EDI-101 for those still contemplating an EDI initiative by: Bob Srdoch

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1 Electronic Data Interchange has made radical changes to traditional transaction-based processes within the distribution industry over the past 20 years, from the early years of price books and POS to today s paperless environment. Implemented correctly, EDI can improve a company s transaction throughput while decreasing error rates many times over though technology, not headcount. Myths and Realities Simply defined, EDI is the electronic exchange of information between business systems with no human intervention. The key words here are no human intervention. Too often, dial-up and internet services for placing orders or checking stock and the exchange of data files via CD and are described as EDI. While these are valid and extremely valuable services, they are not true EDI. Most EDI systems in the U.S. today make use of document standards produced by the American National Standards Institute (ANSI) called X.12 (pronounced X dot twelve ). These standards for business documents, called transaction sets, define the format and sequence of the data to be exchanged between two trading partners (companies). These transaction sets are typically identified by number. When you hear someone talking about an 850 transaction, they are discussing a purchase order, 860 s are change orders, 855 s are purchase order acknowledgments, and so on. As defined, the X.12 standards are broad enough to handle the needs of most industries. But don t let the existence of standards imply a straightforward, simple implementation of an EDI program. The broad scope of these standards allows them to be interpreted many different ways. The transactions are made up of mandatory and optional data elements with the use and importance of the optional elements varying by each implementation. Compounding the issue further, as the standards are updated, new versions are created. In most instances, companies end up supporting multiple versions of the same standard. These issues tend to make the implementation of EDI not as simple as it appears.

2 What are the benefits to an EDI program? There are three major benefits to an EDI program with your customers and suppliers. Productivity - Automate repetitive transactions between your customers and suppliers. For example: after negotiating the price and terms on the supply of specific parts to a customer, have the release orders for the parts come to you via EDI, automatically interfacing to your order processing and shipping system. This would save your salesperson the time of taking the phone call to release the product and entering the release into your system. Think through your organization, where else might EDI improve productivity: price book updates, rebate submissions, point of sale? Quality - Every time data is handled by an individual within your organization, there is room for error. For example, a salesperson takes the order over the phone on a scratchpad, re-writes the order on the proper order form, and then the data entry clerk keys in the order. Here are 3 points of manual contact where an error could have occurred in the processing of the order. Now add to that the steps your customer might go through to place the order and you increase the possibility for error even more. You can quantify this by looking at the number of RMA s that are classified as sales errors. By using EDI, the customer s system talks to your system directly, eliminating most of the potential error points in the process. Competitive Edge - Consider using EDI to offer your customers a simpler, quicker, and more accurate way for them to have scheduled orders released and shipped. EDI could also be used to automatically update the promised date on your purchase orders to your suppliers. These are just two of the ways that you can use EDI to distinguish yourself from the competition. The savings in productivity and quality along with the new business opportunities can easily justify your company s EDI program. (2)

3 Where to start your EDI pilot program It all depends on whether you are approaching EDI from a proactive or a reactive basis. Proactive - Analyze your business processes based on the major benefits we ve described. Look for high transaction volumes, high error rates, and valuable services that could differentiate your company from your competitors. Based on these criteria, select the top one or two candidates for your EDI pilot program. Reactive - Review your customers and/or suppliers that request or demand that you participate in their EDI program. If the majority are requesting a particular transaction, for example - purchase orders (850 s), then start there. If you design your EDI implementation properly, subsequent implementations of the same transaction will require much less effort than the initial implementation. Sometimes the decision as to which transaction to start with is easy, such as a major customer or supplier saying EDI or else. I have seen this on more than one occasion. The Reality of EDI Let s look at an example of the savings through an EDI program. An electronics distributor supplies 75 different products to a manufacturer of PC boards. The manufacturer negotiates the price with the distributor once a year based on the estimated yearly consumption of product. The manufacturer places weekly orders for product based on their internal production schedule. Each product is ordered on a separate order by the manufacturer for ease of tracking and for product routing once the product is received. This equates to 3,900 orders (75 products ordered every week for 52 weeks) from one customer for pre-negotiated product. In a non-edi environment, the 3,900 orders would be entered into an order processing system by either a sales person or a data entry clerk. With 99% accuracy on the date entry, 39 orders would not be entered correctly. This could translate to 39 times that the manufacturer s production schedule could be compromised. With the same scenario in an EDI environment, the manufacturer s MRP system would send purchase orders for the same product via EDI. The distributor s system would receive the purchase orders, verify the part numbers and pricing, and then create sales orders automatically to re-stock (3)

4 the manufacturer. The bulk of the data entry in this process occurred once at the beginning of the year when the manufacturer established the price and supplier for the product needed and when the distributor set-up the cross reference between the manufacturer s part number and the distributors part number. How to get started Identify your starting transaction set(s) and customer or supplier. Provide internal education to your sales, purchasing, and accounting departments on the basics of EDI and your implementation plan for your EDI program. Chances are they are already involved in EDI discussions with customers and suppliers. Create the pilot program project plan. Remember, your first EDI project will be a learning experience, be conservative in your estimates. Select an EDI translator software package if your business system provider doesn t already have integration options with one of the EDI translator providers. There are a number of major packages to choose from with the option of bringing the software in-house and using your I/T staff to manage it or outsourcing the management of the EDI software to the vendor. Once you are comfortable with the start of the pilot program, create and distribute an EDI survey form to your key customers and suppliers. Quantify your prospective EDI partners focusing on transaction volume and opportunity. This will help prevent situations of major implementation efforts and costs for a handful of transactions. (4)

5 About Bob Srdoch Bob brings over 30 years experience in providing IT solutions for business process improvement, project management, and business systems implementation. His primary areas of expertise include business process improvement, business system package selection, project management, order processing and inventory control, warehouse systems integration, and serving as a liaison between business and I/T. He has served as the turnaround agent for business system implementations that were poorly defined, over budget, and behind schedule. He has also published several articles on project management and the selection and implementation of business system packages. Prior to joining Hillyer Group, Bob was the Chief Information Officer for All American Semiconductor, a top 20 industrial electronics distributor. At All American, he was responsible for the formation of the MIS department, selection and implementation of a new business system, and the paperless automation of the central distribution facility. About Hillyer Group Hillyer Group LLC is a professional services firm providing an array of Financial and Operational advisory services for challenging situations since Engagements are local, national and international. More information is available at or call (216) (5)

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