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 over the internet, paying a bill, tracking an overnight

package delivery, or receiving a paycheck electronically.

Now imagine you’re a company. You want to do the same transactions, but

thousands of time a day. That is where EDI steps in. EDI is an agreed upon

message standard 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 with special software via e-mail,

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 all start? 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, Lowes, Macys, 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 communicate across

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 electronic interchanges

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


In the mid 1970’s, it was clear that the TDCC standards were not enough, 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 from transportation,

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 hardware independent;

– 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 draft X.12 standards was


At about the same time, the U.K. Department of Customs and Excise, with the

assistance of SITPRO (the British Simplification 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 GTDI (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) document translation


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, VAN EDI 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 were communicating with their

customers manually via fax, telephone and snail mail because they could not afford

the investment required for VAN EDI. 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


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 the order, 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 mails 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


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 are reduced, 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:

o No data entry errors from your operators

o No mail time

o Reduced labor processing costs and time

o Reduced lead times

o Reduced order cycle time

o Reduced inventory carrying costs

o No 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 is the 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 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 does help 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

Prices for EDI applications vary from free (for very simple one-function products) to

several thousands of dollars for full-function applications. The final price you pay

depends upon several things:

  • The Expected Volume of Electronic Documents. Generally speaking,
    low cost EDI packages handle only a few documents and trading partners. Midrange
    EDI packages can be a little more expensive, but handle a much larger volume of
    EDI. If you anticipate multiple documents or trading partners, a midrange EDI
    system is a much better choice.

  • The Amplitude of the EDI Translation Software. Some products look
    like a bargain, but as your EDI needs grow, hidden costs (such as having to
    purchase new transaction sets) suddenly appear. You may pay more for a program
    with an integrated mapper, but you’ll avoid purchasing overlays and maps in the

  • Implementation Time. Some applications are easier to learn and use
    than others. But as above, the easier to lean the less the software package can
    handle. The more time you spend in training, the more time it takes to get into
    production mode. If your time frame is tight, and you are sure the documents you
    will be using are static, look for a translator that doesn’t require training before

Fees vary from Software Company to Software Company. Ignoring

the hidden costs mentioned above, you can expect the following ongoing charges:

  • Maintenance Fees. Most companies charge an annual maintenance
    fee that is usually a percentage of the translator’s list price. This fee should include
    software updates, standards updates, technical support, and customer service.

  • VAN Charges. If you use a Value Added Network (VAN), you will be
    billed for transmitting data similar to making a long distance phone call. Some also
    bill you for connect time. A fast modem helps to lower transmission costs.

  • Mailbox Fee. Most VANs charge a monthly fee for maintaining a
    mailbox on their network. Some base billing on the document (25 cents per
    document transmitted). Others charge based upon the number of characters in each

EDI can at times take much longer than expected. Remember, you are working with

another company and you have no control over their priorities or business practices.

Your priority may be to implement a Purchase Order (850) with Wal-mart, but their

priority may be implementing the Advance Ship Notice (856). You need to

implement a Remittance Advice (820) with Wachovia yet their Remittance Advice

specialist is on Maternity leave and her replacement only knows Lockbox (823).

Despite its few disadvantages, EDI has proven to be a powerful backbone that supports today’s Electronic Commerce. Companies all over the world utilize EDI’s

versatility and flexibility to communicate with each other. And with the promise of

the Web, which offers much lower connectivity costs, and the lower costs of PCs and

simpler software, EDI is opening its doors to smaller companies. Moreover, XML, an

open standard for sharing data, is starting to appear as a method of EDI coding

standards, which could provide technical clarity across industries and nations

around the world.

Source by Christopher Alexander