Logistics Management Institute EDI Opportunities at the Military Sealift Command TR501MR1 Harold L. Frohman James E. Cotterman EMI DTTO CV&jj'T, Logistics Management Institute EDI Opportunities at the Military Sealift Command TR501MR1 January 1997 Harold L. Frohman James E. Cotterman Prepared pursuant to Department of Defense Contract DASW01-95-C-0019 The views expressed here are those of the Logistics Management Institute at the time of issue but not necessanly those of the Department of Defense. Permission to quote or reproduce any Z except for government purposes must be obtained from the Logistics Management Institute. Logistics Management Institute 2000 Corporate Ridge McLean, VA 22102-7805 LOGISTICS MANAGEMENT INSTITUTE EDI Opportunities at the Military Sealift Command TR501MR1/JANUARY 1997 Executive Summary The Department of Defense is aggressively implementing electronic data inter- change (EDI) to eliminate costly paperwork. The Military Services, Defense Lo- gistics Agency, U.S. Transportation Command and its component commands, and the Defense Finance and Accounting Service have built or modified automated systems to support the electronic exchange of transportation information. The benefits of an electronic business environment include streamlined operations, improved communications, and more efficient operations. Using criteria that both the private and public sectors frequently employ, we ex- amined 14 business areas within the Military Sealift Command (MSC) for poten- tial application of EDI techniques. We eliminated eleven of these business areas as candidates for EDI. Four business areas (special missions, ship support, dry cargo, and mobilization sealift) had low transaction volumes and most of their trading partners were not EDI capable. We eliminated four other business areas (nonfuel petroleum products contracting, ship construction and repair, non-small- purchase contracting, and voyage and time charter contracting) because telecom- munications costs would negate any business savings. However, for these busi- ness areas, alternative electronic commerce methods, such as use of the Internet, may yield significant savings to MSC with minimal investment. We also elimi-' nated two other business areas (tanker operations and nonfuel petroleum products delivery orders) as EDI candidates because the anticipated savings totaled only $10,000, which could not justify the investment of time, money, and personnel needed to achieve them. Finally, we eliminated the small purchase contracting business area because of its planned move to the Naval Supply Systems Com- mand's Fleet and Industrial Supply Centers. Of the three remaining business areas, we found that only one is economically justified. We recommend that MSC use EDI to process ocean cargo invoices and payments. By doing so, MSC would save more than $1.4 million in direct costs and another $1.7 million in reduced interest charges over the next 10 years. In one of the final two business areas (commercial invoices), MSC is testing the use of EDI for nonfuel petroleum products invoices. However, our analysis shows in that an EDI investment in this area is not likely to result in major savings. Conse- quently, we recommend that MSC carefully review the test results before it ex- pands the initiative to all commercial invoices. In the last business area (liner agreements process), MSC and the Military Traffic Management Command are planning to reengineer their associated business processes. We recommend that MSC consider EDI as one of its key tools for reengineering the liner agreements process. By focusing its EDI investment dollars in the invoice processing and payment business areas, MSC will be able to streamline its operations and experience sig- nificant savings over 10 years. In addition, MSC's key trading partners, including U.S. flag carriers, will also reap the benefits of increased efficiencies, reduced costs, and prompt payments. IV Contents Chapter 1 Introduction 1_1 PURPOSE j_j OVERVIEW OF EDI J_J REPORT ORGANIZATION j_ 2 Chapter 2 EDI Opportunities 2-1 EDI FEASIBILITY CRITERIA 2-1 BUSINESS AREA ASSESSMENT 2-2 OPERATIONS 2-4 Special Missions 2-4 Tanker Operations 2-5 Ship Support 2-5 Dry Cargo -6 2 Mobilization Sealift 2-6 CONTRACTING 2-7 Nonfuel Petroleum Products Contracting 2-7 Delivery Orders for Non-Small Purchases and Nonfuel Petroleum Products 2-7 Ship Construction and Repair 2-8 Small Purchase Contracting 2-8 Non-Small-Purchase Contracting 2-9 Voyage and Time Charter Contracting 2-9 INVOICING AND PAYMENT 2-9 Ocean Cargo Invoicing 2-9 Commercial Invoice Processing 2-10 INTERMODAL PROGRAM: LINER AGREEMENTS 2-10 SUMMARY 2-n Chapter 3 Economic Analysis 3_1 DIRECT SAVINGS _! 3 INDIRECT SAVINGS 3.4 INVESTMENT COSTS 3.5 OPERATING COSTS 3_7 RECOMMENDATION 3_9 SUMMARY 3 9 Chapter 4 EDI Operating Concepts 4_1 OCEAN CARGO INVOICE PROCESSING AND PAYMENT 4-1 COMMERCIAL INVOICE PROCESSING AND PAYMENT 4.3 TECHNICAL CONFIGURATION 4.3 EDI Value-Added Network 4.4 EDI Host _ 4 5 EDI Translation Software 4.5 SUMMARY 4 5 Chapter 5 Implementation Strategy 5_1 IMPLEMENTATION PLAN AND SCHEDULE 5.1 SUMMARY 5 7 Appendix A Data Row Worksheets Appendix B Small Purchase Contracting Appendix C EDI Cost Savings Appendix D Alternative Electronic Commerce Solutions Appendix E Glossary FIGURES Figure 4-1. Ocean Cargo Invoice Processing and Payment Operating Concept 4-1 Figure 4-2. Commercial Invoice Processing and Payment Operating Concept 4-3 Figure 4-3. Electronic Commerce Center 4.4 VI Table of Contents TABLES Table 2-1. Initial Assessment of MSC Business Areas for EDI Potential 2-3 Table 3-1. EDI Project Economic Benefit Analysis 3_1 Table 3-2. Direct Cost Savings from EDI 3.4 Table 3-3. Indirect Savings Attributable to Reduced Interest Charges 3-5 Table 3-4. EDI Investment Costs . 3 6 Table 3-5. Estimated Operating Costs 3.7 Table 3-6. Net Savings _ 3 9 Table 5-1. Implementation Plan and Schedule 5_2 vn Chapter 1 Introduction PURPOSE The Department of Defense is implementating electronic data interchange (EDI) on a widespread basis. The military services, Defense Logistics Agency, U.S. Transportation Command (USTRANSCOM) and its component commands, as well as the Defense Finance and Accounting Service (DFAS) have built or modi- fied automated systems to permit the electronic exchange of transportation infor- mation. These exchanges are designed to streamline operations, improve communications, and enhance operational efficiencies. These are also the prem- ises of the Military Sealift Command (MSC) Reinvention Implementation, Febru- ary 1996, as well as its Electronic Commerce (EC) Electronic Data Interchange (EDI) Implementation Plan, Version 1.0, dated 6 March 1996. This report presents an analysis of EDI opportunities to guide MSC in imple- menting its EDI program. It identifies the most promising opportunities for ap- plying EDI. analyzes the life-cycle benefits and costs of those opportunities, and provides an implementation plan and schedule designed to help MSC implement EDI in an orderly and cost-effective manner. We reviewed operations, acquisition and contracting, invoicing and payment, and the intermodal program for potential EDI projects. EDI OVERVIEW OF Electronic data interchange is the computer-to-computer exchange of routine business information in a standard format. It is an automated system designed to link transactions to application software to improve a business process. It relies on business application software. EDI information should flow from one application to another without human intervention; the result is streamlined business opera- tions with less chance of human error. The term "electronic commerce" encompasses EDI and other forms of electronic communication, including fax, electronic mail, and the Internet, used in business- to-business communication. Since the mid-1980s, the private sector has steadily begun to embrace the concept of using EDI systems to replace paper purchase orders, shipping notices, pay- ments, and a variety of other business documents. According to Robert Clifton, secretary of the EDI Coalition of Associations, most major shippers and many of 1-1 the large companies, such as automobile manufacturers, are using EDI heavily. According to at least one estimate, more than 44,000 U.S. companies use EDI in their business operations.1 However, the majority of small companies are not us- ing EDI. For example, in 1991,10 of the largest ocean carriers agreed to develop a com- mon shipping information system by establishing the Information Systems Agreement (ISA). The result was the development of common EDI software, known as Ocean, which provides common booking, documentation, tracking, and invoicing capabilities. ISA's core group of ocean carriers operate 400 cargo ves- sels and transport 1.4 million 20-foot containers at 300 ports, and serve about half the shippers worldwide. Since 1986, when the Department of Defense established a Defense Transporta- tion EDI (DTEDI) program, the Defense transportation community has made an effort to establish and expand its use of EDI. This effort was reinforced in May 1988, when Deputy Secretary of Defense William H. Taft IV directed DoD com- ponents to make "maximum use of electronic data interchange for the paperless processing of all business-related transactions." Several major initiatives have occurred within Defense transportation since then: ♦ In February 1994, the Defense Logistics Agency began transmitting gov- ernment bills of lading (GBLs) electronically to the DFAS. ♦ In May 1994, the Deputy Under Secretary of Defense (Logistics), DUSD(L) directed all DoD components to make maximum use of EDI in their business-related transactions. ♦ In January 1995, the DUSD(L) designated USTRANSCOM as lead agency for the DTEDI program. Subsequently, USTRANSCOM developed a strategic plan for managing the program and accelerating its expansion. DoD now uses EDI to exchange bills of lading, invoices, rate tenders, and shipment status messages throughout its components and with industry. REPORT ORGANIZATION Although the primary purpose of this report is to identify and assess EDI opportu- nities within MSC, we also provide a detailed concept of operations and imple- 'Doug Harper, "Many Shippers Slow to Use New Technology," Journal of Commerce, 13 November 1995, p. 5C. 2Robert Mottley, "ISA's Ocean Attracts a Following," American Shipper, December 1995, pp. 71-72. 3 William H. Taft, IV, "Electronic Data Interchange of Business-Related Transactions", Memorandum, The Deputy Secretary of Defense, 24 May 1988. 1-2 Introduction mentation plan for integrating the recommended opportunities into MSC's opera- tions. ♦ Chapter 2 assesses EDI opportunities within MSC and identifies those that merit further consideration. ♦ Chapter 3 presents an economic analysis of the estimated benefits and costs of each potential project. ♦ Chapter 4 provides detailed operating concepts for the recommended proj- ects. ♦ Chapter 5 describes the tasks MSC should undertake to implement the recommended projects and includes a proposed schedule. Finally, several appendixes provide a variety of supplementary information, in- cluding details that support the analysis presented in the body of the report. 1-3