EDI is a new way of doing business. Many businesses are looking to EDI as a new, fast, inexpensive, and safe method of sending purchase orders, invoices, shipping notices, receiving advices, and other frequently used business documents. For example, Auto manufacturers use EDI to transmit large, complex engineering designs. Multinational firms use EDI to communicate between locations. And universities use EDI to exchange transcripts quickly.
EDI can also be used to transmit financial information and payment in electronic form. When used in this application, EDI is usually referred to as Financial EDI or Electronic Funds Transfer (EFT).
To send a document, you use your EDI translation software to convert the document format into the agreed upon standard. The translator creates and wraps the document in an electronic envelope and puts the ID for your trading partner on it.
If the information is to be sent Point-to-Point, the communications software sends the document directly from your computer system to your partners computer system. If a VAN is used, the communications software dials the phone number for the network and transmits the envelope containing the document. The VAN reads the ID on the envelope and places it in the correct mailbox.
Your trading partner's modem calls the network and retrieves everything in the mailbox. The EDI translator opens the envelope and translates the data from the standard form to their application's format.
If you attempt to do EDI without translation, you run a great risk of transmitting data that your trading partner will not be able to read. Your trading partners may use business applications on computers that are different than yours. The translator ensures that the data you send is converted into a format that your trading partner can use.
EDI Standards
EDI consists of specific data interchange methods agreed upon by standards bodies. EDI messaging protocols help ensure that data arrive as expected, and that corrupted or incorrect data are automatically detected and reported.
- Save Money
The cost of paper and paper processing is incredibly high compared to a properly implemented EDI program. RJR Nabisco estimates that processing a paper purchase order costs the company $70. Processing an EDI purchase order reduces the cost to a mere 93 cents. - End Repetition
If your trading partner wants a copy of a document, instead of calling you they simply check their mailbox. This results in a great time savings from not having to copy and fax/mail copies of business documents. - Save Time
EDI also saves time over paper processing since the transfer of information from computer to computer is automatic. There is no need to re key information with EDI. And the chance for error drops to near zero, with no data entry. - Reduced Inventory Costs
The Automotive Industry effectively implemented Just-In-Time (JIT) inventory concepts with their suppliers through the use of EDI. Through this JIT method a company keeps minimal inventory on hand and continually re-orders and replenishes -- sometime several times a day -- directly from the supplier. The order and order status are exchanged between trading partners through EDI. The implementation of JIT can greatly decrease an organization's cost of maintaining inventory stock by reducing (1) warehouse-floor-space cost, (2) warehouse-personnel cost and (3) the cost of maintaining idle inventory. - Improve Customer Service
The quick transfer of business documents and marked decrease in errors allow you to do business faster and more efficient. KMart is an example of a retailer that implements a Vendor Stock Replenishment (VSR) program. With VSR, the KMart warehouse sends stock as their EDI system reports it and automatically bills the client. It can cut weeks from the order fulfillment cycle and ensures that product is always on the shelf. - Expand Your Customer Base
Thus with improved customer service, you can ultimately expand your customer base. Many large manufacturers and retailers are ordering their suppliers to institute an EDI program. So, when evaluating a new product to carry or a new supplier to use, the ability to do EDI is a big plus.
General Benefits
Many industries have improved relationships with customers and suppliers during the EDI implementation process.
Many companies re-engineer and reorganize supporting administrative processes, departments, and functions to take advantage of EDI. The re-engineering often significantly reduces personnel and administrative costs.
A major effort is being made in the retail industry to collect and analyze point-of-sale data to project customer needs, wants, and buying habits. If Quick Response in the retail industry is any indicator, having the right product at the right place at the right time will significantly increase sales volume and profit for a company.
Disadvantages:
- Too Many Standards
There are too many standards bodies developing standard documents formats for EDI. For example your company may be following the X12 standard format, while your trading partner follows the EDIFACT standard format. - Changing Standards
Each year, most standards bodies publish revisions to the standards. This poses a problem to EDI users. You may be using one version of the standard while your trading partners are still using older versions. - EDI is Too Expensive
Some companies are only doing business with others who use EDI. If a company wants to do business with these organizations, they have to implement an EDI program. This expense may be very costly for small companies. - Limit Your Trading Partners
Some large companies tend to stop doing business with companies who don't comply with EDI. For example Wal Mart is only doing business with other companies that use EDI. The result of this is a limited group of people you can do business with.
Electronic Data Interchange Diagram
An Executive Briefing on EDI
- Company-A reconciles the invoice with the internal system, and transfers the payment information to the EDI software mapping routines.
- Company-A's EDI software converts the payment information into a Payment Order / Remittance Advice X12 data stream and transmits to its bank by way of the VAN.
- The EDI software logs to whom and when the X12 transaction was sent. If it does not receive a functional acknowledgment within a predetermined amount of time, it will notify the EDI software operator that there may be a problem with the transmission.
- Company-A's bank receives the Payment Order / Remittance Advice from Company-A and issues an Electronic Funds Transfer to Company-B's bank.
- The invoice has been submitted and paid entirely electronically.
*Note*
X12 Standards
X12 is the inter-industry EDI standard in the United States of America.
Value Added Networks
VANs are large networks, usually international in nature, which transport EDI information among participating trading partners. VANs offer services such as EDI packet transportation, conversion between different EDI versions and standards, audit trails, security, trading partner identification, education, and consulting. VANs can greatly facilitate a company's entrance into the EDI arena.
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