-critical business processes. "The Internet is a collection of linked networks. There is no "owner" of the Net --- no single organization can take the responsibility to ensure that a message arrives. For business applications this is unacceptable; companies which exchange important business documents need the guarantee that messages arrive in a timely fashion (Raman, 1999).

Internet security is continually under scrutiny by businesses. "The security of the data is another major concern. Competition is intense, margins are thin, and the confidentiality of pricing information in the supply chain is critical. Manufacturers aren't willing to move sensitive data over a public network unless it's protected." (Ritter, 1998) "The Internet is, quite simply, not secure. Anyone can intercept and read all the data that can be sent via the Internet relatively easily. There is virtually nothing that can be done to improve the situation. It is inherent in the structure of the Internet. Those searching for a solution believe they have found it in the encryption of the file by the sender in such a way that only the recipient can decipher it. A number of systems have been developed to accomplish this, based on complicated mathematical algorithms designed to withstand years of computer analysis. Time after time, though, the exponential increase in computing power has meant that coding systems once thought secure have been cracked. This problem will one day, once and for all, be solved, but that is still ahead of us." (Raman, 1999)

The initial problem that EDI was developed to overcome was a lack of standards among business applications. VANs ensure data is properly encapsulated into appropriate EDI transactions before sending them to recipients and then they ensure the recipients receive exactly what was sent. Today, the Internet does not support this standardization which could quickly lead to suppliers being forced to support non-standard data formats of multiple business partners. "There are currently software companies that offer some form of EDI implementation over the Internet; unfortunately, there are no real standards for sending EDI information over the Internet or for interoperability between Web-based and VAN-based EDI systems." (Bloomenthal, 1998)

The Internet offers inexpensive connectivity but VANs do not see it dramatically effecting the current EDI networks they support for two reasons.

- Switching to Internet-based EDI represents minimal savings through lower transmission costs. Bob O'Malley, director of strategic planning, Sterling Software stated, "If you look at the cost to one network value-added provider, less than 10 percent of those costs are dedicated to communication, 90 percent-plus revolve around customer service and training. How could you save more than 10 percent with a cheaper comm line?" (The Future of Electronic Commerce: Will EDI Make The Cut?)

- Current EDI users rely on VANs for much more than simply transmitting their data to business partners. Dan Petrosky, founding member and co-owner, EDI Partners, Ltd., a Minneapolis-based consulting and education firm, says, "With the Fortune 500-level managers I know, their concerns are things like redundancy, disaster recovery, reliability. When they get EDI running in a particular application or department and the volume becomes double-digit, if something goes wrong, people get very concerned. They don't want to stand before senior management and have to explain why they took the low-cost, less reliable communications solution. If something major goes wrong, they don't want to be caught having bought a cheap product or a cheap service. The cost differences between VANs and the Internet primarily rest not with the cost of the basic communications pipe, but with value-added services - services that most companies would be ill advised to do without." (Internet EDI: Separating Hope from Hype)

Internet EDI Advancement Efforts

Work continues to overcome the current obstacles to EDI implementation over the Internet. The big three auto manufacturers intend to fix the problems that make the Internet unsuitable for their business traffic. Their effort is directed toward making business quality Internet service that is known as the Automotive Network Exchange (ANX).

Even though the Automotive Industry Action Group is developing it, it is an effort to reshape the Internet as we know it. "ANX proposes that the industry will pay a premium for business-quality Internet service. This service must include quality of service (QoS) guarantees, which will be monitored and enforced by Bellcore. In addition, service providers must provide security and virtual private network (VPN) facilities that conform to the Internet Engineering Task Force's IPsec standard. These providers must be certified for ANX participation as well, again by Bellcore. Rates for the enhanced service are expected to range two to five times that for standard Internet access. Still, this is a tremendous bargain when compared to the high usage fees that VANs charge. A typical VAN might charge $4,000 to transmit 1.5 megabits of data. A T1 line from an enhanced Internet provider might cost $1,000 per month, with the capacity to move 1.5 megabits every second." (Ritter, 1998)

Should Small Businesses Care about EDI?

Traditionally EDI has remained the playground of big business due to its expense. In spite of the expense, big businesses that have heavily invested in EDI are reaping substantial dividends from their investment in EDI. The Internet has eliminated many of the communications-based constraints associated with Traditional EDI making EDI connectivity a possibility for almost every American business. This opens the doors for big business to potentially extend its EDI footprint to all of its trading partners. With 1998 and 1999 being record years for corporate acquisitions and mergers, chances are increasing that your business partners today may be owned by someone else tomorrow--someone who insists on using EDI. Businesses faced with implementing EDI should not despair but should take the opportunity to use EDI to re-engineer their business processes to make their business operation better. EDI, if implemented properly, offers possibilities to streamline business processes and reallocate resources from support roles to core business processes. William Berry, vice president and CIO of Johnson Controls offers the following advice from his company's EDI implementation efforts. "What we're trying to do, from a foundational standpoint, is to bring consistency to our internal business processes. It's not just a change in technology, but a change in the way we do business." (Karpinski, 1999) Arthur Smith, president and CEO of the EC Council of Canada offers the following warning for businesses that take EDI implementation lightly. "If companies are not re-engineering their processes at the same time they are automating them, things will only get worse." (Karpinski, 1999)

What can EDI do for Small Businesses

Even though EDI has proven itself by tending to mission critical applications for big business, according to Seagate International, EDI offers the following advantages to smaller businesses as well (Electronic Data Interchange Implementation Guidelines).

- Reduced paper handling and mailing costs. In most cases the costs to transmit an EDI document are less than fax and mailing costs.

- Reduced order cycle time. In a true paper environment, it is not uncommon to experience an order cycle time of weeks (from generation of the purchase order to receipt of the acknowledgment). In today's world, this cycle time is usually reduced through the use of the telephone and fax, but often with an added labor cost. With the use of EDI, an order entered in your system can be received by the recipient within hours, and you can receive an acknowledgment by the following day (or sooner).

- Reduced potential for errors. Your EDI transactions are prepared in your system and sent direct, as is, to the recipient. It is up to the recipient, or their software to validate your transaction and map it into their system.

- Improved response to customer requirements. In addition to reduction in the order cycle time, it is expected that the reduction in data entry requirements will free staff members to better deal with "exceptions".

- Improved processing of distributor reported inventory and Point of Sale data.

- Improved partnership. With the use of EDI, most business partners experience a reduction in internal costs with an improved service level.

As other businesses continue to find new ways to exploit automation in their search for more efficient operations, the question becomes: can you afford not to investigate how you can exploit it to find new efficiencies in your business?

Conclusion

EDI has been evolving since the Berlin Airlift. As with any technology, we can expect EDI to change as it matures. The current traditional EDI oversight committees receive a lot of criticism that they are not responsive to the needs of the market when it takes too long for them to publish new transaction sets. It is interesting to note that every member of the X12 standards committee is a volunteer (EDI Insider Interview: New DISA President Speaks Out On Future Challenges, Opportunities). Quite often, standards committees maintain volunteer members in an effort to remove bias from their decisions. It is true that most traditional EDI transactions were designed to support big business but the technology was developed by big business, for big business. The Internet holds promise to migrate EDI down to smaller businesses by bypassing VANs. In spite of all its promises, we must always remember what the Internet really is.

The internet's virtual realm may contain anything humans conjure-up to display on a video screen and, perhaps, enhance with sound. However, underneath the Internet's virtual experience are computers communicating with each other via very strict standard protocols.

The Internet provides a virtual world where virtual storefronts can change from day-to-day unlike their brick-and-mortar ancestors. It is easy for businesses to create the virtual experience they want you to have; yet anyone making purchases from these virtual storefronts eventually realizes the reality of their actions by paying for their purchase with real cash.

Its funny that we owe the virtual world of the ever-changing Internet to strict data-communications standards. Even though the Internet is changing business-to-business relationships every day, it cannot eliminate the need for standards to support computer-to-computer communications among business partners. Regardless of the form it takes, EDI, and its standards, will be with us for as long as we need computer-to-computer communications, which is probably forever.

References