BUSINESS VALUE OF INFORMATION TECHNOLOGY: A STUDY OF ELECTRONIC DATA INTERCHANGE

8/8/2019 BUSINESS VALUE OF INFORMATION TECHNOLOGY: A STUDY OF ELECTRONIC DATA INTERCHANGE

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FUSION OF BUSINESS AND IT

ADITYA KUMAR SINGH(09609040)ABASH ANKUR SURANA(09609065)

NITIN GUPTA(06502928)

SADANAND OJHA(09609106)

BUSINESS VALUE OF INFORMATION

TECHNOLOGY: A STUDY OF ELECTRONIC DATA INTERCHANGE



INTRODUCTION

INFORMATION TECHNOLOGY

A matter of serious concern for management today but has

enormous potential for improving the performance of an

organization.

Recent studies of IT indicates two limitations:-

IT is often treated as single factor.

Cross-sectional or short time series.

A longitudinal study was undertaken to overcome

such limitations i.e. EDI (Electronic Data

Interchange).

9/28/2010 2Business value of Information Technology:A study of Electronic Data Interchange



BUSINESS VALUE OF IT

Studies which have little or no impact on firm¶s

performance:-

Productivity impact of IT in manufacturing sector.

Productivity of information and production workers.

Studies which show positive impact on firm¶s

performance:-

Classified IT in three categories based on management goals.

Two stage analysis of intermediate & final output variables.




BUSINESS VALUE OF IT

(CONTD.)

The overall findings of the four studies did not find strong

evidence of IT impact.

Reasons for such results were:-

Has to contend with two complex issues: measurement &data as the IT impact can not accessed in isolation ,

confounding effects of other such as labor, non-IT capital.

The complexity of teasing out the benefits & value

necessitates the use of rigorous scientific methods oftenmissing in prior work.




BUSINESS VALUE OF EDI

Three studies conducted to study the EDI impact -

First at LTV Steel on its EDI linkages with outside

processors.

U.S. automobile manufacturer & its first-tier suppliersreport.

A order processing system with EDI.

But none of these revealed the business value of EDI as

each used cross-sectional data & failed to capture thegain.




EDI AT CHRYSLER

Launched electronic communication with few suppliers in

1969.

In 1976, implemented an online receiving system to track shipping information.

EDI, launched in 1984, with Supplier Delivery Schedule

transaction to give precise shipping quantities to

suppliers electronically. In 1990, ANSI X12 standard was mandated and adopted

universally by assembly plant suppliers.




IMPROVE MENTS DU E TO EDI

The Supplier Delivery Schedule provided production

schedule information for a 10-day period.

Suppliers were given a long-term forecasts throughMaterial Release Transaction Set.

Transmission of Advance Shipping Notices (ASN) to

Chrysler assembly plants.

Chrysler changed the Schedule Delivery Program which

improved & simplified the planning & control functions

of route managers.




Supplier Delivery Program




ADDITIONAL

IMPROVEMENTS DUE TO EDI

Improved information attempts to stabilize assembly line

production rate.

Reduced uncertainty for inventory management.




MODELING THE EDI

IMPACT The major benefits of EDI system are:

Improved information exchanges between Chrysler and its

suppliers may lead to cost savings.

Electronic Preparing and processing the documents should leadto savings over manual mode.

our analysis focuses on following four cost categories at

assembly centers:Inventory Holding Cost

Obsolete inventory cost

Transportation cost

Premium freight



INVENTORY HOLDING COST

Our hypotheses is that Inventory Turnover (INV) is a function of following:

Launching of EDI program(PROGRAM)

Level of EDI penetration, measured by the percentage of material dollars

procurement under the EDI program.

To isolate the effects of EDI, we must control the plant characteristics that impact the

level of INV.

To capture these factors, two more variables are introduced:

Production volume (VOLUME), measured in 000 of vehicles per year.Production parts (PARTS), to capture part variety.

Thus, INV is specified as a linear function of PROGRAM and EDIP( positive impact);

PARTS and VOLUME(negative impact).




OBSOLETE INVENTORY COST ( OBS)

EDI should result in lower inventory write offs when it comes time

for yearly model change.To control the effect of characteristic , following variable are

introduced:

Minor model changes(MIN

O

R) between 5 to 15% new parts.Major model (MAJOR) with more than 15% new parts.

The dependent variable is OBS (the annual material dollars in 000

written-off at assembly plant)

Thus, linear model for OBS includes EDI related variables (PROGRAM,EDIP*VOLUME) and control variables (VOLUME, PARTS, MINOR,

MAJOR)




TRANSPORTATION COST

The normal transportation cost is likely to be affected by EDI.

Unfortunately, data on transportation cost is not available for

the period study.

Instead, the changes in unit transportation cost was

decomposed to find the effects of changes of prices, mix and

management control of different modes at a system-widelevel.




PREMIUM FREIGHT EDI program allowed Chrysler to control premium freight because of

speedy information sharing with suppliers.

We hypothesize that EDI would reduce premium freight (PFRGHT).

Hence, a linear model is proposed for PFRGHT with two EDI variables

(PROGRAM & EDI*VOLUME) and two control variables (VOLUME &

PARTS)

The EDI variables should reduce the freight & control variable should

increase it.




DATA COLLECTION AND

MODEL ESTIMATION Cross Sectional and time series data were combined toassess the impacts of EDI systems. There are twoadvantages of this Data set:

1. It allows to track the same assembly plants over adecade.

2. Is described several assembly sites of similar productscapturing sufficient diversity without introducingunacceptable heterogeneity into the data set.



SPECIFICATION OF MODEL

The Data set developed primarily from computerizedproduction, accounting, and engineering data withsufficient amount of care.

This Data was expected to be good quality becauseChrysler assumes the legal title of each vehicle as itcomes off the assembly line.

The Inventory Turnover was used rather than InventoryCost data because the latter is more difficult tomeasure.




SPECIFICATIONS OF MODEL

(CONTD.)




With the above mention specifications of this model, it

leads to the result that both plants had significant

improvement in inventory turnover at the launch of EDI in 1984.




INVENTORY CARRYING

COST

With this model, it indicates that both the launch of EDI program and its penetration over time significantlyhelped improve inventory turnover. These resultscapture the adverse effects of large plant and high

parts variety.

Plants with higher turns have less to gain compared toplants that have lower inventory turns.

The rate of savings tends to diminish with increasedEDI penetration because inventory costs are inverselyproportional to inventory turnover.




SAVINGS FROM LOWER

INVENTORY

The above figure depicts the impact of EDI on the

inventory carrying cost for three sizes of assembly

plants. The savings were calculated based on as annual

carrying cost of 20%.9/28/2010 20Business value of Information Technology:

A study of Electronic Data Interchange



OBSOLETE INVENTORY COST

The effect of EDI was to lower the obsolescence cost as

is evidenced by the negative sign of the coefficient of

PROGRAM and EDI * VOLUME. The effect of model

change was to escalate write offs.




OBSOLETE INVENTORY COST

(CONTD.)

The EDI impacts on material obsolescence cost are

illustrate in graph. It is clear from the figure that the

initiation of the EDI program leads to a reduction of material write off by almost 0.17 million dollars. As

the level of EDI penetration increases, the extent of

savings increases, so the additional gains are larger for

bigger plants.




IMPACT OF EDI PENETRATION ON

PREMIUM FREIGHT

Plants with low variety of parts incur less premium

freight for any level of EDI penetration compared to

high variety plants and size of plant may influence to

increase the premium freight.




SAVINGS IN INFORMATION

HANDLING COSTS

An obvious source of savings that result from using EDI isthe reduction in information handling costs. These costs arerealized from reduced personnel cost and lowertransmission charges.

The use of EDI affects a series of clerical activities(document filing, mail preparation, & etc.) normallyperformed in a manual system.

From electronic document preparation and transmissionfor Chrysler, the savings goes about $38.63 per vehicle.




EDI IMPACT

The impact per unit vehicle cost from reduction in

inventory carrying cost, obsolete inventory cost, and

premium freight can be quantified.

The cost reduction was calculated for the average EDI

penetration was about 90 percent.

Thus the savings from improved information exchanges

for 90 percent EDI penetration is over $60 per vehicle.




ESTIMATION OF TOTAL

SAVINGS




BENCH MARKS

THEORY

RELATED

C ONCERN

Lack of theoretical

analysis

Lack of theoretical

analysis

Need for

processorientation

Need for

processorientation

METHOD

RELATED

CONCERN

Possibleconfoundingfactor

Possibleconfoundingfactor

Need forsophisticated

modeling andanalysis

Need forsophisticated

modeling andanalysis

MEASU REMENT

RELATED

CONCERN

Measurement of IT and output

Measurement of IT and output

Aggregation problem Aggregation problem

DATA

RELATED

CONCERN

Data qualityData quality

Problem of

Crosssectional data

Problem of

Crosssectional data

OTHER

CONCERN

MismanagementMismanagement

Redistribution Redistribution




CONCLUSION




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BUSINESS VALUE OF INFORMATION TECHNOLOGY: A STUDY OF ELECTRONIC DATA INTERCHANGE