Electronic Data Interchange (EDI)
ELECTRONIC DATA INTERCHANGE (EDI)
Electronic data interchange (EDI) is the electronic exchange of business information—purchase orders, invoices, bills of lading, inventory data and various types of confirmations—between organizations or trading partners in standardized formats. EDI also is used within individual organizations to transfer data between different divisions or departments, including finance, purchasing and shipping. When the focus of EDI centers on payments, especially between banks and companies, the term financial EDI (FEDI) is sometimes used. Along with digital currency, electronic catalogs, intranets and extranets, EDI is a major cornerstone of e-commerce overall.
Two characteristics set EDI apart from other ways of exchanging information. First, EDI only involves business-to-business transactions; individual consumers do not directly use EDI to purchase goods or services. Secondly, EDI involves transactions between computers or databases, not individuals. Therefore, individuals sending e-mail messages or sharing files over a network does not constitute EDI.
While the concept of e-commerce did not receive widespread attention until the 1990s, large companies have been using EDI since the 1960s. The railroad industry was among the first to adopt EDI, followed by other players in the transportation industry. By the early 1980s, EDI was being used by companies in many different industry sectors. In the beginning, companies using EDI transferred information to one another on magnetic tape via mail or courier, which had many drawbacks including long lead times and the potential for a tape to be damaged in transit. During the 1980s, telecommunications emerged as the preferred vehicle for transferring information via EDI.
By the new millennium, EDI was used widely in many industries including manufacturing, finance, and retail. Some large retailers, among them Sears and Target, required suppliers to use EDI in order to engage in business transactions with them. Additionally, the Federal Acquisition Streamlining Act of 1994 (FASA) required all agencies within the United States government to use EDI.
ADVANTAGES OF EDI
Companies use EDI to exchange information for a variety of different reasons, mainly increased efficiency and cost savings. For example, EDI allows business transactions to occur in less time and with fewer errors than do traditional, paper-based means. It reduces the amount of inventory companies must invest in by closely tying manufacturing to actual demand, allowing for just-in-time delivery. By doing away with paper forms, EDI also reduces postage costs and the expenses and space considerations involved in paper-based record storage. Some companies have seen dramatic improvements in their business processes, such as the shortening of delivery times from days to hours. However, other EDI users have continued to experience snags. In Planet IT, Procter & Gamble, a leading packaged goods manufacturer, reported that it found errors in more than 30 percent of its electronic orders, although these were mainly due to human mistakes.
Although many companies don't view EDI as a strategic weapon, it certainly can be used as one. Having the capability to engage in EDI is a marketing tool, because it makes suppliers attractive to retailers and other companies who buy goods and services. In a situation where several suppliers offer similar products, being EDI-enabled can be an important differential. EDI also can be used to form alliances between companies that provide advantages over competitors in several ways, including the ability to offer the lowest market prices and the best customer service. Such alliances also can lead to newer or more innovative services.
HOW EDI WORKS
During EDI, information is sent from one participant's computer system and translated to a standard format with special translation software. It is then transmitted to another participant, translated back from the standard format into a format used by the receiver and entered into the receiver's computer system. Thus, EDI allows participants to transfer information between their respective computer systems, even if the systems utilize different, incompatible platforms.
Before using EDI, companies usually enter into specific agreements with their trading partners (called trading partner agreements or TPAs). These contracts often spell out the kinds of information they will exchange and how they will exchange it. Because entering into and terminating TPAs is expensive and time consuming, traditional EDI isn't always ideal for companies who change suppliers often, or for companies who frequently enter into temporary relationships with suppliers or other companies.
After identifying trading partners, entering into TPAs with them and purchasing the necessary hardware and software, a means of communication must be chosen. EDI can occur point-to-point, where organizations communicate directly with one another over a private network; via the Internet (also known as open EDI); and most commonly, via value-added networks (VANs) provided by third-party value-added-network services.
VANs are networks dedicated exclusively to EDI. Not only do they function like telephone lines by allowing for the transfer of information, they also contain storage areas, similar to e-mail boxes, where data sent from one party can be held until it is scheduled to be delivered to the receiver. VANs are able to provide translation services to small organizations that find it too cost prohibitive to do in-house with their own software. Companies may need to join more than one VAN because their partners belong to more than one. However, by the early 2000s most VANS were able to communicate with one another.
In addition to translation, VANs offer a wide variety of other services including data backup, report generation, technical support, training, and the issuance of warnings if data is not properly transmitted between parties. Depending on need, all of the services offered by a VAN may not be required by a particular company. VANs vary in the way they charge companies. Some charge high implementation or setup fees followed by low monthly usage fees, or vice versa. Charges often are made based on the number of documents or characters involved in a given transmission. For example, one EDI provider charged its clients a monthly mailbox fee of $17.50, followed by a charge of 30 cents per 1,024 characters (per kilo character or k/char) transmitted. Additionally, charges can vary depending on participants' phone companies and the time of day when transactions are made. It can be less expensive for companies to make transactions during off-peak or evening hours.
In the early 2000s, although many companies still relied on VANs, the Internet was playing a larger role in EDI. It is possible for companies to translate EDI files and send them to another company's computer system over the Internet, via e-mail or file transfer protocol (FTP). Because it is an open network and access is not terribly expensive, using the Internet for EDI can be more cost effective for companies with limited means. It has the potential to provide them with access to large companies who continue to rely on large, traditional EDI systems. The low cost associated with open EDI also means that more companies are likely to participate. This is important because the level of value for participants often increases along with their number. However, this also presents a dilemma for large companies who have invested a considerable sum in traditional EDI systems. Furthermore, Internet service providers (ISPs) usually do not offer the kinds of EDI-specific services provided by VANs.
While the automotive and retail industries have experimented with open EDI for some time, the efforts didn't result in widespread adoption by small suppliers, usually due to cumbersome requirements like the installation of on-site software. Incorporating EDI into e-marketplaces was an approach that held more potential. In March 2000, an e-marketplace called the WorldWide Retail Exchange (WWRE) was established. It allowed suppliers and retails in various industry sectors—including retail, general merchandise, food and drugstores—to conduct transactions over the World Wide Web. After one year of operation, the WWRE had 53 retailer members with combined annual turnover of $722 billion. Leading retailers, among them Kmart, Rite Aid, Best Buy, and Target, planned to offer a Web-to-EDI translation service on WWRE so it would be easier for smaller suppliers to do business with them. In this arrangement, the retailers send purchase orders to a data center where they are translated to a language that can be read with a Web browser like Internet Explorer or Netscape Navigator. Suppliers are then notified about the PO and allowed to respond. This is a break from true EDI, since orders are handled manually by suppliers.
In addition to the Internet, intranets (private internets) and extranets (links between intranets and the Internet) also showed potential for EDI. According to The International Handbook of Electronic Commerce, "The Extranet makes it possible to connect several organizations behind virtual firewalls. For example, suppliers, distributors, contractors, customers, and trusted others outside the organization can benefit from establishing an Extranet. The Internet is used to provide access to the public; the Intranet serves the internal business; Extranets provide a critical link between these two extremes. Extranets are where the majority of business activity occurs. They enable commerce through the Web at a very low cost and allow companies to maintain one-to-one relationships with their customers, members staff and others."
As previously mentioned, when companies use EDI to exchange information, translation software is an important part of the process. During EDI, information is usually translated to and from one of several different standard languages, including ANSI X12 and EDIFACT. These languages are more flexible than custom standards developed by individual companies for their specific use.
Because of its reliability and flexibility, ANSI X12 was the most widely used North American standard in the early 2000s. Also called ASC X12, ANSI X12 was developed by the American National Standards Institute (ANSI), which administrates and coordinates voluntary industry standardization within the United States. In addition to its prevelance in North America, this standard also was used in Australia and New Zealand.
Created in 1987 with the cooperation of the United Nations, Electronic Data Interchange For Administration Commerce and Transport (EDIFACT) standards combine the best aspects of ANSI X12 and a standard known as United Nations Guidelines for Trade Data Interchange (UNTDI). Because it is so universal, EDIFACT is suited for use in international EDI. Although EDIFACT was becoming increasingly popular in the early 2000s, it lacked the comprehensiveness of ANSI X12.
In addition to ANSI X12 and EDIFACT, other EDI standards also exist, including Global EDI Guidelines for Retail (GEDI), used within North America for international trade; the grocery industry's Uniform Communication Standard (UCS); Voluntary Inter-Industry Commerce Standards (VISC), used by retailers of general merchandise; Warehouse Information Network Standard (WINS), used by public ware-houses; TRADACOMS, created by the Article Numbering Association and used by retailers in the United Kingdom; and NACHA, developed by the National Automated Clearing House Association and used for transactions in the banking industry.
For companies using open EDI, a language called extensible markup language (XML), similar in some respects to hypertext markup language (HTML), allows users to share information in a universal, standard fashion without making the kinds of special arrangements EDI often requires and regardless of the software program in which it was originally created.
The paper checks and balances that exist within the clerical world are not possible with EDI. While rare, the possibility that data will be intercepted and stolen or altered in transit does exist. Messages also may be deliberately or mistakenly duplicated. This can result in overcharges, wasted resources, and damaged relations between trading partners. For these and other reasons, companies take measures to ensure accuracy and security, including security policies that limit the authority to engage in transactions to certain individuals; means of verifying that messages sent were received intact (electronic "seals"); the use of proper encryption methods; digital signatures or bio-metrics (the use of human attributes like fingerprints or voice) to verify the identity of senders and receivers; audits that verify the accuracy of electronic records; efforts to ensure that translation software has been written correctly and not altered; and so on.
THE 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.
In a Planet IT article, David Yockelson provided a similar snapshot of EDI in the early 2000s, as well as a glimpse at the road ahead: "VANs haven't gone away, but the demands of businesses and their trading partners have changed dramatically. Internet-based transport, broader and more robust sets of information and real-time connectivity are just a few of the items that have been appended to the connectivity wish lists of most companies. Moreover, the basic language of data movement has suddenly become XML, despite the presence of decades-old EDI standards. VANs aren't dead. EDI isn't going away any time soon. And XML, while incredibly exciting as an application and data-neutralizing standard, is in its infancy."
"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.
Kosiur, David. Understanding Electronic Commerce, Seattle: Microsoft Press. 1997.
Kumar, Ram, and Connie Crook. "Educating Senior Management on the Strategic Benefits of Electronic Data Interchange." Journal of Systems Management, March/April 1996.
Moozakis, Chuck. "No Longer E-Biz Misfits." Planet IT, March 3, 1999. Available from www.PlanetIT.com.
Shim, Jae K., Anique A. Qureshi, Joel G. Siegel, and Roberta M. Siegel. The International Handbook of Electronic Commerce. New York: AMACOM. 2000.
Tiernan, Bernadette. E-tailing. Chicago: Dearborn Financial Publishing Inc. 2000.
Yockelson, David. "Cross-Firm Transport Not Just For VANs." Planet IT, June 5, 2000. Available from www.PlanetIT.com.
SEE ALSO: Business-to-Business (B2B) E-commerce; Intranets and Extranets; UN/EDIFACT; Vortals; XML
"Electronic Data Interchange (EDI)." Gale Encyclopedia of E-Commerce. . Encyclopedia.com. (April 21, 2018). http://www.encyclopedia.com/economics/encyclopedias-almanacs-transcripts-and-maps/electronic-data-interchange-edi
"Electronic Data Interchange (EDI)." Gale Encyclopedia of E-Commerce. . Retrieved April 21, 2018 from Encyclopedia.com: http://www.encyclopedia.com/economics/encyclopedias-almanacs-transcripts-and-maps/electronic-data-interchange-edi
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Electronic Data Interchange
In the quest to achieve a paperless society, electronic data interchange (EDI) has long been a leading technology. Ralph W. Notto, a leading chronicler of electronic commerce (see Challenge and consequence; forcing change to e-Commerce ), has noted that EDI is and has been an essential component in such commerce. EDI predates the emergence of the Internet, now the chief electronic network connecting just about every business to every other. The first implementations of EDI were internal to companies, used private networks, and enabled a multi-location company to use a common accounting system regardless of location. Earliest uses of EDI were also heavily deployed to track parts inventories within a business—but also between a producer, its distributors, and, in turn, the dealers served by the distributors. These private networks were full-grown implementations of EDI in the sense that data were exchanged by means of wired and/or wireless networks and kept data in live format and therefore instantly accessible.
With the spread of small computers, EDI in the less automated form of exchanges of data on tape and on diskettes (and later on CDs) came into widespread use. This technique is still widely used in the exchange of electronic files between systems using the Internet; either e-mail or up/downloading to/from file transfer protocol (FTP) sites is used. Many EDI systems in use in the mid-2000s remain private and move data through private networks; many others utilize proprietary software, but the software uses Internet connections; yet other forms are special arrangements for data sharing making use of standard methods of Internet exchange. Large systems today invariably involve data encryption to ensure data security.
The driving force behind EDI is efficiency made possible by avoiding the handling and rekeying of data on paper. Electronic scanning of bar codes at the point of sale or in inventory taking and document scanning technologies combined with improvements in optical character recognition (OCR) systems have further contributed to EDI by replacing keying of some documents. Data capture, however, is still accomplished predominantly by human keying. A human interface is also typically necessary to check OCR results.
Electronic data interchange had its beginnings in the management of financial data. The technique, however, is rapidly expanding to documentary information and, in such areas as security and law enforcement, also to biometric data.
BENEFITS OF EDI
EDI was developed to solve the problems inherent in paper-based transaction processing and in other forms of electronic communication. In solving these problems, EDI is a tool that enables organizations to reengineer information flows and business processes. It directly addresses several problems long associated with paper-based transaction systems:
- Time delays—Paper documents may take days to transport from one location to another, while manual processing methodologies necessitate steps like keying and filing that are rendered unnecessary through EDI.
- Labor costs—In non-EDI systems, manual processing is required for data keying, document storage and retrieval, sorting, matching, reconciling, envelope stuffing, stamping, signing, etc. While automated equipment can help with some of these processes, most managers will agree that labor costs for document processing represent a significant proportion of their overhead. In general, labor-based processes are much more expensive in the long term than are EDI alternatives.
- Accuracy—EDI systems are more accurate than their manual processing counterparts because there are fewer points at which errors can be introduced into the system.
- Information Access—EDI systems permit myriad users access to a vast amount of detailed transaction data in a timely fashion. In a non-EDI environment, in which information is held in offices and file cabinets, such dissemination of information is possible only with great effort, and it cannot hope to match an EDI system's timeliness. Because EDI data is already in computer-retrievable form, it is subject to automated processing and analysis. It also requires far less storage space.
INFRASTRUCTURE FOR EDI
Several elements of infrastructure must exist in order to introduce an EDI system, including: 1) format standards to facilitate automated processing by all users, 2) translation software to translate from a user's proprietary format for internal data storage into the generic external format and back again, 3) value-added networks to solve the technical problems of sending information between computers, 4) inexpensive microcomputers to bring all potential users—even small ones—into the market, and 5) procedures for complying with legal rules. It has only been in the past several years that all of these ingredients have fallen into place.
To permit the efficient use of computers, information must be highly organized into a consistent data format. A format defines how information in a message is organized: what data go where, what data are mandatory, what is optional, how many characters are permitted for each data field, how data fields are ordered, and what codes or abbreviations are permitted.
Early EDI efforts in the 1960s used proprietary formats developed by one firm for exclusive use by its trading partners. This worked well until a firm wanted to exchange EDI documents with other firms who wanted to use their own formats. Since the different formats were not compatible, data exchange was difficult if not impossible. To facilitate the widespread use of EDI, standard formats were developed so that an electronic message sent by one party could be understood by any receiver that subscribes to that format standard. In the United States the Transportation Data Coordinating Committee began in 1968 to design format standards for transportation documents. The first document was approved in 1975. This group pioneered the ideas that are used by all standards organizations today.
North American standards are currently developed and maintained by a volunteer organization called ANSI (American National Standards Institute). The format for a document defined by ANSI is broad enough to satisfy the needs of many different industries. Electronic documents are typically of variable length and most of the information is optional. When a firm sends a standard EDI purchase order to another firm, it is possible for the receiving firm to pass the purchase order data through an EDI translation program directly to a business application without manual intervention. In the mid-2000s, international format standards were in force to facilitate international business activity as well.
Translation software makes EDI work by translating data from the sending firm's internal format into a generic EDI format. Translation software also receives a sender's EDI message and translates it from the generic standard into the receiver's internal format. There are currently translation software packages for almost all types of computers and operating systems.
Value-Added Networks (VANs)
When firms first began using EDI, most communications of EDI documents were internal or directly between trading partners. Unfortunately, direct computer-to-computer communication requires that both firms 1) use similar communication protocols, 2) have the same transmission speed, 3) have a common proprietary network, and 4) have compatible computer hardware. If these conditions are not met, communication becomes difficult if not impossible. A value-added network (VAN) can solve these problems by providing an electronic mailbox service. By using a VAN, an EDI sender need only learn to send and receive messages to or from one party: the VAN. Since a VAN provides a very flexible computer interface, it can talk to virtually any type of computer. This means that to conduct EDI with hundreds of trading partners, an organization only has to talk to one party. In addition, VANs provide important security elements for dissemination of information between parties.
The fourth building block of EDI is inexpensive computers that permit even small firms to implement EDI. Since microcomputers are now so prevalent, it is possible for firms of all sizes to deal with each other using EDI. Internet protocols, including standard formats such as HTML, have created a standard understood by computers of all makes running different operating systems—all of which are fully enabled to communicate across the Web.
Procedures for Complying with Legal Rules
Legal rules apply to the documents that accompany a wide variety of business transactions. For example, some contracts must include a signature or must be an original in order to be legal. If documents are to be transmitted via EDI, companies must establish procedures to verify that messages are authentic and that they comply with the agreed-upon protocol. In addition, EDI requires companies to institute error-checking procedures as well as security measures to prevent unauthorized use of their computer systems. Still, it is important to note that some sorts of business documents—such as warranties or limitations of liability—are difficult to transmit legally using EDI.
An example of a legal requirement is represented by the Public Health Security and Bioterrorism Preparedness and Response Act of 2002, known as the Bioterrorism Act. Manufacturers, processors, packagers, transporters, receivers, holders, and importers of food must establish and maintain records of all such transactions. As reported in Food Logistics, the Grocery Manufacturers Association (GMA) examined commonly used EDI systems to ensure that their record-keeping methods comply with the Bioterrorism Act. GMA found that EDI systems meet the challenge.
SMALL BUSINESS AND EDI
In at least some form (such as securing backups to computerized accounting and inventory data), most small businesses participate in EDI actively. Many use online order taking integrated with their own systems through proprietary software. Small businesses serving as suppliers to large organizations may participate in a number of EDI systems tied into their own computer systems using the Internet.
see also Data Encryption
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Notto, Ralph W. Challenge and Consequence: Forcing Change to e-Commerce. Fenestra Books, 2005.
Schuff, Sally. "EDI eases recordkeeping." Feedstuffs. 5 December 2005.
"Wal-Mart Tests RFID Data-Sharing Project: Using EDI, the company will be able to know when products are on their way from suppliers." InformationWeek. 17 January 2006.
Hillstrom, Northern Lights
updated by Magee, ECDI
"Electronic Data Interchange." Encyclopedia of Small Business. . Encyclopedia.com. (April 21, 2018). http://www.encyclopedia.com/entrepreneurs/encyclopedias-almanacs-transcripts-and-maps/electronic-data-interchange
"Electronic Data Interchange." Encyclopedia of Small Business. . Retrieved April 21, 2018 from Encyclopedia.com: http://www.encyclopedia.com/entrepreneurs/encyclopedias-almanacs-transcripts-and-maps/electronic-data-interchange
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"electronic data interchange." A Dictionary of Computing. . Encyclopedia.com. (April 21, 2018). http://www.encyclopedia.com/computing/dictionaries-thesauruses-pictures-and-press-releases/electronic-data-interchange
"electronic data interchange." A Dictionary of Computing. . Retrieved April 21, 2018 from Encyclopedia.com: http://www.encyclopedia.com/computing/dictionaries-thesauruses-pictures-and-press-releases/electronic-data-interchange