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 standards.
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 published.
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 standards.
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 products.
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 in.
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:
• No data entry errors from your operators
• No mail time
• Reduced labor processing costs and time
• Reduced lead times
• Reduced order cycle time
• Reduced inventory carrying costs
• 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 future.
- 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 implementation.
- 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 document.
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.