Principal, Xamax Consultancy Pty Ltd, Canberra
Visiting Fellow, Department of Computer Science, Australian National University
Version of April 1992
© Xamax Consultancy Pty Ltd, 1992
This paper was published in the Newsletter of the Business Council of Australia, April 1992
This document is at http://www.anu.edu.au/people/Roger.Clarke/EC/BCA.html
'Data' hardly seems like a burning issue for senior executives - it conjures up images of book-keeping and administration. On the other hand, leading companies have discovered that the talk about an 'information age' and an 'information economy' has some substance - the data which supports decision-making has become strategically important to corporations, and even to nations.
Adopting a strategic approach to data requires that the organisation's focus be lifted beyond internal data, to encompass critical data flows between the corporation and its business partners. In support of the strategic dimension of data-handling, a technological revolution has been occurring. Telefax has enabled images of documents to be transmitted between remote locations. Electronic mail ('email') has made it easy for unstructured, text messages to be received in machine-readable form, and their contents re-used without being re-keyed. For structured data, such as purchase orders and remittance advices, Electronic Data Interchange (EDI) is appropriate. For transmitting complex graphical data, more sophisticated tools are becoming available, such as Computer-Aided Logistics (CALS).
In order to exploit IT in support of their strategic plans, corporations must not just harness individual technologies; they must integrate them. For example, many enterprises conduct their procurement in ways similar to that depicted in the accompanying Exhibit.
Pre-purchasing activities can be supported by electronic versions of white and yellow pages and supplier directories, and on-line price-lists and standing offers or period contracts. Purchasing and logistics can be made more effective and efficient by providing EDI links for messages which have known, pre-defined formats and content, supplemented by email links between partners, to cope with the inevitable but unpredictable exceptions. The post-purchasing area can be addressed through so-called EDI/EFT, whereby expensive cheque-writing and despatch processes are replaced by instructions delivered electronically to the corporation's banker. The challenge confronting IT Managers is to deliver each of these capabilities cost-effectively, within a common, integrating infrastructure.
The purpose of this paper is to tease out the implications of the revolution that has been occurring in data transmission. Rather than attempting to deal with all of the technologies at once, it concentrates on one particular, and particularly important, component, Electronic Data Interchange (EDI). EDI involves the transmission in electronic form of structured documents, such as purchase orders, advance notices of delivery, and remittance advices. These messages are transmitted in an orderly fashion and arrive within hours or even minutes, in machine-readable form. They are much more timely, reliable and convenient than their paper-based predecessors. An overview of EDI is provided in a companion piece to this paper.
EDI has been in use in many countries, and particularly the United States and the United Kingdom, for two decades. The early schemes were based on agreements between small numbers of participating corporations. Although much was achieved, the trail-blazers also learnt a lot about how they could have done it better.
A more mature phase of EDI usage is now in full swing, taking advantage of the messages learnt by the pioneers. A more open architecture is being used, such that the original investment does not merely enable communications with the first few key partners, but establishes an infrastructure through which communications with all of the organisation's partners can be managed.
The early EDI systems used document standards which were specific to particular industry sectors, particular countries, or even particular pairs of companies. The new systems are open in this sense also, using international standards, and hence enabling the company to deal with any of its partners which comply into these standards, not only within Australia but anywhere in the technologically capable world.
In Australia, considerable progress has been achieved in several areas. One is the automotive industry, whose data flows relating to component logistics are now undertaken largely by electronic means. BHP Steel Division has made great progress. Other important users include Coles-Myer, Woolworths and the hardware wholesale and retail sectors, which have various schemes at various stages of implementation.
Even in government, great strides have been taken. In several States it has been judged that the maximum advantage can be gained by commencing at the beginning of the purchasing cycle, by automating data flows concerning central stores holdings, supplier details and standing contracts. In the Federal sphere, the Australian Customs Service's EXIT system has encouraged, and bullied, into EDI the majority of the myriad companies involved in international trade. The Australian Taxation Office's Electronic Lodgement Scheme has attracted thousands of tax agents into EDI, and the majority of personal taxation returns are now submitted either electronically or on EDI-compatible magnetic media.
Technological excitement is not the reason why hard-nosed corporations are embracing EDI. Project proposals are being adopted because the business case has been demonstrated. In some instances, benefits can be gained quite directly. The simplest approach is of course to seek cost-savings by automating existing procedures. As always, investment is necessary in order to achieve lower variable costs, and careful planning and control is essential to ensure that the potential savings are realised. Cost-savings may arise in relation to the preparation, postage and handling of mainstream transactions, or in secondary but expensive areas such as the preparation and despatch of applications for approval by a regulatory authority, or statistical returns.
Beyond the per-transaction cost-savings, significant benefits can arise from reduced exception-handling. In many companies, careful analysis will reveal that a large amount of the time of operational staff is attributable to errors in original data capture, and in the detection, investigation, adjustment and re-work of erroneous transactions. With EDI, data need be captured once-only, and then be used along the whole chain of activity. By imposing appropriate integrity controls at the point of original data entry, large amounts of staff time and cost can be saved.
To these 'bean-counting' approaches to justifying EDI must be added the potentially positive impact on customer service factors, particularly the incidence of errors and the timeliness of communications and deliveries. Hence even simple automation-by-EDI can contribute to a company's competitive advantage, either by sustaining its existing cost-leadership, or by improving its client-service profile.
Much greater advantages are available to the organisation which utilises EDI as an opportunity to rationalise it operations, and enhance its performance against its critical success factors. To some extent this can be done internally, but in most cases it involves relationships with business partners. Improvements in the efficiency of the industry value-chain are, after all, the real micro-economic reform - reform which can be produced by the actions of corporations rather than the rhetoric of governments.
Mature EDI-using organisations are now beginning to seek the greater gains which rationalisation can offer. For example, business partners who are confident in one another's data processing competence can do away with invoices, and pay on the basis of a receipt of goods matched against a purchase order. In many sectors, EDI is likely to contribute to re-allocation of functions between business partners, and in some cases to 'disintermediation' - the demise of middle-men.
On the basis of experiences overseas and analyses undertaken within Australia, it appears that individual corporations can in some circumstances achieve some degree of short-term competitive advantage from EDI. Pre-conditions are, however, that the ground be well-prepared, and that the application of EDI build upon the corporation's existing strengths. Because of the openness of modern EDI systems, it appears unlikely that many applications will confer on their sponsors an advantage which is sustainable for long periods in the face of counter-attacks by competitors. Gains made during the period of service advantage, in particular market share or progressive image, may, however, be sustainable in the long-term.
Alliances appear to have a better chance of gaining and retaining competitive advantage from early application of EDI, particularly in the case of vertically integrated value-chains. It appears from overseas experiences that the gains will be most marked where the ultimate product must be highly adaptive to changes in customer demand, and/or where products are offered with a significant range of options.
It is comforting to the pioneer to know that some protection against second-mover advantage exists, in that the technology is now sufficiently mature that latecomers are unlikely to be able to overtake the first-mover on the basis of superior features or lower cost profiles alone.
No corporation should embark upon EDI without a preparatory phase. Simple automation is the easiest approach to take, but it offers the least payback, and risks achieving micro-efficiencies while locking the company into its existing structure and processes. The real benefits to corporate efficiency can only be achieved if EDI is grasped as an opportunity for rationalisation, and for rationalisation which extends beyond the boundaries of the organisation and involves its key business partners.
The single most critical factor in unlocking this potential is the commitment of senior executives, both in the sense of spoken and written communications by the CEO, and co-operation among the relevant members of the executive team. Only if it is driven from the top is it possible for organisational inertia to be overcome, and for awareness, understanding and evaluation to lay the groundwork for investment, training, implementation and exploitation of applications of electronic data flows which will meet the demands of international competitiveness.
Considerable know-how and infrastructure exist in Australia today. Provided that the corporation shapes EDI to its needs rather than merely accepting a preferred supplier's offering, then full use should be made of the available know-how and infrastructure. A specialist industry association, the EDI Council of Australia (EDICA), operates as a clearing-house for information about standards and suppliers, and as a meeting-point for corporations with common interests.
Beyond general consulting, quite specific capabilities are available, including industry-specific, standards-specific and product-specific knowledge. A number of EDI network services providers have the capability to provide linkages between a corporation and its business partners. The challenges of corporations with multiple business units, and enterprises which are geographically dispersed, and whose internal data processing systems face years of backlogs for even straightforward changes, can be addressed through establishing a gateway, or common interface, as a transitional arrangement to overcome incompatibilities between its systems and external networks.
The various forms of electronic data flows, and especially EDI, are ripe to be used as strategic weapons by all Australian corporations. The motivation of individual corporations to maintain and enhance their international competitiveness is important, but the significance for Australia as a whole must not be lost. The critical impact of early and imaginative application of EDI was recently highlighted by the Minister for Overseas Trade, John Kerin, in a speech on 10 March 1992.
Apart from the direct contributions which their use of EDI will make to Australia's trade performance, BCA members can also assist the country's future by encouraging federal government agencies to develop and coordinate the scatter of policies which affect EDI, and thereby foster its use, and overcome existing barriers.
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Last Amended: 6 October 1996
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