The meaning of electronic data interchange is the exchange of information related to business with the help of a standardized format. That means the information can be sent from one organization to another electronically rather than using the traditional method of papers to send information.
The business conducting entities which share information electronically are called trading partners.
There are various types of documents which can be shared electronically, but purchase invoices and orders for supplies are the most two common types of business documents which are shared frequently between organizations.
Electronic Data Interchange (EDI) substitutes mail preparation and maintenance related to traditional business communications. With the help of EDI, information communicated can be standardized as business documents. Electronic data interchange helps the business to make paperless communication.
In the traditional exchange of information, an invoice is prepared in the computer and printed then the printed copy of the invoice is sent to another party through the mail. When other parties receive the invoice, it uploads that information in their computers for future reference.
In the entire process, the information is sent from the computer of the seller to the computer of the buyer. With the help of EDI, the steps involved in information exchange are minimized by eliminating the manual steps. It improves the process of data interchange.
Transmission
There are various methods of transmission, and trade partners have the freedom to use any of these methods.
Peer-to-Peer (Direct EDI)
Partners can connect directly. For example, a retailer can maintain a modern pool through which he can connect with his all suppliers and suppliers can reach retailer by performing EDI.
However, different modems are required to connect with different manufacturers, along with different software for each manufacturer.
With the emergence in technology, there is a wide variety of software that can be used or connect with another trader, and this software are full of feature to provide establish better communication between them.
Value-added networks
Value-added networks, famously known as VAN, are invented to eliminate the limitations of peer-to-peer networks. Value-added networks are far more secure than peer-to-peer networks.
They act as a religious post office. They check the “from” and “to “information in the sent data and route the data only to the desired recipient.
There is other information which can be provided by the VAN such as third-party audit information, retransmitting documents, handling telecommunication support, working as a gateway for various transmission method, and other security features.
It is important for both the parties to use VAN even when both the parties use internet-based protocols (protocols used by both parties can be the same or different).
Various entities such as healthcare organizations, industry groups, telecommunication services, banks, service providers, etc. can use VAN to share information securely with their business parties.
Any type of methodology can be used by communicating parties to share information by the sender to the receiver, but with the emergence of internet many organizations have started using the internet for electronic data interchange because of these various standard protocols also emerged to serve the purpose of communication between the parties successfully.
Followings are a few examples of internet protocol which are used for the communication between sender and receiver.
- FTP, FTPS, and SFTP
- AS1
- AS2
- AS4
- OFTP
- OFTP2
- Mobile EDI
- Telnet
And many more other technologies.
In the next section, we will learn about all the steps involved in Electronic Data Interchange by looking at the difference between traditional data interchange and electronic data interchange.
Difference between the steps involved in both traditional and EDI transaction
| Traditional document of a purchase order (The entire process takes 2-3 days) | EDI document of a purchase order (The entire process takes less hour) |
|---|---|
| A buying decision is made by the buyer and the purchase order is prepared in computer and a print copy is prepared of it. | A buying decision is made by the buyer and the purchase order is prepared in computer and does not make a printed document of it |
| The purchase order is mailed to the buyer. | An electronic version of the order is prepared and is sent to the supplier automatically. |
| The order is received by the supplier and entered in the entry system. | The entry system of the supplier is updated automatically after it received the receipt in the system. |
| The sender receives the acknowledgement from the supplier after receiving the order. | The acknowledge of the supplier’s order is updated in the entry system and the acknowledgement is sent to the buyer. |
Advantages of Electronic Data Interchange
Electronic data interchange helps in saving time and resources significantly. Many trading organizations take advantage of EDI to make their business deals.
#1 Improved Timelines:
Using electronic data interchange works on real-time processing in this way; a lot of time can be saved by eliminating tasks like sending, receiving, and entering order data on computers.
#2 Minimal Paper Usage:
Using electronic data interchange, a lot of expenses such as the expenses of storage, postage, printing, recycling, and mailing.
#3 Saving costs in operational efficiency:
With the elimination of tasks like creating invoices, printing them and sending them your employees can save a lot of operational work and they can use that time to do other important works.
#4 Enhanced Quality of Data:
As the entry work is not manual; therefore, the chances of manual error reduce. In this way, the accounts improve. The time of receivable and payable amount can be forecasted, and payment can be received on time, which will help in the improvement of the business.
#5 Helps create a greener world:
Usage of paper decreases if you opt electronic data interchange. Papers are made from trees an there will be no need to cut more trees to produce papers for creating invoices.
#6 Improved turnaround times:
By using electronic data interchange, the business cycle of your business can be improved as stock levels are visible constantly and are up to date.
Difficulties in implementing Electronic Data Interchange (EDI)
There are a few difficulties to implement Electronic Data Interchange. Out of those difficulties, one of the prominent difficulties is to accompanying business process change. A business which entirely dependent on paper will find it difficult to switch from paper-based transactions to EDI.
It will require a lot of changes to implement automated processing of business documents. And the next barrier, an organization will face is the time and money to implement the initial set up for Electronic Data Interchange.
The initial cost to change, implement, training, and customization will cost a fortune to the organization. It is important to use the correct level of EDI to integrated all the business requirements.
The last hindrance in implementing EDI is the different perception of businesses for the EDI process and their readability to make a change to adopt a more advanced method of information exchange.
Most people are happy to use old methods, and they don’t want to make a change in their traditional ways.
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