Electronic Data Interchange, or EDI, is not a new technology and in fact has been around since the late 1960s. While EDI has benefited enormously from advances in technology, eg the introduction of the internet, EDI is not technology dependant. There are preferred ways to implement EDI in a company, but there are many approaches to choose from. The approach chosen should be driven by a company’s business needs, not a particular implementation or technology.
In its simplest form, EDI is the computer to computer exchange, between two companies, of standard business documents in electronic format. There are two key elements in basic EDI. First, electronic documents replace paper based ones. Second, the exchange of documents takes place in a standardised format. Using these two basic concepts, any business can enter the world of EDI and begin taking advantage of the speed and economy of electronic commerce, or e-Commerce.
In today’s fast-paced business world, your business may already be moving in this direction, customers or suppliers may already be approaching you to begin trading information electronically. For the newcomer to EDI, it may seem a very confusing subject area.
So what is a document? A document is any form of communication, usually paper based, sent between two companies, examples include:
- Purchase Orders
- Invoices
- Shipping Notices
- Export / Import Notices
- Carrier to carrier waybills
- Funds transfer
- Design specifications
- Health insurance claims
EDI is essentially a data processing concept which is independent of communication protocols or transmission media. EDI is a logical outgrowth of the standard computerisation going on within companies over the last few decades. With EDI, the type of electronic communication between departments within a company can now easily be extended to reach out to other companies or trading partners.
EDI replaces human readable, paper or electronic based documents with machine readable, electronically coded documents. With EDI, the sending computer creates the message and the receiving computer interprets the message without any human involvement at all.
Before learning about what makes up an EDI system and how to implement one, it is important to look at an example that highlights some of the key differences between traditional paper document transactions and EDI. One of the first places where many companies implement EDI is in the exchange of a purchase order, (PO). In the traditional method of processing a purchase order, a buyer or purchasing agent will go through a fairly standard procedure to create a purchase order, consisting of the following steps:
- A buyer reviews data from an inventory or planning system
- The buyer enters data into a screen in the purchasing system to create a PO
- The buyer waits for the PO to be printed, usually on a special form
- After the PO is printed, the buyer mails it to the vendor
- The vendor receives the PO and posts it in their order entry system
- The buyer calls the vendor periodically to determine if the PO has been received and processed
When you add up the internal processing time required by the sender and receiver, and then add a couple of days in the mail, this process normally takes between three and five days. This assumes first that both the sender and receiver handled the PO quickly and that at every point along the way there were no errors in transcribing data from a form to a system.
Now consider the same document exchange when a company places its purchase orders electronically using EDI:
- The buyer reviews the data and creates the PO, but does not print it
- EDI software creates an electronic version of the PO and transmits it automatically to the sender within minutes
- The vendor’s order entry system receives the PO and updates the system immediately upon receipt
What took up to five days with paper and the postal system has just taken less than one hour. By eliminating the paper handling from most of the stages of the process, EDI has the potential to transform a traditional paper based process to look like this:
The major benefits of implementing EDI within your business are discussed in more detail in the ‘Benefits of EDI’ section of this Microsite but in summary EDI can help improve speed and accuracy of transactions, reduce costs and it provides improved flexibility when interacting on a daily basis with your trading partners or customers. To find out how to implement an EDI system, please choose the ‘Implementing EDI’ button from the menu above.
