What Electronic Data Interchange (EDI) is (conventional and internet based) and share with you some of the benefits and downfalls of operating such a system. Some

Introduction

I will expand on what Electronic Data Interchange (EDI) is (conventional and internet based) and share with you some of the benefits and downfalls of operating such a system. Some of the benefits are lower costs, improved accuracy, and decreased paper output and processing time. One main downfall is the initial cost of the implementation of the system. I will also give you an example of how a company uses this technology.

Electronic Data Interchange (EDI) as defined by Roger Clarke: “the exchange of documents in standardized electronic form, between organizations, in an automated manner, directly from a computer application in one organization to an application in another.”

EDI has been around for several decades and it has been the primary method of conducting electronic business-to-business commerce. It contains the same information that would be found on paper documents used for the same function within an organization.

The following are elements of EDI:

Electronic transmission medium (VAN or the Internet) is used rather than the dispatch of physical storage media such as magnetic tapes and disks.
Structured, formatted messages based on agreed standards (messages can be translated, interpreted and checked).
Fast delivery of electronic documents within hours or minutes from sender to receiver.
Communication directly between applications rather than between computers.

Conventional EDI

Conventional EDI uses standard formats, American National Standards Institute’s (ANSI’s) X12 series, which specifies standard fields for invoices, purchase orders, shipping documents, payments and various other data transactions. The EDI software pulls “flat” files (where links to other data have been removed) from the mainframe systems such as financial and/or order-processing and translates the data into EDI standard forms. Then companies transmit large batches of EDI forms over a third-party value-added network (VAN). VANs make the job of connecting with other “trading partners”, organizations that receive or send documents from each other, easier by collecting forms in an electronic mailbox. It then sorts, translates and forwards them to recipients and guarantees that they reach their destinations intact.

Benefits of conventional EDI are large companies can reduce the amount of errors in relation to re-keying information and decreasing the time and clerical costs of processing paper forms by hand.

EDI standards and technologies are dependable, trusted and proven. Information is sent on private lines that have very little exposure to the public and in turn are relatively secure. Also, large volumes of data are moved efficiently through batch transfer of flat files, and established VANs help ease finding trading partners and connecting to their systems.

Downfalls of conventional EDI are companies have to link their back-office systems to ...

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Benefits of conventional EDI are large companies can reduce the amount of errors in relation to re-keying information and decreasing the time and clerical costs of processing paper forms by hand.

Downfalls of conventional EDI are companies have to link their back-office systems to the EDI software, and then it has to synchronize protocols with their trading partners’ systems. Compatibility with new applications is difficult because of the complexity of the X12 formats. As a result of the compatibility the process of transferring large batches of data are delayed, which is at odds with today’s real-time world. Also, the cost of transmitting data through VANs is very costly at $25 per 1,000 characters, but today costs are getting lower.

Because conventional EDI is so rigid, costly and time consuming to initiate, it is only cost-effective for very large companies. For these reasons it keeps the number of EDI participants relatively very low.

EDI via the Internet

The internet was once thought to be the end of EDI, but instead it has given EDI users new options. EDI via the internet is basically the same as conventional EDI with the exception of how the information is transmitted. EDI transactions can now be sent over the internet instead of sending X12 forms back and forth via VANs. Software products put transactions into encrypted envelopes and then electronically seal them so that only authorized parties with the encryption key can view the contents. The envelopes are then sent over the public internet instead of privately owned VANs.

Benefits of sending the transactions over the internet instead of via VANs are it can drastically reduce transmission costs and it is much faster. Also, most companies already have internet access and therefore would not have to pay additional costs to transmit batches over the internet. This would make it easier to attract new trading partners, like mom and pop stores, that have internet connections, but do not have the revenue to invest in VANs.

Downfalls of EDI via the internet are questions raised about security, like confidentiality, data integrity, authentication, and denial of having sent or received transactions. Security is only a concern for some not all EDI managers. Another downfall is that the required software must be the same for trading partners at both ends. They must install the same software and coordinate their upgrade cycles.

Efforts are being made to make systems compatible and create requirements for EDI over the internet standards, but this takes time and therefore companies are limited to firm EDI formats.

Example of EDI

Large companies like Wal-Mart Stores Inc. have an EDI-based stock-replenishment system, which sends sales data to suppliers and initiates reordering of hot-selling items. This drastically reduces retailers’ warehouse inventory costs. Also, this system tells the manufacturers warehouse to ship product direct to a specific retail location. Typical information in a transmission includes a ship to address, bill to address, UPC codes, and quantities. Other information can be included if agreed upon by the trading parties. This process is also practiced by fields such as medicine, transportation, construction, engineering as well as many other industries.

The full potential of an EDI system can be best utilized if it is integrated with other applications such as inventory control, shipping, accounts payable and production planning.

Unfortunately, suppliers are forced to use the sometimes costly EDI system in order to continue a business relationship with the larger companies. This is not always as cost-effective for suppliers as it is for the larger companies.

Summary

EDI saves time because it is faster at transmitting data, delivers data with the utmost accuracy, cuts down on paper usage and decreases overall time by eliminating re-keying of information. It is a more stream-lined business process for both trading parties. Benefits can be obtained in areas like administration, inventory management, distribution, and cash management.

EDI has its share of problems, but its benefits far exceed them. With the internet it is becoming easier for trading partners to transmit data at a much greater reduced cost to both parties.

The next few years hold great promise for EDI and the internet. Existing EDI forms can be kept by trading partners and new ways of transmitting data can be found cheaper, which will enable more new partners.

Bibliography

Clarke, Roger. “Electronic Data Interchange (EDI): An Introduction.”

Retrieved July 29, 2005 from

Radosevich, L. “ELECTRONIC DATA INTERCHANGE-The Once and Future

EDI.” CIO. January 1, 1997. Retrieved July 29, 2005 from

Wikipedia, the free encyclopedia. “Electronic Data Interchange.” Retrieved

June 29, 2005 from