Electronic Data Interchange

Electronic Data Interchange (EDI) refers to the linking together of channel member information systems to provide real-time responses to communication between channel members. For example, a retailer's computerized inventory management system is connected with and monitored by a wholesaler's computerized inventory management system. Ordering of merchandise can then take place automatically when the retailer's inventory level of that wholesaler's products reaches certain minimum re-order points. Thus, the retailer's computer orders the products from the wholesaler's computers without human intervention or paperwork of any kind. The more sophisticated EDI systems can also forecast demand based on sales history. In the case of the wholesaler-retailer relationship the wholesaler's computers will initiate the order for the retailer by predicting what quantity of the product the retailer will need during a specific accounting period. EDI systems can also be linked to production scheduling, allowing production to be determined by sales patterns in the different retail outlets. That is, merchandise that is being sold on a given day in retail outlets around the country will provide the necessary information to guide a manufacturer's production process taking place on the same day.

The emergence of the internet has enhanced the potential of EDI because the internet enables firms to be connected and communicate in a similar manner to EDI but with less investment in computer hardware and software. As such, firms linked via the internet will be able to enjoy the benefits of EDI at a significantly reduced price.

EDI technology enhances distribution efficiency, resulting in substantial benefits to all channel members, including the final customer and consumer. The manufacturer benefits through more accurate production scheduling, while wholesalers and retailers benefit via savings on order processing and inventory carrying costs. The final customer benefits from the reduced distribution costs made possible by EDI and by the higher probability of finding the items they are seeking on retailers' shelves. The obvious primary barrier of EDI is that all channel members must share information openly for the EDI system to work. For those channel members who feel they need control of what they believe to be sensitive or confidential information about the sales of their products, EDI does not have a great deal of appeal.

There are also other barriers to adopting EDI. One of the most significant of these is the necessary change in business processes. Existing business processes built around slow paper handling may not be suited for EDI and would require substantial changes to accommodate automated processing of business documents. For example, a business may receive the bulk of their goods by one- or two-day shipping [Page 580]and all of their invoices by mail. The existing process may, therefore, assume that goods are typically received before the invoice. With EDI, the invoice will typically be sent when the goods ship and will therefore require a process that handles large numbers of invoices whose corresponding goods have not yet been received.

Another significant barrier is the cost in time and money in the initial set-up. The preliminary expenses and time that arise from implementation, customization, and training can be costly and therefore may discourage some businesses from adopting EDI. The key is to determine what method of integration is right for the particular company, which will in turn determine the cost of implementing EDI. For a business that only receives a small number of orders on a per annum basis from a client, fully integrated EDI may not make economic sense. In such a case, a business may use outsourced EDI solutions provided by EDI “service bureaus.” For other businesses that have relatively large volumes of orders from a particular client, the implementation of an integrated EDI solution may be necessary as increases in trading volumes brought on by EDI force them to re-implement their order processing business processes.

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