How to implement safe EDI.

For a distributor to install a complete Electronic Data Interchange (EDI) system involves much more than learning the intricacies of new software and training people in new functions. It means completely changing the way the business operates by rethinking and re-engineering every step of the process.

Still interested? Probably not, according to many experts in the field. Plunging into new technology is scary enough, but the idea of reinventing the company frightens away even those with the best intentions. Yet it's a critical step, stress those who have seen EDI implemented with and without company change. This lack often explains why some companies that have begun implementing EDI won't be able to achieve the full range of benefits.

"EDI involves a completely new process, an entirely different way of looking at what you're trying to do," says Michelle Gamberutti, MIS director at PrimeSource. Consultant Bruce Merrifield agrees. "EDI is the cement to hold the bricks together, but it won't change things on its own," he says. "The big opportunities come in restructuring to remove channel costs, and EDI can facilitate that."

The major problem is that managers jump in and automate existing systems, which can only take a company so far. "The mindset is, 'Let's pave over the cow paths,'" Merrifield says. "EDI involves more than entering numbers electronically. You have to rethink how you let your products go out the door."

The key, says Jack Shaw, president of EDI Strategies, is to let the computer do what it does better than people: Process routine transactions quickly and accurately 24 hours a day. "By doing that, you free up your most valuable resource - your people - to do the things that people can do that computers will never be able to do: Use their judgment, creativity and experience to manage exceptions, solve problems and continuously improve the business process."

Shaw lays out the basics for using EDI in his book, EDI & Electronic Engineering: How To Use Paperless Technology To Improve Your Business Processes. A major point, one that concerns many distributors, is that transacting business electronically does not have to lay the firm open to hackers or force the use of security codes and other restraints to keep your trading "partners" from learning more than they need to know.

According to Shaw, using EDI involves three issues: standards, software and communication. Basically, the standards consist of the actual message being sent, the "dictionary" that translates the message so the receiving computer can read it, and the "envelope" that supplies the routing information and ensures the proper person receives the message.

The software essentially takes the information from the computer and translates it into the EDI standard, called ANSI X12. Messages are sent in this standard and are downloaded on the other end, where they are translated from ANSI X12 into whatever format the recipient uses. As a result, there's no need for the sender to know what format the recipient uses. "By having commonly agreed upon standards and by having software that can translate between those standard formats and your internal format, you can communicate with anyone in the world," Shaw says.

Most users take that a step further by using a third-party Value-Added Network (VAN). These act as electronic mail boxes: Messages to the firm wait there until the company collects them, which also happens on the other end. The two computers never actually link up directly, so security links between the two are not a worry. The two most commonly used VANs are Ordernet and Kleinschmidt.

At PrimeSource, the routine consists of "polling the VAN" four or five times per day to pick up orders, Gamberutti says. These are pulled into the home office, where they are separated by regional office and electronically transferred to the proper site for delivery the next day. Each night, all invoices are gathered together and broken down by customer and shipped out.

Sending out an invoice - a message designated as an 810 in EDI talk - is much tougher to handle than retrieving a purchase order - called an 850 - Gamberutti says. "It's a lot easier to receive than to give," she explains. "When we receive an order, we can match it to our system quickly, pick the item and ship it. To send an invoice, we have to exactly match all the detail - terms, prices, etc. - to ensure it fits the customer's format or it gets kicked out."

The number-one goal is to have the invoice match perfectly using the computer's quick-match process. "When it matches up, whatever we sent goes right through EDI and is paid immediately," she says. "If the translation is wrong somehow, it kicks it out and they have to process it manually, which can take 60 to 90 days. It's critical that we quick-match. So however they want it, that's how we'll give it to them."

Matching each customer's system provides the biggest drawback, she says. "The most important element is to define the requirements of what you want it to do and work with your customers to give them what they want."

Most retailers aren't shy about making their needs known. "Our EDI customers know exactly what they want, which helps us focus our own goals," she says. "Most distributors will have to go with what their customers need as their priority." That may not provide the smoothest introduction or create the best system for the distributor, which causes the most problems with introducing EDI.

Currently, many distributors are using EDI as a glorified fax machine. The orders are electronically sent, pulled down by the computer, printed out, and re-keyed on another system. This low-level EDI improves speed, but it provides no strategic advantage, Shaw says.

Merrifield suggests that any distributors using EDI this way should ensure that each item has a product code number by which the item can be pulled. "It speeds up order picking, reduces errors and frees up people to improve the business, all of which create profit for the distributor," he points out.

The main point is that distributors are beginning to rethink how business is done. "That's how you re-engineer channel costs," says Merrifield.

The potential is even greater, Shaw stresses. "Every part of your organization that communicates structured information with outside trading partners on a routine basis is a candidate for the use of EDI as a tool for business-process engineering," he says. "Much of the information used on a day-to-day basis that is currently on paper or is exchanged verbally can be replaced by electronic transmissions."

In fact, the next major hurdle for those distributors on the cutting edge will be incorporating Vendor-Managed Inventory (VMI) processes, in which the manufacturer can monitor the distributor's inventory on a daily basis and replenish it as needed. This takes a major leap of faith that the vendor won't overburden accounts with inventory, but that chasm is shrinking.

The key is to decide what needs to be accomplished, then figure out how that can be done, Gamberutti stresses. "There are so many things that can bite you on the butt with EDI that you really have to focus your goals," she says.

Shaw agrees, and he warns distributors that the clock is ticking. "You really don't have any choice as to whether you're going to respond to the changes in your external environment," he says. "If you want to say in business, you're going to have to respond. The options are not whether to respond, but how to respond."

SIX STEPS TO EDI

The initial objectives of an EDI program should be to develop a corporate strategy for re-engineering existing business processes. There are six steps, according to Jack Shaw, president of EDI strategies.

1. Organize properly.

2. Educate your staff from top to bottom on how to use the new equipment, letting them think about how it can help them manage their responsibilities.

3. Rank your business process opportunities by potential for re-engineering. Realistically, a company can only re-engineer one business process at a time. You have to decide which one that will be.

4. Analyze in detail the processes you want to automate step by step.

5. Implement a testing program to see if the system you've created actually works with a couple of trading partners.

6. Market to all your customers to increase the volume on the system that creates efficiencies to offset the time and cost involved in setting tip up.

The costs that must be considered include educating the staff and spending time designing the new business process; spending time coordinating with trading partners; and changing the infrastructure.

"VAN services and EDI software are not the issue here," Shaw says. "They are a drop in the bucket. The big costs are in building the overall corporate-wide network that you must have to compete in the 1990s, and building intelligent automated systems that can functionally integrate across that network."

FOR MORE INFORMATION

Here are several sources to help you learn more about the key functions of EDI:

Kleinschmidt Inc., 450 Lake Cook Rd., Deerfield, IL 60015; 708/946-1000 (a Value-Added Network).

Ordernet, from Sterling Software, 4600 Lakehurst Ct., Dublin, OH 43017; 614/793-7000 (a Value-Added Network)

EDI & Electronic Re-Engineering: How To Use Paperless Technology To Improve Your Business Processes, Jack Shaw, EDI Strategies, 1685 Barn Swallow Place, Marietta, GA 30062; 404/578-4980.

A one-day introductory course to the fundamentals of EDI is offered by the EDI Coalition of Associations. The program is held once a month in a different city and is taught by Jack Shaw. For a more complete list, contact Robert G. Clifton at: EDICA, 1149 Lafayette Rd., Wayne, PA 19087; 610/688-2748.