Everything You Ever Wanted To Know About Electronic Data Interchange Every Thing You Ever Wanted to Know About EDI By Brian Harris December 1, 1998 ISDS 4800 Sec. 001 Introduction First of all what is EDI? Well EDI, or Electronic Data Interchange, is the transfer of business documents such as sales invoices, purchase orders, price quotations, etc. using a pre-established format in a paperless electronic environment. Usually this transfer occurs over VANs, Value Added Networks, but it is becoming increasingly popular over the Internet because of cost savings and ease of use. EDI has been around for approximately 30 years. The true genesis of EDI occurred in the mid-1960s, as an early attempt at implementing the fictional paperless office by companies in transportation, grocery and retail industry segments. Although EDI never eliminated paper documents, it decreased the number of times such documents were handled by people.
Reduced handling resulted in fewer errors and faster transfers (Millman, 83). EDI technology is rapidly changing the way business is conducted throughout the world. Firms that use EDI are more efficient and responsive to the needs of customers and partners and in many cases have jumped out ahead of the competition. Many businesses are already using EDI with suppliers and customers, and if your firm wants to do business with companies involved in Government Dealings EDI must be part of your business no later than January 1, 1999. In May of this year, the major industrial groups in charge of standards setting for EDI, have united behind a set of standards that will allow for seamless web-based forms using extensible markup language, similar to HTML, thereby increasing the accessibility of EDI for small businesses on the Internet (Campbell, 28). An example of an application for EDI is filing tax returns with the Internal Revenue Service.
The IRS offers several options for filing your tax return, one of which is filing electronically and receiving your refund by electronic funds transfer or direct deposit. The forms used are available in tax preparation software, which can be downloaded off the Internet or purchased by retail. The forms are filled out directly on a PC then transmitted to another computer, which acts as a midpoint to the IRS. The IRS receives your forms and can issue a refund without ever having to reprocess the data. By using this method you save yourself and the IRS time and money (Campbell, 28).
How EDI Works Table came from Information Technology for Management by Turban, McLean and Wetherbe page 244. Information, such as purchase orders for medical supplies, flows from the hospital’s information system into an EDI station, which consist of a PC, an EDI translator and a modem. From there, the information moves to a VAN (Value Added Network). The Van transfers the formatted information to the vendor, where the vendor side EDI translator converts it to a desired format (Turban, 244). An EDI translator does the conversion of data into standard format. An example of such formatting is shown below.
Table came from Information Technology for Management by Turban, McLean and Wetherbe page 243. An average hospital generates about 15,000 purchase orders each year at a processing cost of about $70 per order. The health Industry Business Communication Council estimates that EDI can reduce this cost to $4 per order, potential yearly savings of $840,000 per hospital. The required investment ranges between $8,000 and $15,000. This includes the purchase of a PC with an EDI translator, a modem, and a link to the mainframe-based information system.
The hospital can have two or three ordering points. These are connected to a value-added network (VAN), which connects the hospitals to its suppliers. (See figure on previous page) The system can also connect to other hospitals, or to centralized joint purchasing agencies. (Turban, 244). Benefits of EDI There are numerous benefits associated with the adoption of EDI.
Probably the most important and largest benefit is efficiency. By utilizing EDI businesses are able to streamline their whole supply chain process. Whether it is upstream to suppliers or downstream to customers, EDI eliminates repetitive tasks such as entering data multiple times and cuts costs of printing hard copies and transportation costs. EDI also allows you to send and receive large amounts of data quickly to or from anywhere in the world. Anywhere that there is access to the Internet there is access to EDI.
For example a supplier could be located in Taiwan while the customer is sitting in Memphis, TN and in no more than a few seconds thousands of product order forms could be sent between the two without any errors or lost data. Companies in partnership agreements can gain access to one another’s shared databases to retrieve and store regular transactions. These partnerships tend to last for a long time as well because of the commitment of a long term investment and refinement of the system over a period of time. EDI creates a complete paperless Transaction Processing System environment, which saves money and increases efficiency. Collecting bills and making payments can be shortened by several weeks because the data doesn’t have to be reentered several time (Turban, 245). There are other benefits to using EDI – security and validation.
Using EDI is secure as long as it is not conducted over the Internet. The information is transmitted over a VAN and on to your partner, but never enters the realm of the World Wide Web. There are only three points of contact versus the millions of interconnections and links over the Internet. The use of EDI also provides a means of validation through time code embedded in the string of electronic codes that are attached to each file. It is time coded at every step in the transmission process. Imagine no longer having to rely on postmarks or call a package delivery service, or check to make sure a fax went through (Campbell, 28).
Disadvantages of using EDI Despite all of the benefits of EDI there are still some disadvantages that have caused much criticism. First and foremost is the cost, the only companies that can really afford to utilize EDI to its fullest potential are the Fortune 1,000 and Global 2,000 firms (Millman, 83). Traditional EDI works fine in the larger enterprises because they have IS professionals to maintain the system, says Dennis Freeman, director of product marketing at Harbinger, an EDI software and services supplier in Atlanta. Those companies exchange business documents with their trading partners and save themselves a huge amount of money by not using paper, Freeman continues. For smaller companies, that process becomes much more daunting. They don’t want – nor can they afford to own a full-blown EDI server.
For them, Internet-based EDI is a low-cost answer (Millman, 38). Another disadvantage of EDI is there could be communication problems with trading partners who use different EDI software. Internet EDI has solved this problem but at the cost of decreased security which is a major issue right now not to mention that network capacity may be unsatisfactory. EDI in the Federal Government. Under the Federal Acquisition Act (FASA), as of June 1, 1998 any organization that wanted to do business with the Department of Defense was required to register with the Centralized Contractor Registration (CCR) to receive government contracts. Companies with existing contracts did not have to register initially …