Electronic Data Interchange 1 What is EDI Electronic

Electronic Data Interchange 1

What is EDI? Electronic Data Interchange is the computer-to-computer exchange of business data and documents between companies using standard formats recognized both nationally and internationally. The information used in EDI is organized according to a specified format set by both companies participating in the data exchange. 2

EDI Definition Simply termed as Paperless Trading International Data Exchange Association (IDEA) formally define EDI as: ‘The transfer of structured data, by agreed message standards, from one computer system to another, by electronic means. ’ Four elements essential to an EDI system: Structure Data: transactions contain codes, value and pieces of text, each piece of information with a defined purpose. Codes for the customer and product. 3

EDI Definition Agreed Message Standard: a universal standard not only agreed between business partners but also national and international bodies. A Purchase Order is one the agreed standards. From One Computer System To Another: any EDI message is sent between two computer applications. A message is directly sent between the customer’s Purchasing System and the supplier’s Order Processing System. By Electronic Means: what is involved is a networking channel designed for EDI for the transmission of the message. 4

Electronic Data Interchange (EDI) Used by organizations for transactions that occur on regular basis. For most part it is used in for purchase transactions. Mostly applied in the Execution and Settlement phases of the trade cycle, it may also be used for Pre-Sale and After Sale. Examples of EDI applications in use: • In the UK, National Health Service (NHS) • British Telecom (BT) : for its bills from the gas, electricity and heating oil utilities. EDI applications reduces delays, inaccuracies and inefficiencies associated with exchange of data on paper. 5

History of EDI The general idea behind EDI was originated by a group of railroad companies in the mid-1960’s, in the United States. Much of the early work on EDI was driven by the industry sectors for: transportation pharmaceuticals groceries automobiles banking 6

A Traditional Document Exchange of a Purchase Order An EDI Document Exchange of a Purchase Order This process normally takes between three and This process normally occurs overnight and can five days. take less than an hour. Buyer makes a buying decision, creates the purchase order and prints it. purchase order but does not print it. Buyer mails the purchase order to the supplier. EDI software creates an electronic version of the purchase order and transmits it automatically to the supplier. Supplier receives the purchase order and enters it Supplier's order entry system receives the into the order entry system. purchase order and updates the system immediately on receipt. Buyer calls supplier to determine if purchase Supplier's order entry system creates an order has been received, or supplier mails buyer acknowledgment an transmits it back to confirm an acknowledgment of the order. receipt. 7

The Basic Steps of EDI The process of sending an electronic document requires a series of steps on the part of both the sending and receiving partners. Steps the Sender Must Take • Document Preparation: Information necessary to produce a business document (purchase order, invoice, etc. ) is collected in an electronic file. • Outbound Translation: The electronic file is converted by the sender's translation software into the standard format. • Outbound Communication: The sender's computer connects to a VAN. Upon successful receipt, the VAN processes and routes the transaction to the electronic mailbox of the receiver. 8

Steps the Receiver Must Take • Inbound communication: The receiver's computer connects with the VAN and receives any files waiting in its electronic "in" box. • Inbound translation: The receiver's translation software "maps" or translates the electronic file from the standard message format into a format the receiver's internal system can understand. • Document processing: The receiver's internal document processing system takes over and the newly received document is handled according to normal internal procedures. 9

Four required components for Electronic Data Interchange: A complete system for exchanging transactions electronically requires the following components, preferably from one vendor that can provide an end-to-end solution. • EDI software translates information from your accounting system into the EDI format • EDI mapping allows your accounting system to sync with your customer’s system • EDI VAN - Transaction Network needed to send and receive transactions (supports AS 1, AS 2 and other connections) • Ongoing EDI support and maintenance services. 10

EDI Process The EDI system first reads in a purchase order from the buyer. It then generates the machine-readable EDI standard file through an EDI translator. This file is then encrypted and transmitted to the seller via telephone lines, either directly from the sender to receiver or via a communications intermediary company called and EDI third-party service provider or VAN (Value Added Network). At the seller’s site, this file is first decrypted. Then, it is fed into the EDI system which maps the standard fields, via EDI translator, into the simple file needed by the receiving computer application, edits and verifies the incoming information, and then passes it to the receiving order entry application for processing. 11

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EDI Standards The TRADACOMS EDI • The UK retail industry is an exception to the use of UN/EDIFACT, as this industry uses the TRADACOMS EDI standard. • TRADACOMS (developed by Article Numbering Association, GS 1 UK) was one of the earliest EDI standards developed. • Although the EDI standard lost many of its followers in 1995, although the retail industry has held on to the standard and probably will for some time. • Because TRADACOMS is only set up for UK currency, it can only be used within the UK. 13

The EDI standards UN/EDIFACT • It is the international EDI standard, but is mainly used outside of the US/Canada. • One of the reasons that Europe is prone to using the EDIFACT EDI standards is because they adopted the system earlier than other regions. • The UN/EDIFACT (United Nations/Electronic Data Interchange For Administration, Commerce, and Transport) is an EDI standard that was created under the work of the United Nations. • The EDIFACT EDI standard outlines rules by which to structure data, offers a standardized procedure for interactive exchange, and provides a “standard message” so that information can be shared between industries and countries. • The industries who use EDIFACT EDI standards most predominantly are the high-tech, civil aviation, retail and tourism industries. 14

The North American ANSI ASC X 12 Standard of EDI Standards • In the US and Canada, the ANSI ASC X 12 (American National Standards Institute Accredited Standards Committee X 12) standard is used almost exclusively for EDI standards. • This EDI standard was created in 1979 by ANSI (American National Standards Institute), although the “X 12” section of the standard term is arbitrary, simply a way to distinguish the EDI standard from other developments. • Industries using this type of EDI standard include healthcare, insurance, government, transportation, and finance, among others. 15

Architecture EDI architecture specifies four layers: the semantic (or application) layer, the standards translation layer, the packing (or transport) layer, and the physical network infrastructure layer. 16

Advantages of EDI Save Money The cost of paper and paper processing is incredibly high compared to a properly implemented EDI program. 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 rekey information with EDI. And the chance for error drops to near zero, with no data entry. Improve Customer Service The quick transfer of business documents and marked decrease in errors allow you to do business faster and more efficient. 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. 17

Disadvantages of EDI Too Many Standards There are too many standards bodies developing standard documents formats for EDI. For example your company may be following the X 12 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. 18