E-Commerce Unit-3: Electronic Data Interchange (EDI)

Introduction
Electronic Data Interchange (EDI) is the transfer of data from one computer system to another
by standardized message formatting, without the need for human intervention. In short, EDI is
the computer-to-computer exchange of business documents in a standard electronic format
between business partners. EDI permits multiple companies – possibly in different countries –
to exchange documents electronically.
Each term in the definition is significant:
• Computer-to-computer: EDI replaces postal mail, fax and email. While email is also an
electronic approach, the documents exchanged via email must still be handled by people
rather than computers. Having people involved slows down the processing of the
documents and also introduces errors. Instead, EDI documents can flow straight through
to the appropriate application on the receiver’s computer (e.g., the Order Management
System) and processing can begin immediately. A typical manual process looks like this,
with lots of paper and people involvement:

The EDI process looks like this — no paper, no people involved:

• Business documents: These are any of the documents that are typically exchanged
between businesses. The most common documents exchanged via EDI are purchase
orders, invoices and advance ship notices. But there are many, many others such as
customs documents, inventory documents, shipping status documents and payment
documents.
• Standard format: Because EDI documents must be processed by computers rather than
humans, a standard format must be used so that the computer will be able to read and
understand the documents. A standard format describes what each piece of information is
and in what format (e.g., integer, decimal, mmddyy). Without a standard format, each
company would send documents using its company-specific format and, much as an
English-speaking person probably doesn’t understand Japanese, the receiver’s computer
system doesn’t understand the company-specific format of the sender’s format.

Compilation: Ajay K Shah (Associate Professor, Purbanchal University) 1

E-Commerce Unit-3: Electronic Data Interchange (EDI)

o There are several EDI standards in use today, including ANSI and EDIFACT.
And, for each standard there are many different versions, e.g., ANSI 5010 or
EDIFACT version D12, Release A. When two businesses decide to exchange
EDI documents, they must agree on the specific EDI standard and version.
o Businesses typically use an EDI translator – either as in-house software or via an
EDI service provider – to translate the EDI format so the data can be used by their
internal applications and thus enable straight through processing of documents.
• Businesspartners: The exchange of EDI documents is typically between two different
companies, referred to as business partners or trading partners. For example, Company A
may buy goods from Company B. Company A sends orders to Company B. Company A
and Company B are business partners.

When you create an EDI document, such as a purchase order, you must adhere to the strict
formatting rules of the standard you are using. These rules define exactly where and how each
piece of information in the document will be found. That way, when the EDI translator on the
receiving computer reads an incoming EDI purchase order, it will immediately understand
where to find the buyer’s company name, the purchase order number, the items being ordered,
the price for each item, etc. Then, that data will be fed into the receiver’s order entry system in
the proper internal format without requiring any manual order entry.
The graphic below shows a sample purchase order in printed form:

In the EDI language, a single business document, such as a purchase order, invoice or advance
ship notice, is called a “transaction set” or “message.” And, a transaction set is comprised of
data elements, segments and envelopes.

EDI System Components

An EDI system consists of all of the components necessary to exchange EDI transactions with
trading partners who are EDI capable. The major components are: EDI translation software,
user or system interfaces, hardware, maps, EDI guides, a communication network, and EDI
experienced personnel. A company that wants to be EDI capable will have to either buy the
components or outsource all of the EDI system components to a third party.

Compilation: Ajay K Shah (Associate Professor, Purbanchal University) 2

E-Commerce Unit-3: Electronic Data Interchange (EDI)

• EDI transactions are very compact and difficult to read and manipulate. EDI translation
software provides the ability to translate EDI data into a file format that can be interfaced
with a company's in-house systems or translated into forms that can be used by users.
• EDI translation software supports the development and maintenance of maps. Maps are
required to manipulate each transaction type. Every transaction type with every partner
will be formatted differently. The map translates the EDI transaction into a useable file
format.
• EDI guides are provided by EDI trading partners to communicate how each transaction
type will be formatted. The EDI guides must be followed exactly in order to be EDI
compliant with a particular EDI partner. The EDI guides are used to develop maps.
• Hardware is required to run EDI translation software. The computer hardware must be
sufficiently powerful and reliable to support exchange of EDI transactions 24 X 7 in
compliance with trading partners' transmission schedules.
• A communication network is necessary to send and receive EDI transactions. A
company can elect to either communicate EDI transactions using a direct AS/2
connection to a trading partner if the trading supports such a connection, or communicate
with trading partners using a VAN. A VAN (Virtual Area Network or Value-Added
Network) is a third party network provider that is a communications intermediary with
other trading partners.
• And perhaps most importantly, expertise is required to implement each of the EDI
system components and maintain each of the specific maps for all of a company's EDI
trading partners.

EDI versus E-mail

Electronic Data Interchange (EDI) Electronic mail
1. EDI is the transfer of data from one computer 1. E-mails are messages distributed by
system to another electronically. electronic means from one computer
user to one or more recipients via a
network.
2. There is typically no human intervention in 2. A human-to-software interface is
the processing of the information, as the involved at a minimum of one end of
interface has software-to-software the interchange.
orientation.
3. The data in an EDI are structured in a 3. The data are not necessarily structured
software-understandable format. to be software-understandable.
4. The interchange is composed by one 4. The data is either composed or
software and interpretation by another interpreted or both by a human.
software. Also a reply is composed by a
software to be interpreted by another
software.
5. It generates the functional acknowledgment 5. There is no any facility of
whenever an EDI message is received, and is acknowledgement.
electronically transmitted to the sender.

Benefits of EDI
By moving from a paper-based exchange of business document to one that is electronic, EDI
continues to prove its major business value by lowering costs, improving speed, accuracy and
business efficiency. The greatest EDI benefits often come at the strategic business level.

Compilation: Ajay K Shah (Associate Professor, Purbanchal University) 3

E-Commerce Unit-3: Electronic Data Interchange (EDI)

Cost savings:
• Expenses associated with paper, printing, reproduction, storage, filing, postage and
document retrieval are all reduced or eliminated when you switch to EDI transactions,
lowering your transaction costs by at least 35%.
• Errors due to illegible faxes, lost orders or incorrectly taken phone orders are eliminated,
saving your staff valuable time from handling data disputes.
Speed and accuracy:
• EDI can speed up your business cycles by 61%. Exchange transactions in minutes instead
of the days or weeks of wait time from the postal service.
• Improves data quality, delivering at least a 30—40% reduction in transactions with
errors—eliminating errors from illegible handwriting, lost faxes/mail and keying and re-
keying errors.
• Using EDI can reduce the order-to-cash cycle time by more than 20%, improving business
partner transactions and relationships.
Efficiency:
• Automating paper-based tasks allows your staff to concentrate on higher-value tasks and
provides them with the tools to be more productive.
• Quick processing of accurate business documents leads to less re-working of orders, fewer
stock outs and fewer cancelled orders.
• Automating the exchange of data between applications across a supply chain can ensure
that business-critical data is sent on time and can be tracked in real time. Sellers benefit
from improved cash flow and reduced order-to-cash cycles.
• Shortening the order processing and delivery times means that organizations can reduce
their inventory levels.
Benefits at the strategic business level:
• Enables real-time visibility into transaction status. This, in turn, enables faster decision-
making and improved responsiveness to changing customer and market demands, and
allows businesses to adopt a demand-driven business model rather than a supply-driven
one.
• Shortens the lead times for product enhancements and new product delivery.
• Streamlines your ability to enter new territories and markets. EDI provides a common
business language that facilitates business partner onboarding anywhere in the world.
• Promotes corporate social responsibility and sustainability by replacing paper-based
processes with electronic alternatives. This will both save you money and reduce your CO2
emissions.

Drawbacks of EDI
1. Setup and maintenance of some of the EDI formats is expensive.
2. Initial cost to setup EDI is time consuming.
3. The business process depends on EDI standard format. If any of the standard format
changes then the business process has to be changed accordingly.
4. An EDI enabled system needs electronic protection from viruses, hacking, malware and
other frauds.
5. Staffs need training in order to run EDI enabled software. Investment has to be done in
training.
6. Proper backup should be maintained as the whole data depends on EDI.
7. Some organization stops doing business which don’t use EDI. For instance, Wal-Mart
prefers to do business only with those organization which uses EDI.

Compilation: Ajay K Shah (Associate Professor, Purbanchal University) 4