Advertisement

Blog

Prices May Soar on EDI Transactions

The history of electronic ordering is complex, and incremental changes in the way orders are processed have exploited technologies as they have become available. The happy result is the overall lowering of costs per transaction.

Leading transaction hub GXS, which handles millions of EDI transactions, has made it known that it intends to change its policies around integrating with trading partners; a move that will add costs and likely result in higher prices for the goods we buy nearly everywhere.

Electronic Data Interchange (EDI) is the backbone of electronic order processing around the world. The EDI ANSI X12 standard defines a long list of documents including purchase orders, shipping notifications, price schedules, and many others that companies use to order and deliver products every day.

The documents move among these trading partners in a variety of ways, but the most common is through companies designated as Value Added Networks (VANs) that maintain digital mailboxes for each trading partner. The EDI documents are placed in and retrieved from these mailboxes and routed to the appropriate trading partner. All seems simple enough until the VAN decides to change the rules it's operated under for years in an attempt to extract a few more dollars from each trading partner.

Because transacting EDI is not always simple, an industry has grown up to provide a variety of services to companies that need to process orders using EDI. These EDI service providers act as funnels by connecting to many (in some cases thousands) of manufacturers, then making a single connection to a VAN that will then route the transactions to and from the other trading partner, usually a retailer like Wal-Mart.

This aggregation of transactions provides a streamlined and efficient way to transfer documents. The EDI service providers charge customers for the provided service and pay the VAN for the use of a single mailbox. The ability to use one mailbox means customers do not need to pay for their own mailboxes, a significant cost.

GXS is a VAN that has grown since the beginning of EDI and has provided gateway services as a matter of course. However the company has recently said that it will no longer allow EDI service providers to “daisy chain” (as it calls the practice). Instead, it will require each company that sends EDI transactions to any of GXS's customers to subscribe to a GXS mailbox.

The pricing for mailboxes can get complex and expensive, eliminating a primary advantage EDI service providers offer to its customers. Worse, this expense may erode the solution provider's competitiveness with potential customers. When these customers are faced with paying for their own mailboxes, they may decide it is more cost effective to bypass the service provider and deal directly with GXS, a reality that GXS has likely calculated into its strategy.

Loren Data, an EDI service provider, has had a long running dispute with GXS and has presented to the US Supreme Court to rule on its contention that GXS holds monopoly status in the industry. To date, the court has not determined whether to take the case. Regardless how the Supreme Court acts, increases in costs are likely to go into effect for some period of time.

23 comments on “Prices May Soar on EDI Transactions

  1. Susan Fourtané
    June 28, 2013

    Thanks, Scott. 

    I didn't know they call it daisy chain. It's great to learn something new.

    “In electrical and electronic engineering a  daisy chain  is a wiring scheme in which multiple devices are wired together in sequence or in a ring.”

    -Susan 

  2. Scott Koegler
    June 28, 2013

    The term 'daisy chaining' seems to be newly applied by GXS as they have attempted to define the practice. I think it works well as a description. 

  3. Himanshugupta
    June 28, 2013

    I think Scott pointed out that GXS holds monopoly so without any competition why anyone will worry about the price increase. But i am surprized that no government agency is taking note of this.

  4. ahdand
    June 28, 2013

    @Himanshugupta: Im pretty sure there will be competition in the coming days and because of that I feel people are getting worried about the pricing factor.

     

    Your point on Government is true. They are not monitoring things properly and that is why they haven't figured this out yet.    

  5. prabhakar_deosthali
    June 29, 2013

    Is EDI still relevant ?

    I thought there are alternate ways for companies to exchange documents rather than using EDI. I have seen companies who were using EDI earlier for say purchase schedules and  goods dispatch notes are now collaborating on common ERP platforms  to exchange such information.

  6. Susan Fourtané
    June 29, 2013

    Scott, 

    Yes, I also think it works well as a description. When I looked it up I also found some good images showing different cases of daisy chaining. It was nice and interesting to have learned about this. 🙂 

    -Susan 

  7. Scott Koegler
    June 29, 2013

    The 'death' of EDI is a myth that's nearly as old as EDI itself. The most recent story is that XML will overtake and replace it for a number of reasons. But the fact that so much trade is managed by EDI means it's deeply embeded in the supply chain, and the cooperation that has been built up over the years would need to be restarted… and for no real reason. The fact is that EDI works and works reliably.

    Here's a story that goes through the history and some of the arguments.

  8. Scott Koegler
    June 29, 2013

    The US Federal Trade Commission does monitor monopolization but there needs to be complaints brought to them. In fact, Loren Data has filed complaints and just recently lost its most current appeal at the US Supreme Court. I posted a link to one story about this in my article. 

  9. Tom Murphy
    June 29, 2013

    Rich: As I'm sure you know, the US government keeps a keen eye on inflation through the producer price index and other measures.  It is low. Troublingly low.

    I'm also concerned about broad phrases like “send prices soaring,” which often translates into 1 or 2 percent.  Exactly how much would the increased GXS fees raise the SRP on a new laptop?  That would be more interesting to me, though I see the point Scott is making in his blog here.  

    He didn't raise the question of whether suppliers will seek to take their daisy chain to a new exchange.  How indispensible is GXS?

  10. Tom Murphy
    June 29, 2013

    Scott:  Actually, I believe the FTC can act on its own to enforce antimonopoly rules.  It may even be required to do so by its charter.  There are probably a half-dozen other US agencies involved in trade regulation that also could play a part, and because this is an international matter, many other nations could play in this game.

  11. Tom Murphy
    June 29, 2013

    Scott:  One thing I've noted about the supply chain is, for all the talk about the need for agility and flexibility, it is depressingly old-school.  Inertia seems to be the over-riding characteristic of many, many participants.   Maybe this whole issue will be the spark that lights a fire under some of those folks to try something new. Who knows? Maybe there's a better way.

  12. Tom Murphy
    June 29, 2013

    Rich: The government watches  industry, but who watches the government while it watches the industry?   I'm a big fan of whistle-blower programs designed to encourage crowd-sourcing on illegal activites that otherwise might go unnoticed — both in industry and the government.

  13. elctrnx_lyf
    June 29, 2013

    I do not really have a basic know how of the edi and gsx. But definitely a single company shouldn't affect the business of all the companies at the same time with a single new rule. I believe the businesses should be able to find low cost alternatives that could not only help the business and customers but also eradicate monopoly

  14. Taimoor Zubar
    June 30, 2013

    I thought there are alternate ways for companies to exchange documents rather than using EDI.”

    @Prabhakar: I do agree that there are alternates available for EDI but companies have mould their business processes around EDI and it's not every easy for them to switch away. Besides, they don't really have an incentive to do so. I don't think an increase in price would also have an impact.


  15. Taimoor Zubar
    June 30, 2013

    The government watches  industry, but who watches the government while it watches the industry?  “

    @Tom: That's a very valid concern. I have seen industries form a body of their own to monitor what the government is doing but that team can only point out the flaws. There's no higher authority that the body can take its concerns to against the government.

  16. ahdand
    June 30, 2013

    @Rich: Good one. I also hope so that it will happen in a very positive manner 

  17. Hailey Lynne McKeefry
    July 1, 2013

    Your question got me to thinking so I did some research. Here's what the goverment said (according to the US inflation calculator on http://www.usinflationcalculator.com/) between 1913 and 2013, the cumulative rate of inflation is calculated at 2253.0%. Something that cost $20 then would cost $470.60 now.

     

    I understand that it depends on the item. Clothing and many manufactured goods probably cost less… I'm not sure that dollars stretch as far as they used to when you consider it in  broad sense though.

  18. Hailey Lynne McKeefry
    July 1, 2013

    Good point, Tom. Power to the poeple! it's important that in goverment and organizations alike that people feel not only empowered but also responsible for making sure that things go well.

  19. FLYINGSCOT
    July 3, 2013

    It is always frustrating seeing companies still use paper systems for order processing and the likes.  EDI should enable us to move to a completely paperless system which should benefit everyone involved.  I hope there are no monopolies though as healthy competition should always be encouraged.

  20. Scott Koegler
    July 3, 2013

    In fact there is another organization that has an even wider reach over EDI – the organization ASC X12 organization that is responsible for developing and maintaining the specification itself. There is a new development in the pricing of the specification that not only raises the cost of the specification documentation to as much as $19,000 but also adds a 20% annual 'maintenance fee' to the mix.  I just published a more fuly detailed explanation here.

  21. Hailey Lynne McKeefry
    July 23, 2013

    I first encountered the idea of the “paperless office” in the 80s and it seemed like a no brainer to me. However, we encounter the reality that people are emotionally and mentally wedded to old systems and you have to literally pry them out of their hands. It's one of those easier said than done sort of things.

  22. Hailey Lynne McKeefry
    July 23, 2013

    @skoegler, what do you think the real ramifications of these pricing structure changes are? I'd be interested in hearing your thoughts. (I enjoyed your article, by the way.)

  23. Scott Koegler
    July 24, 2013

    The reality is that a few relatively small pricing changes will likely have no effect on users and subscribers. However, I see a growing trend in the area of milking the internal processes of the supply chain. And at some point a different alternative will appear that makes better financial sense and may even be a better overall answer. But in the short term I don't see any major shifts or consumer price increases underway.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.