USING EDI
Companies began experimenting with EDI in 1970, and the first EDI standards were developed and released for the transportation industry in 1975. EDI provides a standard format that enables various business systems to communicate with each other. The most commonly used standards of EDI are ANSI ASC X12 (American National Standards Institute/Accredited Standards Committee X12), widely used in North America, and EDIFACT (Electronic Data Interchange For Administration, Commerce and Transport), used throughout the rest of the world. Both standards contain subgroups to accommodate the specific needs of various industries. The purpose of the standard is to determine the order and the location of the data in an EDI document, which contains elements, segments, and transactions. Elements are individual pieces of data. When elements are combined to make meaning, a segment is created. A transaction is a combination of several segments. Trading partners send and receive documents containing transactions such as invoices, orders, bills of lading, etc., either directly to their internal system or via an EDI network service provider. The process of sending a document requires three steps:- Identifying the data to be included in the document,
- Creating an EDI document, and
- Transmitting the EDI document.
- Reduced costs of personnel, supplies, and office/storage space,
- Improved data quality through reduced data-entry errors,
- Reduced time of completion of a business cycle, from ordering to cash collection,
- Improved business efficiency by enabling employees to focus their attention on critical issues rather than correcting mistakes,
- Improved data security through the use of passwords and encryption programs,
- Reduced disruptions during the auditing process,
- Increased strategic benefits through the enabling of demand-driven business models,
- Improved decision-making processes as a result of having access to information instantaneously, and
- Enhanced social responsibility and sustainability through reduced paper use.
USING BLOCKCHAIN
Blockchain is a decentralized information system that relies on peer-to-peer technology and cryptography to create a shared ledger of transaction records. The system records an ever-growing ledger of verified transactions that are grouped as batches (blocks) in a single, secure, and immutable (append-only) database. When a customer wants to order some goods from a vendor, the customer could send the purchase order as a hash record to the vendor, who decrypts the sales order using a private/public key combination (see Figure 2). Alternately, the customer and vendor could negotiate and create a smart contract that represents the terms of the contract and automate all the subsequent steps in the process.COMPARING EDI AND BLOCKCHAIN
EDI and blockchain share some important characteristics:- Both technologies can incorporate multiple trading partners. For example, one company can have many vendors and many customers depending on whether the transactions represent the revenue or the expenditure cycle.
- Both technologies enable the communication of transaction details.
- Companies can send and receive any type of documentation.
- Trading partners’ information systems don’t need to be compatible. EDI applications convert forms in various formats to a standard format before sending/receiving documents. Transaction hashes are sent/received; hence, the trading partner information systems don’t need to be compatible if using blockchain.
- Companies can limit and control access and portions of data that’s accessible to their trading partners.
- Both technologies enable an audit trail and maintain a detailed history of records centered on the entity.
- Adequate preventive controls need to be implemented and enforced. These include data-edit integrity controls, access controls, and general controls such as source document preparation, management policies, and user responsibilities.
Even though there are several similarities, there are some important differences between the two that companies should consider before deciding on which application to use (see Table 1).
One of the major advantages in the blockchain is the immutability of the distributed ledger. Because the blocks are linked to the previous block using previous block hashes, the attempt to roll back transactions or alter a previously written transaction will require changing the hashes of all subsequent blocks. Since the majority of the nodes have already accepted the current state of the blockchain as valid, any change to a previous block will be rejected. For example, if one entity tried to tamper with the data in a block that’s already included in the blockchain, it will change the hash of the most recent block and put the altered chain on the one node, which will become out of sync with the other nodes carrying the correct data.
EDI doesn’t provide immutability, so transactions can be subsequently modified and thus result in erroneous transactions. And apart from preventive controls, EDI requires processing controls to be implemented, enforced, and maintained. Blockchain, on the other hand, consists of consensus algorithms that handle processing controls.
DEVELOPMENT STRATEGIES
In addition to the two technologies’ features and functionality, another consideration to assess is the work and effort required to implement each of them. There are two methods of obtaining EDI. One is to develop an in-house EDI network among the trading partners. This option may be costly and requires the company to develop and maintain maps and specifications for each trading partner connection. The second option is to outsource to a third-party EDI service provider. Many enterprise resource planning (ERP) systems, such as Oracle and SAP, also provide EDI solutions.
Some factors to consider when selecting an EDI service provider are the number of trading partners already using a specific service provider, the level of support and training available, the flexibility of the application, compatibility with existing systems, transparency in the communications, and the level of access and workflow controls available. An advantage of a third-party EDI service provider is that companies may have the option to select a pay-as-you-go pricing model as well as a monthly or annual subscription pricing model. This provides some flexibility based on a company’s particular business needs.
In comparison, there are currently two ways to implement blockchain among trading partners: permissioned or private blockchains. One development strategy is to build a permission/private blockchain from scratch, which involves the acquisition of computing infrastructure, network, and storage. Although the cost of the hardware can be reduced by using infrastructure as a service (IaaS) cloud computing services, the in-house development costs can be very costly. Developers with expertise in encryption, peer-to-peer networking, and blockchain architects are rare and command a very high salary.
Alternatively, organizations can utilize a blockchain that is hosted as a service from cloud service providers. Technology giants such as SAP, Amazon, Microsoft, and IBM are involved in the blockchain as a service (BAAS) space, and Accenture is focused on providing blockchain consulting services. Open-source blockchain platforms such as the Hyperledger Fabric significantly reduce the development cost of the backbone blockchain infrastructure, protocol, and encryption method.
Ultimately, the labor cost of development, testing, and configuration of the blockchain decentralized applications and smart contracts will remain to be cost drivers and barriers for many smaller organizations. Moreover, the pricing of the service by blockchain host and administrator may need to be considered given the novelty of the technology.
MAKING THE RIGHT CHOICE
Before deciding to invest in blockchain technology, management should consider two fundamental questions:
- What is the problem we would like to solve using blockchain?Decision makers should obtain a thorough understanding of the existing problem. Further, they should consider the relative impact of the problem on the mission and strategy of the company.
- Is there an alternative solution?One common mistake executives make is adopting new technology without an in-depth understanding and analysis of costs, risks, operations, and maintenance.
When considering alternatives, management should look at the existing technology, compatibility, investment, time required for implementation, maintenance requirements, expert skills needed, adequacy of technical support, and other factors. A decision tree such as the one in Figure 3 can help assess whether the business problem is a good use case for blockchain technology.
Further, management should decide whether there is a significant competitive advantage in embracing blockchain technology and whether the investment could be justified compared to the potential benefit—not just of the technology itself but in being an early adopter. Companies that choose to be early adopters are essentially guinea pigs and will likely experience challenges in implementation and transition that the late majority will be able to avoid.
While focused on comparing EDI and blockchain, the approach and process we’ve described here is applicable for evaluating many technology decisions, particularly when choosing between a new technology still in infancy and a more established alternative. A critical evaluation of the business use case based on the costs, benefits, advantages, and disadvantages of available alternatives options will help.
June 2020