Many manufacturers use ERP systems to manage production and communicate internally with other departments, but to provide more efficient service externally -- to customers, distributors, contract manufacturers, material suppliers and transportation providers -- factories look to business-to-business (B2B) electronic commerce (e-commerce).
B2B e-commerce allows more productivity and efficiency gains in processes that might include transportation and inventory costs. Exchanging information between suppliers and customers can increase visibility, help make decisions faster, and lower productivity costs. In addition, quicker data exchange of payments, services and warranties can improve efficiency.
E-commerce has been around for 30 years and is the result of industries recognizing a need to share information with their business partners, as well as a need for a standardized system with which to exchange data regarding invoices, purchase orders, scheduling, etc.
“Standards are needed because everyone runs different systems internally with different structures for data and documents such as invoice forms and purchase orders. To define common ways to share information, industries will often work together to come up with a common technical structure, called standards, for these documents,” says Steve Keifer, VP of Industry and Product Marketing for GXS, an EDI services and solutions company.
Two standards have emerged for exchanging information. The first, electronic data interchange, or EDI, is the dominant standard manufacturers have been using to exchange formal documents between businesses and other organizations.
But when the standards were first put in place 30 years ago, only larger companies could afford EDI as it was relatively expensive to share information with other companies. Manufacturers would spend thousands of dollars a month to buy a circuit from a telecom company that would network them to their partners. As a result, small and mid-size companies couldn’t embrace it because of the cost and complexities.
With the emergence of the internet, EDI became cheaper and more affordable for smaller companies to adapt. Manufacturers could now send their EDI documents via email over the internet for only $20 to $30 a month.
As a general, standardized document, one drawback of EDI is its inability to be customized. For instance, if a company needs to provide more detailed shipping information in order for imports and exports to quickly pass customs checkpoints, EDI falls short.
But with the internet came new standards, business practices and technology that could address EDI’s shortfalls.
The Long Tail
The Long Tail, a concept and book written by Chris Anderson, describes this practice as a niche strategy of businesses, such as Amazon.com or Netflix, that sell a large number of unique items in relatively small quantities.
“Ten years ago, if you went to a book store or a music store in the mall, they would only stock the most popular titles because that was the only way they could profitably run a business. Now, with the internet, you can buy find both popular and less mainstream entertainment,” says Keifer.
Just as the internet changed consumer buying habits, it has changed manufacturers’ business-to-business practices, particularly EDI.
“This is where The Long Tail effect comes into play,” says Keifer. “EDI was a great standard in the 80s and 90s and everyone used it, but it wasn’t specific enough for business practices in industries that required more customized data.”
To address the long tail issue of niche businesses that needed a specific set of document standards, XML, or Extensible Markup Language became the alternative to EDI. It allows users to share customizable data via the Internet. Users can now define their own elements and customize their documents to meet their industry’s specific needs.
Instead of only two or three standards, XML allows hundreds of standards to be created specifically for an industry’s needs.
“For example, the electronics industry uses a standard called RosettaNet, in aerospace it is spec2000, in the consumer products industry GUSI is used. Even the chemical, paper and gas industries all have their own standards now using XML. So what has been created is a long tail effect, with all these different standards for niche industries,” Keifer notes.
But for all its benefits, XML does have its drawbacks. It is still a relatively new technology, having been around for only the past ten years or so. EDI, on the other hand, has been around long enough to have developed maturity and a following that has helped it survive changes in technology.
“In fact, EDI has grown more in the past 10 years than the first 20 years of its existence. Even though the internet has been around and XML has come along, EDI found ways to evolve,” says Keifer.
Keifer says EDI continues to thrive through Web sites where you can create an EDI document and turn it into a web page. This made it really cheap for small businesses who only want to pay $10 or $20 a month.
“Also, EDI is established -- people know it’s mature and it works. People spent a lot of money in the 80’s and 90’s to install EDI and they don’t want to change technology just for the sake of changing technology,” Keifer points out.
In addition, because so many industries still use EDI, if a company outside of these industries were to exchange data with someone using the XML standard, it can be difficult because the two standards are completely different.
To combat this issue, there are software vendors that provide a service that lets companies exchange electronic documents regardless of whether they use XML or EDI.
“For someone using XML that needs to get a document to a business partner who only uses EDI, we can convert it on our network and shield the differences between the two long tail standards,” says Keifer.
When to convert from EDI to XML
Bigger companies such as Intel, GM, are Walmart are recognizing the benefits and cost-effectiveness of XML and are proactive in their technology investments, but for smaller companies with smaller budgets, XML may need to wait.
“The best time to incorporate XML into your company is when a major change event occurs, such as a new technology project or system is put in place, the company expands its product line or expands globally,” advises Keifer. “In those cases, XML’s payback is immediate.”
“XML’s popularity could still be 20 to 30 years away before it reaches 50 percent of the market, but it will definitely happen as more businesses update their technology and recognize the value and benefits of XML. Companies that use XML will have a competitive advantage over the companies still using EDI because of the industry-specific framework that allows them to be much more productive and cost-effective,” says Kiefer.
There are benefits to the automation both electronic standards provide overall and if your industry currently is not using XML or EDI, talk to your customers or suppliers to discuss how you can be more efficient and more competitive in the market.