Reduced overhead costs:
Through the use of EDI there will be cheaper transaction costs, as the costs of sending invoices via post can be very expensive when you factor in the costs of paper, envelopes, etc. As well as costs for suppliers sending invoices, it can be costly for retailers receiving these invoices. Doug Carlile from Associated Food Stores (AFS) estimated that its costs to process non-EDI invoices and related documents were between $25 and $50 each, excluding the additional time and hard disk storage space costs of scanning in documents into the digital filing system, whereas EDI transactions were converted to digital images and stored automatically in the company's digital warehouse, eliminating these costs. ( 2005)
Reduced labour rates:
An obvious benefit of transferring to an EDI system is that of higher labour efficiency, leading to labour cost reductions. Associated Food Stores found that by boosting the percentage of its suppliers conducting business electronically by just 20 percent, it was able to reduce staff in its AP department from 25 to 10. ( 2005) With a reduced need for human interaction, many companies will be able to cut staff levels or redeploy staff. GXS an EDI implementation company say that handling exchange of data electronically may be critical to survival, giving employees the tools to be more productive while reducing overhead. One company they worked with ‘Organic Farm foods’, noticed a huge difference in labour efficiency. Working with six major supermarket chains means Organic Farm Foods receives over 250 orders and issues 100 invoices per week from these customers alone. Where they previously took orders manually, consuming 2 ½ hours per day, this time was cut to less than ½ hour per day when EDI was implemented. (www.gxs.com)
Negative financial implications:
Although there is much evidence to show many firms benefit financially, this is not always the case. From undertaking work at Babylicious Ltd, a frozen baby food company, I found that there was a lot of time lost on the phone to the VAN provider, when technical problems arose with the EDI machine. Sometimes these costs may outweigh the cost benefits of using EDI. Although it can be argued that by using web based EDI this could be eliminated, the reliance on the internet for the transmission of data can also have negative impacts if the server crashes and although web based EDI costs less it is still time consuming in comparison to traditional EDI and a connection to the internet from both firms is needed to transfer data.
When considering the over impacts EDI has on the financial situation of the company, you need to consider the costs of setting up the initial EDI. According to () EDI is often viewed as a solution only for large manufacturers, their suppliers and their customers because of the high implementation and maintenance costs associated with it. Even with the new advances in web based EDI many small suppliers can’t afford to set up EDI.
Employee Impacts
Even if labour time is saved, this does not mean that employee productivity will necessarily improve. Employee roles will change- with the need for less data entry, staff will be moved to another area of the business or the complexity of their tasks will increase. Having to deal with this new technology could leave some staff feeling overwhelmed and de-motivated, which will have negative effects on the rest of the business.
Trading Partner Relationships
There are some conflicting views about the effect of EDI on trading partner relationships. On one hand it is thought to improve trading partner relationships as in order to successfully transmit, interpret and process transmissions automatically, much trading partner co-operation and analysis are required. By eliminating keyed entry errors on the receiving side, suppliers can make more accurate, timely deliveries and reduce expenses of returned shipments of incorrect products. This higher level of customer service attracts new customers to the suppliers and tends to make existing customers increase their orders, therefore creating an enhanced brand image for the supplier. (www.gxs.com)
It is also found that EDI transaction improves customer service at multiple levels of the supply chain. The POS data a retailer supplies can provide valuable input into a suppliers product forecasting and distribution planning. According to McGahee (1999), the better a vendor can forecast and distribute its products to a retailer, the better it will serve the retailer, which ultimately improves service to the consumer.
However Unilever-Sagit found that the EDI transfer process is very impersonal (Calza and Passaro 1997) with a low level of interaction, as it does not allow suppliers to gain close relationships with the retailers other than those provided for the information technology network. While at Babylicious I found that once an EDI relationship is established with a major retailer, you lose the ability to talk to someone as all processes are automated. Loosing this connection can leave the smaller partner feeling vulnerable, but it can be argued that with the cost and time savings gained they can spend time improving their relationships and making their business processes stronger, Hermann (Organic farm foods) found this to be the case. He commented “We are now far more responsive to the needs of our customers. As a result, we’re not only reaping impressive time- and cost-savings benefits, but also improving our customer relations. We can now focus our time on addressing more qualitative issues around the way we do business.” (www.gxs.com)
IT Implications
The risks associated with electronic trading (such as that via EDI) can result in increased vulnerabilities to fraud. Through an EDI system, individuals can commit many different types of electronic fraud, including the creation of unauthorized checks, manipulation of records, and creation of invoices, regardless of their physical location. (Smith 2005)
Impacts on operational processes (Supply chain)
A supplier can be responsive to the retailers' needs by delivering products promptly when demanded by the retailer. In food retail lead time (the elapsed time between receiving a customer's order and filling it) and on time delivery have been used in the past as indicators of responsiveness to customers. ( and 2001)
In order for a supply chain to be responsive, information needs to be quickly shared and disseminated across the supply chain. Researchers say that EDI contributes to efficient supply chain management, providing integration among the elements of the supply chain through timely exchange of information ( and 2001). EDI increases both speed and accuracy of business transactions. With no interaction needed for electronic transfer of data, the risk of errors in data entry is eliminated. The reduction of errors not only saves a supplier time when processing a PO through reduced labour time, but also reduces the chance of a wrong product being sent out. Rapid receipt of accurate and complete transactions enables suppliers to process orders quicker and therefore reduces lead times. With this faster delivery of goods and higher faith of the right products being delivered, the retailers do not need to order products as often, so can reduce inventory costs.
Through a case study of a major retailer, researchers Maltz and Srivastava (1997) have shown that EDI systems are likely to be most effective for products with unstable demand. With the high level of competition in the food industry most suppliers to the major retailers face fluctuating demand, coming from unstable consumer demand. This often means suppliers have to react quickly to late orders from customers, giving them little lead time. EDI enables them to process information quickly, therefore creating a short delivery cycle. Many researchers say that EDI is increasingly becoming a necessary way to do business. Vuayasarathy and Robey 1997 say this is especially true in an environment characterized by quick-response.
EDI also enables the adoption of Just in time systems. JIT is a philosophy of producing goods exactly when they are needed, neither too late, nor too early. JIT works on transaction’s happening and being responded to quickly, therefore EDI can be seen as a prerequisite for this as a paper trail is too slow.
However although there are so many positive impacts of EDI on supply chain processes, it can be argued that it is only effective for retailers and not for suppliers who have been bullied into adopting EDI. Hart and Saunders (1997) explain; `When firms use coercive power to force trading partners to adopt EDI, less powerful partners may be left more vulnerable. And, over time this perceived vulnerability becomes a constraint in inter-organizational relationships that prevents improvements in coordination through expanded use of EDI.'
Management Recommendations
In order to ensure that real value is gained from the use of EDI the following recommendations are made for the different departments across the business:
HR (Employee impacts):
To reduce employee vulnerability, it is important that full training is given on the EDI processes. Connie Robinson an EDI consultant says that an extensive training program has two purposes, firstly to enable employees to use the system and secondly through education to get the employees to see the benefits and ‘buy in’ to EDI. Once employees buy into the system it is thought they will find new and better ways to use it. (Reich 1988). It is also important that staff are motivated to use the time saved productively. This could be achieved through both discipline and incentives, such as employee bonuses.
Supply Chain (operational impacts):
In order to gain the full benefits of EDI in supply chain and deliver real value to the business EDI must be used fully and managed efficiently. Two organizations may use EDI, yet one might be more responsive to recent changes than the other one due to the differences in their extent of EDI use ( and 2001). Therefore if a supplier users EDI for most its transactions it is expected to have a higher delivery performance then a supplier which doesn’t use EDI often.
Finance (financial impacts):
To ensure real value is gained from this technology the financial impacts need to be weighed up. The cost benefits identified can only be gained if the process of swapping over to EDI is managed effectively. Firstly it needs to be considered which type of EDI system would be most beneficial to the company. With the pressure from retailers, it is inevitable that some form of EDI will need to be implemented in order to continue to trade. Traditional VAN EDI is already established to be a reliable working system, but it is only worth implementing if there is a large number of transactions. With a lower cost, web based EDI offers an alternative to company’s who can’t afford to implement the traditional system. Products such as EDICT Systems GroceryEC.com allow suppliers to receive EDI generated purchase orders and to send invoices over the Internet. GroceryEC.com converts the Web-based forms into EDI format, allowing supermarket chains to engage in EDI transactions with their small suppliers ( 2003). However there are negative impacts of web EDI such as higher systems and data security risks ( ) and loss of time through lengthy transactions ( 2003). The choice of whether to go for a VAN or web based system depends on the objectives of the technology implementation. If a company is acting reactively web EDI is likely to be the best solution, whereas for a proactive company looking to use EDI throughout the business VAN EDI could be the better option.
IT (Security implications):
The IT department need to make sure security is in place to support the system. Smith (2005) states ‘An EDI system must have internal and external controls so that fraudulent attempts to enter false documents are prevented, detected and fixed’. He also says that each EDI system should have network access controls and encourages the use of message sequence numbers and a message log to ensure security. Once these processes are in place an employee is unlikely to commit fraud, however this added security means added costs and time, which can cause a strain on the company.
Sales (Relationship impacts):
With the potential loss of connection between a retailer and supplier, it is important that the sales department try’s to maintain a relationship with their buyer. Whilst it is clear that there are many customer service benefits to be had through EDI, the sales force must ensure that the retailers are satisfied as well as keeping a connection open for any questions other departments may have.
3.6 Summary
After weighing up the benefits and disadvantages of Electronic data interchange it would be recommended that some form of EDI is introduced by all food retail suppliers. Through planned implementation Electronic data interchange can have substantial benefits on any company. However this is only if the right system is implemented and care is taken to prepare the company through extensive training and enhanced security.
References
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Dresner M, (2003), “EDI Vs. The Internet”, Frozen Food Age, New York, Vol. 51, Iss. 8; pg.40
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Scheier R.L, (2003), “Internet EDI grows up”, Computerworld, Vol.37, Iss. 3; pg. 38-39
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Ahmad S, Schroeder R.G (2001), “The impact of electronic data interchange on delivery performance”, Production and Operations Management, Vol.10, Iss. 1; pg. 16-30
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McGahee B.N (1999), “Traditional EDI gets competition—and compatibility—from the net”, Apparel Industry Magazine, Vol.60, Iss. 2; pg. 62-63
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Koegler S (2005), “Bringing suppliers into the 21st century”, Progressive Grocer, Vol. 84, Iss. 7; pg.34
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Hart P, Saunders C (1997), “Power and Trust: Critical Factors in the Adoption and Use of Electronic Data Interchange”, Organization Science, Vol. 8, Iss. 4; pg. 23-42.
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Vauyasarathy L.R, Robey D (1997), “The Effect of EDI on Market Channel Relationships in Retailing”, Information & Management, Vol. 33, Iss.2; pg. 73-86.
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Maltz E, Srivastave R. K (1997), “Managing Retailer-Supplier Partnerships With EDI: Evaluation and Implementation”, Long Range Planning, Vol. 30, Iss. 6; pg. 862-876.
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Reich, C (1988), “Making EDI Work”, Purchasing World, Vol. 32, Iss. 4; pg. 47
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Calza F, Passaro R (1997), “EDI network and logistics management at Unilever-Sagit”, Supply Chain Management, Vol. 2, Iss. 4; pg 158- 170
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Agi M, Ballot E, Molet H (2005), “100% EDI-connected suppliers projects: An empirical investigation of success factors”, ,
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Curtis G, Cobham D (2007). Business Information Systems- analysis, design and practice, 5th edition. Prentice Hall: Financial times. Pg.164