Electronic Data Interchange (EDI) is a tool that can be used for the transmission of business transactions through these electronic networks. Electronic Data Interchange, or EDI, is the automated exchange of structured business documents, such as purchase orders or invoices, between an organization and its trading partner(s). The structured, machine-readable format allows business documents to be transferred, without re-keying, from an application in one location to an application in another location, without human intervention or interpretation. EDI is intended to replace paper documents and eliminate the inefficiencies of manual systems.
EDI is not a new concept. It is based on the notion that original data should be entered only once and subsequently passed electronically between relevant parties. In the most common EDI scenario, the EDI cycle begins when the purchaser sends the supplier an EDI purchase order. The supplier returns a purchase order acknowledgment to the purchaser. Next, at shipping time, the supplier sends the purchaser an EDI advance shipping notice. An EDI invoice follows and, finally, the purchaser sends payment information to his bank and the funds are transferred electronically to the supplier's bank account through electronic fund transfer (EFT) or financial EDI. The EDI cycle is now complete. There are other uses for EDI:
universities use EDI to exchange transcripts quickly
manufacturers use EDI to transmit complex engineering designs
consumers use EDI for credit card and banking transactions
governments are beginning to use EDI to support the electronic filing of income tax returns
HISTORY OF EDI
EDI was first introduced in North America in the 1970s. It was implemented first in the transportation sector, followed by the food and drug distribution, the automotive, and the banking and financial sectors. Electronic processing and transfer of information was significantly faster, more efficient and more accurate than the manual exchange of paper. This translated into increased productivity and faster order fulfillment, and thus provided a competitive advantage. Industry estimates indicate that processing a paper purchase order costs about $70, whereas an EDI purchase order costs about $1. EDI has been a part of Canadian business landscape since the early 1980s. The book and serials industry, which includes libraries, entered the EDI scene only recently.
In EDI, the emphasis is on the automation of business transactions. Therefore, EDI is not electronic mail, fax or tape transfer because in all of these transactions a human- to-machine interface is involved, at least at one end of the interchange, and usually someone has to interpret and re-key the exchanged information.
For EDI to work, the industry must agree on standard formats for messages and the way in which they are applied. It is not necessary for trading partners to have identical systems since standardization makes the process independent of any specific hardware or software. The linkage of heterogeneous systems is achieved through the use of a common format for data transfer. In North America, the agreed upon standard is ANSI X12 for the North American traffic, whereas UN EDIFACT is the preferred standard for international traffic. Translation software is usually required to interpret the data extracted from local systems.
The delivery of these standardized data to their destination (trading partner's application) may be achieved in a number of ways. The most common methods are:
Point-to-point or direct EDIDirect EDI , as the name implies, is a direct link between two computers. Direct EDI typically requires considerable expertise to incorporate EDI translation software into an organization's computing environment but it is also considerably cheaper than other methods and as such is often preferred to support high-volume ordering.
Value-Added-Network (VAN)A VAN provides an electronic mailbox with a store-and- forward facility as well as other added services for which the subscriber is charged a monthly and/or per use fee. However, using a VAN as a communications component can greatly facilitate EDI and is often critical to the success of the EDI implementation. Therefore, the use of a VAN is often the recommended delivery method for EDI messages.
InternetThe Internet has shown potential as a way to deliver EDI messages because it allows a fast and economical delivery of these messages, either through electronic mail or file transfer. The issues of authentication, access control, data integrity, and confidentiality on the Internet are currently being addressed.
Integration of standardized data into existing or re- engineered processes is crucial to a successful EDI implementation. Hence, the major task in implementing EDI is the process of mapping the proprietary format data (extracted from a local system) to the prescribed structured format.
In the library environment, EDI can be applied primarily to the acquisitions process, with EDI considered an ordering mechanism. Many libraries send or receive acquisitions data electronically but generally some human intervention (rekeying, tape load, special processing) is required. The issues associated with the implementation of EDI in libraries will be addressed in greater detail in a future Network Backgrounder.
Examples of companies using EDI:
R. J. Reynolds Tobacco Co. places more than 80,000 orders with 2,300 supplier world-wide for a total of $1 billion dollars a year. It is saving more than $5,000,000 a year in inventory costs now that almost all suppliers are EDI. The savings are illustrated by their spare parts inventory. It used to take 30 to 45 days from the time a part was ordered until it arrived. Now R. J.’s suppliers provide the inventory items in two days. Additional cost savings come from the purchasing department where it previously cost $75 to process each paper order. With EDI ordering costs limited to $.93 the company is saving almost $6,000,000 each year.
R. J. Reynolds is in the process of linking bar coding information to EDI using the Advance Ship Notice (ASN) procedures. A supplier sends a ASN via EDI to R. J., providing information about the shipment (including a package or pallet number and the estimated date of arrival). The number is downloaded from the mainframe to a handheld scanner that matches its number against those recorded by scanning incoming boxes or pallets. When the scanner detects matching numbers, it posts the receipt to the purchase order system automatically. A related project now being implemented, Evaluated Receipt Settlement, will make it unnecessary for supplier to send invoices in many cases. On regular inventory items, where the price is known, R. J. will order goods through EDI and post the order to the system When the goods are received, R. J. puts them in the system and pays for them without receiving an invoice. Obviously much more is involved than simply exchanging messages with supplier.
Kmart began using EDI in 1976 and had to hit people over the head to get them interested. Now vendors come to them. Kmart’s latest effort is Quick Response which is the marriage of three technologies; Scanning (capturing information at the POS), EDI and shipping container markings. The program involved 300 of Kmart’s vendors participating in Vendor Managed Inventory (VMI). On a daily basis, Kmart sends the vendors a transaction set called Product Activity Data. The vendor massages that information, adds his own intelligence, comes up with an order, and sends it back to Kmart via EDI. Once in Kmart’s system, the order is treated as though Kmart itself created it. Kmart doesn’t question the order and trusts its vendors to create the type of order that will best meet their inventory needs.
Seminole Manufacturing Co. reported that they used EDI to cut delivery time by 50 percent (twenty two days) for a particular item of clothing being delivered to Wal-Mart. Wal-Mart was then able to increase sales for the particular line of clothing by 31 percent over a nine-month period.
Egghead Software is a company that was forced to use EDI by one of its customers. Now they sing its praises. The volume of business with the customer went from 10 orders a day to sometimes nearly 200 and Egghead has landed major contracts worth multiple millions of dollars a year based solely on their EDI capability.
ADVANTAGE OF EDI
§ Strategic competitive advantage over competitors--locks in customers and can use cost savings to be low cost supplier.
§ Reduced operations costs from elimination of the expensive process of data entry and verification from paper documents.
§ Reduced paperwork and mailing costs.
§ Cost savings from better inventory turnover and lower inventory holding costs.
§ Increases accuracy of information by reducing transcription errors, thereby producing better quality information on a more timely basis.
§ Also increases accuracy of information because trading partners will not tolerate errors.
§ Better customer service available from the faster turn-around/response time, and service representatives have freedom to spend more time on analyzing customer needs.
§ Enhances and reinforces ties with business trading partners
§ Better production planning through facilitation of JIT and MRP practices.
§ Reduced production lead time and raw materials inventory levels.
§ Makes international business more feasible and efficient
RISK IN EDI-BASED SYSTEMS
EDI systems expose an organization to risks of far greater magnitude than existed in the past
EDI systems transcend the boundaries of an entity, thus allowing outside parties to directly or indirectly access the organization’s information system.
Transactions are being initiated electronically by systems interacting directly with each other (often no authorizing signatures).
Traditional audit trials change or disappear, making error correction, disaster recovery, and application testing more difficult.
External and internal auditor’s work is made more difficult because of the elimination of the customary forms of audit trail and audit evidence.
More automated processing exists with greater concentration of control and data in a single location. Traditional audit trails change or disappear, making error correction, disaster recovery, and application testing more difficulty
There is greater risk of unauthorized access to data within the company and a greater need to protect data during transfer outside the company.
Network failures can be disastrous.
EDI IMPLEMENTATION CHALLENGES
Integration of EDI with computer software applications
Difficulty in understanding EDI technology
EDI user training
Setting up Trading Partner Agreements
FACTORS INFLUENCING SUCCESSFUL ADOPTION OF EDI
Implemented as part of an overall business strategy.
Top management support
Cooperation across functional areas (i.e. purchasing, production, information systems)
Good relationships with trading partners.
Being an early adopter.
FUTURE OF EDI
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 between EDI and other Internet channels—including hybrid EDI/Internet electronic trading networks, Internet e-marketplaces, extranets, Internet company-to-company links, and private emarkets—were 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.
References
- Crocker, Dave. IETF draft specification for structuring MIME for EDI. Brandenburg Consulting, Sunnyvale, California, 1996. URL: http://ftp.sterling.com/rfc/rfc1767.txt. EDI: Electronic Data Interchange -- Theme Issue. Vine. Issue No. 94, March 1994. ISSN 0305-5728.
- E-Commerce Growth Prospects Remain Strong." Corporate EFT Report, January 17, 2001.
- Karpinski, Richard. "The Future of EDI." Planet IT, March 3, 1999. Available from www.PlanetIT.com.
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