What is Electronic Data Interchange (EDI)?
Electronic Data Interchange is the computer-to-computer exchange of business documents in a standard electronic format between business partners. Over a period of time, the cost of technology declined, and subsequently, the use of computers increased.
This greatly reduced the time to process internal transactions. However, delays still existed in the form of data transfer and data-entry into computers. EDI proved to be a solution to these problems. Being an automated process, EDI vastly increased the speed of systems and improved the accuracy of entering information into the user’s computer system.
Table of Contents
- 1 What is Electronic Data Interchange (EDI)?
- 2 Introducing EDI
- 3 How EDI Works
- 4 Standards of EDI
- 5 Advantages and Disadvantages of EDI
Earlier, businesses interacted through telephone and mail. Both are slow mediums and need human intervention. EDI helps organizations in the following ways:
- Uses direct links between computer systems to minimize transmission delay
- Reduces human errors and saves time
- Enables organizations to have better communication between them
- Helps in increasing efficiency and improving customer service by cutting costs and maximizing productivity and profitability
- Solves business problems
- Offers cost savings and strategic benefits
- Provides a competitive edge
- Improves market share of an organization
- Helps lowering the costs of an organization by reducing inventory through timelier ordering and minimizing overstocking
EDI was first introduced in the 1960s in the US transportation industry. At the outset, EDI was used to eliminate the discrepancies that occurred while working on three-four different operations systems and to create standardization between customer and vendor.
The successful implementation of EDI in the transportation industry led to its being embraced by the US grocers and then by the automotive industry. The retail industry is another force behind EDI. Retailers, such as Walmart, Home Depot, JC Penney, Price Costco, and Sears, demand EDI compliance from their suppliers.
Big organizations are able to save millions of dollars by implementing EDI at all levels. They are able to procure the cost from their operations using EDI, which decreases the price of goods for consumers and benefits them.
EDI is based on a set of international standards, such as X12 and EDIFACT, which are used for standardized document content and structure. Every industry has its own set of guidelines to implement these standards. X12 is the primary standard used in the US, while EDIFACT is the primary standard in Europe.
This chapter starts by introducing the concept of EDI. Next, it discusses the international standards of EDI. Thereafter, the chapter explains the various transmission modes of EDI. Towards the end, a few advantages and disadvantages of EDI have been discussed.
INTRODUCING EDIElectronic Data Interchange is a widely-used technology for the computer-to-computer automated exchange of business documents between business partners. The transfer of documents takes place in a standard electronic format between dissimilar applications.
Using EDI techniques, documents, such as purchase orders, advance ship notices, invoices, and other business documents, can be exchanged directly between business partners, without human intervention, from one business system to another.
There has been a major transformation in the way businesses exchange documents after the introduction of EDI. By shifting focus from a paper-based exchange of business documents to electronic, businesses have experienced major benefits such as reduction in administrative cost, reduction in errors, fast order-to-cash cycles, and increase in processing speed. Moreover, this leads to improved relations with business partners too.
In business systems, EDI has replaced postal mail, fax, and e-mail. Although e-mail uses an electronic approach, it is still handled by people rather than computers for exchanging documents. The human intervention involves errors and also slows down the processing of documents.
On the other hand, EDI is an automated process in which documents can get transferred directly to the specific suitable application on the receiver’s computer, for example, the Order Management System, and processing can start immediately.
Before the introduction of EDI, a typical manual process in a business environment used to be as depicted in Figure, with people and paper involved:
After the introduction of EDI, business processes became as depicted in Figure , with no paper and people involved:
Important Terms Related to EDI
Let us be familiarised with a few terms related to EDI:
- Business Documents: Such documents are typically exchanged between businesses, such as purchase orders, invoices and advance ship notices, bills of lading, customs documents, inventory documents, shipping status documents, payment documents, etc. The most common documents exchanged using the EDI technique are purchase orders, invoices, and advance ship notices.
- Standard Format: By definition, EDI documents are processed by computers without the intervention of humans. Thus, a standard format is required for the computer to read and understand the documents and transfer them. A standard format defines every piece of information a document carries and its format.
For example, for numbers, it is defined whether the number is an integer or decimal; for dates, it is mentioned whether the date is s in mmddyy format, in ddmmyy format, or in any other format.
In the absence of a standard format, each organization would send documents using its own organisation-specific format, and the receiving organization’s computer system would not recognise it. The scenario is similar to two persons talking in different languages, each not understanding the other’s language.
For both of them to communicate with each other, they should talk in a common language. Thus, there are several EDI standards that have been defined. They are as follows:
- ANSI (American National Standards Institute)
- EDIFACT (Electronic Data Interchange For Administration, Commerce and Transport)
- ebXML. (Electronic Business using eXtensible Markup Language)
- ANSI (American National Standards Institute)
Every standard has different versions, for example, ANSI 5010 is a version of ANSI, and EDIFACT version D12 is a version of EDIFACT. When two businesses decide to exchange documents using the EDI technique, there has to be an agreement on the use of a specific EDI standard and version.
Businesses usually implement an EDI translator to translate the incoming document in EDI format to a format understandable by their internal applications, so that the processing of documents can be carried out straight away. An EDI translation can be carried out either by in-house software or through an EDI service provider.
- Business Partners: The two different companies between whom documents are exchanged using the EDI technique are referred to as business partners or trading partners.
How EDI Works
EDI was first implemented in the purchasing operations of a business. Before its implementation, a purchasing system of an organization was used to enable buyers to access their materials list and review their requirements. The buyers would then create purchase orders, print them, and then mail them.
The supplier would receive the purchase order and enter it manually into their order system. The material would be shipped, and an invoice would be printed, which would then be mailed back to the supplier.
In such a purchase-delivery setup, the whole process depends on the speed of the mail and the backlog pending at the supplier’s order-entry system. The whole cycle could take a week even if the purchased materials were shipped and received on the same day the purchase order was received.
With the introduction of EDI, the whole scenario changed dramatically. Purchase managers still prepare their material requirements list and create purchase orders. However, instead of taking a print and mailing them, the purchase orders are automatically transmitted directly to the supplier’s system over an electronic network using EDI.
The purchase order is automatically received at the supplier’s end and posted. This whole process enables the material to be shipped the same day the purchase order is sent. Moreover, suppliers are also able to send their shipping documentation electronically to the buyer on the same day even prior to the actual arrival of the material at the buyer’s end, providing the buyer with accurate receiving documents.
The additional advantage for the supplier is that now the invoice can be sent directly to the customer’s accounts payable system. This accelerates the payment process from the buyer to the supplier.
Standards of EDI
EDI provides a technical platform for commercial “conversations” between two business entities. EDI encloses the whole data interchange spectrum, be it transmission, message flow, document format, or software needed to interpret the documents. Thus, defining standards becomes a necessity.
EDI standards are formats defined for EDI documents to specify what, how, and where information fits within an EDI document. If information is missing or is in the wrong place, an EDI document might not get processed correctly. EDI standards are determined by the type of industry a business organization belongs to and the standards followed by the trading partners.
Trading partners, before implementing EDI, must set up a trade agreement that defines all the parameters of EDI, which are discussed as follows:
- Along with defining parameters for external EDI exchange, every partner in an EDI trade agreement must also define the methods to translate internal data to and from EDI-formatted documents received from outside.
- Trading partners must also be in agreement on the communication media being used and arrange the method for transmitting the information. For this, dedicated communication links, such as a Value Added Network (VAN) or the Internet, may be used.
- Every trading partner must provide for system recovery in case of failure or error, ensure the security of the system, and maintain timely responses.
The sender system must convert data from its internal system format to the EDI format for the transmission of data. The receiver system, on the other hand, must be ready to receive the transmitted data in a timely fashion, as agreed upon by trading partners.
The data can be received instantaneously or at regular time intervals. The receiver system then converts the EDI-transmitted data to the format recognized by an internal system for further processing.
Usually, every transmission set represents a single business form. The format consists of the following sections:
- The form contains a header area, where preliminary information, such as business name, address, date, etc., is mentioned.
- In the next section, the actual transaction information, i.e., the item, description, quantity, etc. is mentioned. In this section, each line corresponds to a segment, and each item in the segment is a data element.
- The end is the summary data, which contains the control information. Each data element is identified by a unique reference number that is present in the EDI master data element list. Although the structure of each message is strictly defined, there is a scope for variable-length data.
EDI standards have been defined to be independent of any communication media. Thus, the EDI data transfer can take place using any electronic media from magnetic tape to telecommunication. It must be ensured that a valid connection has been established between the sender and the receiver before any transaction can occur.
Moreover, methods of error checking and recovery must be established between both sides to safeguard against the loss of data.
The figure shows the various standards followed in EDI:
The EDI document standards in business are discussed as follows:
Ansi Asc X12
The American National Standards Institute (ANSI) chartered the Accredited Standards Committee (ASC) X12 to develop uniform standards for EDI in 1979. Originally, ANSI X12 was started to support companies across different industry sectors in North America. However, more than 300,000 companies worldwide follow X12 EDI standards in daily business transactions today.
In the ANSI ASC EDI standard, the data structure and content are defined for business transactions to be transmitted between computer applications. The data is grouped to represent all the information required for a particular business function such as a purchase order.
The business form in ANSI ASC X12 specifies standard data elements with data dictionaries that specify the name, length of the data field, description, data type, and meaning.
United Nations (UN)/Electronic Data Interchange for Administration, Commerce, and Transport (EDIFACT) is a set of internationally agreed-upon standards that was developed by the UN. The UN Centre for Trade Facilitation and Electronic Business (UN/CEFACT) is responsible for the maintenance and further development of this standard.
EDIFACT provides a set of guidelines for the electronic interchange of structured data particularly related to trade in goods and services. The EDIFACT standard defines a set of syntax rules for the interactive exchange of information and provides a set of standard messages, which enable the exchange of electronic business documents across countries and industries. EDIFACT is used widely across Europe because many companies adopted it early.
EDIFACT consists of data elements (a value), segments (a logical group of data elements), messages (a collection of segments relating to a business function), and rules for combining all of these.
The EANCON (EAN + Communication) was developed by European Article Number (EAN) General Assembly in 1987 on the then-emerging international UN/EDIFACT standard. Originally, EANCOM was being developed for the retail sector.
Over a period of time, EANCOM has now grown into the most widely-used subset of UN/EDIFACT and has implementations in a variety of other industrial sectors such as healthcare, construction, and publishing.
The EANCOM standard provides a logical sequence of messages used in business and agreed upon by trading companies to adapt to their needs. EANCOM standards are followed in business areas such as master data, commercial transactions, report and planning, and transporter.
Thus, the EANCOM standard covers almost all the functions required to effect a complete trade transaction. EANCOM standards include price catalogs, purchase orders, invoices, etc. related to trade transactions; messages to move goods related to transport services; and messages used in the settlement of trade transactions through the banking system.
The Health Insurance Portability and Accountability Act (HIPAA) was developed by the US Congress in 1996. The HIPAA was initiated for establishing national standards for electronic healthcare transactions and for establishing national identifiers for health providers, health insurance plans, and employers.
The HIPAA standards encouraged the widespread use of EDI in the US healthcare system to improve the efficiency and effectiveness of the North American healthcare system.
The Organisation for Data Exchange by Tele Transmission (ODETTE) is a group that takes care of the interests of the automotive industry in Europe. The organization belongs to Europe and is an equivalent of the Automotive Industry Action Group (AIAG) in North America. ODETTE defines and develops standards and recommendations to improve the flow of goods, services product data, and business information across the whole automotive value chain.
It is responsible for developing communication standards, such as Odette File Transfer Protocol (OFTP) and OFTP2.0, constant improvement processes, such as Materials Management Operations Guideline/Logistics Evaluation (MMOG/LE), and automotive-specific document standards.
The RosettaNet is a document standard that is based on XML (Extensible Markup Language), which defines guidelines for message transfer, business processes interface, and implementation frameworks for interactions between companies.
RosettaNet is a syndicate of major computer, consumer electronics, semiconductor manufacturers, telecommunications, and logistics companies integrating to develop and maintain e-business process standards across industries.
These standards follow a common e-business language to regulate processes between supply chain partners across the globe. These standards enable business partners of all sizes to connect electronically so that they can process transactions and move information within their extended supply chains.
The Society of Worldwide Interbank Financial Telecommunication (SWIFT), headquartered in Brussels, was established in 1973. SWIFT was started to create a worldwide financial messaging network between banks and financial institutions.
It also provides software and services to financial institutions, which are used on the SWIFTNet network, which is basically the infrastructure that is used to exchange financial documents. FIN, InterAct, and FileAct are some of the software used to encode the SWIFT documents for transmission on EDI.
By the end of November 2008, SWIFT has networked 8740 financial institutions across 209 countries. The SWIFT document standard consists of four areas, payments, trade services, securities, and trading.
Tradacoms is one of the earliest-developed EDI standards. It was primarily used in the UK retail sector. Originally, it was introduced in 1982 as a precursor to EDIFACT and was maintained and further developed by the UK Article Numbering Association, now called GS1 UK.
This standard is now obsolete in the retail sector since the development of the EDIFACT EANCOM subsets in 1995 but still proves to be effective in a majority of the retail EDI traffic in the UK.
The Voluntary Inter-industry Commerce Standard (VICS) is a subset of the ANSI ASC X12 national standard. The standards developed by VICS are used by the general merchandise retail industry across North America. VICS EDI standards are implemented by thousands of companies, department and specialty retail stores, mass merchandisers, and their respective suppliers.
VDA is responsible for developing standards and tools to serve the needs of companies within the German automotive industry. The VDA has developed over thirty standards to meet the need of companies such as Volks Wagon, Audi, Bosch, Continental, and Daimler AG.
Advantages and Disadvantages of EDI
EDI not only has advantages in its favour but also faces a few disadvantages. Let us discuss them in the following sections.
Advantages of EDI
Implementation of an EDI system has benefits when creating/sending purchase orders, advanced shipment notifications, or automatic invoicing. Several immediate advantages can be realised by exchanging documents electronically, which are as follows:
- Speed: EDI requires little or no human intervention, thus, the information moves more rapidly between computers, lending speed to the whole system. If the EDI process is directly integrated into an organisation’s accounting or Enterprise Resource Planning (ERP) system, the direct data flow accelerates the processing of orders, packing, shipping, invoicing, etc.
- By implementing EDI, the transactions that take 5 days by paper mails can be completed in less than an hour. For example, an American automotive corporation reduced the process cycle time by 97%, i.e. the process that used to take 30 days was reduced to 24 hours. A major retailer reduced its order cycle time by 75%, from 24 days to 6 days.
- Accuracy: In EDI, the information is passed directly from one computer to another. This direct transmission from computer to computer, without any human intervention and not having to re-enter the information, eliminates the chances of data-entry errors.
Moreover, there are negligible chances of the receiving computer to invert digits or add an extra digit in the incoming information. Thus, the overall accuracy in the system is ensured.
According to a research, paper-based processes often lead to as much as 5% of the data on an invoice being inaccurate. Accuracy in data leads to an efficient supply chain management in the organisation. Some estimates indicate that implementation of EDI can result in 30% faster delivery time to customers.
- Economy: EDI proves to be economical for an organisation, because the cost of sending an electronic document is comparable to a regular first class postage.
In addition, there is a reduction in the overall cost by eliminating the errors due to re-keying of data, human handling, routing, and delivery. This leads to a net and substantial reduction in the cost of a transaction.
According to a research, implementing EDI has reduced the cost by almost two-third of its paper-based equivalent.
Another research puts the cost at 70 times less. A leading American company reported that there is a reduction in its order processing costs from $38/order to $1.35/order with EDI.
A study from the European market states that by taking 10 minutes less to process for every electronic invoice saves 120 euro per invoice every year. Similarly, in the UK, it was found that UK grocers saved £14 on every electronic order.
- Increase in Business Efficiency: Automated system with no paper-based tasks leads to employees being free to concentrate on higher-value tasks and be more productive. EDI has an immediate processing of error-free business documents, thus, it leads to less re-working of orders.
There are fewer stock outs and less cancelled orders. Buyers can take advantage and bargain for better payment terms and discounts.
Similarly, sellers can also benefit from improved cash flow and reduced order-to-cash cycles. Reduction in order processing time and delivery times results in having to maintain reduced inventory levels.
A research reports that there is as much as a 50% saving on human resources after the use of EDI. According to another study, a reduction in an average of 10% inventory leads to a major cost-saving benefit for an organisation as maintaining an inventory often accounts for 90% of product costs.
Disadvantages of EDI
Although the benefits of EDI are irresistible and have been oft repeated in boardrooms around the world, it has a downside too. In small to mid-sized companies, there is still far less acceptance and reluctance to implementation of EDI.
Following Are a Few Disadvantages of EDI
Expense: Business application systems are complex and expensive and are regarded as peripheral functions of a business. They were not considered as being fully integrated into all business activities.
Thus, although implementing EDI leads to substantial savings for an organisation, for small to mid-sized companies, the cost of re-designing and deploying software business applications to incorporate EDI into an existing system proves to be a deterrent.
Besides computer systems, EDI needs a basic infrastructure to transmit and receive information to and from a wide variety of customers or suppliers. A heavy investment in computer networks hardware and software is required. To be able to send and receive electronic documents, there must be a specific point-to-point electronic path for the documents.
Thus, companies are required to invest in the development of extensive and expensive networks. This need to develop extensive telecommunication capabilities proves to be another deterrent for widespread EDI implementation in small to mid-sized companies.