ELECTRONIC DATA INTERCHANGE
Definition
Electronic data interchange EDI is the transfer of structured data, by agreed message
standards, from one computer system to another, by electronic means without the need for
human intervention.
Or
Consider also: EDI is computer-to-computer exchange of business documents in a standard
electronic format between business partners.
Or
EDI is an electronic communication method that provides standards for exchanging data via
any electronic means.
Example of data: Invoices, transfer of funds, enquiries, quotations, technical information etc.
can be exchanged electronically.
A transaction
A transaction is a term used to describe the electronic transmission of a single document.
Segment is a line of each transaction.
Element is a piece of information in the line.
For example in a purchase order, the segment is the name and address of the purchaser or
supplier. The segment is broken down into data elements such as organization name, address
line 1, address line 2, address line 3, postcode and country.
EDI operation
In purchasing, EDI operates as follows:
1. A company creates a purchase order using its internal business software, i.e. internal
system.
2. EDI software translates the order into its format.
3. The company sends the purchase order to the selling company over a third-party
value-added network (VAN) or encrypted in EDIFACT format over the Internet.
4. The seller receives the purchase order document and will translate it from EDI to its
proprietary format.
5. As may be required, the seller will send an acknowledgement via the same means.
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The process can be depicted in the diagram below.
Company A
1.
Third Party
Purchase order
Company B
4. EDI system
3
EDI system
EDI purchase
document
2. Internal Software
Value-added
network/Internet
Internal software
Benefit of using EDI:




Reduced costs because of the automatic nature of the process.
The absence of a need for paper, telephone calls or fax transmissions.
There is less likelihood of distortion of the message en-route.
EDI enabling internal and external communications
Advantages of EDI
1. Replacement of paper documents: Purchase requisitions, enquiries, purchase orders,
acknowledgement, invoices etc. used by requisitioners, buyers and sellers in
commercial transactions are replaced with standard electronic messages conveyed
between computers often without the need for human intervention.
Consider the use of EDI at a supermarket. The use of EPOS (electronic point-of-sale)
involves a number of functions. When an item is bought, the checkout operator (sales
clerk at the till) scans a barcode on its label which automatically registers the price of
the item on the cash till. At the same time the price is displayed on the screen of the
computer.
The same signal triggers a computer process that

Reorders the item from the manufacturer

Sets off a production cycle

Arranges invoicing

Arranges payment, and

Arranges transportation of the new order
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EDI effectively put the product back on the shelf with no paperwork and a minimum
of human involvement
2. Reduction in lead-times: Buyers and sellers are made to work in a real time
environment. This saves time to a big extent as

Order is prepared and authorised electronically

Order is taken from EDI service by recipient and put straight into order
processing system and acknowledgement is created automatically and sent to
the EDI service

Manufacturing process begins while the acknowledgement is received by the
originator and processed automatically.

Delivery is completed within a short time.
3. Reduction in the cost of inventory and release of working capital: The process of
ordering goods and getting them takes a relatively short time (lead-time). Therefore
the need for keeping large stocks to cater for the needs of the organisation while
waiting for the arrival of new orders is reduced. In the same vein, the money that is
tied up in stock is highly reduced.
4.
Promotion of such strategies as JIT: As a result of the two points pointed out above,
Just-in-time can easily be promoted.
5. Better customer service: in the end the service that is rendered to the customers, both
internal and external, is improved.
6. Facilitation of global purchasing using international standards: EDIFACT is
compatible with most equipment in most countries. In 1970, SITPRO (Simplified
International Trade Procedures Board) to guide, stimulate and assist the
rationalisation of international flows associated with them (these international
standards). SITPRO works with the British Standards Institution (BSI) in connection
with EDI standards.
7. Facilitation of invoice payment: The computer-to-computer transfer of money
eliminates the need for the preparation and posting of cheques.
8. Integration of functions: At corporate level, the major functions of marketing, supply,
production and finance are integrated leading to efficiency and effectiveness.
9. Promotion of relations: EDI tends to promote long-term buyer-supplier relationships
and increases trust.
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Potential problems in implementation of EDI
Before adopting EDI, an organisation should
i.
Ensure that exchanging information electronically supports the overall organisational
strategy.
ii.
Consider the cost and ramifications of EDI’s standard tools and techniques, including
implementation, software maintenance, manpower and participant training and how to
promote systems and applications integration.
iii.
Consider the organisational and process changes involved.
In connection with the second point, Norman states that the more the data are processed and
reprocessed, the more room there is to save time and money. Potential users should,
therefore, calculate the cost per transaction. It is cheaper to fax or perform manually a task,
the buyer probably lacks the volume to invest in EDI. The following are, according to
Monczka and Carter, the indicators of a reasonable opportunity for the application of EDI in
the purchasing environment.
1. A high volume of paperwork transaction documents
2. Numerous suppliers
3. Long internal administration lead time associated with the purchasing cycle.
4. A desire for personnel reductions, new hire avoidance or both
5. A need to increase the professionalism of purchasing personnel.
EDI limitations
The two main limitation of EDI relate to cost and inflexibility.
Cost: EDI is still an expensive option. Until recently, organisations sent all EDI transaction
over a VAN (value-added network) that had set up and running costs often on a per thousand
characters transmitted basis. The scope of EDI was also intentionally limited to ensure
controlled activity within a closed door environment. The heavy overheads associated with
EDI infrastructure are prohibitive for many small and medium sized enterprises.
However, internet and extranet approaches can enable a small business to link into secure
EDI networks at minimal cost. The internet pricing model of flat monthly rates has forced
most of the VAN networks to lower their pricing structures. A new market shift is also
underway in which organisations are moving from proprietary technology to extranet
solution.
Small businesses using the Internet can compete on level playing field with large competitors,
expand globally and improve their trading partner relationships.
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Inflexibility: EDI is said to be a cumbersome, static and inflexible method of transmitting
data which is more suited to straightforward business transactions such as placement of
orders for known requirements. It is not suitable for transactions requiring tight coupling and
coordination such as considering consideration of several possible purchase alternatives or
supply chain optimisation. Unlike human beings, computers are poor at interpreting
unstructured data and cannot derive useful information from Web documents that are not
predefined and permanent. Standard document language used to create web pages is
hypertext mark-up language (HTML). While HTML is able to display data and focuses on
how data look, it cannot describe data. While HTML can state what items a supplier can
offer, it cannot describe them. Traditional EDI approaches do not thus provide the flexibility
required in a dynamic internet environment.
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