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This paper empirically studies Electronic Data Interchange (EDI) adoption and implementation by US automobile suppliers by focusing on their incentive systems. Based on our survey data from 103 first-tier and second-tier suppliers and personal interviews, our study found that: (1) there was a gap of understanding about EDI benefits between firms that use EDI and those that don't; (2) the distinction between first-tier and second-tier suppliers was becoming ambiguous because of more competitive supplier selection practices; (3) EDI adoption among second-tier suppliers was low, primarily because of perceptions of low benefits and high costs and asymmetric benefits in favor of customers and also because of a lack of trading partners with EDI capability; (4) there were no essential differences between the US firms and Japanese transplants; and (5) proactive companies perceived EDI as having significant competitive advantages, while reactive companies considered EDI as only a necessity.

The growth in just-in-time (JIT) and quick response (QR) business practices has increased the needs for developing better inter-firm coordination (Premkumar et al., 1997) and hence inter-organizational systems. Inter-organizational systems are information systems that are developed and used by two or more networked organizations (Crook and Kumar, 1998). Electronic Data Interchange (EDI) is one form of business-to-business electronic commerce that can help coordinate the various firms in a supply chain. Of course, routine communications over the Internet are widely accepted, and even EDI over the Internet is increasing because of its lower costs. However, issues of security, accuracy, and the size of files may hold up Internet usage for production and business transactions (Brunell, 2000). Instead, Value-Added Networks (VANs) or dedicated lines will continue to play a crucial role (Rassameethes, 1999). The American National Standards Institute (ANSI) defines EDI as the transmission, in a standard syntax, of unambiguous information of business or strategic significance between computers of independent organizations. The United Nations EDI for Administration, Commerce, and Transportation (UN/EDIFACT) gives a similar definition—EDI is the interchange of standard formatted data between computer application systems of trading partners with minimal manual intervention (Kalakota and Whinston, 1996). These and other definitions of EDI emphasize the need for communication standards and computer-to-computer communication for inter-organizational coordination. In the US, EDI application began in the 1960s with the transportation industry using an EDI standard developed by the Transportation Data Coordination Committee (Sokol, 1989). EDI use spread widely as computer applications and communication costs declined, and by the 1980s EDI was being used in a wide range of industries, including automotive, retail, and government sectors (Zimmerman, 1996 and Kalakota and Whinston, 1996). The advantages of EDI are not only replacing paper documents with electronic equivalents, but also eliminating clerical errors from duplicate manual data entry (Arunachalam, 1997). This results in faster order processing and therefore lower lead-times between order receipt and fulfillment. The greater accuracy and reduced lead-time both contribute to lower inventory costs and more precise delivery schedules. Electronic surrogates for billing have led to improved cash flows, and fewer data-entry employees have lowered overall administration costs. Eliminating dependence on unreliable postal systems is another advantage. As with other telecommunication technologies, EDI is subject to positive network externality characteristics, i.e., its utility increases with the level of its adoption by other related firms (Brousseau, 1994). A critical number of trading partners must be realized to gain significant benefits of using EDI. Therefore, widespread EDI adoption is considered important for achieving a volume of transactions that make EDI implementation economically justified (Iacovou et al., 1995). Although EDI has been available for approximately thirty years, and its benefits are widely acclaimed, the level of EDI diffusion is considered low (Senn, 1998, Gottardi and Bolisani, 1996 and Brousseau, 1994). In the US, of the 2 million companies with more than 10 employees, only 100,000 companies have adopted EDI (Radosevich, 1997). Many practitioners complain that convincing trading partners to implement EDI is more difficult than implementing EDI in the first place (Iacovou et al., 1995). In fact, an industry joke is that most companies are so unfamiliar with EDI that they do not even know how to spell it (Kalakota and Whinston, 1996). Although EDI is becoming an intensive issue in industry, surprisingly few attempts have been made to investigate empirically the incentive systems for auto suppliers' EDI adoption. One survey was performed by the Industrial Technology Institute Center for Electronic Commerce (Morell et al., 1995). However, the focus of that survey was on small- to mid-sized firms in a variety of industrial sectors including automotive, aerospace, semiconductor, telecommunications, and defense. Arunachalam (1997) states that there has been insufficient insight into adoption and management of EDI systems, and so more empirical studies are needed to enrich the understanding about issues of EDI adoption. In this paper, we study systematically the reasons why EDI is or is not adopted by automobile suppliers in the US. Our approach is a hypothesis-generating type, rather than a hypothesis-testing type. This is because it is difficult to construct hypotheses for relatively new subjects such as EDI use by second-tier suppliers (Cook and Campbell, 1979).

This paper empirically examined EDI adoption and implementation by automobile suppliers by focusing on their incentive systems. Based on our survey data from 103 first-tier and second-tier suppliers and personal interviews, our study found that for non-adopters the perception of ambiguity of EDI benefits was a primary barrier. Such a perception by non-adopters of low benefits was more significant than the perception of high costs. However, for adopters the perception of low benefits was considered less significant than the perception of high costs. This reflects a gap of understanding about EDI between non-adopters and adopters. We also found that both adopters and non-adopters perceived the presence of asymmetric EDI benefits in favor of customers (EDI promoters). Lack of trading partners with EDI capability was also a significant barrier for non-adopters. This may imply that a larger number of EDI-capable trading partners will make EDI more cost-effective and justified in terms of network externalities. Although financial capabilities are a constraint for adopting EDI, even small companies can benefit from EDI. For example, among the 81 adopters in our sample, there were 15 companies with annual sales below $10 million. Two of these companies (one with only $3.8 million annual sales) successfully integrated their EDI systems with their customers, suppliers and banks. EDI over the Internet is significantly less expensive than traditional VAN systems. This will probably become the favored system for small companies in the future when problems with security are solved. The trend of using fewer suppliers in the automobile industry will also speed up the process of EDI diffusion, since presumably the remaining suppliers will be larger and more able to justify EDI. The importance of network externalities, economies of scale, financial resources and the perception of asymmetric EDI benefits must be considered by EDI promoters when developing strategies for promoting EDI to their suppliers. Identifying and grouping suppliers on the basis of their readiness may be necessary in order to make promotion programs efficient and effective, as Vermaa et al. (1998) propose. For example, EDI promoters should give first priority to the group of large suppliers with many trading partners that are EDI capable. This group will potentially benefit most, so they will have the least resistance to adopting EDI. Small companies with few EDI-capable trading partners should be given the lowest priority because this group will be likely to have the highest resistance to adopting EDI. As the number of adopters grows, the resistance of this group will probably diminish.Training programs are also very important in the process of EDI diffusion and implementation because, as this study revealed, there is a significant perception of low and asymmetric EDI benefits. EDI promoters' help in this learning process is crucial. However, imposing mandatory EDI use without helping to improve understanding about EDI may only heighten the perception of asymmetric EDI benefits. This will discourage the managerial proactiveness that is important to integrate EDI systems. For the same reasons, imposing penalties on suppliers that make mistakes in operating EDI will probably backfire in the long run, since suppliers will consequently perceive EDI as a burden and compensate the costs of adopting EDI into the price of their products. Instead, EDI promoters should try to help eliminate the causes of errors in order to benefit both parties. We observed that the diffusion of EDI in second-tier suppliers is slower than in first-tier suppliers, apparently because of their significantly lower perceptions of benefits. The first-tiers' higher perception of EDI benefits, especially in the area of improving customer services, may reflect the higher pressure from their customers (OEMs) to adopt EDI. Since customer-push was found to be the most important motivation for adopting EDI, the lower adoption by second-tiers is likely to be due to the lower external pressure on them or higher managerial discretion for not adopting EDI. Because second-tiers had greater difficulties in externally integrating their EDI systems, EDI promoters should offer their suppliers creative incentives to compensate for the extra costs of operating EDI from initiation until achieving a critical mass of operations. Offering such incentives will decrease the perception of asymmetric EDI benefits and encourage proactive adoption.In comparing suppliers to US firms and Japanese transplants, we found hardly any significant differences between these groups in their understanding of EDI. One significant difference is Japanese companies' higher perception of changes needed in their business processes to implement EDI. Our study confirms the trend of behavioral convergence between US and Japanese companies in the areas of EDI usage. At the industry level, uncertainties about investment and operation cost due to the lack of transaction standards and high frequency of software/hardware changes seemed to significantly hamper the process of EDI diffusion and performance. There are a large number of dedicated systems with limited inter-communication capability. This significantly diminishes the network externality advantage of EDI. Accordingly, industry associations such as AIAG have a very important role in developing and enforcing a common technical standard. Cooperation between users' groups and software vendors is necessary to control vendors' opportunistic behavior by offering “technology for technology's sake,” in which vendors continually try to offer new technology solutions for the sole purpose of creating new markets (Bensaou and Earl, 1998). EDI systems can generate both operational and strategic benefits to suppliers who have adopted them. EDI integration, both externally and internally, seems to be critically important. We found that managerial proactiveness seems to be associated with the success of EDI implementation. This is plausible because the success of EDI requires a proactive champion to ensure cooperation and commitment of all participating firms in the inter-organizational system. Proactive companies could also have a strong willingness to identify potential EDI benefits and to learn about them as competitive weapons in the marketplace. Accordingly, our findings can be summarized as the following hypotheses: 1.there is a gap of understanding about EDI benefits between firms that use EDI and those that don't; 2. the distinction between first-tier and second-tier suppliers is becoming ambiguous because of more competitive supplier selection practices; 3.EDI adoption among second-tier suppliers is low primarily because of perceptions of low benefits and high costs and asymmetric benefits in favor of customers and also because of a lack of trading partners with EDI capability; 4. there are no essential differences between the US firms and Japanese transplants; and 5.proactive companies perceive EDI as having significant competitive advantages, while reactive companies consider EDI as only a necessity. Finally, the opportunity for further research into EDI adoption seems to be great with respect to the characteristics of the data. Specifically, the findings in this research must be interpreted with care, since they mainly stem from cross-sectional data and therefore cannot validate causal predictions. Research with respect to different industries (e.g., consumer electronics, machine tools) would also broaden our understanding of business-to-business electronic commerce.