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The Evolution of EDI for Competitive Advantage: The Fedex Case

Margaret L. Williams; Mark N. Frolick

To cite this Article Williams, Margaret L. and Frolick, Mark N.(2001) 'The Evolution of EDI for Competitive Advantage:
The Fedex Case', Information Systems Management, 18: 2, 1 — 7
To link to this Article: DOI: 10.1201/1078/43195.18.2.20010301/31277.8
URL: http://dx.doi.org/10.1201/1078/43195.18.2.20010301/31277.8

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 EVOLUTION OF EDI

THE EVOLUTION OF
EDI FOR
COMPETITIVE
ADVANTAGE: THE
FEDEX CASE

Margaret L. Williams and Mark N. Frolick

"The ideal company makes no product it has not already sold, and buys nothing it
does not need right away. Its suppliers behave the same way. The total supply chain
Downloaded By: [Monash University] At: 08:12 20 September 2010

— customer, manufacturer, supplier — performs as an integrated unit, operating with

the barest of inventory, incurring the least possible cost, communicating seamlessly
in real time and, of course, making flawless products."1 While not quite reality, the
arrival of Electronic Data Interchange (EDI) made this goal more achievable. This is
especially true for FedEx.

T HE PURPOSE OF THIS ARTICLE IS TO

provide an understanding of Electronic
Data Interchange (EDI), detail its advan-
tages and disadvantages, and show how
FedEx uses EDI to develop innovative solu-
tions to resolve its complex business issues.
INTRODUCTION
EDI was the first method of E-commerce.
Traditional EDI works in a method similar to
MARGARET L. using a telephone (before three-way calling).
WILLIAMS works for
The computer systems are set up so that com-
Federal Express.
MARK N. FROLICK, munication can occur only between two trad-
Ph.D., is an associate ing partners. EDI requires programming on
professor of MIS at the the part of both trading partners to develop
University of Memphis, communication standards. In order to trans-
Tennessee, and a pro-
mit data between the two companies, each is
ject manager with the
FedEx Center for Cycle required to utilize a value-added network
Time Research. (VAN), which charges a fee for each bit of
information that is sent over their networks.
As a company adds other trading partners,
programmers must develop additional trans-
mission specifications based on the require-
ments of the new companies. This makes the
prospect of using traditional EDI cost prohib-
itive for all except the largest, most profitable
companies.
As technology has evolved, many of the
problems originally associated with EDI have
been mitigated. Instead of EDI being "hard
coded" between companies and individual
members of their supply chain, the new EDI
is more accessible. Internet lines are used
instead of expensive value-added networks.
Software packages are now designed with
electronic commerce modules. This means
that there is less need for expensive consult-
ing firms or large contingents of IT profes-

I N F O R M A T I O N S Y S T E M S M A N A G E M E N T
S P R I N G 2 0 0 1
 EVOLUTION OF EDI
sionals to develop and design specialized
communication. It helps both large and small
companies lower their costs of business.
However, large companies that have heav-
ily invested in EDI technology are not scrap-
ping their networks. They are combining old
B efore the
and new technologies to create a more flexi-
ble system. FedEx, being both a technology
advent of the leader and a customer-driven company, has
Internet, EDI found advantages to using EDI regardless of
was the only its form. It continues to use traditional EDI and
has developed Internet solutions to assist its
means of
customers, vendors, and others in the supply
linking chain to better communicate with the compa-
computers for ny. In addition, it has dedicated resources to
the purpose of assist trading partners.
E-commerce.
OVERVIEW OF EDI
EDI is an automated method of transmit-
ting information from computer to computer.
EDI predates the Internet, chronologically and
technologically, and it gained a level of accep-
tance before the Internet was even taken seri-
ously.2 Before the advent of the Internet, EDI
was the only means of linking computers for
the purpose of engaging in E-commerce.
In order to transmit EDI documents
between computers, a VAN is normally used.
A VAN is a company that offers fast, secure,
Downloaded By: [Monash University] At: 08:12 20 September 2010
access-restricted transportation of EDI docu-
ments between businesses. VANs also have
additional functions such as message trans-
port and tracking. The networks function by
providing grouping and distribution of batch-
es of electronic data to company servers via
secure communications links. Translation pro-
grams interpret data from the EDI format to
the internal systems of the individual compa-
nies.3 Trading partners that rely on VANs pay
for each transmitted character and often for
multiple data pass-throughs. In addition to
transmitting documents, the networks simpli-
fy communication because companies are
dealing with one intermediary instead of a
mass of customers and suppliers. VANs also
streamline the business partnership by help-
ing companies that use noncompliant or vari-
ant message formats operate smoothly in the
business chain.4
EDI uses a standardized format created by
a suborganization of the American National
Standards Institute (ANSI) called x12. The x12
organization has assigned numbers to each
type of business document. For example,
invoices are the number 810; remittance
advice is 820; the documents used for meter
reads are 867; and purchase orders are 850.
I N F O R M A T I O N S Y S T E M S
S P R I N G
X12 has tried to provide enough variation
within each document type to allow it to be
used by any industry. There are few mandatory
fields, which support versatility while allowing
for different interpretations by any company
that uses the standard. Codes define the mean-
ing of each data field. For example, a date field
would contain a code to indicate the type of
date that is stored in the field. The date could be
an invoice date, a date of service, a birth date,
or some other date.6 Although EDI is considered
to be old and outdated, there are still many
advantages to using this technology.
ADVANTAGES OF EDI
The major benefit of EDI is that there is no
human intervention once the programming
has been completed. Transfers of data are set
up to occur at intervals determined by both
the sender and receiver. Because of this lack
of intervention, faster, more accurate informa-
tion can be produced in greater detail. With
the normal information flow automated, users
can focus on managing exceptions. Because
the document flow is automated, the use of
EDI can reduce the volume of paper required
in order management and billing, help track
shipments, provide status on in-transit pur-
chases and proof of delivery, and give
employees the opportunity to focus on more
value-added job responsibilities.
Using EDI gives a company the ability to
develop solutions to manage its inventory
problems. This includes using a just-in-time
(JIT) inventory management style. Companies
utilizing JIT can also use EDI to prevent order-
ing too much or too little inventory. This in turn
lowers the carrying cost of the inventory and
increases the cash flow of the company. The
business cycle becomes compressed, resulting
in lower account balances for inventory, receiv-
ables, and payables.7 Although EDI presents
companies with distinct advantages, there is
also a downside to choosing this technology.
DISADVANTAGES OF EDI
Because EDI links an individual supplier with
an individual customer, the cost of imple-
menting EDI can be prohibitive. Programmers
must spend time to appropriately develop
requirements. Many companies do not have
this expertise in-house and must outsource in
order to develop EDI. EDI may have standard
formats, but each company is unique in the
way it utilizes the standards. This means that
each time a new customer or supplier is
selected, programmers must build new
M A N A G E M E N T
2 0 0 1
 EVOLUTION OF EDI
requirements. This makes EDI less efficient
than other methods of electronic commerce.
EDI also makes no allowances for data
synchronization. EDI only provides for trans-
mission of data over a VAN or over the
Internet. This requires that each supply chain
C ost and
partner keep a copy of the product database
on its own system. When changes are made to
ease of use one business partner’s copy of the file, EDI
drives many can automatically notify the other partner.
companies However, there is no provision to ensure the
originator that the alteration has been mir-
toward the
rored in the trading partner’s copy of the data-
Internet; base. To mitigate this issue, EDI provides for a
however, most UPC catalog. The UPC catalog reflects all the
companies changes made by the vendor; however, there
have combined are no indicators that show which data ele-
ments have been changed. To see the
the two
changes, the partner must scroll through the
technologies. database. In the meantime, transactions may
be made with inaccurate information, which
may cause discrepancies to arise between the
supposedly identical databases.8
Another issue related to EDI is the unwill-
ingness or inability of some trading partners to
upgrade to the latest version of ANSI x12 stan-
dards. New EDI standards are released every
few years. Not everybody upgrades at the
same time, and many never upgrade. Some
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companies may be uncomfortable with
change, find the process too labor-intensive,
or have limitations in their own information
systems. There are many versions of EDI
being used today, and not every version is
compatible.
Although using EDI is less expensive than
paper for both the sender and receiver, it is
still an expensive method of transmitting data.
This is because EDI is conducted over expen-
sive proprietary value-added networks. This
makes it difficult for small and medium-sized
businesses to take advantage of the technolo-
gy to improve their processes. This is evident
by the amount of money large companies
such as UPS spend on technology. For the
past 11 years, UPS has spent more than $1 bil-
lion annually on technology, which is more
than it has ever spent on trucks in a single
year.9 Smaller companies do not have and can-
not afford to spend this large amount of
money to secure the same technical advan-
tages. Given the popularity of the World Wide
Web, many companies are considering com-
bining the benefits of EDI with the low cost of
the Internet to create a more flexible method
of data exchange.
I N F O R M A T I O N S Y S T E M S
S P R I N G
INTERNET-BASED EDI
EDI continues to work well for those busi-
nesses that have committed the money and
resources necessary to maintain costly net-
works. Increasingly, the global economy is
forcing the use of less expensive methods of
conducting business. Traditional EDI does not
work well for global networking, and to com-
pensate, many companies phone, fax, or e-
mail information. However, these methods are
prone to errors, and errors introduced at the
beginning of the process can grow exponen-
tially. The Internet is seen as an alternative,
and it is forcing changes for traditional EDI as
it evolves into a more complex yet more
usable tool. Cost and ease of use drives many
companies toward the Internet; however, most
companies have combined the two technolo-
gies. Companies with traditional EDI systems
in place are not ready to discontinue its use.
They still use VANs when and where it is
appropriate, but they also want to increase
their flexibility. By combining the Internet
with EDI, there is now the opportunity to
reduce costs, introduce new capabilities, and
expedite solutions to problems. This collabo-
ration gives companies a more cost-effective
and powerful form of EDI, and it has given
smaller companies the ability to compete at
the same level as their larger competitors.10
However, the Internet also has its prob-
lems. It is not as reliable as the value-added
networks, and there are also problems with
transmitting critical data. Security and privacy
issues continue to deter some companies from
pursuing EDI over the Internet, and there are
computer server malfunctions, slow response
time and extensive training.11
FedEx is an example of a company that
successfully combined EDI and the Internet
and yet continues to use traditional EDI. The
two technologies gave the company more
flexibility for its customers and suppliers,
reduced costs, and helped maintain the domi-
nance of FedEx in the express transportation
industry.
EDI AT FEDEX
FedEx Corporation is a leader in technology;
however, it realizes that more can be done to
increase efficiency, improve customer service,
and lower costs. The company has been
extremely innovative when computers and
automation assist with the generation of sales.
This is evident in its development of Internet
tracking and Powership, an E-commerce tool
that allows customers to key shipments, track
M A N A G E M E N T
2 0 0 1
 EVOLUTION OF EDI
packages, and print invoices and reports. The
company is now looking for methods to auto-
mate internal processes in order to reduce
inventory levels, decrease costs of purchasing
products, and increase the efficiency of bill
paying and accounting.
T he ten
FedEx has been using traditional EDI for
quite some time. In fact the company has a
largest separate department that is dedicated to con-
contract necting with its many trading partners, devel-
trucking oping translation maps, and making EDI
transmissions ready for downloading into the
vendors send
many different mainframe and PC-based appli-
their invoices cations. There are also other departments that
directly to have technical resources that are responsible
FedEx via for determining the abilities of the trading
traditional partners and coordinating the transition to
EDI. As competition has increased in the
EDI.
express transportation business, the need to
decrease costs has become paramount.
However, this decrease in costs could not
come at the expense of the customer or of
good business practices and procedures.
FedEx has tailored its solutions to fit the busi-
ness needs of the company. These solutions
have taken the form of continuing EDI in its
most traditional form and making some
changes to the current business routines.
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Traditional EDI at FedEx
FedEx has invested heavily in traditional EDI,
and the decision has been made to continue
to use this technology. Both the accounts
receivable and accounts payable functions are
using and will continue to use traditional EDI
for billing and invoicing purposes. This is due
to many of the company’s customers and sup-
pliers, who continue to embrace EDI as well.
The use of EDI has enabled FedEx to lower
costs associated with specialized printing,
paper, personnel, mailing, or postage. In addi-
tion, EDI has allowed high-speed matching of
purchase orders, receipts, and invoices.
Other departments also use traditional EDI
as a method of communications. The compa-
ny’s largest contract trucking vendors send
their invoices directly to FedEx via traditional
EDI. The invoices are then downloaded and
matched with the route details and pricing
within the computer system. All matched
invoices are interfaced with the accounts
payable system and paid while others are held
in the department until they are researched
and adjusted.
Although some departments are content to
continue to use EDI in the current manner,
others are investigating different ways to uti-
I N F O R M A T I O N S Y S T E M S
S P R I N G
lize traditional EDI. Currently, FedEx is not
fully utilizing electronic funds transfer (EFT)
for payment of invoices, and very few cus-
tomers are using EFT for the payments to
FedEx. The costs to the company can be
expressed in terms of loss of cash flow and
costs for printing and mailing paper checks. In
addition, lost payment checks must be can-
celed and reissued, while checks received
from customers must be applied to their
accounts. The process can be made more dif-
ficult if remittance advices do not contain
enough data to properly adjust accounts
receivable. An electronic process to send pay-
ments as well as apply accounts receivable
appears to be an advantage to the company.
FedEx is capable of sending an EDI remittance
advice, but has found that many of its suppli-
ers are not able to receive the electronic detail.
The company has resolved the issues sur-
rounding sending remittance advices and has
given its suppliers several options that can be
tailored to fit a company’s specific need. Now,
there is a search underway for trading partners
who have the ability to receive remittance
advices along with EFT.
While there are many examples of FedEx’s
use of traditional EDI, the company is also
moving beyond the confines of this technolo-
gy. It has found that combining EDI with the
Internet has created a more flexible and user-
friendly tool.
Traditional EDI Combined with Internet
Applications
Because FedEx has committed to EDI, it will
continue to utilize this technology whenever it
is convenient to do so. However, as the
Internet becomes the preferred method of
transacting business, the company is finding
ways to incorporate the Internet into its current
business practices and is looking for more
applications for Internet technology. Currently,
the company uses EDI for transmission of data
and the Internet to provide catalogs and other
information to company employees.
To assist in decreasing the costs associated
with purchasing products and to reduce
inventory levels, FedEx has purchased a prod-
uct from a company called Ariba. Ariba is a
requisitioning system that is housed on the
FedEx intranet. The system is set up so sup-
pliers can maintain a database of catalogs that
can be accessed by anyone in the company.
Employees who need additional information
about what product can be purchased can
connect directly to the supplier’s Web site.
M A N A G E M E N T
2 0 0 1
 EVOLUTION OF EDI
Once the employee has made a requisition, it
is routed to the manager for approval through
the intranet. After the approval has been
given, the orders are sent to suppliers either
via traditional EDI or over the Internet and
invoices are sent to FedEx via EDI. To increase
O ne area,
the number of suppliers and decrease the total
costs of doing business, FedEx actively looks
with the assis- for vendors who are both capable and willing
tance of its to use electronic means (either EDI or the
supplier, has Internet) for both purchasing and invoicing.
The Ariba system has achieved several
developed an
benefits for the company. Because it allows
intranet site individual, authorized employees to make
that will be purchases on behalf of the company, the need
used to order for additional procurement staff is eliminated.
employee The system also has a module for desktop
receiving. Once an item has been physically
safety awards.
received, a manager can key the receipt into
Ariba. By doing so, the need for additional
people designated for that particular function
is removed. Ariba also interfaces with the
FedEx inventory systems. This means that
inventory levels can be automatically updated
for purchases of inventory items and that there
can be a more accurate inventory replenish-
ment process.
Other departments have also found uses
for combined Internet and EDI applications.
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One area, with the assistance of its supplier,
has developed an intranet site that will be
used to order employee safety awards. The
site is slightly different from what is offered by
Ariba. Because there is no requisitioning mod-
ule, ordering is restricted to management.
However, every employee has the ability to
review the catalog that is provided. The orders
will be sent to the supplier via traditional EDI.
The supplier will also send EDI invoices, and
FedEx will pay invoices via Electronic Funds
Transfer (EFT).
Most large customers have embraced EDI
in all its forms. However, not every customer
has the capability of receiving EDI invoices.
For those customers, FedEx provides invoices
in the manner easiest for the customer. This
flexibility has paid off for the company.
Approximately 30 percent of FedEx invoices
are sent electronically to its customers. To
convert the remainder, the company is
embracing Internet technology. The company
has developed FedEx Invoice Online, an
Internet tool, whereby customers can view
their invoices and select the ones for payment.
They can then choose a method of paying the
invoices, which can be either payment over
the Internet or electronic funds transfer (EFT).
I N F O R M A T I O N S Y S T E M S
S P R I N G
Accounts payable is also taking advantage
of both the Internet and EDI. While electronic
invoicing methods have given the department
the ability to move toward automation, 80
percent of the vendors sent ten or fewer
invoices in a one year time span. Because of
the costs involved in setting up EDI, this
method is not suitable for the majority of the
company’s small suppliers. The newest project
underway is for an extranet-based solution.
FedEx is developing a means to have these
vendors key their invoices on a secured
Internet site. The invoices will then be inter-
faced with the company mainframe.
As hard as it may be to believe, there are
trading partners that are not suitable for either
an EDI or Internet solution. FedEx has devel-
oped a "proprietary method" to handle these
unique types of situations.
The Proprietary Method
The proprietary method of transmitting data is
simply a data file that can be downloaded
directly into the FedEx mainframe. Normally,
the file is sent via e-mail over the Internet.
While it is not EDI in the pure sense of the
word, the ability to receive data in an elec-
tronic format has been helpful. The biggest
issue with using a data file is the potential for
errors. Many times the file is not a download
of information in the computer systems of
suppliers or vendors; it is data that is entered
by clerks into a specific format. The fact that
there is human intervention in the process cre-
ates the potential for errors such as keying
mistakes.
The proprietary method of invoicing has
proven successful in areas where traditional
EDI is too cumbersome. This includes depart-
ments where there must be an ability to
approve, reject, or partially pay invoices. With
EDI, the entire invoice must be paid; there is
no opportunity to dispute or pay parts of a
bill. The proprietary method gives them the
flexibility to do this.
The proprietary method has also been
used successfully in automating the automo-
tive aftermarket vendors. Because of the large
fleet of trucks owned by FedEx, these suppli-
ers generate the majority of small-dollar
invoices (individual invoices of less than
$5000 in total). However, the vendors have
computer systems that are owned by the par-
ent company. These systems do not allow for
computer-to-computer invoicing. Using the
proprietary method of invoicing, the supplier
is more efficient at processing these invoices,
M A N A G E M E N T
2 0 0 1
 EVOLUTION OF EDI
and FedEx also gains the ability to pay each
vendor in a more timely manner. This has
been a "win" for both the vendors and FedEx.
The New Frontier of EDI at FedEx
The key to being able to pursue trading part-
V ANs
ners effectively is flexibility. Each trading part-
ner must be able to communicate in the most
provide docu- convenient manner, while at the same time,
mentation of FedEx must have the ability to be able to
the accept and send communications that match
those of their trading partner. This is challeng-
information
ing to a company the size of FedEx, especial-
that was ly when part of the overall goal is to develop
transmitted. electronic communications to the fullest extent
possible. Although the use of Internet and the
proprietary method have substantially reduced
the costs of EDI at FedEx, the cost of using the
value-added network continues to rise as the
company becomes more automated.
To achieve the combined goals of lower
costs and flexibility, FedEx has created its own
secured method of sending and receiving elec-
tronic documents called FedExNet. In order to
connect to FedExNet, trading partners are pro-
vided with software. The software uses sever-
al different platforms including URL (for
Internet access) FTP, dial-up access through an
Internet Service Provider, or direct access
Downloaded By: [Monash University] At: 08:12 20 September 2010
(computer to computer). FedExNet has two
major advantages. First, trading partners no
longer have to use a value-added network in
order to transmit documents via EDI. This
makes becoming a business partner a more
attractive proposition and saves them money.
Secondly, FedEx has been able to utilize
FedExNet to send and receive transmissions.
Every time FedExNet is used, the company’s
cost of transacting business decreases.
Of course, there are some trading partners
that still prefer to use the VANs. The networks
provide documentation of the information that
was transmitted. This is particularly useful
should there be disputes about transmission
times or data or if the trading partner does not
receive transmissions. Trading partners who
choose to use VANs cannot connect directly to
the FedExNet. As a result, FedEx cannot take
full advantage of the benefits of electronic data
transfer via FedExNet. Because many of the
largest suppliers and customers use traditional
EDI, new solutions must be instituted. As an
enhancement, interconnectivity between
FedExNet and the various value-added net-
works will be established. This means that
even if the trading partner continues to use its
VAN for its personal reasons, FedEx can use
I N F O R M A T I O N S Y S T E M S
S P R I N G
the FedExNet and benefit from the flexibility
and lower cost that this technology provides.
CONCLUSION
EDI may be older technology, but it has been
proven to be a valuable tool to business. The
use of EDI has helped FedEx lower inventory
levels, pay bills faster, account for purchases
and payments of product, provide for better
relations with its customers, and decrease the
amount of labor required to perform these
functions. In addition, FedEx has tailored its
EDI presence to support customers that have
no EDI ability, no access to EDI through tradi-
tional methods, or no Internet-based EDI.
Clearly, trading partners are moving
toward Internet-based methods of communi-
cation. To support these customers and sup-
pliers and to continue to develop new market
opportunities, FedEx has also created innova-
tive solutions that use the Internet. This
includes using the Internet for tracking pack-
ages and as a means for transmitting orders,
receiving invoices and providing secure com-
munications.
FedEx has developed Internet-based solu-
tions that provide small and medium-sized
businesses the same advantages that are
enjoyed by the large companies. This was
accomplished by harnessing the power of the
Internet while continuing to embrace the cur-
rent methods already in use by FedEx and
other large companies. This includes using the
Internet so those vendors can track the
progress of their payments and billings in a
method that is similar to tracking customer
packages. These new methods should prove
cost-effective for both FedEx and its suppliers
and customers.
Most important, FedEx is willing to devel-
op services that will benefit the customer as
well as decrease the costs for the company.
Although FedEx will be focusing efforts on
Internet solutions, it does not plan to move
away from Electronic Data Interchange (EDI)
unless the market does so. "We want to do
business however our customers want to do
business."12 ▲
References
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February 11, 1999, p 69.
2. "Operations benchmark’99," Catalog Age,
January 1999.
3. "Raising the Bar," Purchasing Magazine,
January 14, 1999, p. 44.
M A N A G E M E N T
2 0 0 1
 EVOLUTION OF EDI

Notes 6. Hawker and Schwab, 1999.

1. Avery, Susan, "Internet Report; E-commerce;
MRO Supplies Online Ordering Lets Buyers
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2. Virgoroso, Mark, "On the Internet, E-com-
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3. Werner, Tom, "EDI Meets the Internet."
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4. Werner, 1999.
5. Hawker, Louise and Schwab, Tom, "Re-
Engineering for Multi-Entity Communications
— EDI Requirements for the New
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7. Helms, Glenn L. and Mancino, Jane ,
"Auditing/Technology: The Electronic Auditor."
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8. Scheraga, Dan, "Technology: The New EDI."
Chain Store Age, October 1, 1999, p. 110.
9. Isadore, Chris, "Air Carriers Enhance Sites."
Journal of Commerce, January 12, 1999, p. 10A.
10. Kernahorn, Carole, "Achieving Competitive
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11. Virgoroso, 1999.
12. Hickey, Kathleen, "Ex Focus on E-commerce."
Traffic World, December 21, 1998, p. 50.

Roadmap to the e-Factory

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Alex N. Beavers, Jr., Thomson Industries

As manufacturing control systems converge with manufacturing automation
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Supply chain management Operations
Lean manufacturing Emerging trends
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