EDI in Manufacturing 



Businesses today are facing increased competition from both domestic and foreign producers. This has in many cases resulted in reduced profit margins and the need to streamline operations and reduce operating costs, but at the same time still provide the information required for effective decision making. While many companies have moved their operations offshore to compete with foreign competitors who have lower labor and operating costs, these are only short-term tactical solutions. To compete, we must learn to use our assets more effectively not only to reduce costs, but to increase revenue, improve customer service and provide value-added services that differentiate us from our competitors and put us at a true competitive advantage.

The Just-in-Time (JIT) philosophies of the past ten years have changed our views dramatically about maintaining large work-in-process inventories, manufacturing products in large lot sizes and justifying long setup times. However, these efforts only match what other companies have already done. What must happen is that companies must take the keys to JIT (timeliness, speed, accuracy, integration) and begin to apply the technologies of today to develop a true competitive edge. This is known as Electronic Commerce (EC) and is really a business strategy that combines the philosophies of JIT, principles of total quality and concepts of business reengineering with the latest IES technologies (e.g., EDI) to create an offensive weapon to win the business war.

Recently, the Gartner Group published several research notes establishing a framework that allows companies to measure their EDI efforts in terms of the number of years of competitive advantage generated. This framework is shown in Figure 1 and illustrates that paper-based EDI actually costs companies money and results in a negative number of years of competitive advan­tage. Companies that have improved or changed their business processes and organizations to capitalize on the benefits of EDI are realizing up to five years of competitive advantage. However, the real competitive advantage occurs when companies get past the initial cost reduction efforts and focus on using the information obtained from these inter-enterprise linkages as a competitive weapon to increase revenue and provide value-added services.

To understand what we mean by "EDI: Gateway to Competitive Advantage," it's important to understand where some of today's EDI efforts fit into this framework and what future possibilities exist on the horizon for the 1990s.

• Quick Response (QR) — This concept involves the capture of sales data at the cash register and transmission of them using various methods to the manufacturer who uses the information to schedule production and replenish the retailer's inventory. This activity typically fits into the "process change" or "new ways to conduct business" categories of the model depending on the degree to which existing business processes are changed. The benefits of QR are usually significant because it allows retailers to respond quickly to consumer demand without maintaining large inventories and manufacturers have timely access to sales data to schedule production without requiring elaborate production forecasting systems.

• Continuous Replenishment Planning (CRP)—This concept extends QR to the point of a manufacturer actually monitoring the inventory levels and demand at a manufacturer, distributor, or retailer, and automatically scheduling the replenishment of inventory based on parameters such as actual consumption. This activity is similar to QR in that it fits within the new ways to conduct business category of the model. The benefits are significant because it eliminates inventory, reduces cycle time, and provide a value-added service to the customer.

• Evaluated Receipts Settlement (ERS)—This concept involves transmitting a ship notice to the customer upon shipment of the product. The ship notice information is automatically compared to the purchase order in the system to validate and price the shipment. Upon receipt of the shipment, quantities are verified against the ship notice and authorization for payment is issued. An electronic funds transfer (EFT) transaction may then be generated based on the payment terms. This activity fits into the "process change" or "new ways to conduct business" categories of the model. Based on a recent study by the EDI Forum, the cost savings for manufacturers by eliminating the three-way matching process was over $60 per receipt and up to $60 per shipment for suppliers.

Based on the above examples it is clear that some companies are moving toward utilizing EDI for competitive advantage, but most published accounts are still focused on the cost reduction side of the equation. However, it is clear that utilizing EDI as a compet­itive weapon is directly related to a company's ability to first apply EDI to reduce costs and streamline business processes. It is from these efforts that opportunities to utilize EDI for competitive advantage begin to surface as companies continue to innovate on the knowledge gained from previous efforts.

To be Continued


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