What is EDI?
"Have you heard someone mention EDI (Electronic Data Interchange) or eCommerce
and wondered what it was? Simply put, eCommerce is the exchange of information
about trading goods, services, or money from computer to computer. For example,
the purchase of a widget (s) over the internet, paying a bill, tracking an overnight
package delivery, or receiving a paycheck electronically.
What is EDI?
What is EDI?
What is EDI?
What is EDI?
Now imagine you're a company. You want to do the same transactions, but
thousands of times a day. That is where EDI steps in. EDI is an agreed upon
standard message that exchanges information from one computer application to
another with the minimum of human intervention. And 95% of all eCommerce uses
EDI to exchange that information. It can be done withspecial software via email,
across the Internet, or by customized connections. And it goes beyond just
purchasing goods and submitting invoices. A company can request information
about inventory levels in it's suppliers ' and customers ' warehouses, receive an order
status; and send funds electronically along with automatic notification that an
invoice was paid. These are just a few of the many types of automated transactions
EDI is not something new. As a matter of fact, it is much older than you might
think. Yet to some industries it is only a few years old. And the health industry of
the United States had to be mandated by the Federal government before they dared
venture into EDI.
Who uses EDI? And how and where did it allstart? What are the benefits? What are
the costs? What are the legalities? And why, with all the apparent advantages, do
some industries balk at switching to EDI? Well let's start at the beginning to see
how it all came about.
Who uses EDI?
About 90% of the fortune 1000 companies currently use EDI. Companies such as
American Airlines, BMW, Coca-cola, Dunkin Donuts, Eastman Kodak, Federal
Express, Gordmans, Heinz, InFocus, JCPenney, Kohls, Macys, Lowes, Nike,
Openheimer, Prudential Insurance, Queens City Government, Radio Shack, Staples,
Texaco, United Airlines, Verizon, Wachovia, and Yokohama Tires to name but a few.
EDI is widely used in manufacturing, shipping, warehousing, utilities,
pharmaceuticals,construction, petroleum, metals, food processing, banking,
insurance, retailing, government, health care, and textiles among other industries.
Any company that buys or sells goods or services can potentially use EDI. Because it
supports the entire business cycle, EDI can streamline the relationship that any
company has with its customers, distributors, suppliers, and so forth. According to
a recent study, the number of companies using EDI is projected to quadruple within
the next six years.
History of EDI
The first recorded EDI dates back to the 1850s when the railroads and Western
Union used the telegraph to communicate business information. Starting there,
Samuel Morse's patented code was the single method used to communicateacross
the lines.
In 1948 during the Berlin Airlift, thousands of tons of food and consumables were
needed to be air-freighted. The task of coordinating these consignments (which
arrived with differing manifests, languages and numbers of copies) was addressed
by devising a standard manifest.
In the late 1950 's and early 1960 's the rise of computer enabled companies to store
and process data electronically, companies needed an expedient "method to
communicate the data. This method was realized by the widespread use of
computer telecommunications. Using telecommunications, companies could
transmit data electronically over telephone lines, and have the data input directly
into a trading partner's business application. These electronicinterchanges
improved response time, reduced paperwork, and eliminated the potential for
transcription errors. Computer telecommunications, however, only solved part of
the problem.
Early electronic interchanges were based on proprietary formats agreed between two
trading partners. Due to differing document formats, it was difficult for a company
to exchange data electronically with many trading partners. What was needed was a
standard format for the data being exchanged. In 1968 the United States
Transportation Data Coordinating Committee (TDCC) was formed, to coordinate the
development of translation rules among four existing sets of industry-specific
standards.
In the mid 1970 's, it was clear that the TDCC standards were notenough, and work
began for national EDI standards. The Electronic Data Interchange Association
(EDIA), a non-profit organization set out to serve as an administrator for several
different industry groups. Each industry served has a committee to determine new
standards, modify existing ones, and pass the information on to the EDIA for
publication and distribution. EDIA was asked to develop a set of standards
applicable to the grocery industry. The first such standard is The Uniform
Communication Standard (UCS) which was applied to an actual transaction by the
Quaker Oats Company in 1981.
In 1979 the American National Standards Institute (ANSI) Accredited Standards
Committee (ASC) was formed. It included representatives fromtransportation,
government & computer manufacturer industries, The committee's first meeting
took place in Rosslyn, Virginia with the goal to create a set of standard data formats
based on the TDCC structure that:
-were independent hardware;
-were unambiguous, such that they could be used by all trading partners;
-reduced the labor-intensive tasks of exchanging data (e.g., data re-entry);
-allowed the sender of the data to control the exchange, including knowing if and
when the recipient received the transaction.
In 1982, Version 1 of the ANSI ASC certified release of X 12 standards draft was
published.
At about the same time, the U.K. Department of Customs and Excise, with the
assistance of SITPRO (the BritishSimplification of Trade Procedures Board), was
developing its own standards for documents used in international trade, called
Tradacoms. These were later extended by the United Nations Economic Commission
for Europe (UNECE) into what became known as the GTTO (General-purpose Trade
Data Interchange standards), and were gradually accepted by some 2.000 British
exporting organizations.
Problems created by the trans-Atlantic use of two different (and largely
incompatible) sets of standardized documents have been addressed by the
formation of a United Nations Joint European and North American working party
(UN-JEDI), which began the development of the Electronic Data Interchange for
Administration, Commerce and Transport (EDIFACT) documenttranslation
standards.
Early on, Value Added Networks (VANs) served as an "electronic post office" for
buyers and suppliers that needed to exchange data. For example, Company A could
send an electronic purchase order to the VAN and Company B could go to the VAN
to pick it up. If Company B claimed it did not receive the purchase order, the VAN
would serve as a third-party intermediary and would validate whether the purchase
order had in fact been picked up or not. That is the type of "value-add" these
networks provided.
Despite the benefits, EDI VAN had limited adoption because it was cost-prohibitive
for most companies to deploy. Before Internet EDI became available, approximately
80% of the suppliers in any given supply chain werecommunicating with their
customers manually via fax, telephone and snail mail because they could not afford
the investment required for EDI VAN. This resulted in inefficiencies throughout the
supply chain including: lost or mis-keyed purchase orders, late invoices, out-of-
stocks, etc.
With the advent of secure Internet EDI, companies of every size are now able to
transact electronically with their trading partners. And VAN services such as
"Message Disposition Notifications (MDNs) are built right into the software
products.
Benefits of EDI
Consider a very simple non-EDI-based purchase: A buyer decides he needs 365
widgets. He creates a purchase order, prints it out and pops it in the mail. When
the supplier gets theorder, she types it into her company's computer system. The
inventory guy pulls the order and ships out the widgets. Next, the supplier prints
out and mail an invoice. It's not hard to imagine that this process could take
several days. EDI has the potential to cut massive amounts of time out of the
process. Sending documents, such as purchase orders or invoices, electronically
takes minutes, not days, and shipments can often go out the day the order comes
ins.
Moreover, the electronic format does not need to be re-keyed upon arrival. And
that is the part of the biggest benefit of EDI. This saves a tremendous amount of
labor time, and means that no data entry errors are introduced into your system by
your staff. Cycle times arereduced, and data entry backlogs are almost completely
eliminated. This allows for very quick order processing. A proper system can easily
handle receiving an order and shipping that order with its invoice the same day.
Studies indicate that the average reduction in turn around time is about 40% for
most business functions like order fulfillment, procurement, manufacturing,
logistics and finance.
This often allows a company that first implements EDI to handle far greater volumes
without adding personnel and other costs. This means increased sales and
increased revenues once the initial investment in EDI is recaptured.
These savings come from:
or No data entry errors from your operators
or No mail time
or Reduced laborprocessing costs and time
or Reduced lead times
or Reduced order cycle time
or Reduced inventory carrying costs
or not filing and other processing of paperwork
EDI improves margins by meeting customer demands and consequently
strengthening relationships. It also allows time and effort to be focused on other
internal priorities.
Studies have shown that processing a purchase order or invoice costs most
companies about $ 5 in paper, postage, handling, direct labor and other such odds
and ends of direct costs. With EDI this can be reduced to about 50 cents;
sometimes as little as 13 cents, depending on how the EDI document is transmitted.
If your direct handling costs are greater, the savings is greater.
Another benefit isthe implementation of Just-In-Time (JIT) order process
methodology. With Just-in-Time, a company can avoid stock-outs and/or obsolete
inventories, reduce lead times on ordering from suppliers and reduce inventory
carrying costs. Whether implementing a subset or the whole of the JIT process
methodology, EDI is what makes Just-In-Time possible and allows it to be feasible.
With the proper agreements between trading partners, a manufacturer can
determine the current sales of their buyers and their buyers ' current inventory
levels. Therefore the manufacturer can forecast probable future sales and plan
production and their own purchasing accordingly. Obviously there will occasionally
be wild fluctuations that will disturb this scenario, but it doeshelp the manufacturer
to accurately plan production, and the purchaser to know that their needs will more
likely be met by their suppliers.
Just-In-Time helps the manufacturer communicate quickly and inexpensively with
their suppliers, who may be using the same forecasting to meet the requirements of
their customers.
Disadvantages of EDI
The biggest disadvantage implementing EDI is it reveals inefficient business
practices. If a company's business process was inefficient before EDI, they will be
multiply with the implementation of EDI. The original purpose of EDI was to save
money and time. When used improperly, EDI does neither, and actually wastes both.
Costs of EDI
What is EDI?
