Interop Case Study #4: Electronic Data Interchange Interoperability

The forth case study in our interop series looks into Electronic Data Interchange interoperability.  The case was researched with the help of our wonderful Berkman student fellow Matthew B. Becker.  He submitted the following blog post as an introduction to the case:

Electronic data interchange (EDI) provides an excellent context for examining how interoperability at the technological and data level can also produce profound effects at a higher, institutional level.  Originally conceived as a means for speeding up the delivery of invoices and purchase orders by sending them electronically, EDI resulted in significant shifts with regard to retailer-supplier relations that went far beyond transaction efficiency.

In tandem with the introduction of bar codes (the subject of another case study in our Interop series), which provided greater insight into sales trends, the use of EDI allowed retailers to automate their purchase orders, increasing inventory replenishment speed and redefining supply chain management; i.e., allowing the merging of Internet technology with JIT (just-in-time), a Japanese manufacturing management method that was developed in the 1970s.  Retailers and suppliers who had previously guarded their sales and inventory information and made deals at arms-length, found that they had much to gain by radically integrating their operations and using EDI to share their inventory data immediately and automatically.  One of the first and largest adopters of the merged EDI-JIT system were the three major U.S. automakers (GM, Ford, and Chrysler), in which they used electronic “mailboxes” to acquire information on production and non-production parts as well as to manage their order and requests electronically.  Retailers such as Wal-Mart and Sears quickly followed suit, in which whenever a sale was made, that information was immediately transferred electronically so that the data could be used to update inventory, calculate sales and create other statistical reports.

With the merger of EDI and JIT, purchase decisions were shifted to the suppliers themselves, who examined sales trends to provide retailers with the products they would need as soon as required, and not before.  Not only was this approach more responsive to customer demand, it also reduced expensive inventory back stock and remaindering costs.  Through a similar integration with shippers, warehousing costs were slashed as products were shipped directly from suppliers to retailers, without need for expensive storage.

Over the past decade, EDI has been undergoing a significant shift, as some businesses and organizations (e.g. Lufhansa AirPlus) have started employing XML-based EDI (XML/EDI), with the promise of even greater flexibility and interoperability.  However, adoption has been limited, and many of those who are using XML/EDI have implemented it in a less-than-fully interoperable manner.  Additionally, support from major software companies, which appeared strong around the turn of the 21^st century, has largely dissipated.  As such, although the implementation of traditional EDI provides a good example of how private actors and third-party organizations can establish viable interoperable technology, the stalling of XML/EDI demonstrates that this approach is not always successful.

Because the route to an established interoperable standard involves many nuances and complexities, one might argue that there may be a role for government when private actors appear unable to succeed on their own.  However, this study, authored by Matthew Becker, concludes by noting that if this is indeed the case, the best approach may actually be a very light one, in which government involvement is limited to setting a general objective and a timeline, leaving the innovation and implementation to the private sector.