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EDI 101

In today's business environment, intense competition is forcing businesses to look at new ways of operating. Leaders are constantly looking for new methods that will allow their business to do things faster, cheaper, and better than before.

The problem with most approaches is that they often sacrifice one objective in favor of another. It's one thing to cut costs in your operation, but that often increases the time it takes to service the customer. Also, depending on how cost reductions are achieved, you end up providing an inferior product.

Electronic Data Interchange, or EDI, is a tool that allows you to achieve significant improvements in all three objectives. EDI can speed up many business functions, while cutting cost in a number of areas. By reducing unnecessary delays, you have more time to produce a better product and can provide your customers with improved service.

In today's competitive world, speed is a weapon you can use against the competition. By providing your product or service faster than the competition you can not only win increased business, but reduce sales loss due to price competition.

Before describing what EDI is, it is important to describe what it is not. EDI is not new and it is not dependent on any one technology. While the buzz-word, EDI, may sound new, EDI has been with us since the late 1960's.

While EDI has benefited enormously from advances in technology, EDI is not technology dependent. There are preferred ways to implement EDI in your business, but there are many approaches to choose from. The approach you choose should be driven by your business needs, not a particular implementation or technology.

So what is Electronic Data Interchange? EDI is paperless document transfer between companies. What's a Document? A document is any form of communication, usually paper, sent between two companies. Examples include:

  • Purchase Orders
  • Invoices
  • Shipping Notices
  • Export/Import Information
  • Carrier-to carrier waybills
  • Funds Transfers
  • Design Specifications
  • Health Insurance Claims

EDI is a data processing concept independent of communication protocols or transmission media. EDI is a logical outgrowth of the standard computerization going on within business for the last several decades. The type of electronic communication between departments within a business is now being extended to reach out to other business, or trading partners.

EDI is computer-to-computer communication. Contrast this with the other forms of communications like Electronic mail. E-mail is person-to person communications over a computer. A person creates a text message, which is sent to another person. While this form of communications is electronic, it still requires people to interpret the message.

EDI replaces human-readable, paper or electronic based documents with machine readable, electronically coded documents. With EDI the sending computer creates the message and the receiving computer interprets the message without human involvement.

Let's take a standard business transaction, a purchase order, and explore how and where EDI fits into the picture. Without EDI the process might look something like this:

  • The Customer determines a need to purchase an item and creates a purchase order document. Often a computer produces these documents.
  • The PO is sent to the supplier via either Post Office, Express mail, Electronic Mail or Fax.
  • In all cases, it takes a person at the supplier to receive and interpret that purchase order
  • The PO is then transcribed into the supplier's computerized order system.

An EDI implementation simplifies the process to:
  • The customer's computer system creates and sends the electronic PO.
  • The supplier's computer receives the PO and places the order directly into its system.

What is clear by the example is the time saved by eliminating the post office and the people cost saved in the process. What is perhaps a subtle area of savings is the cost due to errors. How much would it cost if the order entry clerk added an additional zero to the quantity field?

More benefits will be discussed in detail later. First, let's look at the history of EDI.

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