What is EDI?

Electronic Data Interchange (EDI) is commonly defined as the application-to-application transfer of business "documents" between computers, i.e., doing business and carrying out transactions between trading partners electronically. EDI covers most transactions that are typically done using paper based communication, for example placing purchase orders with suppliers and carrying out certain financial transactions with a company's customers and vendors. This is why the term "paperless trading" is often used to describe EDI. Many businesses choose EDI as a fast, inexpensive, and safe method of sending purchase
orders, invoices, shipping notices, and other frequently used business documents. Today, there are over 80,000 companies using EDI.

EDI is not a new concept. It has been practiced for over two decades in both Europe and North America, spanning a multitude of industry sectors that produce or market various products and services. As the powers of computing and telecommunications have grown, EDI technologies have evolved as a natural data carrier replacing the paper document. More recently, the use of EDI has been accelerating because of the
drastically reduced cost of computing hardware, software, and telecommunications, combined with the lifting of trade barriers across Europe. Another major factor is the growing realization of the role of EDI as a business enabler in increasingly competitive and dynamic markets.

EDI is quite different from sending electronic mail messages of sharing files through a network, modem, or bulletin board. What differentiates EDI from e-mail is the standardized structure and content of the data message. The content of an e-mail message is not intended to be processed by a receiving application system, but EDI messages are specifically intended for this purpose. Therefore the straight transfer
of computer files requires that the computer applications of both the sender and receiver (referred to as "Trading Partners") agree upon the format of the document(s). The sender's application must create a file format acceptable to the receiver's application.

When using EDI, it is not necessary for the trading partners to have identical application systems. When the trading partner sends an electronic document, the EDI translation software converts this proprietary format into an agreed upon standard. When the other trading partner receives the same document, EDI translation software changes the standard format into the proprietary format of their application system.

EDI has the potential to deliver the lowest transaction costs available, if done correctly. A commitment must be made by each department involved in EDI to change their processes to a more efficient, less manually intensive, and truly cost effective
methodology. Once this has been accomplished, EDI can move to the forefront of a company's offerings and be actively sold to customers and prospects as a primary value-added feature.

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What are the benefits of EDI?

Rather than thinking of EDI as a computer-to-computer concept, it is better to conceptualize it as application-to-application. For example, a customer uses EDI to transmit purchase orders to its suppliers. The benefit of EDI is not that the customer has replaced a paper document with an electronic data transmission, but that the customer has electronically linked its purchasing application to the supplier's ordering application. By doing that, EDI reduces administrative costs, improves the timeliness and accuracy of data, and promotes a closer trading partner relationship.

Save Time and Money

EDI is a tremendous cost and time saving concept. The order entry system without EDI involves many people and has many intermediate steps. When a customer wants to order a product from its supplier, the customer's purchasing department enters the purchase order on-line. Overnight, hard-copy purchase orders are printed, sorted, stuffed into envelopes, forwarded to the mailroom, stamped, and mailed. Consider the
cost of supplies. Someone must design the purchase order documents. They must be printed on a regular basis and there are envelope, postage, and printer ribbon costs and the inventory of forms must be monitored. Direct and indirect costs can add up quickly, but substantial cost savings can be achieved by eliminating most of these steps and transmitting the "documents" directly to a trading partner. In this example, purchasing personnel receive the purchase requisition and enter it into their purchasing application system. From that point, the rest of the process is almost totally automated. RJR Nabisco estimates that processing a paper purchase order costs the company $70. Processing an EDI purchase order reduces this cost to a mere 93 cents. Studies indicate that EDI reduces transaction cycle time by an average of 40% in such business areas as order entry, procurement, manufacturing, logistics, and finance. This will allow a company to accommodate greater volumes without adding personnel and other costs.

Improve Customer Service

EDI is also a method of improving customer service. The quick transfer of business documents and the marked decrease in errors allow a business to fill orders better and faster. K-Mart and other retailers have implemented a program called Vendor Stock Replenishment (VSR). VSR requires that vendors maintain appropriate inventory levels in all of K-Mart's stores. With VSR, vendors don't risk having the store run out of their product while they wait for a purchase order. Vendors ship product, as their EDI system deems necessary and automatically bill the client. It cuts days, even weeks, from the order fulfillment cycle and ensures that their product is always on the shelf. Another benefit is that it opens the door to increased sales and revenue. More and more companies are mandating the use of EDI with their suppliers. If a company is "EDI-enabled," it's business has a competitive advantage over those who still process documents manually.

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How does EDI work?

Essentially, EDI takes information from order processing, invoicing, or other systems and communicates it to a "trading partner" - someone that has an electronic business relationship with a business. This information is usually transmitted over a Value Added Network, or VAN. The VAN is like an electronic clearinghouse ensuring that information is securely sent and received. Once the trading partner receives the information, EDI translation software can help place it into the right areas of the receiving computer application. There are many types of information which may be sent including price lists, purchase orders, invoices, confirmations, shipping carrier information, etc. In order to transmit any of these "documents," a standard form must be created - one (in most cases) for each of the transaction types. There transactions are typically referred to by a number, such as 850, 832, 867, etc., and are defined by the American National Standards Institute (ANSI).

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What is needed to implement EDI?

Implementing an EDI system requires buying any necessary hardware, a communications modem, and appropriate EDI software, which ranges in cost from $1,500 to $10,000, depending on the computer platform and functionality. It is necessary to sign up with a VAN, which typically requires an initial sign-up fee. Also, there is a monthly maintenance fee, plus transmission charges with potential discounts for volume. Additionally, there are the ongoing costs for support and personnel. Many companies initially hire a consultant to handle the task of integrating the EDI software with their existing applications.

Technically there are three main components, which must be addressed before electronic trading can commence - Standards, Software, and Communications.

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EDI standards define the structure of the data that make up the electronic equivalents of paper based documents. In other words, there are standardized methods for describing the components that make up a trading document, e.g. product code, price, name, address, etc.

Understanding the different categories of standards and the evolution of EDI standards is very important to the person or group attempting to implement EDI in their industry - and to the personnel responsible for the corporate EDI function. EDI implementation represents a substantial investment. An incorrect decision regarding the correct standards to use can result in unnecessary costs and manpower expenditures.

Two standards dominate the world of EDI:

ANSI X.12 is the dominant standard in North America and is also widely used in Australia and New Zealand. This is due to the large number of transactions that it offers as well as their proven reliability.

EDIFACT (Electronic Data Interchange for Administration, Commerce, and Transport), on the other hand, is the newer standard developed under the United Nations and is gaining worldwide acceptance, particularly in Europe. However, it does not yet offer the comprehensive transaction set of ANSI EDI.

If a company is not being forced to adopt a different specific standard by their trading partners, the recommendation is to implement X12-based standards. X12's commitment to merge with EDIFACT standards, or at least to seek common ground, will permit interoperability between these two standards sometime in the near future. For a company with substantial domestic and international business interests, it is
reasonable to expect a dual implementation strategy where both standards would be supported until they are merged.

Depending on the industry, there are a number of other standards to be considered for EDI implementation. They are:

  • Uniform Communication Standard (UCS) - Used primarily by the grocery industry
  • Voluntary Inter-Industry Commerce Standards (VISC) - Used by the general merchandise retailing industry
  • Warehouse Information Network Standard (WINS) - Used by public warehouses and their depositor customers
  • Global EDI Guidelines for Retail (GEDI) - Used by companies within North America for trade outside of North America

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Of the three components that make up the EDI triangle, it is the software that will present the greatest number of variables. Accordingly, it must be carefully selected to accommodate the way EDI systems are used.

EDI Translation Software converts or translates X12 standardized data into and out of data that a company's computer applications can work with. Selecting a translation package is a time consuming and difficult task. It requires constant comparisons and a thorough understanding of the business and technical requirements.

EDI Software Selection Factors:

Ease of build: When evaluating a package, one should determine how easy it is to "map" or build a standard document from your existing computer application. If extensive user interaction is needed, or volumes of reference material must be committed to memory, it would be fair to say that the mapping facility is not user-friendly. Numerous software vendors have modified their systems and sell user-enhanced, interactive front ends that make the mapping process easier and user-friendly. This feature is attractive to firms having large numbers of trading partners or transaction sets.

Ease of upgrade: As an EDI trading relationship matures, there is likely to be a requirement for enhancements of the existing systems. This may arise as a result of additional messages, changes to existing messages or standards, addition of new trading partners and their individual messaging requirements, inclusion of additional network connections, or an increase in the number of business applications to be integrated. Consequently, the translation software you select must be easy to upgrade.

Network connectivity: Some EDI software packages are restrictive since they do not allow users to be connected to all of the major EDI networks or VANs. Fortunately, this is the exception to the rule since most popular packages have multi-network connectivity.

Multi-standards capability: In situations in which two or more trading partners require EDI documents to be transmitted using different standards, the software must be able to accommodate this need.

Print/report generator: Some companies will not be integrating their EDI application with their in-house systems and will require a hard copy print of any incoming messages. This facility must be available on the software under consideration.

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To function in an EDI environment, some method for electronic communications is needed. The two primary methods used today are direct transmission or a value added network.

Direct transmission occurs when a company connects directly to the computer of its trading partner, either using a dial-up or dedicated line.

A VAN is a company offering the communications skills, expertise, and equipment needed to communicate electronically. In an EDI context, a VAN acts like an electronic post office by receiving, storing, and forwarding electronic messages. A company and its trading partners have "mailboxes" on the VAN where EDI transactions can be stored.

Direct connectivity appears simpler, easier, and less expensive, but this is frequently not the case. VANs are designed to permit companies with different computer systems to communicate with each other. This capability is known as protocol conversion. They also improve transmission efficiency. In a direct transmission, each transmission does not occur or there are transmission errors, the entire process must be rescheduled, coordinated, and executed. Once the number of trading partners is expanded beyond a few, the scheduling and coordination efforts can quickly tie up valuable personnel and the related costs can far exceed those of a VAN. VANs can reduce monthly telephone bills since they charge by the amount of data transmitted, not on transmission distance. GEIS (General Electric Information Services), AT&T, STERLING, and IBM are major players in this market.

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