Every Manager's Guide to Information Technology:

Extract (5): Electronic Data Interchange (EDI)

Electronic data interchange (EDI) eliminates intermediate steps in processes that rely on the transmission of paper-based instructions and documents by performing them electronically, computer to computer. EDI is becoming the norm in inter-company transactions, particularly in ordering, distribution, and payables and receivables.

Consider the following examples of benefits reported by companies that have implemented EDI. The 40-member Petroleum Industry Data Exchange used EDI to eliminate "joint interest billing" documents, which often amounted to thousands of pages that were created, copied, and mailed by partners in a producing well, enabling one firm to reduce its staff by 37 percent. Westinghouse used EDI to streamline the procurement process for a customer, Portland General Electric, reducing elapsed time from order to delivery from 15 days to one-half day and processing costs from $90 to $10. Levi-Strauss's Levilink EDI enabled one customer to reduce the replenishment cycle for its chain of 60 stores from 14 to 3 days and order delivery time from 9 to 3 days and to entirely eliminate its regional warehouses. Linking 100 customers to its purchasing and payments systems via EDI has saved R. J.. Reynolds between $5 and $10 million in costs of labor, inventory, and lead times and led the firm to offer a 5 percent discount to customers that pay via EDI. Finally, the Port of Rotterdam's INTIS cargo-clearing system clears goods on average in 15 minutes, compared with two days, and has substantially reduced the nearly 50 percent return of export order documents for errors.

Such quantifiable economic and "softer" organizational benefits, together with the growing trend among firms to require it of their suppliers, make EDI one of the major emerging competitive uses of IT for the 1990s. Firms that have implemented EDI effectively have been able to streamline operations, shrink administration, reduce errors and delays, and generally improve service.

Companies with market dominance are increasingly requiring suppliers to link to their EDI systems and refusing to deal with those that refuse or cannot. The chairman of Sears, for example, informed the firm's suppliers by letter in mid-1990 that they would have to link to its EDI systems. To smooth the transition, Sears offered training and free software. General Motors has had such a requirement in place for several years. As more companies move in this direction, EDI becomes a competitive necessity for small as well as large firms.

The technical base for EDI is relatively simple. Rather than require firms to use the same document formats, it exploits standards that provide for local translation of incoming and outgoing messages into appropriate formats. The relevant standards include X12, the closely related international EDIFACT, and X.400, a more general, less comprehensive standard for simple electronic messages.

To use the standards effectively, EDI partners must agree on terminology-for example, that "weight" will mean "gross weight," not "net weight," or that "DM" will refer to "Deutschmark." One reason that many companies are adopting EDIFACT is that it provides dictionaries of agreed-on standard terms for many aspects of international trade. More broadly, industry groups are cooperating on the development of trading standards. Because all parties concerned are looking to reach a mutually beneficial agreement, the standard-setting process is proceeding more rapidly in EDI than in other areas of IT.

Other countries are well ahead of the United States in implementing electronic data interchange as an explicit part of economic policy. In Singapore, Hong Kong, and Rotterdam EDI is used to process government documents and clear goods through customs in 10 to 15 minutes versus the typical two to three days.

As is often the case in IT, the most complex aspects of EDI are organizational rather than technical. EDI requires that firms rethink business processes, not just try to make the paper chains faster and existing bureaucratic procedures more efficient. Any major IT innovation that is also an innovation in work must get by issues of standards, architecture, incompatibility, organizational change and learning, and inappropriate business justification- the old refrain of reasons for implementation failures. But impediments to implementation notwithstanding, the benefits of EDI are so great that it is safe to predict that it will be one of the fastest growing and most pervasive applications of IT in the l990s.

It is possible, though dumb, to run a business without using telephones. In more and more industries, it is just as dumb not to use EDI.

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