Electronic Data Interchange

Electronic Data Interchange (EDI)

Electronic data interchange (EDI) is the electronic exchange of business informationpurchase orders, invoices, bills of lading, inventory data and various types of confirmationsbetween organizations or trading partners in standardized formats. EDI also is used within individual organizations to transfer data between different divisions or departments, including finance, purchasing and shipping. When the focus of EDI centers on payments, especially between banks and companies, the term financial EDI (FEDI) is sometimes used. Along with digital currency, electronic catalogs, intranets and extranets, EDI is a major cornerstone of e-commerce overall.

Two characteristics set EDI apart from other ways of exchanging information. First, EDI only involves business-to-business transactions; individual consumers do not directly use EDI to purchase goods or services. Secondly, EDI involves transactions between computers or databases, not individuals. Therefore, individuals sending e-mail messages or sharing files over a network does not constitute EDI.

While the concept of e-commerce did not receive widespread attention until the 1990s, large companies have been using EDI since the 1960s. The railroad industry was among the first to adopt EDI, followed by other players in the transportation industry. By the early 1980s, EDI was being used by companies in many different industry sectors. In the beginning, companies using EDI transferred information to one another on magnetic tape via mail or courier, which had many drawbacks including long lead times and the potential for a tape to be damaged in transit. Dur ing the 1980s, telecommunications emerged as the preferred vehicle for transferring information via EDI.

By the new millennium, EDI was used widely in many industries including manufacturing, finance, and retail. Some large retailers, among them Sears and Target, required suppliers to use EDI in order to engage in business transactions with them. Additionally, the Federal Acquisition Streamlining Act of 1994 (FASA) required all agencies within the United States government to use EDI.

Communication Methods.

After identifying trading partners, entering into TPAs with them and purchasing the necessary hardware and software, a means of communication must be chosen. EDI can occur point-to-point, where organizations communicate directly with one another over a private network; via the Internet (also known as open EDI); and most commonly, via value-added networks (VANs) provided by third-party value-added-network services.

VANs are networks dedicated exclusively to EDI. Not only do they function like telephone lines by allowing for the transfer of information, they also contain storage areas, similar to e-mail boxes, where data sent from one party can be held until it is scheduled to be delivered to the receiver. VANs are able to provide translation services to small organizations that find it too cost prohibitive to do in-house with their own software. Companies may need to join more than one VAN because their partners belong to more than one. However, by the early 2000s most VANS were able to communicate with one another.

In addition to translation, VANs offer a wide variety of other services including data backup, report generation, technical support, training, and the issuance of warnings if data is not properly transmitted between parties. Depending on need, all of the services offered by a VAN may not be required by a particular company. VANs vary in the way they charge companies. Some charge high implementation or setup fees followed by low monthly usage fees, or vice versa. Charges often are made based on the number of documents or characters involved in a given transmission. For example, one EDI provider charged its clients a monthly mailbox fee of $17.50, followed by a charge of 30 cents per 1,024 characters (per kilo character or k/char) transmitted. Additionally, charges can vary depending on participants' phone companies and the time of day when transactions are made. It can be less expensive for companies to make transactions during off-peak or evening hours.

In the early 2000s, although many companies still relied on VANs, the Internet was playing a larger role in EDI. It is possible for companies to translate EDI files and send them to another company's computer system over the Internet, via e-mail or file transfer protocol (FTP). Because it is an open network and access is not terribly expensive, using the Internet for EDI can be more cost effective for companies with limited means. It has the potential to provide them with access to large companies who continue to rely on large, traditional EDI systems. The low cost associated with open EDI also means that more companies are likely to participate. This is important because the level of value for participants often increases along with their number. However, this also presents a dilemma for large companies who have invested a considerable sum in traditional EDI systems. Furthermore, Internet service providers (ISPs) usually do not offer the kinds of EDI-specific services provided by VANs.

While the automotive and retail industries have experimented with open EDI for some time, the efforts didn't result in widespread adoption by small suppliers, usually due to cumbersome requirements like the installation of on-site software. Incorporating EDI into e-marketplaces was an approac h that held more potential. In March 2000, an e-marketplace called the WorldWide Retail Exchange (WWRE) was established. It allowed suppliers and retails in various industry sectorsincluding retail, general merchandise, food and drugstoresto conduct transactions over the World Wide Web. After one year of operation, the WWRE had 53 retailer members with combined annual turnover of $722 billion. Leading retailers, among them Kmart, Rite Aid, Best Buy, and Target, planned to offer a Web-to-EDI translation service on WWRE so it would be easier for smaller suppliers to do business with them. In this arrangement, the retailers send purchase orders to a data center where they are translated to a language that can be read with a Web browser like Internet Explorer or Netscape Navigator. Suppliers are then notified about the PO and allowed to respond. This is a break from true EDI, since orders are handled manually by suppliers.

In addition to the Internet, intranets (pri vate internets) and extranets (links between intranets and the Internet) also showed potential for EDI. According to The International Handbook of Electronic Commerce, "The Extranet makes it possible to connect several organizations behind virtual firewalls. For example, suppliers, distributors, contractors, customers, and trusted others outside the organization can benefit from establishing an Extranet. The Internet is used to provide access to the public; the Intranet serves the internal business; Extranets provide a critical link between these two extremes. Extranets are where the majority of business activity occurs. They enable commerce through the Web at a very low cost and allow companies to maintain one-to-one relationships with their customers, members staff and others."

Communication Standards.

As previously mentioned, when companies use EDI to exchange information, translation software is an important part of the p rocess. During EDI, information is usually translated to and from one of several different standard languages, including ANSI X12 and EDIFACT. These languages are more flexible than custom standards developed by individual companies for their specific use.

Because of its reliability and flexibility, ANSI X12 was the most widely used North American standard in the early 2000s. Also called ASC X12, ANSI X12 was developed by the American National Standards Institute (ANSI), which administrates and coordinates voluntary industry standardization within the United States. In addition to its prevelance in North America, this standard also was used in Australia and New Zealand.

Created in 1987 with the cooperation of the United Nations, Electronic Data Interchange For Administration Commerce and Transport (EDIFACT) standards combine the best aspects of ANSI X12 and a standard known as United Nations Guidelines for Trade Data Interchange (UNTDI ). Because it is so universal, EDIFACT is suited for use in international EDI. Although EDIFACT was becoming increasingly popular in the early 2000s, it lacked the comprehensiveness of ANSI X12.

In addition to ANSI X12 and EDIFACT, other EDI standards also exist, including Global EDI Guidelines for Retail (GEDI), used within North America for international trade; the grocery industry's Uniform Communication Standard (UCS); Voluntary Inter-Industry Commerce Standards (VISC), used by retailers of general merchandise; Warehouse Information Network Standard (WINS), used by public ware-houses; TRADACOMS, created by the Article Numbering Association and used by retailers in the United Kingdom; and NACHA, developed by the National Automated Clearing House Association and used for transactions in the banking industry. For companies using open EDI, a language called extensible markup language (XML), similar in some respects to hypertext markup language (HTML), all ows users to share information in a universal, standard fashion without making the kinds of special arrangements EDI often requires and regardless of the software program in which it was originally created.

How Edi Works

During EDI, information is sent from one participant's computer system and translated to a standard format with special translation software. It is then transmitted to another participant, translated back from the standard format into a format used by the receiver and entered into the receiver's computer system. Thus, EDI allows participants to transfer information between their respective computer systems, even if the systems utilize different, incompatible platforms.

Before using EDI, companies usually enter into specific agreements with their trading partners (called trading partner agreements or TPAs). These contracts often spell out the kinds of information they will exchange and how they will exchange it. Because entering into and terminating TPAs is expensive and time consuming, traditional EDI isn't always ideal for companies who change suppliers often, or for companies who frequently enter into temporary relationships with suppliers or other companies.

Why EDI?

EDI comes into its own when repetitive manual tasks are required to support a business relationship; Electronic data interchange simply eradicates them by automating the process and removing the paperwork element.

It increases accuracy by eliminating the re-keying of data and the quality of data is enhanced by agreeing product codes, prices and location codes in advance.

Electronic data interchange also helps cement customer/supplier partnerships by reducing the supply chain costs associated with manual processing.

EDI enabled suppliers are cheaper and easier to deal with.

Advantages of EDI

Companies use EDI to exchange information for a variety of different reasons, mainly increased efficiency and cost savings. For example, EDI allows business transactions to occur in less time and with fewer errors than do traditional, paper-based means. It reduces the amount of inventory companies must invest in by closely tying manufacturing to actual demand, allowing for just-in-time delivery. By doing away with paper forms, EDI also reduces postage costs and the expenses and space considerations involved in paper-based record storage. Some companies have seen dramatic improvements in their business processes, such as the shortening of delivery times from days to hours. However, other EDI users have continued to experience snags. In Planet IT, Procter & Gamble, a leading packaged goods manufacturer, reported that it found errors in more than 30 percent of its electronic orders, although these were mainly due to human mistakes.

Although many companies don't view EDI as a strategic weapon, it certainly can be used as one. Having the capability to engage in EDI is a marketing tool, because it makes suppliers attractive to retailers and other companies who buy goods and services. In a situation where s everal suppliers offer similar products, being EDI-enabled can be an important differential. EDI also can be used to form alliances between companies that provide advantages over competitors in several ways, including the ability to offer the lowest market prices and the best customer service. Such alliances also can lead to newer or more innovative services.

Five key benefits of Electronic Data Interchange (EDI)

The benefit of electronic trading is well documented. Here are the top five reasons why businesses adopt EDI.

Benefit One: Remove document re-keying

By removing the manual keying of key business documents such as Orders, Invoices, Acknowledgments and Despatch Notes your company can benefit significantly by::

Reduced labour costs

Elimination of human keying errors

Faster document processing

Instant document retrieval

Remove reliance on the postal service

Benefit Two: Eliminate Paper

Paper-based trading relationships have some inherent disadvantages when compared with their electronic trading equivalents:

Stationery and printer consumable costs

Document storage costs

Lost documents

Postage costs

Benefit Three: Reduce lead times and stockholding

Electronic trading documents can be delivered far more quickly than their paper counterparts, thus the turnaround time from order to delivery can be reduced.

By using EDI for forecasting and planning, companies are able to get forward warning of likely orders and to plan their production and stock levels accordingly.

Companies receiving advanced shipping notes or acknowledgments know in advance what is actually going to be delivered, and a re made aware of shortages so alternate supplies can be sourced.

Integrating electronic documents means they can be processed much faster, again reducing lead times and speeding up payments.

Benefit Four: Increase quality of the trading relationship

Electronic trading documents when printed are much easier to read than copies faxed or generated on multi-part stationery by impact printers.

Accurate documents help ensure accurate supplies.

Batches of electronic documents are usually sequentially numbered, therefore missing documents can easily be identified, not causing companies to wade through piles of paper.

Benefit Five: Competitive Edge

Because electronic data interchange (EDI) makes you attractive to deal with from your customers' point of view, and you are in their eyes cheaper and more efficient to deal with than a competitor trading on paper, your costs will be lower because you will require less manpower to process orders, deliveries or payments.

It is no accident that the leading UK retailers all rely on EDI for placing orders and receiving invoices - they know the benefits they get and the costs that can be saved.

The drawbacks of EDI

Significant costs are associated with implementing and operating EDI systems. This is because solutions available in the market must be adjusted to a company's own needs and employees must be trained. In addition, a pilot phase or an initial parallel operation is frequently necessary. The result is that small and mid-sized companies in particular avoid EDI and rely on traditional forms of data transmission instead.

Furthermore, processes in a company must undergo significant changes before EDI can be applied. For instance, a company may normally receive its goods before an invoice is s ent in the mail. But if EDI were used, the invoice would arrive before the goods were delivered. Accordingly, processes must be adjusted in such a way that invoices can be processed by the company before the goods have arrived.

Security Issues

The paper checks and balances that exist within the clerical world are not possible with EDI. While rare, the possibility that data will be intercepted and stolen or altered in transit does exist. Messages also may be deliberately or mistakenly duplicated. This can result in overcharges, wasted resources, and damaged relations between trading partners. For these and other reasons, companies take measures to ensure accuracy and security, including security policies that limit the authority to engage in transactions to certain individuals; means of verifying that messages sent were received intact (electronic "seals"); the use of proper encryption methods; digital signatures or bio-metric s (the use of human attributes like fingerprints or voice) to verify the identity of senders and receivers; audits that verify the accuracy of electronic records; efforts to ensure that translation software has been written correctly and not altered; and so on.

Past, Present and Future of EDI

EDI began in earnest over 20 years ago and is now used by over 20,000 UK companies.

It is most commonly used by the UK retail sector, typically in Grocery, Catering, Building & DIY, Publishing, Stationery and Department Store sectors.

EDI can also be found supporting business supply chains in a vast spectrum of other industries ranging from Electronics to Motor Manufacturers, and Pharmaceutical Supply to the Inland Revenue. There are no barriers to the use of electronic data interchange in any industry.

The expansion has been driven by major clients insisting that sup pliers adopt electronic data interchange (EDI) to reduce overhead costs, thereby helping to enhance the on-going competitiveness of their business.

Widely used across Europe, North America and the rest of the world, EDI is actively encouraged by European Governments using United Nation's EDI standards to facilitate cross border trading.

EDI is expected to grow with business-to-business e-commerce overall, a sector that was growing quickly in the early 2000s. In 2000 alone, business-to-business sales were estimated to be $3.3 trillion, with forecasts predicting an increase to $5.2 trillion by 2004, according to Corporate EFT Report. The Gartner Group forecast sales in this sector to be even higher, reaching $7.29 trillion by 2004. The use of EDI also is expected to grow along with international trade agreements like the North American Free Trade Agreement (NAFTA).

According to Corporate EFT Report, in the early 2000s the lines b etween EDI and other Internet channelsincluding hybrid EDI/Internet electronic trading networks, Internet e-marketplaces, extranets, Internet company-to-company links, and private emarketswere beginning to blur, and companies were relying on a variety of channels to conduct business with suppliers, depending on the nature of their business goals.

In a Planet IT article, David Yockelson provided a similar snapshot of EDI in the early 2000s, as well as a glimpse at the road ahead: "VANs haven't gone away, but the demands of businesses and their trading partners have changed dramatically. Internet-based transport, broader and more robust sets of information and real-time connectivity are just a few of the items that have been appended to the connectivity wish lists of most companies. Moreover, the basic language of data movement has suddenly become XML, despite the presence of decades-old EDI standards. VANs aren't dead. EDI isn't going away any time soon. A nd XML, while incredibly exciting as an application and data-neutralizing standard, is in its infancy."

References:

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