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EDI in Manufacturing 

 

PART III. 

 

Now that we understand the strategic role EDI can play in achieving your business goals and objectives, it's important to discuss the business environment and factors that contribute to utilizing EDI for competitive advantage. Three aspects provide the best perspective for assessing whether EDI offers a similar opportunity for your company.

Market Conditions

Based on my experience with companies in a variety of industries, there appears to be a number of market conditions that signal a prime opportunity for companies to utilize EDI as a competitive weapon. They include: increased market competition, reduced profit margins, greater product options, shorter delivery lead times, faster time to market requirements and a need for more timely access to sales and operating information. By examining each one of these conditions in more detail it's also difficult to find a company today that is not dealing with at least one of these issues. Therefore, the key point is that, despite market conditions, companies should be continually looking for ways to reduce costs, increase profits and become more responsive to customers. EDI represents one of the technologies that allows companies to be more competitive under these conditions.

Business Processes

The next aspect is understanding the importance of examining your business processes. Until recently, many companies did not see a need to redesign their business processes when implementing EDI. As a result, the benefits were less than dramatic. Effective business process redesign requires that four key components be properly aligned. These include your strategy, processes, data and organization structure.

Many companies are at what is referred to as EDI Stage I. This is where an assumption has been made that the strategy, processes and organization structure currently in place are appropriate for EDI. The primary change that occurs is in the method (technol­ogy) of communicating information between companies. The result is usually faster transmission of information, but not necessarily a more efficient or less costly process, especially if the information must be reentered into internal systems.

The next step is referred to as EDI Stage II. This is where a new business strategy is developed (e.g., EC) and the associated processes, data and organization are redesigned and enhanced to support the strategy. The result is usually significant changes to the business processes and information systems, but significant business benefits, too. The point to remember is that the best opportunity to utilize EDI for competitive advantage occurs as a result of significant business process reengineering efforts.

The importance of streamlined business processes will become evident in the future as companies begin to move to the next level of EDI, exchanging product specifications and CAD drawings to support concurrent engineering. In a recent study, McKinsey & Co. found that reducing the time to market is a critical business issue for the 1990s, and, if a company can deliver a product to market six months earlier than planned, the annual profits could be as much as 12 percent higher over the life of the product. This means that for a company with revenues of $100 million, the additional profit could be as high as $1.6 million per year. That's the importance of reengineering your business processes!

Industry Position

The last aspect that impacts a company's ability to utilize EDI for competitive advantage is its position within an industry. If you are a "hub" company that possesses considerable clout you are able to demand that your suppliers implement EDI. However, very few companies find themselves in that position. Therefore, it is important that a company understands its industry position and the challenges and opportunities that exist when trying to implement EDI for competitive advantage. Two situations are described below to provide some insights and ideas.

Today, many manufacturers are faced with requirements by the "hub" companies such as original equipment manufacturers (e.g., Chrysler) and retailers (e.g., Kmart) to implement EDI-based processes such as QR and ERS or be eliminated as a supplier. These manufacturers also typically don't have the same clout with their suppliers to make the same demands. The key success factor in this situation is for the manufacturer to establish the proper business and systems environment to integrate their internal processes, systems and data with those of their customers. This will allow the manufacturer to not only become the most efficient and responsive supplier (assuming an EC strategy), but it also offers the potential to increase revenue by manufacturing and selling additional products through the same distribution channels.

One of the best opportunities to use EDI for competitive advantage appears to be at companies that are vertically integrated (e.g., manufacturing, distribution, and retailing). Changes in many of these industries are creating new customer relationships with unique information needs. For example, in the automobile repair business, much of the cost has been paid by insurance companies. However, this is changing as deductibles are increasing and the end consumer is becoming the buyer. Insurance companies are also negotiating national agreements to further reduce costs and improve profitability. This is creating requirements for value-added services such as 800 numbers and information to monitor shop repair effectiveness and develop marketing campaigns targeted on the end consumer. The challenge and opportunity for these companies are to fully implement EDI-based processes to capture and process the information required to provide value-added services and information to their customers.

To be Continued


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