Wal-Mart is making an e-commerce move that only a company with its power and influence could pull off: It has mandated that all of its suppliers begin to move all their electronic data interchange (EDI) transactions over the Internet.
EDI is the lifeblood of a retailerâs business, the way in which it exchanges purchase orders and other key information with its supply base. Wal-Mart built its empire by being able to cut prices more steeply than competitors, in large part due to its early, aggressive use of technologies such as EDI.
Traditionally, EDI transactions have moved over private "value-added networks," or VANs. Those networks route and manage EDI messages for customers, an important middleman role that relieves trading partners from having to handle those complex tasks.
Testing and explaining
Wal-Mart has already begun testing its program with a few big suppliers, and recently sent a missive to its supply base explaining the new direction.
"Itâs a good deal for Wal-Mart," said Ken Vollmer, analyst with Giga Information Group, noting that the retailer stands to save millions of dollars in VAN fees by moving traffic to the Internet.
Vollmer cautions that while Internet-based EDI is by nature less expensive than VAN-delivered transactions, the cost of supporting and managing those transactions in-house can eat away at the savings. But Wal-Mart may be big and powerful enough to overcome such concerns, he said.
"They are big enough to tell people what to do if they want to do business with them," Vollmer said. "They can also afford the staff and the technical people to monitor the thousands of connections that will now be coming in."
Wal-Mart said the move is designed to cut costs and improve customer service. "Any savings get driven right to the bottom line," a company spokesman said. "We look to take out any cost we can." (Wal-Mart executives would not comment for this story.)
Wal-Mart has more than 14,000 suppliers who process more than $217 billion worth of transactions via EDI annually. Those suppliers can choose to link up with Wal-Mart via the Internet by any approach, and through any vendor, they like. However, they must comply with a new standard, dubbed AS2, that brings the security and reliability of private networking to public Internet EDI.
According to analysts, Wal-Mart is the first company to mandate that its suppliers make use of the standard, and itâs one of the first large companies to commit so heavily and broadly to Internet-based EDI.
Wal-Mart has cut a deal with vendor iSoft, which is providing back-end Internet EDI services to the retailer, to act as the preferred vendor for helping suppliers move to Internet-based EDI. As part of the agreement, iSoft is offering to get companies linked up for just a $300 annual support fee.
"I think itâs going to have a fairly dramatic effect on the industry," said iSoft CEO Christian Putnam.
For suppliers, tough choices lie ahead. In many cases, it may not make economic sense to support a new communications infrastructure just for Wal-Mart. Many smaller suppliers almost certainly wonât have the technical capacity to manage a move to a new EDI platform.Yet, especially in this tough economy, few businesses would be willing to lose Wal-Mart as a customer.
One solution: Go back to those long-standing EDI value-added network providers and make use of emerging services that deliver EDI messages coded to the new AS2 standards via a private network, rather than the Internet.
For suppliers, Vollmer said, that eliminates any cost-savings that might come with Internet EDI. But they get to keep Wal-Mart as a customer.
And Wal-Mart? Since their end of the network link is now Internet-based, theyâll save money whether the supplier does or not, he said.