EDI 101

The changes in the computer technology environment and the increasingly integral role information technology now plays in today's manufacturing, distribution, and service environments, along with changes in business philosophy and practices, have changed the definition of Electronic Data Interchange. The definition must now be more encompassing than merely the rapid transmission of electronic documents.

EDI must now be viewed as "an enabling technology that provides for the exchange of critical data between computer applications supporting the process of business partners by using agreed-to, standardized, data formats." EDI is no longer merely a way to transmit documents. It is a means to dynamically move data between companies that will be used by computer systems to order raw materials, schedule production, schedule and track transportation, and replenish stock.

EDI History

EDI first came about in the U.S. transportation industry in the early 1970's. The practice was quickly embraced by U.S. grocers and then the automotive industry. Today, each major industry segment is a driver of Compliance EDI – standardized flows of electronic documents containing pertinent data that streamline and enhance the supply chain. The retail industry is a major force behind Compliance EDI. Retailers such as Wal-Mart, Home Depot, JC Penney, Price Costco, and Sears demand compliance from their suppliers as a goal toward Supply Chain Excellence. For these companies, EDI means better information flow, improved inventory management, reduced costs, and more accurate accounting. By saving millions of dollars at the administration level, they are able to squeeze the cost from their operations, driving down the price of goods for consumers and increasing profit margins for themselves.

EDI is based on a set of standards such as X12 and EDIFACT, which are used for document content and structure. Each industry publishes its own set of guidelines on how to implement these standards. X12 is the primary standard used in the US, while EDIFACT is the primary standard in Europe.

How EDI Works

One of the first places that EDI was traditionally implemented was in the purchasing operations of a business. Before the implementation of EDI, a purchasing system would allow buyers to review their material requirements, and then create purchase orders, which would be printed out and mailed. The supplier would receive the purchase order, and manually enter it into their customer shipping system. The material would be shipped, and an invoice would be printed, which would then be mailed back to the supplier.
 
In this simple example, even if the purchased materials were shipped and received on the same day the purchase order was received, the cycle time could be as much as a week, depending on the speed of the mail and the backlog at the supplier's order entry system.
 
With the introduction of EDI, this scenario changed dramatically. Purchasing agents would still review their material requirements and create their purchase orders. But instead of printing them out and mailing them, the purchase orders would be transmitted directly to the suppliers over an electronic network.
 
On the supplier's end, the transaction would be automatically received and posted. This new process could allow the shipment of material on the same day the purchase order was sent. As an added bonus, suppliers could send their shipping documentation electronically to the buyer in the form of a shipment notification, providing the buyer with accurate receiving documents prior to the actual arrival of the material. And the supplier gained an additional advantage as well, since now the invoice could be sent directly to the customer's accounts payable system, speeding payment to the supplier.

Advantages of EDI

Whether implementation of EDI is in the area of purchase orders, advanced shipment notification, or automatic invoicing, several immediate advantages can be realized by exchanging documents electronically.

Speed

Information moving between computers moves more rapidly, and with little or no human intervention. With integration, data flows directly into the accounting or ERP system speeding up the processing of orders, picking, packing, shipping, invoicing, etc.

Accuracy

Information that passes directly between computers without having to be re-entered eliminates the chance of data entry errors. There is almost no chance that the receiving computer will invert digits or add an extra digit.

Economy

The cost of sending an electronic document is not a great deal more than regular first class postage. Add to that the reductions in cost afforded by eliminating the re-keying of data, human handling, routing, and delivery. The net result is a substantial reduction in the cost of a transaction.

The Downside of Traditional EDI

Although these benefits are compelling, and were repeated in boardrooms around the world, actual acceptance and implementation of EDI was far less prevalent than might be expected, for small to mid-market companies because the technological complexity of EDI presented a number of major stumbling blocks.

Expense

Business application systems were complex and expensive. Primarily serving the peripheral functions of a business, they were not regarded as being fully integrated into all business activities. So while there were substantial savings to be gained from the use of EDI, the cost of re-designing and deploying software applications to integrate EDI into an existing portfolio of business applications was high enough to offset the anticipated advantages. 

Networking Complexity

The need for extensive telecommunications capability posed a second major barrier to widespread EDI implementation for small to mid-sized companies. Beyond the computer itself, a basic requirement of EDI is a means to transmit and receive information to and from a wide variety of customers or suppliers. This required a heavy investment in computer networks. Unlike the mail, to send electronic documents there must be a specific point-to-point electronic path for the document to take. So companies were either required to develop extensive and expensive networks, or rely on intermittent point-to-point modem communication.

EDI for the Small and Middle Market

Client server-based applications and hardware can be obtained today for about the same cost as a small mini-computer of 10 years ago, but the same dollars are now buying a machine that has mainframe computing capability in a PC-sized box. PC's are now economical enough that their price approaches the same cost per user as a dumb terminal did attached to that same mini-computer.  
 
The same type or improvements are found in the area of communications. It is now commonplace for computer users in retail stores to access computers many hundreds of miles away. Now, the terminal or PC on a desk in a steel plant may actually be using data from several computers, each in a different location.
 
Advances in networking and client-server environments have encouraged the realization that while information is surely one of the most valuable assets of any business, information that is strategically shared within and between companies becomes a most powerful asset.  
 
The need for greater speed and flexibility has led to an overhaul in the way the documents are being used. Instead of merely sending documents to trading partners, EDI is now used to replace electronic documents also. 
 
For example, enhanced relationships between trading partners has in many companies replaced purchase orders with production schedules and inventory balances. Rather than have purchasing agents review raw material requirements and place purchase orders, purchase orders can be placed automatically, based on pre-determined inventory levels. In many cases, companies have begun to make their inventory levels or production schedules available to their suppliers via EDI, allowing the supplier to adjust their own production schedules to respond quickly to their customer's needs. In addition, with bar coding and point-of-sale data collection, replenishment of retail inventory or shipment of finished products can now be triggered by information collected right at the cash register. 
 
To remain competitive in today's global economy, businesses are being forced to re-evaluate the way the do business with their customers and their vendors. The focus of these relationships has moved relentlessly towards greater speed through shorter transaction cycles – and true partnerships. 

Everyday EDI – A Hypothetical Example 

BizStuff is an imaginary distributor of office supplies selling to retailers. 
 
BizStuff receives regular daily updates from all of its retailers, transmitted directly from the POS (Point of Sale) registers. An up-to-the-minute inventory balance for BizStuff’s retail stores and distribution warehouses is maintained. On a nightly basis, inventory consumption of each supplier's products are transmitted directly to BizStuff’s suppliers (manufacturers). 
 
The manufacturer reviews the inventory consumption and identifies an increase in demand in the West Coast region. Accordingly, the manufacturer adjusts its production schedules at a local plant to meet that demand. At the same time, the manufacturer electronically schedules transportation to pick up the shipments and notify BizStuff of the expected shipping dates, quantities, and carriers. 
 
For larger shipments, the manufacturer has agreed to ship directly to the retail outlet, rather than to BizStuff. As each shipment is loaded onto the carrier, the containers are scanned or otherwise automatically identified to verify the accuracy of the order. Advance Ship Notices (ASN 856 document) are then transmitted to BizStuff for each shipment, and an electronic invoice (820) is sent. 
 
As BizStuff receives the advance ship notice (856), warehouse routing tickets for the material that is being shipped to BizStuff’s warehouse are prepared in advance. Some material will be identified as needed for immediate shipment, and in order to expedite movement of this material, shipping labels will already be prepared, and outbound shipments will be scheduled. 
 
When the BizStuff receives the physical shipment, it is scanned and routed automatically. Material scheduled for shipment is cross-docked, and the rest is delivered to pre-assigned inventory locations. Inventory is automatically updated, and the receipt triggers a payment authorization, which is sent to Accounts Payable. When the authorization is matched with the electronic invoice, an automatic funds transfer is authorized to the manufacturer. 
 
In the example above, BizStuff is both a customer and a supplier. So, on the outbound side of the process, moving material from the distribution center to the retail outlets, BizStuff can apply the same steps. 
 
As BizStuff receives Point of Sale information, it will automatically schedule replenishment of the inventory consumed. Rather than shipping in "replenishment units" based on each store’s basic operation shelf stock quantity, BizStuff will replace exact quantities, adjusting them based on known inventory trends. 
 
Advance Ship Notices (856 documents) will be sent to the retailers, and in the same manner that the vendors drop-shipped to the retailers, the distribution center can place orders for large customers that can be shipped directly to the customer (the retailer). 
 
All of these steps are achievable and go a long way to defining the current environment of Electronic Commerce using EDI as an enabling technology. 
 
This example has used a basic vendor/distributor/customer relationship. Another example from the food brokerage industry serves to highlight the changes this enabling technology has made possible, and the extent to which document trading partnerships have become true business partnerships: 
 
A manufacturer receives a large order and their master production schedule to accommodate the large order. The production schedule updates (862 document) for key components are sent to the suppliers. The suppliers adjust their own production schedules and confirm shipping dates and quantities to support the manufacturer's new production schedule. During the manufacturing process, product defect data is collected and transmitted to the supplier on a daily basis, allowing the supplier to keep its process within the required standards for free-to-stock certification of the material. 
 
A customer in a retail outlet asks about an out-of-stock item. From the cash register, the clerk finds it in a store on the other side of town. Rather than ask the customer to travel to the other store, the clerk reserves the material, and schedules a delivery of the item that afternoon. Within minutes the clerk advises the customer that the item can be available at a specific time. 
 
A customer calls a frozen food delivery service and orders eight items, to be delivered that afternoon. A delivery truck, already on it's route can fill the order with items already on the truck. With a small hand-held unit, the driver calls up the order, and a printed invoice is generated. When the driver returns to the truck, the transaction is communicated to his office where a credit card transaction is sent. 
 
These are just a few examples of how companies can add speed and efficiency to their businesses by entering into information partnerships with their customers and suppliers. And without it, it is difficult to imagine how they will achieve the levels of cost savings, quality, flexibility, and customer satisfaction necessary for survival today’s competitive market place.