EDI is software that allows information transfer between businesses electronically instead of paper. EDI allows for business information flow between organizations which is automatic. It allows for a common language among different data formats and computer systems. Though many business documents can be exchanged using EDI, the two most common business documents can be exchanged using EDI; invoices and purchase orders.
What Is EDI?
EDI refers to the computer-to-computer interchange of standard business documents between businesses, such as orders, purchases, invoices, inventory levels, and shipping notices.
How EDI works
Sending EDI documents involves three steps: document preparation, translation of documents into EDI format, and, lastly, the transmission of the EDI documents to a business partner (Shahzad, 2012). Step 1: Preparation of document to be sent. The target company has to collect and organize its data in this step. For example, since EDI does not involve printing purchase orders, the Target system creates an electronic file with the required information to structure an EDI document. Data sources and available methods to generate electronic documents can include Data entry by humans via screen, Exporting Personal Computer-based data from databases or spreadsheets. Purchase of application software with built-in interfaces for EDI files. It reformatted electronic reports into data files.
Step 2: Translation of the documents into EDI format. Target’s next step is feeding the electronic data via translator software to transform the company’s internal data format into the EDI standard format using suitable data elements and segments. The target company can purchase EDI translation that can be managed and maintained at its premises. However, this will require specialized experts in mapping who can help define how to map internal data to EDI data. This translation software is available for any budget and computing environment. It varies from very large systems that handle millions and thousands of transactions to small systems that process a few hundred transactions. If the target company cannot purchase its translation software, it can use an EDI service provider translation service. Moreover, in this case, the company sends data to the service provider, and the service provider handles translation to and from the EDI format on behalf of the company.
Step 3: Connection and transmission of Company EDI documents to its business partner
Once the company business documents are translated into the suitable EDI format, they can be transmitted to the business partner. The company decides how to connect to different business partners before performing the transaction. There are several ways of connecting with the different partners to perform the transmission, which may include: 1) connecting directly using AS2 or another secure internet protocol, 2) Using the company-preferred communications protocol to connect to the EDI Network provider and relying on the network provider to connect to the company business partner using any communication protocol preferred by the business partner, or 3) combining both connection methods and this depends on the volume of transactions the company hopes to exchange and the particular partner the company is dealing with (Shahzad, 2012).
Illustration of how EDI works
Benefits of EDI to Target Company
The first benefit is that it Increases Accuracy and eliminates manual errors. Since only a little human work is involved during the process, there is no room for potential human error (Iyengar, 1999). The interchange of data is completed electronically between the systems. Paper involvement in the business process may lead to illegible things and loss of data; some data may need to be included, remembered, or entered correctly. EDI improves the quality of data and error reduction. This improves relationships with trading partners, minimizes chargeback costs, reduces late deliveries, and reduces incorrect product prices. The second benefit is Increases Processing Speed and Time saving. The rate at which information is processed with EDI is higher than the manual one. Incoming orders are automatically created without input from the user or even consuming employee time. EDI can help cut the time needed to work on the necessary document during exchange so that workers can concentrate on other higher-value tasks, which can increase productivity. This improves company relationships and transactions.
Another benefit of EDI is Increased Savings. EDI helps eliminate expenses such as printing, paper, postage, storing, faxing, filling, and more associated with standard business processes. Since its Accuracy rate is also high, it helps lower the expenses incurred in making up for errors. The next benefit is Increased Simplicity and Security. The automatic generation of invoices, shipment reports, sales orders, and many more makes work simple for the staff and sales. One of the most vital concerns of technology is information security. The right EDI solution provides security for information. These solutions are set up to be only accessed by authorized users; the capacity can tack every transaction taking place using audit trails and archives. EDI enhances strategic decision-making. Using the right EDI solution in the company, the company can shift attention from the daily activities and tasks that can be improved and automated to decide on other strategic decisions that will have a greater impact on the company’s growth and development. Lastly, EDI creates efficiency. The benefits of EDI, such as data accuracy and speed, result in greater business efficiency. The company can streamline its day-to-day activities and processes; operations are simplified, and there is less to worry about data prone to error, reduced lead time, chargebacks, and lost orders and delays. There is an accurate and quick exchange of information (Iyengar, 1999).
EDI stands for electronic data interchange. It is an older technology than flat-file transfers and is being used and adopted by many industries to replace manual or human processes. EDI has got many advantages, but it also has security risks. Therefore, the target company should consider assessments or risks and establish measures to reduce those risks.
Iyengar. J. (1999). Electronic data interchange (EDI): Application of EDI and its impact on information quality: Core: Journal of International Information Management. Vol. 8, issue 1. https://scholarworks.lib.csusb.edu/jiim/vol8/iss1/7
Shahzad, S. (2012). What is EDI, and how does it work? Hochschule Furtwangen University. https://webuser.hs-furtwangen.de/~heindl/ebte-2011ws/How%20EDI%20Works_term%20paper.pdf