Selecting the right EDI solution

Electronic commerce is the wave of the future. But to be truly effective, be sure your needs are in synch with your technology.

• As with any new technology, manufacturers must define their business needs before selecting an electronic data interchange (EDI) solution.
• Next, determine factors for EDI success, whether these are defined internally or by a third party.
• Translator-only solutions work best for manufacturers that send and receive a small volume of data, perhaps to only one major customer.
• Manufacturers operating in a specialized market and using proprietary software benefit the most from a custom solution.
• Integrated solutions that work as part of a company`s overall financial software system serve manufacturers that manage a high volume of EDI traffic with many different trading partners.

Electronic commerce (e-commerce) has become one of those vague phrases seen on the myriad software packages that promise to provide it. Today, the term can mean everything from the ability to make a purchase on a Web site to a sophisticated electronic data interchange (EDI) solution.

For small- to mid-sized manufacturers providing products to large companies, such as major retailers or the automotive industry, e-commerce most often refers to the EDI technology customers or trading partners require to conduct business electronically. Put simply, EDI is the computer-to-computer exchange of business documents in a standard electronic form. Among the many documents and transactions EDI handles are purchase orders, invoices, shipping notices, shipping schedules, and order forecasts.

Many sets of EDI standards cover a variety of industries and geographic areas. Often, within each standard, industry-specific subsets meet the needs of specific industries, such as grocery, retail, and automotive. These standards and subsets are broad in scope; in fact, they`re more like general guidelines that give each manufacturer the freedom to design an EDI implementation to meet its particular needs.

As a result, every trading partner or company that uses EDI must be either big enough to force its vendors and customers to comply with its standards, or the owner of software that is flexible enough to handle the varied implementations that will come its way. In both cases, using EDI successfully requires understanding its growing importance, the factors that determine its success, and the type of system that`s right for your organization.

Why EDI matters

Although only 6 percent of the estimated 10 million companies in the United States are EDI-capable, many industries are EDI-driven-meaning EDI will become the primary means of conducting business. EDI growth is expected to quadruple to $3.2 billion by 2001, according to the EDI Group.

To reap the benefits a strong EDI system offers, manufacturers must plan implementation programs carefully. A strong financial, distribution, and manufacturing system with built-in EDI capabilities will be a primary requirement for success. Markets such as retail, manufacturing, automotive supply, and warehousing are especially focused on providing a strong EDI supplier chain.

Large companies depend on EDI because it improves efficiency and reduces overhead. In other words, it saves them money. According to the Premenos Corp., 90 percent of Fortune 1,000 companies use EDI as part of their business operations. In the past, these benefits often failed to transfer easily to Fortune 1,000 vendors, though they were required to comply with EDI requirements. Today, more technology is available to help small and mid-sized companies reap EDI`s benefits.

Defining success factors

Before companies invest in a new technology of any kind, it must carefully consider its unique business needs. This basic rule applies to selecting the right EDI solution as well. Once critical business needs are defined, staff next must define the benefits they expect EDI software to generate and consider how the new software will affect business processes. Review each EDI solution for both effectiveness and expected return on investment. Consider inviting each department to define its individual factors for success and, from this, generate a company-wide list of benefits and impacts.

Jeffrey Brooks, an independent EDI consultant, suggests basing your purchase decision on a set of quantitative and qualitative factors. Quantitative factors include:

• Financial rewards, such as cost savings generated;
• Operational efficiency, including simpler processes and transactions;
• Service capabilities, such as 24-hour access to information and faster turnaround; and
• Competitive advantage resulting in increased revenue. The qualitative factors are, by nature, more difficult to define but equally important:
• The justification factor explains what the new EDI business process will do for your company.
• The education factor is how the new process works to improve business.
• Differentiation looks at how the new process compares to the competition.
• Participation identifies the individuals responsible for making the new solution work.
• The communications factor includes the materials available to create awareness of the new initiative.
• And, finally, the segmentation factor defines the broader marketing messages.

Remember, EDI is more than a simple software purchase. EDI represents a fundamental change in the way you run your business. Making the right decision can significantly increase your company`s strength. Three basic EDI solutions

Once you have a clear understanding of your business needs and the benefits you seek, it`s time to evaluate the different EDI systems available to small- and mid-sized companies. After selecting one of the three main types of solutions, you can then move forward and evaluate specific vendors and products.

1. Translator-only solutions are perhaps the most common in today`s market. For example, a company purchases an EDI translator and runs it as a standalone piece of software. Inbound documents are sent through the translator. Once data is processed, a report is generated detailing the incoming information. Conversely, outbound documents are sent through the translator, which processes the data and transmits the information to the trading partner. These solutions cost between $500 and $20,000.

Translator-only solutions work best for manufacturers sending and receiving a relatively small volume of data. For example, consider a $5 million automotive parts manufacturer exists primarily to serve a retailer with modest EDI requirements and ships only a few small orders per week for a specialty part. This manufacturer may be able to meet its trading partner`s minimum trading requirements with a translator-only solution.

For most manufacturers, however, the translator-only solution has several disadvantages. All inbound documents, such as orders or planning schedules, must be printed and re-keyed into a financial or manufacturing system. Outbound documents must also be re-entered from a manufacturer`s financial system into the translator. If advanced shipping notices (ASNs) are required, data entry must be done a second time.

This solution, called "fancy fax" or "rip and read" EDI by some, increases labor costs and the chance of error, reducing overall efficiency. In the future, this solution may not be generally accepted. Many trading partners are beginning to demand that manufacturers prove that outbound documents are being created electronically, not by hand.

2. Custom solutions can potentially eliminate many of the disadvantages of translator-only EDI, depending on the sophistication of the design. Because manufacturers themselves design custom solutions, they can meet very specific EDI requirements. And since the programmer who designed the system is typically an employee of the manufacturer, updates and changes may be handled internally. The costs of custom solutions vary tremendously, depending on the internal resources required and the complexity of the EDI solution.

Manufacturers that benefit most from custom solutions already run proprietary accounting, distribution, and manufacturing systems, or off-the-shelf packages that have been highly customized and modified. These organizations may rely on an internal staff of computer specialists who understand their companies` systems and business requirements. Many such manufacturers operate in niche markets and offer highly specialized, unique products and services.

In some cases, the cost of labor to design a custom EDI solution is prohibitive; costs for development time may run as high as $500,000. In addition, custom solutions tend to "hard code" many EDI requirements, which means adding trading partners or documents and dealing with changing requirements will necessitate further investment to maintain the system. As with any custom solution, the costs for debugging, upgrading, and integrating can run high.

3. Integrated solutions, which are written as part of a manufacturer`s own financial system, process inbound documents such as customer purchase orders through the translator. The solution then integrates them directly into an order-entry module of the application. Outbound documents, such as invoices or ASNs, are generated directly from the accounting data, transferred to the translator, converted to raw EDI format, and transmitted to the trading partner.

Integrated solutions work best for small- to mid-sized companies that generate and receive a significant volume of EDI. Because an integrated solution requires little, if any, data entry, it can increase customer satisfaction and decrease costly data entry errors by an estimated 50 percent. Resulting increases in efficiency and reductions in overhead can allow companies to grow and expand their business without adding resources.

To reap the benefits of an integrated EDI solution, manufacturers are often limited to accepting their current vendor`s EDI product offering. Manufacturers interested in taking advantage of EDI technology should keep this factor in mind when selecting a new financial, distribution, and manufacturing system.

Here`s an example of how an integrated EDI solution can work:

Serengeti Eyewear Inc., Sarasota, Fla., sells eyewear at optical, sporting goods, and sunglasses specialty retailers worldwide. "Our large customers have multiple retail locations around the country, each requiring unique purchase orders," says Craig Davison, MIS manager for Serengeti. "An integrated EDI system provides us with error-free, timely order-entry capabilities."

Currently, Serengeti is using EDI to process invoices and purchase orders. In the past, invoices took at least three or four days to process. Now, the company sends invoices electronically when products are shipped.

EDI helps in another way as well. One of Serengeti`s major customers sends 1,000 different orders at one time. Serengeti has a window of time to fill the order-if the order isn`t shipped by a particular deadline, the customer doesn`t want it. In the past, the company used almost the entire window for order entry. "As a result, we were paying premium shipping costs to get the product to the customer on time," Davison says. "EDI has eliminated that problem."

In addition, Serengeti no longer has to hire a new staff member strictly for order entry each time the company secures a new customer. Davison estimates that a single individual using the EDI solution can process as many transactions as five people handling the same transactions without EDI. This offers direct savings on labor costs.

Whether your company chooses a translator-only, custom, or integrated solution, plan carefully, advises Davison. "Be sure you know who your customers are and exactly what their EDI requirements entail before investing in an EDI solution," he says. "Make sure you`re buying the right capabilities as required by your customers." Following that advice will help you make the best match between your business and your system.

Four Phases of EDI

How to Move from Offsetting Costs to Gaining a Strategic Advantage

Exactly how could your manufacturing operation use electronic data interchange? EDI applications generally evolve into four distinct phases, each of which can be characterized by its overall impact on your business.

Phase 1: Automating existing processes. Basic EDI applications typically automate repetitive manual processes. If your organization uses standalone EDI software, you`re able to receive purchase orders and send invoices electronically instead of through the mail. Although you can process orders faster, overall efficiency and accuracy remain the same.

Phase 2: Changing existing processes. In this phase, the amount of business you conduct electronically and the level of integration throughout your entire enterprise increase. Browser-based applications often give employees access to more information via an intranet system. Employees can get credit information and inventory stock status 24 hours a day, which enables them to make smarter business decisions.

Phase 3: Developing new processes. Working from the already-established foundation of EDI, you can focus on new processes that facilitate enterprise-wide exchange of information and collaboration. This phase focuses on changing the nature of the traditional customer-vendor relationship. Emerging EDI applications enable a manufacturer to easily share inventory and production data with a supplier. Since the information exchange is seamless, the customer can optimize its operation even as vendors can forecast demand more accurately and schedule production runs more efficiently.

Phase 4: Facilitating new business. In this final phase, you can make entirely new business models. For example, you can create an electronic presence on the Web to reach new customers around the world. Some EDI solutions even have the ability to take orders entered on a Web site and transfer them directly into a manufacturer`s financial system. -J. C.