What is Electronic Data Interchange (EDI)? EDI Document Standards, Benefits and Drawbacks

What is Electronic Data Interchange (EDI)? EDI Document Standards, Benefits and Drawbacks

 

In this article on Electronic Data Interchange (EDI), we will try to understand basics of EDI with simple example. We will see how Electronic Data Interchange (EDI) documents make your business easier and faster as compared to the paper documents. We will discuss some benefits and disadvantages of Electronic Data Interchange (EDI). We will also come to know EDI standards and compliance.

 

What is EDI? Defination of Electronic Data Interchange (EDI)

 

EDI (Electronic Data Interchange) is a standard format for exchanging business data and documents. In other words, EDI is a process which allows one company to send information and documents to another company electronically rather than with paper.

 

The real power of EDI is that it standardizes the information communication communicated in business documents, which makes possible a "paperless" exchange. EDI replaces the faxing and mailing of paper documents.

 

EDI (Electronic Data Interchange) documents use specific computer record formats that are based on widely accepted standards. However, each company will use the flexibility allowed by the standards in a unique way that fits their business needs.

 

EDI (Electronic Data Interchange) Standards

 

The standard is ANSI X12 and it was developed by the Data Interchange Standards Association. ANSI X12 is either closely coordinated with or is being merged with an international standard, EDIFACT.

 

EDI: The Basic Example

 

Most companies create invoices using a computer system, print a paper copy of the invoice and mail it to their customers. Upon receipt the customer frequently marks up the invoice and enters it into its own computer system. The entire process is nothing more than the transfer of information from the seller's computer to the customer's computer.

 

EDI makes it possible to minimize or even eliminate the manual steps involved in this transfer.

 

EDI (Electronic Data Interchange) Compliant

 

Almost any business document that one company wants to exchange with another company can be sent via EDI. However each EDI document must be exchanged with the partner in exactly the format they specify.

 

Many partners will have an EDI implementation guide or kit that explains their specific requirements. Maps are required to translate the EDI documents from the trading partner’s format into the format that is useable by the receiving party.

 

Meeting all of an EDI trading partner's EDI requirements is called being EDI compliant.

 

Applications of EDI (Electronic Data Interchange)

 

Many business documents can be exchanged using EDI, but the two most common are purchase orders and invoices. It allows value chain partners to exchange purchase orders, invoices, advance ship notices, and other business documents directly from one business system to the other, without human intervention.

 

Proven advantages are fewer errors, lower administrative costs, and faster order-to-cash cycles.

 

EDI Message Format

 

An EDI message contains a string of data elements, each of which represents a singular fact, such as a price, product model number, and so forth, separated by delimiter. The entire string is called a data segment. One or more data segments framed by a header and trailer form a transaction set, which is the EDI unit of transmission (equivalent to a message). A transaction set often consists of what would usually be contained in a typical business document or form.

The parties who exchange EDI transmissions are referred to as trading partners.

Benefits of EDI (Electronic Data Interchange)

 

By moving from a paper-based exchange of business document to one that is electronic, businesses enjoy major benefits such as reduced cost, increased processing speed, reduced errors and improved relationships with business partners.

 

1. Much less labor time is required. Paper purchase orders can take up to 10 days from the time the buyer prepares the order to when the supplier ships it. EDI orders can take as little as one day. 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.

 

2. Fewer errors occur because computer systems process the documents rather than processing by hand.

 

3. Business transactions flow faster. Faster transactions support reduction in inventory levels, better use of warehouse space, fewer out-of-stock occurrences and lower freight costs through fewer emergency expedites.

 

Drawbacks of EDI (Electronic Data Interchange)

 

1. Companies must ensure that they have the resources in place to make an EDI program work; however, the need for buying and hiring these resources or outsourcing them may be offset by the increased efficiency that EDI provides.