Electronic Data Interchange (EDI) and the supply chain communication system. 9

1.3.1. The supply chain communication system

Information technology plays an important role in enabling the collaboration practices between organizations (Pramarati, 2007). Information technology in supply chain management can be found in various forms, however in the context of this study, the focus will be solely on supply chain communication system, which is one subset of supply chain management system. The system, according to Bowersox, Closs and Stank (1999.as cited in Wu et al., 2006), is defined as an information system shared by partners in a supply chain in order to facilitate electronic transactions, quality and cost calibration, and collaborative forecasting and planning. Communication systems are designed to overcome barriers of time and distance (Boddy et al., 2008). The supply chain communication system can include a number of communication methods, ranging from traditional channels such as face-to-face meetings, telephone, emails or informal business meetings, to methods that involves electronic interface systems such as EDI, to link different parts of the supply chain management together including enterprise resource planning, customer relationship management, advanced planning, transportation management, and warehouse management systems (Wu et al., 2006; Nakayama, 2003). In addition to EDI, Radio Frequency Identification (RFID) is the newly emerged communication technology that is expected to revolutionize many of the supply chain operations, especially if the scope of implementation is extended from internal warehouse and distribution processes to supply-chain processes involving collaborating partners (Prater et al., 2005.as cited in Wu et al., 2006).

1.3.2. EDI

1.3.2.1. Definition and relational benefits in adopting EDI

According to Lee and Whang (2000), EDI was originally designed to be a means to process transaction, however it has been extended to facilitate sharing of some other information such as point of sales or inventory status. EDI is a crucial element for the success of various collaboration strategies such as VMI, CR, CRP, etc.

Swatman and Swatman (1992.as cited in Iacovou, Benbasat & Dexter, 1995) defined EDIs as cooperate inter-organizational systems that allow trading partners to exchange structured business information electronically between separate computer applications. Pfeiffer (1992.as cited in Iacovou et al., 1995) suggested four conditions that an inter-organizational system needs to fulfill, in order to be classified as EDI. The conditions are:

 It must have at least two organizations in a business relationship as users;

 Data processing tasks pertaining to transaction at both (all) organizations must be supported by independent application systems;

 The integrity of data exchange between application systems of trading partners must be guaranteed by agreements concerning data coding and formatting; and

 Data exchange between the application systems must be accomplished via telecommunication links

EDIs act as the agents that enable information flow between or among trading partners, thus it is unavoidable that it can bring certain benefits to one or more organizations in the relationship. Bensaou (1997), in a study concerning the role of information technology on buyers-suppliers relationship in Japan and the United State, suggested that in the manufacturing sector, the use of EDI applications across multiple functions (such as design, purchasing, production control, delivery or payment) provides greater information processing capabilities that support greater cooperation among partners. A similar finding for the Australian automaker industry was also found by Mackay (1993.as cited in Nakayama, 2003). Stump and Sriram (1997.as cited in Nakayama, 2003) also suggested that the percentage of IT usage in transaction increases the overall closeness in buyers-supplier relationship.

1.3.2.2. EDI drawbacks and its adoption enablers

Regardless of the above mentioned benefits of EDI, this invention also has a number of drawbacks. Some of these drawbacks, which are discussed by Lee and Whang (2000), can be listed as below:

 Since EDI is designed as for all companies in one-fits-all spirit, it may not meet the exact needs of a supply chain;

 EDI is designed primarily for transaction processing, especially around purchase orders and invoices, thus it has severe limitation for information sharing;

 Small and medium sized companies are often discouraged by the high costs of installing EDI.

The drawback regarding high costs of installing EDI in organization was also mentioned in Iacovou et al.’s study (1995). The authors considered financial resource as one of the two organizational enablers that can facilitate the adoption of EDI in organizations. The financial readiness refers to financial resources available to pay for EDI installation, implementation and ongoing expenses during usage. Although the cost of adoption is not high, the integration process can cost a company over 10000 USD (Bouchard, 1993.as cited in Iacovou, 1995). Based on this argument, the authors stated that small companies tend to lack such resources, thus limiting their ability to receive all strategic benefits of the technology.

This issue certainly acts as a barrier toward the adoption of EDI in small companies.

Technological readiness is another factor that can decide the organization’s preparedness in adopting EDI. Technological readiness refers to the level of sophistication of IT usage and IT management in an organization. Companies with high level of technological resources are less likely to be intimidated by the technology, have access to IT facilities such as hardware, software, IT experts, etc, and possess superior cooperate view of data as an integral part of overall information management. Clearly, this factor plays an important part in utilizing the power of EDI and enabling organizations to optimally integrate EDI in their systems, in order to receive all of the expected benefits.

Another EDI enabler to be mentioned is external pressure, particularly competitive pressure.

Competitive pressure refers to the level of EDI adoption in the industry that the organization is a part of. Accordingly, companies will be more inclined to adopt EDI if more trading partners, and their competitors, become EDI-capable (Iacovou, 1995).

2. Vendor-managed inventory

Collaboration has always been one of the most discussed issues in supply chain literature, among which a large number of collaboration strategies have been presented and analyzed.

In this paper, one specific collaboration strategy, which is vendor managed inventory (VMI), is chosen to be applied for one relationship the company has with a long term customer.

Analyzing the success of applying this strategy at the case company is one of the goals of the paper. Therefore, it is important that literature regarding this concept is properly presented.

The following part of the paper reviews the concept of VMI collaboration or relationship in supply chain management. All of the discussed theories, including the VMI definition, VMI successful criteria, as well as its benefits will be used to describe the existing relationship in one of the cases in the paper. Additionally, these theories will also be used to discussed the potential of VMI implementation in one other case. These discussions will be the response to the first, second and fourth research question in this thesis.

2.1. Definitions and types of vendor-managed inventory (VMI) collaboration