Various companies and experts discuss the risks and benefits of doing business via electronic data interchange.
Many large companies are pushing their suppliers into electronic data interchange. If you're prepared, that can be good news
After 10 years of selling her product to giant retailers like Sears, Roebuck and Co. and JCPenney Co., Lorette Sobel-Konezney had earned a reputation for reliably filling orders. Her routine was simple: customers faxed in purchase orders, and she sent the goods and mailed out an invoice. Delivery was prompt, and nothing fell through the cracks. That's why the owner of Pen Notes Inc., a $1.3-million designer and manufacturer of children's writing guides, based in Long Island, N.Y., was annoyed when JCPenney wanted her to abandon her fax machine and go on-line for ordering and invoicing. Now, after two years, $10,000, and countless hours of frustrating software fiddling, Sobel-Konezney is finally able to receive purchase orders on-line from JCPenney. "It seemed ridiculous," recalls Sobel-Konezney. "But the message was clear: you either do it or die."
The Cedar Works Inc., in Peebles, Ohio, got pushed on-line too. Five years ago Wal-Mart told the then $4-million manufacturer of aromatic bird feeders and mailboxes that it had to start taking orders and sending invoices on-line. The company's experience with information technology at the time went no further than two stand-alone Macs. Nevertheless, Cedar Works' owners were enthusiastic about mastering whatever technology was necessary to keep a big customer happy. Today, Cedar Works is an $18-million company, on-line with no fewer than 10 major retailers, including Home Depot Inc., Target Stores, and Nature Co. Inc. Roy Willman, one of Cedar Works' owners and its vice-president, says it's been a win-win situation. "We've improved cash flow and customer satisfaction," notes Willman. "And even if we were losing money, customer satisfaction alone might justify being on-line."
Whether companies are ready or not, the age of electronic partnering has arrived. For many that will mean replacing conventional order-taking, shipping, and invoicing processes with electronic data interchange (EDI) systems, which hook computers together via telephone lines to swap information. Large companies and companies that serve consumers may be able to pick and choose when and with whom they set up EDI relationships. But growing companies that supply large organizations aren't likely to have much say in the matter.
Giant retailers, big manufacturers, and the U.S. government are pushing EDI harder than ever. That's because they can save millions with EDI by placing and processing orders faster and more accurately. In addition, by sharing critical point-of-sale, inventory, and forecasting information with suppliers, large companies can carry smaller inventories and still run out of items less frequently.
But for growing companies, the prospect of going on-line with a large customer can be a double-edged sword. On the one hand, many smaller companies say they lack the time and expertise to set up EDI properly. And some business owners complain that even when they do get a system up and running, they find that all the benefits of EDI accrue to their heavyweight partners -- not to them. On the other hand, growing businesses that embrace EDI as an opportunity to leverage investments in technology find that the process provides a chance to cut costs, speed order turnaround, boost cash flow, improve sell-through, and cement lucrative relationships.
There's strong evidence to suggest that EDI doesn't have to be a burden to smaller companies. In a recent survey conducted by the EDI World Institute, in Montreal, only 8% of 149 small businesses claimed that EDI had weakened the company's financial performance. Fully half saw improved profits, while almost a third had better inventory management.
But deriving the full benefits of EDI isn't easy, notes Snehamay Banerjee, associate professor of decision sciences in the College of Business at Clark Atlanta University, in Atlanta, and a specialist in EDI. "Long-term benefits come from integrating a company's internal network with an EDI system," he says. "Small businesses usually aren't capable of that."* * *
Getting Dragged into EDI
No wonder some businesses treat EDI like a disease. Consider Pen Notes. Despite a number of notices from JCPenney informing her of coming changes, Sobel-Konezney spent the better part of two years trying to avoid going on-line, mainly because she lacked technical know-how. Not only was she unfamiliar with EDI, she had never used a computer. Sobel-Konezney didn't bite the bullet until JCPenney sent a letter in mid-1993 stating that if she wasn't EDI-capable by January 1, 1994, she'd be dropped. JCPenney was too valuable a customer to let go: it brought in $40,000 a year in sales and through its Christmas catalog got Pen Notes' products in front of more than 14 million people.
Between running a small factory and producing artwork for the books she manufactures, Sobel-Konezney had neither the time nor the inclination to research EDI requirements herself. So with less than three months left to meet her January 1 deadline, she took the list of technical specifications that JCPenney had given her and went to her local computer store. By the end of the month, she had a 486 PC with a 9600-baud fax modem and an account with General Electric Information Systems (GEIS), a service that provides software and telephone-based communications links to companies that want to hook up on-line.
Sobel-Konezney then dutifully signed up for an EDI training course with GEIS. It's not a fond memory. "Let's just say I had trouble keeping up," she says. While she was struggling with such computer basics as using a mouse, JCPenney was counting down the days until the on-line-or-out deadline. Sobel-Konezney hadn't even realized that orders would be sent to her computer; she had expected to type them in after receiving them by phone. "It was humiliating," she recalls. "I had made it all this way in business, and now I was like a kindergartner."
With the deadline a few days away, Sobel-Konezney had gotten as far as being able to download purchase orders, but when she tried to transmit invoices, JCPenney would receive them in garbled form. Frustrated, she enlisted the help of a computer-savvy business neighbor who'd had some experience with EDI. When he couldn't fix the problem either, Sobel-Konezney knew she would miss the deadline. She pleaded with JCPenney for a reprieve. The company agreed to allow her to send her invoices and shipping notices manually for the first season. Having spent $4,055 on hardware and $500 on GE's EDI software, Sobel-Konezney received six purchase orders over the wires. And she was only halfway there. "It was a nightmare," she recalls. "I knew I needed more help."
Sobel-Konezney finally hired a consulting firm, EDI Options Inc. It took only a moment for founder Neil Abbruzzese to recognize Sobel-Konezney's problem: GE's DOS-based EDI program was just too complex. The software required that Sobel-Konezney learn a series of arcane codes and verification numbers that meant nothing to her. Abbruzzese eventually switched her to an AT&T network and loaded a more user-friendly DOS-based application onto her machine.
By the following Christmas season, Sobel-Konezney could send invoices and receive purchase orders and manifests. But even with EDI running smoothly, she has yet to see any efficiency gains. If anything, the new system has created more work. She used to give her truck drivers a manifest that was color coded to indicate which of six different JCPenney warehouses each like-color-coded package was destined for. She would also send a copy of the manifest to the JCPenney buyer as backup.
Now she sends a manifest to the buyer electronically, but because the electronic form doesn't include information important to the driver, such as shipping weight and warehouse destination, she types out a different manifest for her drivers. "After all the money and time and aggravation, I'm stuck doing things twice," she says.
This past season Sobel-Konezney sent 12 purchase orders, 2 manifests, and 12 invoices on $45,000 in sales with JCPenney. She recently told her salesman to inform other clients that she was "EDI capable," but there has been no interest in her hard-won new capability.
Making EDI Pay Off
If everything seemed to go wrong, EDI-wise, for Pen Notes, Cedar Works has had the golden touch. The company sells its products through more than 200 retailers, but Wal-Mart Stores Inc. is by far its largest customer. Cedar Works was even profiled in an advertisement as part of Wal-Mart's Buy American campaign.
When Wal-Mart asked Cedar Works to begin using EDI, the company spent little time in debate, recalls co-owner Roy Willman. "It was a no-brainer," he says. "If you want to do business with certain accounts, you need to have some ability to do EDI. The costs aren't that extreme."
Rather than even attempt to get EDI going without help, Cedar Works immediately brought in EDICT Systems Inc., an EDI consultant, in Dayton, Ohio. Willman purchased a modem and a 486 computer from a local computer store and then had EDICT install and configure Formula One, a $2,000 DOS-based EDI application. Formula One "greets" data coming from Wal-Mart or any other EDI trading partner and allows Cedar Works to filter the information into a usable format, such as a report or a corporate database.
About three months after Wal-Mart had asked Cedar Works to use EDI, Lowe's Companies Inc., a retail chain based in North Wilkesboro, N.C., also asked Cedar Works to receive purchase orders electronically. Although Cedar Works could use the same computer and software for both companies, Wal-Mart's purchase orders had to be downloaded over the giant retailer's proprietary network. Cedar Works also had to buy a $1,500 bisynchronous modem, the only type of modem that works over Wal-Mart's network. For Lowe's -- and most other retailers -- Willman could choose from a variety of companies that provide secure private networks for data transmission. He decided on OrderNet, today known as Commerce:Network, operated by Sterling Software's Network Services Division, in Dublin, Ohio. Commerce:Network provides Cedar Works with a mailbox -- fees start at $50 a month -- that the small supplier can dial into at any time to download purchase orders.
Cedar Works spent $7,000 to go on-line with Wal-Mart and Lowe's. But not much changed in the way the small company received its purchase orders. In the past, order manager Lisa Hanson had received a faxed copy of a purchase order from a customer and punched it into the Cedar Works system. Now Hanson dialed up Wal-Mart or Commerce:Network, downloaded purchase orders, and printed them out. Because Cedar Works' EDI system was not connected to its corporate database, Hanson continued to key purchase orders into the corporate database by hand so that work orders, packing slips, and invoices could be generated and sent off. "We were really using EDI as a glorified fax machine," says Willman.
But it wasn't long before Wal-Mart started asking for more. "It can be tough with that company breathing down your neck," says Willman. This time Wal-Mart was pushing Cedar Works to send invoices electronically and to use Wal-Mart's proprietary point-of-purchase information and communications software, called Retail Link. For $5,000, Cedar Works bought the software and an NCR 486-DX computer, which Wal-Mart insisted be purchased through it to standardize technical support.
Now Cedar Works runs a UNIX-based serial network that integrates its Macs, PCs, and workstations to support some 25 nodes. The company uses Retail Link to communicate with Wal-Mart's buyers and to access information such as inventory forecasts, allowing Cedar Works to create tighter production schedules. Recently, the company upgraded both its accounting package and EDI software to sophisticated UNIX-based programs that can be networked and integrated. In the near future, when a purchase order is downloaded, the computers at Cedar Works will automatically transfer the order from the EDI software to the company's accounting software, which will then generate an invoice and return it electronically to the customer. Cedar Works also expects to join the ranks of those Wal-Mart suppliers who are so tightly wired to the retailer that they don't wait for purchase orders to come in -- they write their own on Wal-Mart's behalf based on anticipated demand at the stores.
Taking the Offensive
Some growing companies are so enthusiastic about EDI that they're not waiting for customers to ask them to go on-line. Instead, they're actively seeking the opportunity. CRC Products Inc., a 60-year-old, $6-million food-service equipment and supply distributor, in Terre Haute, Ind., decided three years ago it could improve its financial performance if it could forge electronic links with some of its larger customers. As it turned out, only one customer was amenable. Fortunately, it was a big one: the U.S. government. A number of U.S. government agencies have been using EDI for as many as 10 years, and the government hopes that eventually all federal agencies will make purchases through the governmentwide Federal Acquisition Network.
When government agencies or military bases need to procure goods, they often submit requests in writing to the General Services Administration (GSA), which posts the bids in newspapers such as the Commerce Business Daily. CRC looks to the paper for opportunities and also solicits the GSA directly, constantly updating the agency on CRC's offerings. In the past when the government needed 5,000 serving spoons, CRC would draw up a bid and either fax or mail it to the GSA. The agency would review the bid and then return a purchase order. The process could take as long as a week.
However, using a 486 computer and a modem over a private network connection from Harbinger Corp., based in Atlanta, CRC now has access to government "electronic bid boards." Although the GSA still requires signatures, many government agencies post requests for goods electronically. Every day, CRC downloads the government's requests from its "mailbox" at Harbinger.
To make the process more efficient, CRC electronically filed a registration form with the government, marking off the categories of supplies the company offers. Each category corresponds to a different national stock number, which Harbinger's computers can use to sort incoming government bids and filter the pertinent ones to CRC's mailbox.
Not only is CRC privy to more bids, but the company can secure contracts faster, giving it more time to fill orders. Vice-president Scott Rohleder uses the extra time to combine orders and to buy stock at a lower cost as well as to save on the cost of freight. In addition, Rohleder sends his invoices electronically to the GSA, shaving four or five days off his pay cycle. "We are ready and waiting for other partners to come along and trade with us electronically," says Rohleder.
Some growing companies are expanding the form of their data sharing with large customers. Ironically, that often requires less technical know-how than standard EDI. That's because instead of having to set up a system that's compatible with their partner's, they access the partner's system directly and use it as if they were an employee of the partner.
G&F Industries Inc., a $20-million maker of plastic molding, in Sturbridge, Mass., got the idea for deep data sharing from its largest customer. Four years ago, Bose Corp., headquartered in Framingham, Mass., asked G&F to put one of its employees on site full-time at the Bose plant in Westborough, Mass., as part of a just-in-time manufacturing-resource-planning approach known as JIT-II.
At the time, the notion of an on-site supplier was considered radical, but since then, G&F planner John J. Argitis has spent part of almost every day at Bose. As an on-site supplier, he has access to all the information available to any of the Bose buyers, and he has the authority to place purchase orders with G&F on Bose's behalf. Argitis begins every Monday by logging onto Bose's internal network and calling up a materials, requirements, and planning report for the Westborough plant. The report predicts Bose's inventory needs for six weeks. G&F uses the reports to plan its production schedule and to ship product that goes straight into Bose's production process, eliminating Bose's need to inventory G&F products.
G&F supplies not only Bose's West- borough operation but also plants in Ste. Marie, Quebec; Carrickmacross, Ireland; Hillsdale, Mich.; and San Luis, Mexico. Each of those plants used to order from G&F independently, making it all but impossible for G&F to map out efficient production schedules and to achieve economies of scale. Now Argitis can use the computer at Bose to check inventory and material requirements and planning reports for all of Bose's manufacturing around the world. So, for example, if he sees that Carrickmacross needs 300 white speaker cabinets and that three weeks later Hillsdale will need 300 of the same part, he can run the 600 parts in one shot.
G&F now tries to apply the Bose model to its other customers, using a modem connection in place of an on-site employee. One is the First Years Inc., a $50-million distributor of infant accessories. G&F manufactures and packages product for First Years and ships it to a warehouse, in Avon, Mass. G&F buys five components to manufacture the First Years product but never carries any of them in inventory. Instead, each week G&F account representative Edward Reyes Jr. dials into First Years' network and downloads inventory demands for three months. He uses that information to purchase components as needed. Reyes can also access sales information daily, allowing him to see if First Years is overselling its forecasts.
The trick of Reyes's job is to carry as close to zero inventory of raw materials as possible while always making sure that First Years can fill its orders, especially when they come from large retailers like Wal-Mart. "Wal-Mart's got a three-day turnaround," says Reyes. "If Wal-Mart can't get product from First Years on time, it will just go elsewhere; and if we can't get the product to First Years, we're dead."
The moral is that even if your large customers are content to conduct business the old-fashioned way, one of their large customers could put the screws on them tomorrow. For growing companies, being prepared can make the difference between being a coveted electronic partner and being an EDI casualty.
EDI MADE EASY
If the idea of operating an EDI system truly terrifies you, there is an option: have someone do it for you. Several companies offer complete EDI services on an outsourcing basis.
Jim Weavil Inc., a 17-employee TV and appliance retailer, in Winston-Salem, N.C., had no choice but to go on-line with R. J. Reynolds Tobacco Co. But the small company received only a handful of purchase orders from its large customer. "We just weren't getting enough purchase orders to justify an investment in EDI," says co-owner Barbara Weavil. Instead of buying a computer and setting up EDI for itself, Weavil could have hired an EDI service outsourcer. But R. J. Reynolds, not Weavil, ended up hiring Edi Masters Inc., in Miami Lakes, Fla., so that Weavil could go the EDI route.
Now, R. J. Reynolds electronically transmits purchase orders to Edi Masters, which then faxes a copy to Weavil. When Weavil needs to send an invoice, it is faxed to Edi Masters and then electronically sent on to R. J. Reynolds. Weavil says the company will eventually go to EDI, but only when the volume of electronic transactions becomes significantly higher.
FIVE KEYS TO SUCCESSFUL ELECTRONIC PARTNERING
1. Don't wait. Talk to customers and see what others in your industry are doing. Don't be caught off guard with a letter from a customer that says it's either EDI or good-bye.
2. Evaluate your readiness. Before you try to go on-line with a large customer, assess your computer capabilities. The EDI World Institute (phone: 514-288-3555; E-mail: firstname.lastname@example.org.; WWW: http://www.ediwi.ca/ ediwi/) has made that easy to do with its EDI Readiness Evaluation Grid, a kind of self-test. Also check out the institute's The Why EDI Guide for Small- and Medium-sized Enterprises, which profiles several small businesses that have gone on-line.
3. Get help. If you're having a tough time figuring out how to go on-line with a customer, consider hiring a consultant. The EDI World Institute should be able to point you to a consultant in your area. And a host of publications can help you learn more about EDI, among them EDI Forum: The Journal of Electronic Commerce (708-848-0135); EDI News (301-424-3338); and EDI WIndow (514-288-3555). If you're looking to go on-line with the federal government, contact the Federal Electronic Commerce Acquisition Program Management Office (phone: 703-681-0364/9; fax: 703-681-0362/3; E-mail: email@example.com); the Department of Defense Electronic Commerce Information Center (phone: 800-EDI-3414, 703-681-0211; fax: 703-681-1225; WWW: http://www.acq.osd.mil/ec/ecic_hpg.html; E-mail: firstname.lastname@example.org. mil); and the Small Business Administration (phone: 800-827-5722; fax: 202-205-7064; WWW: http://www.sbaonline.sba.gov).
4. Make the most of the data. Information sent from a customer should help you to be more productive. For example, by knowing well in advance when a customer is going to need a shipment, you should be able to squeeze at least some inefficiencies out of your end of the supply chain.
5. Leverage your EDI investment with other customers. Once you're up and running with one customer, adding others shouldn't be difficult or expensive. And EDI capability may even help you attract new business.