Trading Up – Outsourced EDI | Article

invoicingWhen one thinks of outsourcing, Electronic Data Interchange (EDI) is not the first function to come to mind. EDI is a business process that utilizes standard formats and communication protocols for exchanging business data contained in transactions such as orders, ship notices, and invoices between trading partners. Initially EDI evolved using various types of private networks, but today it is conducted increasingly over the Internet. Each transaction is comprised of data elements (each representing one piece of information like “item description”) that, when strung together, form data segments (comprising, say, an order with item number and quantity) framed by a header (which directs the transaction to its destination) and trailer (which mostly indicates the transaction is over).

The American Water Heater Company in Tennessee manufactures about 8,500 water heaters a day under different brands like Whirlpool. It sells the majority of them to Lowe’s, its primary trading partner. The company uses EDI to carry out eCommerce activities like receiving orders and sending invoices.

Until late 2005, the company used an EDI administrator who migrated the company from its outmoded installed EDI solution from ProEDI to a more updated one from Trusted Link; he then managed the new system. When he left, however, the manufacturer evaluated the merit of replacing him versus using an outsourced solution and opted for the latter. “We decided that an EDI administrator is not a full-time job and that the potential ROI of outsourcing was big,” says Don Cottage, Director of Information Services. He also admits that, after some consideration, he did not want to risk getting into an installed EDI solution that would not be future-proof. The reason the company transitioned to Trusted Link in the first place was because ProEDI fell behind the state-of-the-art and eventually went out of business.

Cottage says he picked RedTail Solutions’ outsourced EDI service primarily because RedTail already had an EDI link and a working relationship with Lowe’s. “Lowe’s does things Lowe’s’ way,” explains Cottage, “and we need to match that.” Like many large retailers such as Wal-Mart, Lowes dictates that its trading partners use EDI to meet their specific requirements and business rules for transaction exchange.

Now RedTail affects transaction exchange for the manufacturer and Lowe’s, according to the latter’s specifications, and is migrating its remaining trading partners onto RedTail’s platform so RedTail’s interface alone can handle all transactions to its business system.

The solution proved to be turnkey, easy to implement, yielded almost immediate savings, and better ensured that EDI operations going forward would be state-of-the-art, bulletproof and future-proof. For instance, Cottage testifies that, whereas it took his former EDI administrator six months to implement his installed EDI solution and switch all trading partners over to it, “RedTail had Lowe’s up and running in a week and a half.” Furthermore, he claims he’ll save $60,000 in the first year with RedTail and, when he replaces his aging Baan ERP system, RedTail will have or develop a standardized interface that lets him readily plug into its solution. And then there was this: with over 200 customers in its short tenure and cutting-edge technology, the provider would likely continue to grow rapidly, not go bust as one provider in the past.

Hosted EDI

According to Benoit Lheureux, Research Director, Networked Infrastructure and Architecture, Gartner, “When you outsource EDI, you outsource IT, people, and process – those are the possible degrees of outsourcing.” Using RedTail’s model, customers outsource all of them. It provides IT (Internet connection, servers, EDI software, etc.), people (specialists for setup integration and other tasks), and process (standardized interface and application development). This is everything a supplier doing B2B with a retailer the old way (transactions via phone, fax, etc.) needs to fully automate.

RedTail provided American Water Heater onsite client software, hosted servers, and administrators that let its back office applications send and receive transactions to and from partners’ differently branded back office applications. Cottage also liked RedTail’s transaction price model – he explains that “we pay according to the number of transactions RedTail processes, and the more transactions, the less we pay per transaction.” That was the cost of the entire solution. Patricia Meisner, RedTail’s CEO, says that RedTail caters to middle market suppliers who trade with many large retailers and distributors and process thousands of transactions monthly.”

Lheureux saysRedTail’s out of the box’ integration to key middle-market manufacturing systems like Microsoft Great Plains and the family of SAGE Software applications “makes RedTail unique by reducing overhead associated with EDI administration, eliminating order entry costs, and enabling expedited integration on the shipping floor or remote warehouse, where customers can use the original order information to generate advanced ship notices and UCC 128 shipping labels.”

How It Works

According to David Unger, RedTail’s Chief Technology Officer, RedTail installs thick clients (client/server client software, not browsers) on the customers’ premises and uses its own standardized interfaces for customers’ various back office accounting, ERP, and other business applications. Customers like Cottage send and receive transactions through the client; the interfaces convert the customer’s native data formats into a proprietary one, which is transmitted over the Internet to RedTail’s servers, where data transformation occurs according to global standards and with the application of a particular trading partner’s business rules.

RedTail acts as an SSL-encrypted EDI transaction brokering service, but typically one partner (usually the supplier like American Water Heaters) pays for the service so it can conform to the EDI specs of a trading partner (usually a large retailer like Lowes). RedTail either has or develops standardized integration interfaces for all applications involved, so all the relevant trading partners can simply plug into the RedTail solution. Unger says, “We support the most up-to-date requirements for hundreds of retailers including Wal-Mart and Home Depot.” He says this approach is much more efficient than more conventional outsourced EDI such as “rip-and-read” solutions where the customer and its partners have to manually enter EDI data from a browser interface into their back office applications, a redundant process Cottage wanted to avoid

Lheureux says the downside to the client/server approach is that “getting a whole bunch of suppliers to install your client software is not easy,” and scaling up requires that customers install it on the new PCs, which is an additional chore.

Meisner, however, explains, “RedTail addresses this by developing standardized interfaces (as opposed to ‘adaptors,’ tools that merely help the supplier do its own integration) to the business systems that the client can install remotely via the Internet.” Also, she adds, RedTail is a vertical solution partner of the business system software providers and partners with their Value Added Resellers (VARS) who maintain close relationships with suppliers and service their systems of record. These benefits especially appealed to Cottage because they radically simplified his technology transfer and guaranteed ongoing expert tech support.

Lessons from The Outsourcing Journal:

  • Hosted EDI cuts up-front costs and converts fixed overhead associated with software maintenance and upgrades into variable usage-based expenses and allows re-deployment of IT staff to core business areas.
  • Outsourcing lets smaller suppliers engage larger competitors on a level playing field, so they can win more business and integrate with new trading partners without additional applications or changing business processes.
  • By integrating to suppliers’ business systems, suppliers eliminate transaction errors, pay invoices faster, and reduce charge-backs and penalties for transaction errors or noncompliance. This helps them get product on the retailer’s shelf quicker and money into their bank account faster.


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