Logistica

International Journal ofProduction Economics, 26 ( 1992) 135-143 Elsevier

135

Electronic data interchange
Mohsen Anvari*
Faculty of Commerce and Administration, Canada H3G lM8

and inventories

Concordia University, 1445 de Maisonneuve Blvd. W., Montreal, Quebec,

Abstract
Several studies have been undertaken to examine the impact of ED1 on business corporations from variousvantage points. Most of these studies have focused on the impact of ED1 as a strategic business tool aimed at creating competitive advantage. However, one of the major findings of these studies has been that the reduction in the level of inventories constitutes a major benefit of ED1 systems. The only study to-date on this issue has been a short analysis by Hill et al. ( 1989). Our study quantities theimpact of ED1 on inventories by considering the impact of ED1 systems on; ( I ) reduced lead time, (2) reduced uncertainty during lead time, and (3) reduced ordering cost. We will show, analytically, that as a result of EDI, the total inventory management cost of the firm will be reduced. Furthermore, we will quantify the level of savings as a function of the demand pattern for the ordering firm.Finally, we will examine the connection between ED1 and JIT inventory systems and explain how ED1 will facilitate the implementation of JIT procedures.

1. Introduction Electronic Data Interchange (ED1 ) is a procedure for electronic exchange of business data between trading partners. In essence, the computer systems of a buyer and a seller are linked to effect exchanges of various messages thatarise in connection with a trade transaction, including the payment. ED1 is a subset of the broad class of interorganizational computer and communication systems that have emerged as a result of widespread development of these technologies. The consequences of introduction of such systems are being investigated both from the vantage point of their effects on the internal operations of eachindividual firm as well as the strategic position of the firm in its industry as a result of the new relationships that are engendered with customers, suppliers, and competitors (see for example Weisman [ 11, Barret [ 2 1, Cash and Konsynski [ 31, and Clemons and Kimbrough [ 41).
*The author gratefully acknowledges the financial support of the Natural Sciences and Engineering Research Council of Canadain preparation of this paper.

Focusing on EDI, it can be observed that these systems are spreading at a very fast rate within North America (e.g. Fitzgerald [ 5 1, Brooker and Fitzgerald [ 61, Hill, Ferguson, and Stone [ 71) and Europe (see for example Gilkins and Hitchcock [ 81) as well as world-wide in selected areas such as transportation (see for example Mercier [ 9 ] ). The consequencesof this phenomenon on practice of management is indeed overwhelming. The purpose of the present paper, however, is more modest than that of a global examination of these consequences. We focus on the observation that in almost all documented implementation of ED1 systems, a reduction in costs associated with management of inventories is reported. It is the objective of this paper to investigatethis aspect of EDI. This paper is organized as follows. In Section 2, an overview of ED1 is presented. Section 3 presents a conceptual framework for quantifying the benefits of ED1 in reduction of inventory costs within the context of conventional inventory management models. It will also detail the additional benefits of ED1 that are not usually captured in such models. Section 4 focuses on theinteraction between ED1 and Just-in-Time in-

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0 1992 Elsevier Science Publishers B.V. All rights reserved.

136 ventory management systems and provides an overview of how ED1 can facilitate the implementation of these systems. 2. Electronic data interchange EDI is the intercompany computer to computer communication of standard business transactions in a standard format....