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Doing business the paperless way.

GLENN H. FORD, PRESIDENT OF ASHCURT Scientific, a laboratory supply company, didn't need much prodding to adopt electronic data interchange (EDI) when he launched the company two years ago. As the computer-to-computer transfer of business transactions between companies, EDI would help Ford's Plymouth, Minnesota-based company expand its regional reach and increase the number of contracts on which it could bid. Long the province of big corporations, EDI is now helping many small and medium-size businesses, like Ford's company, increases their competitiveness.

In fact, one of Ford's prospective clients, Abbott Laboratories, required that its suppliers adopt EDI to facilitate business. Despite having to spend roughly $4,000 in start-up costs, Ford committed to EDI as part of his company's overall launch plans. "EDI costs were high, but it was a necessary investment. A major client had insisted on it." Today, Ford processes about 22% of his purchase orders using EDI.

EDI is changing the way businesses interact. For years, large corporations benefited from the greater efficiency and reduced costs of the technology. Now, many require that their suppliers, like Ashcurt Scientific, be EDI capable. Following the example of corporate America, the federal government, led by the Department of Defense, is embracing this form of data transfer, which is expected to reduce the administrative costs of the federal procurement process, encourage greater competition among suppliers and lower prices. EDI also benefits small businesses by lowering processing costs and enabling them to compete for contracts beyond their regional bases.

The combined push by private industry and the federal government is bringing small and medium-size businesses into the EDI arena. The Federal Acquisition Streamlining Act of 1994 mandates that the government go entirely electronic in its procurement process by the year 2000. The Department of Defense has already established a detailed schedule for automating trading with vendors. Under the Streamlining Act, government buyers can use point-to-point electronic trading with purchases up to $100,000; previously, the Simplified Acquisition Threshold was $25,000. At the same time, all purchases between $2,500 and $100,000 are now exclusively set aside for small businesses; this expansion in the federal market should, in turn, greatly accelerate the use of EDIs in the procurement system.

Meanwhile, Jan Zimmerman, author of Doing Business With the Government Using EDI (Van Nostrand Reinhold; $29.95), estimates an increase of nearly $10 billion in the federal government's small business allotment. This represents an enormous opportunity for companies seeking government business. But the impending EDI requirement raises the costs and barriers to doing business: More competition will mean lower profits and some companies may lose local business to distant competitors. For some companies, it'll be wise to implement EDI now, while others will be better off waiting until it reaches critical mass.

WHAT lS EDI?

EDI allows companies to transact business without the hassle and time associated with data entry and mailings, the traditional method of handling paper documents. Electronic interaction replaces paper in most business-to-business transactions. Requests for, and responses to, proposals, invoices and acknowledgments are conducted via computer. This produces lower transaction costs and quicker response time both for the customer and the supplier. It also eliminates much of the inefficiencies and possibilities for error that are traditionally a part of the manual entry and dispatch of business information.

Of course, if your current or prospective private-sector customers aren't requiring EDI, and you have no plans of doing business with the government above the $2,500 threshold, then this technology is not an immediate concern. If you have plans to sell to the government, make sure that they are purchasing your particular product or products via EDI. Most of the cu purchases via EDI are as medical and office and office furniture.

"The most important thing when considering EDI is to find out if your customer base requires it," says Paris Inman, who launched Capital Paper Express, a Washington D.C.-based reseller of paper and laser printers, along with partners Derrick Hicks and Darryl Wiggins. In its start-up phase, Capital Paper Express generated nearly $50,000 using EDI to bid on Xerox paper requests by the U.S. Army and Navy, and Inman expects that figure to increase. While the federal government is clearly moving toward EDI, Inman notes that not all agencies are compliant.

"The majority of government agencies are not yet using EDI," agrees Sunil Bajaj, director of network services at the Fairfax Electronic Commerce Resource Center in Virginia. He believes company owners should decide about using EDI with federal contracts only after finding out if the government purchases their goods in a significant volume. "Companies also have to make sure they have the capability to deliver goods to distant sites and remain cost-competitive in the process," he adds. The Electronic Commerce Information Center (800-334-3414; or Web site: www.acq.osd.mil/ec) offers business owners information on which agencies and products have high EDI transaction rates.

Zimmerman recommends that business owners conducting business with the government take the following factors into consideration when deciding whether to implement EDI now or later:

* Is your business trading or intends to trade with the government?

* Are your annual government sales greater than 10% of gross revenues, or does your company earn more than $3,000 in profits from those sales?

* Do you sell goods or services that average in the $2,500 to $100,000 range?

* Do you sell commodities or other goods that the government is currently trading electronically?

If you answer yes to all of these questions, it's a good bet that you should consider implementing an EDI strategy. Otherwise, take the time to learn the costs, benefits and procedures involved with EDI. If your company does business with the federal government or major corporations, it will probably affect you sooner or later.

GETTING STARTED

The first step in the EDI process is to register as a certified government trading partner with the Federal Acquisition Computer Network (FACNET). This will enable you to conduct business with the federal government using EDI. Before registering as a trading partner, businesses must acquire a data universal numbering system number from Dun & Bradstreet (800-333-0505), a taxpayer or employer identification number and a commercial and government entity code that can be obtained from the Small Business Administration. This information is required on the trading partner profile, which must be completed to register with FACNET.

A trading partner profile is not necessary when conducting EDI with private-sector companies. It's more important when choosing a value added network (VAN), a special online service that conducts business traffic between FACNET or a private corporation s network and the trading companies subscribing to the VAN. It'll act as the inbox and the postman for all your EDI correspondence.

Many VANs sort proposal requests by category, sending your company only the ones in the class that you have specified. However, before selecting a VAN, business owners will need to invest in a 486-based (or equivalent) computer equipped with a modem and communications software. Expect to pay between $1,200 and $2,000 for this kind of machine, if you don't already have one.

Choosing a VAN is a crucial step in the EDI process. Not only will it be costly, but the services it provides may help or hinder your entry into the world of EDI. Make sure to match VAN offerings with your company's needs. However, choosing a VAN simply for conducting business with the federal government is easier than choosing one for business with various private corporations. VANs have various pricing practices; some charge per transaction, others offer a flat rate. VAN charges for doing business with the government average from $50 to $80 per month. Ford, whose $2.5 million company uses EDI for thousands of dollars in purchase orders monthly, feels the $50 his company spends monthly on EDI service is "a mere pittance" compared to what it would cost to handle the orders over the phone, or on paper.

When dealing with the government, "Business owners should select a [Department of Defense] certified VAN that has an easy setup process, including all of the necessary services and software," suggests Inman of Capital Paper Express. It costs nearly $800 in setup fees for Inman's business to add the EDI translation software to its existing computers and connect to a VAN. Translation software, needed to read EDI format, was included with his VAN service. Bajaj contends that current VAN setup and software fees for EDI with the government usually are between $100 and $200, and recommends taking advantage of VANs that offer free EDI service on a trial basis (for more, see "Resources For EDI," Techwatch, this issue).

For companies planning to do business with private corporations, the procedure is more involved and expensive. Translation software, a key component in conducting EDI transactions, ranges from $500 to $3,000. There's no standard for EDI transaction implementation guidelines, so companies must make sure that the software they purchase is compatible with the equipment used by the companies they plan to do business with. "But there are numerous hidden costs," warns Lee Phillips, president of DBP Inc., a Minneapolis-based electronics distribution and computer training company. For starters, companies have to factor in the cost of training one or more employees to use this technology.

"Each time a company adds a corporation to its EDI client list," Phillips explains, '`it must purchase separate mapping software from the corporation enabling them to trade information in a standard manner." Mapping software generally has a one-time fee of $1,000 to $3,000.

Though he does not dispute the benefits of EDI, Phillips believes these costs form a barrier to small businesses. The reduction in administrative work resulting from EDI has allowed him to cut his administrative staff from six employees to two. Phillips, who uses EDI to conduct business with both private- and public-sector clients, estimates that 75% of his business is conducted through this computerized transaction system. In order to expand the base of minority- and women-owned businesses using EDI, Phillips has spearheaded the creation of MBENet (www.mbenet.com), a service that lets small and medium-sized businesses receive requests for quotes and purchase orders via the Internet. "There is no significant cost factor for using the EDI via the Internet," says Phillips, who believes that the Internet and Intranets will soon be the premier means for companies conducting EDI transactions.

WINNING THE CONTRACT

Once a business has subscribed to VAN, it can begin receiving and bidding on proposals. Inman cautions small business owners not to assume that the orders will start pouring in just because they have EDI. "It's just another tool to supplement your own efforts, but it doesn't replace the face-to-face interaction that develops business relationships."

Ford, of Ashcurt Scientific, also believes it's important for small businesses using EDI to maintain personal contact with their clients. This way, they establish credibility with their clients and make sure that they aren't missing out on non-EDI opportunities. This also holds true when dealing with the government. Some government agencies are using both EDI and traditional procurement methods, so a traditional marketing approach can't hurt.

Bajaj, of the ECRC in Fairfax, Virginia, reminds small business owners not to forget that the government requires that procurement contracts be awarded on the basis of the best value rather than solely on the lowest price. Face-to-face meetings will go a long way to instill confidence in potential clients, and possibly add an edge in winning more business for your company.

EDI ISSUES

For small businesses with the desire and necessity, the benefits of EDI are many. It'll lower marketing and administrative costs, allow faster payments and provide access to more contract opportunities. But it's not without its drawbacks.

Requests for proposals posted via FACNET will have an average posting time of 10 days or less, writes Zimmerman. A far cry from the 15-to-30-day cycle of requests in Commerce Business Daily, the publication where government suppliers can find federal procurement needs. However, the shorter response cycle will mean that a business owner will have less time to prepare bids, and will have to frequently check their VAN e-mail. While increased competition will let the federal government and corporations obtain goods at lower prices, it'll also mean lower profit margins for small businesses. More competition may also result in the loss of some long-term clients to other small businesses outside of your region.

"The key to implementing a successful EDI implementation strategy is to determine when your clients will be using EDI and whether it helps you increase profits, cut costs or do more business with less staff," stresses Inman. Unless your business has received notice that its major clients or government agencies will soon be converting to EDI, you can weigh the option. "The time now is for business owners to familiarize themselves with the technology and the process of EDI," he says. "So when it's time to move to EDI you'll be ready to meet your clients' needs."
COPYRIGHT 1996 Earl G. Graves Publishing Co., Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1996, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Title Annotation:B.E. Special Report on Small Business; electronic data exchange
Author:Roach, Ronald
Publication:Black Enterprise
Article Type:Cover Story
Date:Nov 1, 1996
Words:2166
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