Across an entire range of industries, companies are adoptingbudgets, but now, it seems that the little guys are in with a fighting chance. But the question is, are they willing to adopt such a new technology? electronic data interchange (EDI) to cut costs. Traditionally, EDI was the preserve of large companies which could afford the IT setup and private virtual area network (Van) charges to run it on. But now Web-based EDI is enabling smaller companies to participate.
The benefits of EDI for inter-company trading are well established. It can be used to automate several time-consuming and labour-intensive processes, such as issuing purchase orders and invoices and reconciling purchase orders sent with invoices received.
Organisations use it to reduce cycle times, centralise procurement and collapse supply chains to make the business more efficient.
By centralising its procurement, Avon Cosmetics estimates it can save $400 million a year from an annual spend of $2.3 billion. This is an extreme case - Avon is a $5 billion-a-year manufacturing company with factories in 22 countries and over 26,000 suppliers, most of which operate on local purchasing contracts. But it gives an idea of how operating efficiencies accumulate.
But conventional EDI is expensive for small companies. It is associated with mainframe or mid-range proprietary or Unix hardware and the costs associated with that.
'There have been lots of benefits for large companies, but the benefits for SMEs have yet to appear,' says Gene Frantz, global marketing manager for EDI for small businesses at GE Information Services (GEIS), a leading provider of EDI software and services. 'But in the future, the ability to respond to customers will be dependent on SMEs openness to adopting technologies which were once the preserve of big companies.'
Consequently, businesses rarely manage to reach more than 40 per cent of their business partners through EDI. Thus, there are over two million businesses in the UK, but only 17,000 EDI users.
Admittedly, EDI has moved downmarket - software which costs about #2,000 to set up and with an annual lease of about #1,800 can be run on a Pentium server. Even this can be off-putting to SMEs, which are normally left out of the electronic trading loop.
The increased globalisation of trade also means that organisations are often dealing with suppliers in countries where computer-to-computer communications are not reliable, for example, in some places in Eastern Europe, Asia and the Far East, Latin America and parts of Africa.
But given a PC and a modem, the internet reaches everywhere, so browser-based e-commerce, with links into conventional EDI networks, is rising in popularity.
'E-commerce is used broadly in manufacturing, but it is taking on a new meaning with the internet because this makes EDI cost-effective at the lower end of the supplier scale,' says Antoinette Gawin, vice president of manufacturing industries at GEIS. 'Instead of pushing costs from the big manufacturers down the supply chain, we have tools which can cut costs from their businesses.'
The trend towards globalisation means more smaller companies will be pushed into exporting their products. Export trade is notorious for its paper-intensive administrative processes, but there are moves to bring the benefits of e-commerce to bear here as well (see box, page30).
In the UK last month, Dixons Stores Group (DSG) began an effort to convert all its suppliers to electronic trading. DSG is unusual in that 320 of its 374 merchandise suppliers are already on EDI.
'In the software market we might be dealing with a publisher because it has the best game at the time, but six months later we're doing no business with it at all, so it's hard to insist it adopts EDI,' says Pam Bingley, commercial systems controller for Dixons.
So Dixons has identified a subset of the 54 non-EDI suppliers that would be suitable for the Web-based EDI system, TradeWeb. If the project is successful, Bingley expects TradeWeb to be used for Dixons' 7,000 non-merchandise suppliers, that provide everything from toilet paper to temporary staff.
The system is not ideal, says Bingley, because it does not integrate with backoffice systems yet in the way that fully fledged EDI does, but it is an improvement over no automation at all.
UK grocery leader Tesco is also encouraging suppliers to adopt EDI. The supermarket trades with 2,000 EDI-enabled suppliers, but also has more than 600 small and medium-sized companies, for whom IT - let alone EDI - is a rarity.
In May 1997, Tesco began trials to link its EDI network to a Web-based e-commerce system, enabling smaller suppliers outside of the EDI network to exchange orders, invoices and other documents with Tesco on the same footing as large suppliers.
It will be a while before internet-based e-commerce catches up with Van-based EDI in terms of value: market researchers at Input estimate that by 2000, the market for e-commerce products and services will be worth $11.5 billion, but even so, half of it will still be on conventional Vans.
Frantz says TradeWeb combines the best of EDI and the Web. It provides an EDI mailbox, similar to an email box, with which EDI documents are exchanged between partners. It also takes the complexity out of establishing new EDI accounts by handling all the mapping and translation issues. A forms library provides common invoice and purchase order formats and enables companies to digitise their own forms and make them available for authorised users - both within their company and among their trading partners. TradeWeb also provides a directory of companies using the service.
'You can learn about it on our Website, sign up on our Website and download software to become fully EDI-enabled,' says Frantz. 'You can be transmitting 20 minutes later.'
EDI users and service providers have been guilty of bullying small companies into EDI use in the past by threatening them with exclusion from the trading community if they don't sign up, says GEIS CEO Harvey Seegers.
For smaller suppliers Web-based EDI is more carrot than stick. A subscription to a Web-based electronic trading network like TradeWeb - which is used by Dixons and Tesco in the UK - can cost as little as $65 a month for a supplier, claims Gawin. Subscription for customers' buyers is free.
Obviously, both parties have to pay for client-side software, but this is still a far cry from the up-front costs for a traditional EDI setup plus, the monthly charge for running it over a private Van.
Frantz says the cost in the first year for a small supplier is typically less than $1,000, including internet service provider (ISP) charges, assuming a traffic of 30 outgoing documents a month. Incoming documents are free.
So what stops companies from adopting Web-based EDI?
Mostly, it is worries over security, including concerns with non-repudiation, retransmission, transport protocol, and tracking and reporting, as well as genuine security issues to do with the interception of trading data by an unauthorised third party for the purposes of fraud.
RFC1767 provides the framework for sending EDI messages over the internet.
It stipulates Level 3 certification, a secure electronic document which establishes to a trading partner that you and your company exist. Level 3 certificates can be obtained from organisations like Verisign for about $1,000.
Under this system, EDI documents transported over the internet are encrypted, electronically signed, sent via SMTP like an email message, and de-encrypted.
A message disposition notification (MDN) - acknowledgement that the EDI file has been received - is then encrypted by the receiving party and sent to the sending party for de-encryption.
Both companies have unique encryption keys, so they know who the EDI file and the MDN have come from because only the authorised party can use the key.
But there are two problems with this system.
First, Level 3 certification is not available in browsers yet, and requires expensive software. And, there is no client software for MDN which has a different definition to internet email.
Second is the problem of tracking. What happens if, after sending an EDI file, an MDN isn't returned by the recipient? When do you make the decision to resend? And if you do resend, can the recipient trading partner recognise that he has received the same purchase order number twice?
The very system which was meant to eliminate time-consuming and costly human interaction could result in trading partners calling each other and asking: 'Did you receive my EDI file?'
But to convert low-end trading partners to e-commerce, the best current route is using HTTP.
Although it is non-IETF compliant and uni-directional, it offers simplicity and ubiquity in that any trading partner with a browser and internet access can use it.
It can provide a forms-based front-end for access to EDI facilities (as does Dixons' system) and security can be provided by secure socket layer (SSL1 or 2) or basic encryption such as Pretty Good Privacy.
This requires only one certificate - Level 1 or 2 - at the server end, and acknowledgement of receipt can be handled by a CGI script. The arrival of SSL3 will make security tighter.
Citing security as a reason for not embracing e-commerce is usually an excuse for something else: perhaps an irrational fear of adopting new business practices or a lack of openness with trading partners.
If a company is in the habit of keeping secrets from its customers, it is going to resist providing them with electronic access every step of the way.
One of the areas of trade which is labour and paper-intensive is export.
The basic documents have barely changed for the past 100 years. The cost and complexity of international trade is often prohibitive to smaller businesses.
But this process could be cut by half using a software credit instrument - TradeCard - which is backed by the World Trade Centers Association and major financial institutes.
TradeCard acts like a credit card for international trade, enabling importers and exporters to arrange lines of credit. By automating the paper-based processes between exporter, importer, financial institute and freight forwarder which have existed for centuries, TradeCard wraps up the separate processes of trade finance, pre-export finance, domestic and international inspection services and insurance in an online process that remains under the control of the two principle parties - importer and exporter.
Once the financial house has arranged the line of credit, it is no longer involved in the process until the goods are delivered triggering payment.
This will remove a great deal of lag from the export process, says Guy Tozzoli, president of the World Trade Centers Association, who designed the system principally to help SMEs with the burden of export paperwork.
'The buyer and seller deal directly with each other, not via a string of intermediaries,' says Tozzoli.
TradeCard will be operated by Full Service Trade System, a Bermuda-based company, and trading partners will connect to each other over GE Information Services' Van. NationsBank, Royal Bank of Canada, Bank of America and ABN Amro Bank in the Netherlands are the first financial institutes to offer credit to importers and exporters via TradeCard.
'We've had discussions with more than 30 banks,' says Tozzoli. 'None of them have said no, but a few of them want to wait and see.'
London-based insurer Sedgwick is developing marine cargo insurance instruments for TradeCard.
Savings will be realised by parties in the trading process, says Harvey Seegers, CEO of GEIS, because they will be connected in a complete information loop, rather than one-to-one relationships using enhanced EDI, which integrates domestic and international EDI.
The TradeCard service begins with the importer applying for a line of credit from a TradeCard funding institution. The importer and exporter create a purchase order pro forma invoice (Popfi) which is matched against the shipping requirements. Once the terms of the electronic trade have been met, payment is released through the normal channels.
'People have been waiting for the international bodies to set a standard for electronic export trade, but we've gone ahead and set our own - Popfi,' says Tozzoli.
TradeCard has been presented to G7 for review and is being considered by the EU as a means of combating habitual late payers.
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