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
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.
back to top
are the benefits of EDI?
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.
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
back to top
does EDI work?
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).
What is needed to implement
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
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,
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
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:
Communication Standard (UCS) - Used primarily by the grocery
Inter-Industry Commerce Standards (VISC) - Used by the
general merchandise retailing industry
Information Network Standard (WINS) - Used by public warehouses
and their depositor customers
EDI Guidelines for Retail (GEDI) - Used by companies within
North America for trade outside of North America
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
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:
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
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
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.
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
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.