Section: ELECTRONIC BUSINESS
In this article, senior executives comment on the strategic issues involved in EDI. Trading partner relationships and the balance of power are critical issues when firms participate in electronic commerce. The relationships between trading partners who exchange data electronically are very important to these executives. The participants in the study also are concerned about the relative power between their firm and other members of the supply chain.
MUCH HAS BEEN WRITTEN IN THE past decade regarding the competitive uses of information technology (IT) in industry. Organizations are encouraged to move into the supply chain, the system of interdependent activities used to produce a product or service, and to establish direct, electronic links with their suppliers and customers. Recent applications of IT, such as Web-based commerce, have targeted customers and distribution channels. These electronic links, or interorganizational systems (IOS), are a powerful competitive weapon for facilitating cost leadership and differentiating products and services.
A mature technology such as Electronic Data Interchange (EDI) allows users to examine the strategic relationships that develop over time between firms that share data electronically. EDI is a critical technology for establishing direct, electronic links between trading partners. Much of the past EDI research has described EDI technology and the activities necessary to implement EDI successfully. The strategic implications of EDI have not been studied as closely as its tactical concerns. This article addresses the need for a better understanding of the competitive effects of electronic linkages by examining the strategic issues associated with EDI usage. Users need to better understand the strategic implications of electronic linkages between firms as the amount of business-to-business commerce across the Web grows monthly.
It is often easy to overlook important strategic issues when a technology such as EDI becomes widely accepted as a way of doing business. Questions such as "Who benefits from these electronic linkages?" and "What are the concerns of firms that are forced to use a technology?" should be explored. Unfortunately, the focus of many practitioners and researchers is solely on identifying and realizing the immediate benefits of EDI. This article attempts to bridge the gap between the tactical and strategic: issues by examining the competitive implications of electronic linkages between trading partners, as exemplified by EDI.
STRATEGIC EDI ISSUES
EDI enables the direct, computer-to-computer exchange of standard paperwork, such as orders and invoices, between participating firms. EDI usage affects much more than the way of handling business between two firms. Multiple constituencies are involved in EDI activity, including
· the hub or EDI adopting firm
· the trading partners (spokes: customers or suppliers) of the hub firm
· third-party firms that provide support services to EDI trading partners
These three parties are shown on the supply chain in Exhibit 1. Some of these hub firms have been very aggressive in implementing EDI. Others, especially spoke firms, have adopted EDI in reaction to threats of lost business.
Organizations occasionally adopt technologies like EDI simply to keep up with the strategic IS investments of other firms in the same industry. EDI becomes a necessary way of doing business rather than a competitive tool. Firms that make IS investments m response to pressure from customers or initiatives of competitors may gain strategic advantage over competitors that neglect to develop similar systems. However, the IS investment was a reactive move and not a carefully designed component of an IS strategic plan.
The strategic issues surrounding EDI implementation seem to be much more difficult to manage than the technical issues. Technologies such as the ANSI standards and communications software are maturing. But business issues (e.g., relations with trading partners) are evolving and affect organizations other than the firms that are exchanging documents directly. The authors' research into competitive IS applications and EDI implementation points to three key strategic EDI issues:
1. business relationships between trading partners
2. balance of power between buyers and sellers
3. impact of EDI adoption on third parties
Business Relationships Between Trading Partners
EDI implementation affects the amounts of data transferred between firms, influences the types and timing of information releases, raises concerns for security; and creates a need for changes in the business processes used by participants. Successful implementation of EDI dictates higher levels of cooperation, evidenced by thc increased amounts of data that are exchanged between trading partners. Cooperation is mutually beneficial because it contributes to long-term relationships between buyers and sellers. High volume and simple products, which fit well into EDI-based systems, also are associated with long-term, stable, buyer-seller relationships. Fruit of the Loom has been successful in interacting with its distributors across the Web because of this high volume, simple product model. Conversely, complex products that require large amounts of information exchange during routine transactions may not adapt easily to electronic systems in which multiple buyers and sellers are exchanging data.
IOSs like EDI force changes in business processes. Firms that adopt EDI out of competitive necessity must realize cost savings to recover their EDI investment; this cost recovery comes about as basic business processes are redesigned or even eliminated. EDI usage affects the types and timing of information releases, forces changes in production methods used by supplier firms, and raises concerns for security and legal issues.
Changes in the relationships between trading partners are evident in both the types and timing of information releases. Some retailers are sending sales figures directly (i.e., via EDI linkages) to manufacturers, or alternatively giving online access to sales information in the retailer's database, to speed the reordering process. Manufacturers, in turn, must implement more efficient production methods and are informing their suppliers of manufacturing resource planning forecasts to ensure a steady flow of raw materials to feed just-in-time production processes.
Releasing internal data to a trading partner by way of a direct computer link requires a rethinking of the responsibilities or roles of each partner. Firms now are exchanging proprietary information. Allowing an outside firm to view transaction-level data places a premium on trust between trading partners because of the competitive risks associated with this type of access. Security concerns for on-site and communicated data can be addressed by internal accounting controls, passwords, callback routines, and encryption. Even the legal barriers to electronic contracting may not be as formidable as once thought. Trading partners should agree on terms and conditions up front and understand that electronic transactions are as enforceable as those that are paper-based.
Closely related to security and legal concerns are issues regarding the regulation of data flows between trading partners when the partners are located in different countries. Transborder data flows are subject to a variety of restrictions. Firms may be required to process data in the country in which the data originated, and organizations can be limited in the way communications facilities are used. Managers should be aware of the existence of constraints on international data movement because of the potential for reducing the benefits received from EDI or other forms of electronic commerce.
Cooperating with trading partners within a supply chain may encourage a firm to look at other electronic relationships. Competitors are jointly developing IT infrastructures to provide data to cooperative and EDI systems. The difficulties of sustaining a competitive advantage with IT the risks involved in new, large-scale ISs, and the costs of such projects make joint ventures attractive. These jointly developed systems benefit buyers and sellers by lowering search costs and increasing the efficiency of interorganizational transactions. These systems make available competitive information in a single information system. EDI is a valuable extension to these joint systems because participants can perform price and product comparisons and electronically place orders.
Buyer/Seller Balance of Power
Systems that cut across company boundaries shift the balance of power in an industry. When a single, large firm mandates EDI usage by its suppliers, the balance of power between buyer and seller is changed. Large manufacturers, such as Ford and General Motors, and retailers, such as Wal-Mart and Sears, are examples of companies that have made EDI usage mandatory. The organizations that operate these IOSs enjoy substantial economies of scale and benefit from the closer integration of steps in the supply chain, made possible by the systems.
The EDI-mandating firm -- the hub -- begins to dictate when business will take place, how that business will be transacted, and when shipment of product is expected. Some hub firms even dictate the EDI software and network that must be used. Suppliers that are slow to modify their business processes to fit the hub firm's demands may be endangering a much needed business relationship.
Responses by trading partners -- the spoke firms -- not only vary but actually may result in a loss of some of the expected benefits of EDI adoption when viewed from the perspective of the overall distribution system. For example, some firms use personal computers to receive and then print hard copies of EDI documents. These documents then are reentered manually into the receiving firm's computerized information system (IS). This manual process can result in errors, time delays, and other problems associated with data entry.
Other spoke firms, instead of developing fast production capabilities, build up inventories and thus their own costs to rapidly respond to orders. One survey of auto industry supplier firms revealed that the average lot size delivered by the suppliers was much smaller than the average lot size the supplier produced.(n1) This production example shows how inventory holding costs can be shifted to other firms in the supply chain.
Although hub firms receive substantial benefit from using EDI, it is not at all clear that these benefits extend to each of the hub's trading partners in an equitable fashion. In fact, EDI usage may be disadvantageous to some members of a given supply chain. Another survey of firms that supply large automotive manufacturers found that most of the supplier firms were unable to identify any advantage to using EDI.(n2) The suppliers had adopted EDI simply to avoid losing business with the mandating hub firm.
Some supplier firms cannot afford, or are not technically advanced enough, to move to EDI without assistance. The hub firm can assist in EDI adoption by providing software and training or by offering faster payment for EDI-based transactions.
All trading partners in a given industry share the direct costs of EDI programs. Industry experience suggests that these programs make participants more efficient, and thus reduce their operating costs. The savings should filter down to the ultimate consumer of the good or service in the form of lower prices, higher levels of service, or both. Unfortunately, it is hard to isolate the effects of EDI efforts from other competitive initiatives of user organizations.
There are cases in which electronic order entry systems that are controlled by a single firm have led to industry consolidations. The Economost system from McKesson Drug is an example of a system that caused smaller competitors, who were unable to develop their own EDI systems, to get out of the business or be taken over.
Third-Party Impacts
Improving the information flow between trading partners affects other organizations in the supply chain. These third-party firms often provide support services to the principle trading partners. Mandates for EDI usage can include demands by the hub firm that there be no middlemen (e.g., factory representatives) involved in the transaction. The result is that organizations that historically have brought together buyers and sellers now are excluded from participating.
Transportation firms are affected by EDI efforts in a significantly different manner. Retailers are advancing the concept of "Quick Response" or "Efficient Consumer Response" to provide just-in-time inventory to the store floor. Trucking firms have installed expensive ISs, such as satellite links in each truck, to improve the tracking of shipments while in transit. An electronic link between trading partners therefore can affect the supply chain component that provides the physical link between those firms.
A second way transportation firms are affected is when Quick Response retailers place small orders each day instead of larger orders monthly. Larger orders can be delivered to the retailer's distribution centers by trucking firms specializing in large containers. Next-day carriers such as UPS and Federal Express often deliver the small orders. Here a change in order size, as a result of a just-in-time program and electronic order exchange, leads to a change in both lot size and freight carrier.
Relationships among trading partners are affected by the decision to exchange data electronically. These relationships are experiencing substantial change due to forces both external (e.g., customer demand for higher levels of service) and internal (e.g., hub firm actions) to EDI-using industries. Exhibit 2 diagrams these competitive issues across a supply chain.
Summary of EDI Competitive Issues
EDI usage is having far-reaching impacts on competition and business practices in several industries, including
· improvement in external links leading to better customer service, lower transaction costs, and more efficient intercompany information exchanges
· the shift of market power toward hub firms and away from spoke firms
· a willingness to share the risks and costs of large-scale EDI projects among groups of competing firms
· the lack of concern by some members of the supply chain for the needs of third parties that facilitate business transactions
Once all major competitors in an industry have adopted a technology, no single competitor gains any significant competitive advantage. The systems turn into a cost of doing business as adoption is a competitive necessity. An exception may be organizations that are "first movers" and so maintain a competitive advantage by developing strong ties with trading partners that are not quickly broken by competitors who adopt similar technologies. After all competitors have made a sizeable investment in an IT infrastructure to support the electronic transfers of data, they actually may suffer lower profits as a result. IS applications that are strategic necessities are therefore candidates for cooperative development. Industry-specific EDI standards are an example of such cooperative efforts. Another example of cooperation is the use of VANs as a method of supplying a shared infrastructure for EDI.
There seem to be few penalties for using EDI, given the stable nature of the technology involved. However, in some industries (e.g., retailing and automotive), EDI is becoming a required component of doing business. Firms that do not use the technology will be unable to keep pace with competition.
FINDINGS
To confirm the validity of these competitive relationships the authors asked several senior executives, who are familiar with day-to-day EDI operations, for feedback based on their personal experiences. Their comments provide a clearer understanding of the importance of trading partner relationships when firms exchange data electronically.
The Respondents
Exhibit 3 lists the job titles of the respondents, a description of each firm, and the firm's annual revenues. These multibillion dollar firms are typical in size of other EDI hub firms. The senior executive rank of these managers provides the strategic viewpoint necessary to comment on competitive issues and trading partner relationships.
One firm is a public utility; the others represent a mix of manufacturing and service industries. The three manufacturers compete in low-margin, high-volume lines of business against multiple competitors; thus, cost control and efficiency are critical. The retailer is an active participant in the current consolidation going on in that industry. The public utility services both residential and commercial accounts. The healthcare firm is under pressure to deliver higher levels of services while controlling the costs of interactions with doctors, hospitals, third-party providers, and insurance companies. Although the sample of firms is selective, it is an excellent cross-section of the types of firms and industries that are candidates for the efficiencies offered by EDI.
Data Collection
The authors contacted executives who have experience with EDI. The participating executives were mailed a brief questionnaire and a copy of a diagram that listed the strategic issues discussed here. They also met with several firms as part of this study. Respondents were asked to comment on the correctness of the EDI issues identified by discussing how well the items listed match their personal experience. Participants discussed their firms' EDI involvement with both customers and suppliers. Finally, the authors asked them about the competitive issues their firm considered when deciding to use EDI.
Direction of EDI Usage in the Supply Chain
The retailer uses EDI back down the supply chain with its suppliers. The healthcare firm also uses EDI in one direction -- with other insurers, doctors, and hospitals. The other four firms use EDI in both directions -- down the supply chain to suppliers and up the supply chain with customers. The gas company uses EDI with large suppliers and large commercial accounts. The three manufacturers use EDI with both customers and suppliers. The three manufacturers and the healthcare firm mentioned that they are initiators of the EDI relationships between themselves and their trading partners. Their role as initiator supports the idea that these are hub firms in the EDI relationship.
Competitive Issues
Respondents commented on two competitive issues: relationships with trading partners and the balance of power between themselves and their trading partners. The vice president from the electronics manufacturer noted that "... EDI causes change in every relationship, but the change is necessary for each industry to survive. I strongly believe everyone gains as opposed to your (the researcher's) comment that trading partners may not gain anything." This executive pointed to the mutually beneficial nature of the relationship change. Data exchanges between trading partners are an important part of the relationship: "Since we are the vital product link, meaning the ultimate producer of a major part of the customer's revenues, communications and information flow is absolutely vital."
The gas company viewed itself as small relative to the size of its suppliers and customers. They experience "substantial competition in large volume markets" and must be an efficient producer and distributor. EDI represents less than five percent of transactions with suppliers and commercial customers, and the gas company does EDI here due to competitive pressure. This firm views the balance of power issue as a real threat. The office products' vice president, however, stated that the buyer/seller balance of power is "rarely affected in the real world" by use of electronic interactions.
The retail respondent noted that larger retailers, "Federated, Bells, Sears, K-Mart, J.C. Penny," are "pushing" EDI, where previously the big vendors pushed the technology on retailers. The retailer sees a current change in the balance of power, swinging in favor of the retailer. The authors met with four textile and apparel industry firms that have implemented Quick Response (QR). They found the pressure for the use of bar coding, EDI, and automatic replenishment was primarily from the retail partner. Retailers wanted the suppliers to institute QR because inventory was pushed backward in the channel, away from the retail floor and the retailer's distribution center. Retailers pushed to have all deliveries from the supplier made directly to the store floor, ready to sell. Although the inventory ownership responsibility and even additional duties, such as tagging the goods, were pushed to the apparel manufacturer, it was not obvious that the retail partner passed funds to the supplier to cover these added costs. QR does allow the retailer to improve customer service by having goods in stock that are currently in demand by consumers.
The presence of well-defined EDI standards makes it easier for hub firms to switch between suppliers and can be an additional factor that increases the bargaining power of these large buyers. Our research uncovered charges that some retailers initiate business with a small-to-medium sized firm and gradually increase the amount bought, which means that the buyer is taking an increasing percentage of the seller's total volume. When the buyer gets to a significant percentage of the seller's business the retailer pressures the manufacturer to agree to new terms; otherwise the buyer will halt all business. The resulting loss of sales to the seller is, in some cases, over 75 percent of their production. With such a threat, the seller has little choice but to agree to the retailer's terms. EDI gives the buyer a greater chance to apply this pressure because the cost to switch between suppliers has been lowered.
When discussing competitive issues, one respondent mentioned the importance of changes to internal processes and procedures if the benefits of electronic transactions are to be realized fully. "I must emphasize that the use of EDI is only a minor part of the equation. What is clone with the order, shipment, invoice, etc. internal to the company is much more important." To achieve the benefits of electronic trading partner links, a firm must change how it operates. These internal changes are a hidden cost of EDI.
An interesting comment by the retailer was that "few" are using electronic funds transfer with EDI because they want the float, or time lag. Here business strategy is the overriding factor, not technology. The authors found that one retailer paid its suppliers manually, managing the float, because the firm was cash-rich and other apparel industry members were not able to pay their bills.
WHAT WAS LEARNED
Firms in very diverse industries are having similar experiences with EDI. The balance of power between trading partners is a legitimate concern in some industries. The stresses introduced because of relative power inequities must be balanced against the benefit of cooperation from electronic exchanges of data between these trading partners. Firms that initiate electronic data exchanges are driven by competition and by a need to introduce efficiencies into day-to-day operations. Two study participants, the retailer and the healthcare firm, are under extreme pressures to control their cost of operations -- the retailer from discounters and the healthcare firm from regulators. Both industries are experiencing consolidation as one way of accomplishing cost savings by gaining economies of scale.
These firms are looking beyond internal efficiencies -- they are looking in all directions in their supply chains to leverage the benefits of information technology. What starts out as the simple automation of a manual process -- the exchange of paperwork --becomes an issue with important strategic implications for each firm that participates in the supply chain.
Comments from these executives express that these strategic issues are important to how they manage their firms. These large firms are concerned about developing beneficial and efficient relationships with their trading partners. However, these same firms are interested in leveraging their size to influence the supply chain -- to their benefit.
CONCLUSIONS
EDI is an important application of IT in a number of industries. Large EDI hub firms in these industries are forcing adoption by smaller companies. The largest share of the benefits seems to be accruing to the hubs.
EDI seems destined to be a technology that is adopted individually by all the major players in a given industry and so provides no enduring advantage to any one firm. Although joint efforts are underway to develop standards, there is currently no evidence that competing firms are engaged in efforts to share EDI software or infrastructure costs.
The willingness of organizations to share internal, operational data is leading to other types of information exchanges and closer working relationships between trading partners. Efforts at more efficient communications between firms now extend to opening up internal electronic mail networks to suppliers and customers and opening internal, Web-based ISs to trading partners.
There is still an enormous potential in industries where firms just now are beginning to consider seriously electronic exchanges of data. Lower-cost hardware, increased availability of EDI translation software, the movement of EDI transactions to the Internet, and the quality and variety of VANs are factors contributing to EDI acceptance. On the other hand, concerns arise today due to the fact that benefits from usage are spread unevenly, and implementation costs are not being shared by competitors.
Although this study did not deal directly with electronic commerce over the Web, some speculation is not out of line. The authors believe that the strategic relationships that have evolved through EDI linkages may set a pattern for Web-based commerce that is now emerging. In both cases, organizations are accomplishing business-to-business linkages with technology, they dramatically are affecting the way information transfers take place with trading partners, and they are changing internal business processes as they exchange data with these trading partners. Finally, the authors suspect the strategic aspects of Web-based transactions will pass rapidly the tactical and technical issues, such as bandwidth needs and Web page content, as the most critical issues in electronic commerce.
Notes
(n1.) Helper, S., How much has really changed between U.S. automakers and their suppliers? Sloan Management Review, 31, 7, 1990.
(n2.) Bohl, D., Ed., EDI at Work, American Management Association, New York, 1989.
DIAGRAM: EXHIBIT 1; An EDI Supply Chain
DIAGRAM: EXHIBIT 2; Competitive Issues Across a Supply Chain
Legend for Chart:
A - Job Title
B - Description of the Firm
C - Annual Revenue
A B
C
Vice President Healthcare, insurance
$5.8 Billion
Senior Vice President Manufacturer, electronics
$5.8 Billion
Senior Vice President Manufacturer, forest products
$13 Billion
Vice President, IS Manufacturer, office products
$1.2B division of $3.8B firm
Project Officer Gas and oil utility
$490 Million division
Project Manager Retailer
$3.5 Billion
Recommended Reading
1. Benjamin, R., de Long, D., and Scott Morton, M., Electronic data interchange: How much competitive advantage?" Long Range Planning, 23, 29, 1990.
2. Cecil, J. and Goldstein, M., Sustaining competitive advantage from IT, The McKinsey Quarterly, 4, 74, 1990.
3. Clemons, E., Corporate strategies for information technology: A resource-based approach, Computer, November, 23, 1991.
4. Kalakota, R., Whinston, A., Frontiers of Electronic Commerce, Addison-Wesley; Reading, MA, 1996.
5. O'Leary, M., Store-crossed lovers, CIO, 5, 40, 1991.
6. Waterhouse, P., Technology forecast: 1997, Price Waterhouse World Technology Centre, Menlo Park, California, 1997.
7. Radosavich, L., The once and future EDI, CIO, January 1, 1997.
8. Stalk, G., Evans, P, and Shulman, L., Competing on capabilities: The new rules of corporate strategy, Harvard Business Review, 70, 1992.
~~~~~~~~
By Dale Young; Houston H. Carr and R. Kelly Rainer, Jr.
DALE YOUNG is an associate professor in the Department of Decision Sciences and Management Information Systems at Miami University, Oxford, OH
HOUSTON H. CARR is a professor of management at Auburn University, Alabama
R. KELLY RAINER, JR. is a privett professor of management at Auburn University, Alabama.
Copyright of Information Systems Management is the property of Auerbach Publications Inc. and its content may not be copied without the copyright holder's express written permission except for the print or download capabilities of the retrieval software used for access. This content is intended solely for the use of the individual user.
Source: Information Systems Management, Winter99, Vol. 16 Issue 1, p32, 8p, 2 diagrams.
Item Number: 1394169