A formal model of the introduction of a vertical EDI system

Electronic data interchange (EDI) between firms is becoming increasingly important for increasing the efficiency of operations and for implementing new business strategies, such as just-in-time manufacturing. The authors examine the impact of the introduction of an EDI system on the manufacturer-supplier relationship with the help of a formal model. Key issues are the importance of transaction volume of the suppliers and the possibility of credible threats of the manufacturer to substitute a supplier. The notion of `process benefits´, i.e., benefits deriving from overall changes in the way a manufacturer does business because of the system (e.g., changes in manufacturing philosophy) is introduced. The authors show that a manufacturer´s expectation of process benefits exert an externality on smaller suppliers to join the system. The practical implications of the model are discussed leading to guidelines for the introduction of a vertical EDI system