EDI and its applications Introduction EDI (Electronic Data Interchange) is the computer-to-computer exchange of business information using

a public standard. EDI is a central part of Electronic Commerce because it enables businesses to exchange information electronically much faster, more cheaply and more accurately than is possible using a paper-based system. EDI was first used in the transportation industry more than ! years ago. "cean, motor, air, rail carrier, and the associated shippers, bro#ers, customs, freight forwarders, and ban#ers put EDI into practice. $he first set of EDI standards were de%eloped by the $ransportation Data Coordinating committee ($DCC). &'(I (&merican national (tandards Institute))* standards (electronic numbers and formats) were de%eloped later and based upon the $DCC format. EDI is widely used in these industries+ manufacturing, shipping, warehousing, utilities, pharmaceuticals, construction, petroleum, food processing, and health care. & recent study pro,ects that the number of companies using EDI will -uadruple in the next six years. &bout .!,!!! pri%ate sector companies in the /nited (tates, li#e 0ederal Express, Eastman 1oda#, &merican &irlines, 'i#e, (taples, 'ationsban#, 2C 3enney, and others currently use EDI. EDI Trading Partners & $rading 3artner is a business that has agreed to exchange business information electronically. $his term describes any business that has been registered with the /.(. 0ederal 4o%ernment as well businesses in the commercial mar#et place that exchange business information electronically. Definition $he Electronic Data Interchange (EDI) is simply defined as the computer-to-computer exchange of business documents in a structured, pre-defined standard format. $he main purpose of the EDI is to a%oid and pre%ent additional human inter%ention of reading and processing information between trading partners by establishing a standard data transmission protocol. &s a result traditional processing delays and errors due to the document transfers and data re-entries can be eliminated. Reasons of adopting EDI "rgani5ations ha%e adopted EDI for the same reasons they ha%e embraced much of today6s modern technology-enhanced efficiency and increased profits. 7enefits of EDI include+ 8educed cycle time 7etter in%entory management Increased producti%ity 8educed costs Impro%ed accuracy Impro%ed business relationships Enhanced customer ser%ice Increased sales

9inimi5ed paper use and storage Increased cash flow

Uses of EDI Electronic data interchange can be used to transmit documents electronically such as in%oices, purchase orders, receipts, shipping documents, and other standard business correspondence between organi5ations and business partners. EDI can also be used to transmit financial information and payment in electronic forms, which is usually referred as electronic funds transfer (E0$). 7ecause of these, the functions of the EDI become more and more significant nowadays especially with the growth of electronic commerce o%er the :orld. Problems with the traditional information interchange $raditional computeri5ation of a business company mainly focused on replacing predefined or pre-printed business forms with similar defined electronic forms on computer, such as purchase orders, in%oices, or deli%ery orders. ;owe%er, the procedures of processing those documents remain the same as before. 0or example, a typical purchasing system which allows client to re%iew their material re-uirements and create purchase orders automatically according to the stoc# le%els and bill of materials (7"9). $he created purchase order will be printed out and mailed to the supplier. $he supplier then manually enters the item information to their customer shipping system upon recei%ing the order. Information to be inputted may includes customer name, order date, order items, -uantities, re-uired deli%ery date, agreed price, payment method, and so on. "n the date of deli%ery, ordered items or materials will be shipped. In%oice will then be printed by the shipping system and mailed bac# to the purchaser.

Figure 1: Traditional exchange of information between trading partners &s we can see in this simple example, e%en if the purchased items were ordered and shipped on the same day, the cycle time could be as much as a wee# which would depend on the speed of the mail and the bac#log at the client<s order entry system. 0igure *

shows the traditional method of exchanging information or documents between merchant and supplier. In short, the %arious problems with the traditional information interchange are discussed below+ Increase in Processing Time: In the traditional paper based processing system, the physical transmission of documents between the trading partners causes the increase of processing time to complete a single transaction. &nother reason which causes the delay is the time it ta#es to re-enter data. (ame information is entered twice in the example abo%e. ;owe%er, the number of re-entering data will be a lot more in the real practices, especially in the manufacturing industries. ow !ccurac": Due to the paper-based system that re-uires multiple instances of the same information, data ha%e to be re-entered at %arious places within the processing life cycle. Clearly, repeat entering the same data greatly increases the possibilities of errors. #igh abor $ost: $raditional flow of information re-uires data to be entered manually at each step in the processing cycle, such as the input of purchase order, in%oice, deli%ery note, receipt, and so on. $hese operations are labor intensi%e. Increased Uncertaint": 7ecause of the delays in mailing and processing stage, the time of recei%ing document will be unsure. It is not unusual that a merchant find out that the supplier ne%er recei%ed the purchase order when the items are not deli%ered as expected. $his #ind of uncertainty often resulted in constant telephoning to confirm the receipt of document. !d%antage of EDI o%er traditional data interchange $he use of EDI can help to eliminate or significantly reduce the problems found in the traditional information interchange system. 0or instance, with the implementation of EDI in the pre%ious example, the merchant can still re%iew their material re-uirements and create purchase order. ;owe%er instead of printing a hardcopy of the order and mailing it, the purchase order will be transmitted directly to the supplier o%er an electronic networ#.

Figure &: Information Interchange Using EDI "n the supplier<s end, the transaction will be recei%ed and posted automatically. If there is an a%ailable stoc#, the supplier can e%en deli%er the items on the same date they recei%ed the order. 0urthermore, the supplier now can be able to send its shipping document and notification electronically to the merchant, pro%iding the client with accurate recei%ing documents prior to the actual arri%al of the items. In addition, since the in%oice can be sent directly to the merchant<s accounts payable system through the EDI

implementation, the supplier could recei%e its payment sooner than before. 0igure illustrates the simplified information interchange cycle after the use of EDI. $hus with the help of EDI the problems associated with the traditional data interchange are sol%ed as follows+ 0irst, the delays associated with the physical transmission of documents, and the time re-uired for human to read and re-enter data are eliminated and automated by electronic data transfer. (econd, since data are not repeatedly re-#eyed, the chance for error is greatly reduced. $hird, labor costs can be reduced, as data are not re-uired to re-enter fre-uently and manually at each stage of the processing cycle. 0ourth, because of the reduction in time delays, more certainty can be obtained in the flow of information. In short, with the implementation of EDI, the producti%ity, efficiency and accuracy between business and trading partners can be greatly impro%ed. 'enefits of EDI :hether implementation of EDI was in the area of purchase orders, ad%anced shipment notification, or automatic in%oicing, se%eral immediate ad%antages could be reali5ed by exchanging documents electronically. (peed: Information mo%ing between computers mo%es more rapidly, and with little or no human inter%ention. (ending an electronic message across the country ta#es minutes or less. 9ailing the same document will usually ta#e a minimum of one day. Courier ser%ices can reduce the time (while substantially increasing the cost) but at best can shorten the cycle to hours. 0acsimile transmissions wor# well for small documents, but for se%eral hundred pages, it6s not a feasible solution. !ccurac": E%en when alternate means of document transfer are used they suffer from the ma,or drawbac# of re-uiring re-entry into the customer order system, admitting the opportunity of #eying errors. 7ut information that passes directly between computers without ha%ing to be re-entered eliminates the chance of transcription error. $here is almost no chance that the recei%ing computer will in%ert digits, or add an extra digit. Econom": $he cost of sending an electronic document is not a great deal more than regular first class postage. &dd to that the reductions in cost afforded by eliminating the re-#eying of data, human handling, routing, and deli%ery. $he net result is a substantial reduction in the cost of a transaction. #ow does EDI wor)* $his section simply describes fi%e basic steps or processes which will happen during a typical EDI transaction. $hese steps together with the EDI standards ma#e the exchange of data possible between two trading partners. 0igure = shows an o%er%iew of how EDI wor#s.

Figure +: #ow EDI wor)s* $he steps are as follows+ 1 Preparation of electronic documents+ $he first step in the se-uence of EDI is the collection of information and data. $he way to collect the re-uired information should be same as the way to do it in the traditional system. ;owe%er, instead of printing out the data on paper in tradition, the system has to build an electronic file or database to store those data. In the case of companies who already use computer to issue their documents li#e purchase orders, they may already ha%e some sort of databases which store those information, then they can start with the next step described below. & ,utbound translation: $he next step is to translate the electronic file or database into a standard format according to the specification of the corresponding document. $he resulting data file should contain a series of structured transactions related to the purchase order for example. If more than one company is in%ol%ed in the particular transaction, indi%idual files should be produced for each of them. + $ommunication+ $hen the computer should connect and transmit those data files to the pre-arranged >alue &dded 'etwor# >&' or Internet automatically. $he >&' should then process each file and route to the appropriate electronic mailboxes according to the destination set in the file. - Inbound translation+ $he destinated company should be able to retrie%e the file from their electronic mailboxes in a constant period, and then re%erse the process by translating the file from the standard format into the specific format re-uired by the company<s application software. . Processing the electronic documents: $he internal application system of the destinated company can process the recei%ed documents now. &ll the resulted documents corresponding to the recei%ed transaction should use the same processes or steps to transmit bac# to the transaction initiator. $he whole cycle of the electronic data interchange can then be completed. Example

;ere is an example of how an EDI transmission wor#s+ & buyer prepares an order in his purchasing system and has it appro%ed. 'ext, the EDI order is translated into an EDI document format called an EDI purchase order. $he EDI purchase order is then securely transmitted to the supplier either %ia the internet or through a >&' (>alue &dded 'etwor#). $he buyer<s >&' is a li#e an electronic post office that interconnects with the supplier6s >&'. $he >&'s ma#e sure that EDI transactions are sent and recei%ed. $he supplier<s >&' ensures that the supplier recei%es the order. $he supplier<s EDI system then processes the order. Data security and control are maintained through out the transmission process using passwords, user identification and encryption. 7oth the buyer<s and supplier<s EDI applications edit and chec# the documents for accuracy. Each trading partner has uni-ue EDI re-uirements. $hese will include the specific #inds of EDI documents to be processed, such as the EDI purchase order used in the example abo%e, EDI ad%ance ship notices and EDI in%oices. In fact, most any business document that one company would exchange with another company can be sent %ia EDI. ;owe%er, each EDI document must be exchanged with each partner in exactly the format they specify. 9any partners will ha%e an EDI implementation guide or #it that explains their specific re-uirements. 9aps are re-uired to translate the EDI documents from the trading partner<s format into the format that is useable by the recei%ing party. $omponents of EDI EDI capability in%ol%es either buying or outsourcing the following components+ *. (oftware for communications, mail boxing of EDI transactions, mapping and translation. . >&', &(?'C, 7I(?'C, and Internet communications as re-uired by %arious partners. =. ;ardware including a ser%er or 3C, communication de%ices and peripherals @. (ecured office space and monitored security .. Data bac#ups and redundant power for reliability A. &dditional software will be needed if integration of the EDI transactions with bac# office systems is desired. B. & >&' will need to be contracted for ongoing EDI transmissions. C. 3ersonnel must be trained in how to use the software and communication de%ices. D. 9aps will need to be de%eloped for each EDI document type to be exchanged with each partner. 9aps translate the encoded EDI record into a useable format. EDI standards $he need for definition of and adherence to standards is paramount in assuring successful EDI. :ithout an agreed upon set of standards, EDI would be unwor#able from the start. $here is a comprehensi%e set of public standards that define the syntactical re-uirements for a wide %ariety of EDI transaction types, so that %irtually any business need can be addressed within the guidelines of an internationally accepted set of standards. $he EDI standards are de%eloped and maintained by the &ccredited (tandards Committee (&(C) )* . $he standards are designed to wor# across industry and company boundaries. Changes and updates to the standards are made by consensus, reflecting the

needs of the entire base of standards users, rather than those of a single organi5ation or business sector. EDI permits hundreds of unrelated companies to communicate and process business transactions electronically. EDI wor#s because it relies on a standard system that e%eryone can use, de%eloped under the guidelines of the &merican 'ational (tandards Institute (&'(I), the coordinator for national standards in the /nited (tates. $he &'(I committee ensures that e%eryone using a process such as EDI follows the same rules and methods, ma#ing the program uni%ersally accessible. &s a result of the standard, all businesses share a common interchange language, which minimi5es the need for users to reprogram their internal data processing systems. $ost of implementing EDI In any pro,ect, it is necessary to #now what the true cost of implementation will be, and it is no different with EDI implementations. (ome of the cost exposures are ob%ious, such as hardware and software. $his list is certainly not definiti%e, but may pro%ide some direction in anticipating costs that are not so ob%ious. *. Translation (oftware: Cost is usually on a per-C3/ basis, and most %endors will negotiate site license costs. . (oftware /aintenance: 3urchasing a software maintenance contract is always ad%isable, since this will usually pro%ide technical assistance, and will fre-uently guarantee automatic updates. :ith translation software, the updates should include additional transaction sets as they are implemented. =. Internal (oftware de%elopment costs: 9odifications to internal systems should be cosseted as any other software pro,ect would be. @. #ardware costs: Cost will depend not only upon platform, but upon the specific configuration of the platform. &dditional costs may be encountered in operating system software licensing, hardware interfaces for networ#ing, and additional peripheral de%ices such as tape bac#up systems. .. Training costs: these costs can include in-house training for new procedures, %endor training for software products and for hardware. A. !dditional resource costs: If a business is %enturing for the first time into the /'I) open-systems en%ironment, it may be necessary to hire a technical specialist that s familiar with system administration and support for the platform. B. (pecialt" hardware: the EDI pro,ect may re-uire special data collection de%ices such as bar code e-uipment or special printers. C. 0etwor)ing costs: If a pri%ate networ# will be used, there are leasing costs for phone lines, and additional networ#ing hardware costs. If the business opts for the use of a >&', explicit pricing policies for all ser%ices should be a%ailable, allowing for exact determination of start-up and on-going communications costs. D. egal costs: (ince EDI re-uires entering partnerships with other companies, it will re-uire that contractual relationships are defined. 0or EDI, a standard contract form has been de%eloped called and EDI $rading 3artner &greement. $his form helps define relationships and responsibilities. It is a fairly straightforward form, and should ser%e as the basis for any contractual arrangements.

&lso, it is always ad%isable to insure that such contracts properly protect parties, so legal costs may ha%e to be factored into pro,ect estimates. *!. $onsulting costs: It may be a worthwhile in%estment for a company new to EDI to hire the consulting ser%ices of #nowledgeable experts. 3rofessional expertise can be in%aluable in initial planning, particularly in determining strategic ob,ecti%es. !pplications of EDI 7usinesses, go%ernment agencies, and other organi5ations use EDI for a %ast range of transactions. $he classic application of EDI is in purchasing. & manufacturer or a retail store might use EDI with its suppliers to replace paper purchase orders, material releases, shipping notices, and in%oices. &t a simple le%el, the ob,ecti%e of EDI is to replace paper. $he creation, shuffling and storage of paper is cumbersome and expensi%e. 7y eliminating paper, EDI allows information to be exchanged between trading partners more rapidly, more efficiently, and with far fewer errors. 7ut to fully understand what is dri%ing EDI, one must see EDI in the context of a bigger picture. Companies employ EDI as part of broad management strategies, li#e ,ust-in-time manufacturing and -uic# response retailing. $he goal of these strategies is often to reduce in%entory stoc#s and to allow companies to be more responsi%e to changes in mar#et demand. & buyer company (manufacturer or retailer) prefers to order product from suppliers only as and when it is needed, and it prefers that the product arri%e -uic#ly after the order is placed. $his strategy calls for the buyer to send suppliers many more order messages than was necessary in the past, each message co%ering a smaller -uantity of product. Instead of ordering !! widgets e%ery month, the buyer may begin ordering *! widgets e%ery business day. EDI allows managers to be creati%e in the exchange of data between companies. 9anagers may see# to re-engineer the business process to simplify it. "ne example of this is #nown as e%aluated receipt settlement (EE8(E), a strategy that see#s to eliminate the exchange of an in%oice between a manufacturer and its supplier. /nder E8(, when a buyer purchases a particular product from the seller, the two companies exchange a series of ordering and shipping messages. "nce the product arri%es, the buyer has enough information to calculate the amount of money the buyer owes the seller for the product. $hus, the buyer does not want an in%oiceF the buyer ,ust calculates and pays. $he sending and processing of an in%oice would be a redundant step in the process. &nother idea emerging from EDI is %endor managed in%entory (E>9IE). 7efore >9I, a buyer such as a retailer would analy5e its sales, and based on its analysis place orders for new in%entory. /nder >9I, the responsibility for analy5ing sales and for deciding when the buyer will recei%e new product shifts to the seller. $he buyer sends raw sales data in electronic form to seller. (eller then ma#es ,udgments as to which products are more li#ely to sell in the future and decides which products to send. $his shift in responsibility changes the allocation of ris#s and responsibilities between buyer and seller. In short, EDI can be used by different sectors of acti%ity li#e industry, commerce, ban#s, insurance, transport, customs, etc. 0urthermore trading partners from all these sectors can be lin#ed through an EDI system. Get us see the applications of EDI in different sectors+

11 Industr"2commerce EDI presents a lot of applications in industry and commerce. $he main applications are+ bid, order, contract deli%ery, shipment order in%oice, payment 'id3 order3 contract & customer that wants to buy a product or a ser%ice can as# one or more suppliers to submit a bid. $he call for a bid can include technical specifications of the product, -uantity, date and means of deli%ery etc. $he supplier can answer with a bid specifying all the details of the transaction li#e price, payment arrangement, shipment arrangements etc. $he procedure can be repeated till the two parties agree and result to a contract.

Deli%er"3 shipment :hen the products are ready to be deli%ered the supplier order transmits internally the deli%ery order and the shipment order to the transport company. In%oice3 pa"ment &fter the deli%ery of products, the supplier sends the in%oice with all the details of the transaction+ product, ser%ices, -uantity, price, payment arrangement etc. $he payment can be also done through EDI with a payment order. (upplementary documents concerning the account can be transmitted. $he benefit of EDI is its speed and accuracy.

&1 'an)2insurance 'an)ing en%ironment* EDI is used in ban#ing en%ironment from the %ery beginning (late .!<s). 7an#s world-wide are transmitting millions of EDI messages with international payment orders, currency exchange arrangements, credits and debits etc. 8ecently EDI is used by the insurance industry. >arious pro,ects are connecting insurance companies, which are exchanging information about clients, car insurance etc.

Insurance

+1 Transport2 customs Transport $here are EDI pro,ects in road, rail, sea and air transport as well as in logistics and storage companies. $ransport and logistics companies can be lin#ed between them and also with export companies, ban#s, customs etc.

$ransport companies are trading though EDI with their customers exchanging deli%ery orders, shipment details, in%oices, payments etc. $ustoms :hen there is a transnational exchange, customs must be informed by the importerH exporter about the transportation of goods. ImportersH exporters can transmit EDI messages instead of filling the forms concerning all the details of the transportation. Customs process the data and sends a notification with the fees to be paid. $he payment of the fees can be done also though EDI.

Future of EDI Electronic Data Interchange is a business-to-business communication scheme used with established business partners. It has been in place for o%er ! years. In many corporations and organi5ations, the technology has streamlined the purchasing processes and lowered the procurement costs. $he economic ad%antages of the EDI are widely recogni5ed nowadays. ;owe%er, such an impro%ement li#es automating the accounts payable function or the funds transfer process are no longer satisfied by today<s competiti%e and dynamic business en%ironments. Companies are reali5ing that to truly impro%e their producti%ity, they need to automate their external processes as well as their internal processes. &nd this forms the new directions of EDI. $he future EDI ser%ices for electronic commerce are seen as the future bridge that automates both the external and internal business processes. $hose ser%ices pro%ide information management solutions that allow companies to lin# their order entry, purchasing, accounts payable, funds transfer, and other systems together, so that they can interact with each others and further communicate with the corresponding systems in the side of the company<s trading partners, such as suppliers, distributors, customers, ban#s, and so on. Conse-uently, the new EDI ser%ices enable companies to impro%e their producti%ity on a great scale.