Purchasing technologies: EDI
There are various types of e-procurement trading models in the market. In this section, we will look at an electronic method of transmitting data that offer a whole new way of communicating across the internet and beyond.
1. What is electronic data interchange (EDI)?
EDI is the direct computer transmission of orders and other transaction information. In purchasing, EDI is usually used for the electronic
transmission of orders, invoices and payment between buyer and seller. The main elements of an EDI system are computer hardware, software, computer compatibility between the sender and receiver, and subscription to a common network.
There are many benefits of using EDI. For a small firm, EDI may help keep a valued trading partner or customer or even gain new ones. For larger firms, the main benefit is generally the cost savings, or to be known as a leading-edge company.
A simple example of what EDI can do for a firm follows. A buyer takes a request from someone within the organisation, creates a purchase order and mails it to the supplier to fill and ship. This process is speeded up when the buyer enters the purchase order on a computer screen as he or she is talking to the user and sends the order electronically to the supplier’s system as soon as he or she hangs up the phone. This, of course, would only be done if the person ordering had the authorisation and if the order had to be sent that quickly. Traditionally, a firm could collect the orders to a single vendor and send them all together at the end of the day. EDI software technology enables the orders to be converted into a standard format and translated either directly to the supplier’s system or to an electronic mailbox on a third-part valued-added network (VAN) accessed by the partners. On the supplier end, there must be a computer either to receive the communication or to go to the VAN to get the messages. Once the data are received, they must be converted back into readable information. If the format of the data is not the same or corruption occurs, the data are useless. Industry trade groups have developed standard formats that allow different systems to communicate with each other.
2. Advantages of EDI
There are some definite benefits of utilising EDI:
a. Replacing the paper documents : Replacing purchase order s , acknowledgements, invoices and so on — used by buyers and sellers in commercial transactions with standard electronic messages conveyed between computers, often without the need for human intervention.
b. Reduction in lead times: Buyers and suppliers work together in a real-time environment. Time saved can be used for data analysis to improve process further.
c. Reduction in the cost: The cost of labour, inventory and release of working capital.
d. Better customer service: EDI capabilities show potential customers a supplier’s willingness to cooperate, which improves relations and leads to better long-term relationships.
e. Facilitation of global procurement using internal standards.
f. Facilitation of invoice payments: Computer-to-computer transfer of money eliminates the need for the preparation and posting of cheques.
g. Integration of functions: Particularly marketing, procurement, production, engineering and finance.
h. Suppliers’ relationships: EDI tends to promote long-term buyer-supplier relationships and increase mutual trust.
3. Potential problems and challenges in EDI implementation
EDI is not for everybody.
EDI requires additional costs that must be considered including computer hardware and software costs, as well as the maintenance fees for the mailbox (VAN) usage. The largest and most important cost is the training of the users and the suppliers. The system itself is a waste of money if it is not effectively used. This means extensive training of buyers, administrators, management, suppliers and auditors will be required. Implementing EDI will also demand new procedures that will take time to learn and use effectively, as well as learning to control by management and auditing.
As with any major change, like implementing EDI, at least some resistance and many barriers are to be expected. Informing users of the change along with heavy training and education will support the move to EDI. This is vital to users, who must feel comfortable with their new jobs. EDI is a concept designed to support the organisation operations, and without proper training, it will cost an organisation quality and efficiency.
Data integrity and legal issues are barriers that management will also encounter. Change agents will need to understand the emotions in change process and work through the transition with the stakeholders. Top management support may also be hard to obtain, but it is vital for a successful move to EDI operations, just like any other change program.
There are also some risks when using EDI that should be considered. As discussed above, EDI is expensive. The machine and training costs will add up to a large amount and cutting corners in other areas to provide for the budget may cost an organisation more than it can save. Security is also an issue. It is felt that procedural safeguards have not kept up with the technology in this area. The problem is exposure to outside users, which opens up a doorway to false messages. These messages may come in the form of a person who is not a supplier sending data or the data being interrupted and/or altered. Operational procedures need to have safeguards in place in order to avoid such situations. Buyers and sellers must interactively communicate, especially if a questionable transaction is received.
Then, after all the capital expenditures and efforts setting up EDI system in the organisation, an obvious risk is that current trading partners may refuse to use EDI. This is a situation that must be addressed by the organisation policy. A decision must be made whether to trade singularly through EDI or use both EDI and traditional methods.
4. EDI limitations and future outlook with small and medium-sized firms
Most of the world’s economies are supported by small and medium-sized firms, which form a significant majority of their nations’ enterprises. EDI has two principal limitations with this category of potential users:
a. Cost: EDI was and still is an expensive option. The heavy overheads associated with EDI infrastructure were prohibitive for many small and medium-sized firms. Moreover, the volume of transactions for individual firms is not likely to justify the investment.
b. Inflexibility: EDI is a cumbersome, static and inflexible method of transmitting data, most suited to straightforward business transactions, such as the placement of purchase orders for known requirements. It is not suitable for transactions requiring tight coupling and coordination, such as the consideration of several possible procurement alternatives or supply chain optimisation. Unlike human beings, computers are poor at interpreting unstructured data and cannot derive useful information from web documents that are not predefined and permanent. Traditional EDI approaches do not provide the flexibility required in a dynamic business environment. This is the other main obstacle with the system for small and medium-sized enterprises, many of which have their competitive edge on working with unstructured data.
While the new technology brings on excitement for the larger firms, the above limitations also work against the business practices of many smaller
firms that are purposefully more fluid and unpredictable.
|Please read about ‘the current state of e-procurement initiatives’ on pages 401 – 407 from your textbook Procurement Principles and Management, 10th edn, England: Prentice-Hall, Pearson Education Limited by Baily, P, Farmer, D, Crocker, B, Jessop, D and Jones, D (2008).|
|Question to activity 2.4
||Suggested answer to activity 2.4