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What is EDI?

Have you heard someone mention EDI				able to
(Electronic Data Interchange) or eCommerce
				transact electronically with their trading
and wondered what it was? Simply put,				partners. And VAN services such as
eCommerce is the exchange of information
				"Message Disposition Notifications" (MDNs)
about trading goods, services, or money from				are built right into the software
computer to computer. For example,
				products.Benefits of EDI
the purchase of a widget over the internet,
paying a bill, tracking an overnight				Consider a very simple non-EDI-based
				purchase: A buyer decides he needs 365
package delivery, or receiving a paycheck
electronically.Now imagine you're a company.				widgets. He creates a purchase order,
You want to do the same transactions, but				prints it out and pops it in the mail. When

thousands of time a day. That is where EDI				the supplier gets the order, she types it
steps in. EDI is an agreed upon				into her company's computer system. The

message standard that exchanges information				inventory guy pulls the order and ships out
from one computer application to				the widgets. Next, the supplier prints

another with the minimum of human				out and mails an invoice. It's not hard to
intervention. And 95% of all eCommerce uses				imagine that this process could take

EDI to exchange that information. It can be				several days. EDI has the potential to cut
done with special software via e-mail,				massive amounts of time out of the

across the Internet, or by customized				process. Sending documents, such as
connections. And it goes beyond just				purchase orders or invoices, electronically

purchasing goods and submitting invoices. A				takes minutes, not days, and shipments can
company can request information				often go out the day the order comes

about inventory levels in it's suppliers'				in.Moreover, the electronic format does not
and customers' warehouses, receive an order				need to be re-keyed upon arrival. And

status; and send funds electronically along				that is the part of the biggest benefit of
with automatic notification that an				EDI. This saves a tremendous amount of

invoice was paid. These are just a few of				labor time, and means that no data entry
the many types of automated transactionsEDI				errors are introduced into your system by
is not something new. As a matter of fact,
it is much older than you might				your staff. Cycle times are reduced, and
				data entry backlogs are almost completely
think. Yet to some industries it is only a
few years old. And the health industry of				eliminated. This allows for very quick order
				processing. A proper system can easily
the United States had to be mandated by the
Federal government before they dared				handle receiving an order and shipping that
				order with its invoice the same day.
venture into EDI.Who uses EDI? And how and
where did it all start? What are the				Studies indicate that the average reduction
benefits? What are				in turn around time is about 40% for

the costs? What are the legalities? And				most business functions like order
why, with all the apparent advantages, do				fulfillment, procurement, manufacturing,

some industries balk at switching to EDI?				logistics and finance.This often allows a
Well let's start at the beginning to see				company that first implements EDI to handle
				far greater volumes
how it all came about.Who uses EDI?
				without adding personnel and other costs.
About 90% of the fortune 1000 companies				This means increased sales and
currently use EDI. Companies such as
				increased revenues once the initial
American Airlines, BMW, Coca-Cola, Dunkin				investment in EDI is recaptured.
Donuts, Eastman Kodak, Federal
				These savings come from:
Express, Gordmans, Heinz, InFocus, JCPenney,
Kohls, Lowes, Macys, Nike,				- No data entry errors from your operators

Openheimer, Prudential Insurance, Queens				- No mail time
City Government, Radio Shack, Staples,
				- Reduced labor processing costs and time
Texaco, United Airlines, Verizon, Wachovia,
and Yokohama Tires to name but a few.				- Reduced lead times

EDI is widely used in manufacturing,				- Reduced order cycle time
shipping, warehousing, utilities,
				- Reduced inventory carrying costs
pharmaceuticals, construction, petroleum,
metals, food processing, banking,				- No filing and other processing of
				paperworkEDI improves margins by meeting
insurance, retailing, government, health				customer demands and consequently
care, and textiles among other industries.Any
company that buys or sells goods or services				strengthening relationships. It also allows
can potentially use EDI. Because it				time and effort to be focused on other

supports the entire business cycle, EDI can				internal priorities.Studies have shown that
streamline the relationship that any				processing a purchase order or invoice costs
				most
company has with its customers,
distributors, suppliers, and so forth.				companies about $5 in paper, postage,
According to				handling, direct labor and other such odds

a recent study, the number of companies				and ends of direct costs. With EDI this can
using EDI is projected to quadruple within				be reduced to about 50 cents;

the next six years.History of EDI				sometimes as little as 13 cents, depending
				on how the EDI document is transmitted.
The first recorded EDI dates back to the
1850s when the railroads and Western				If your direct handling costs are greater,
				the savings is greater.Another benefit is the
Union used the telegraph to communicate				implementation of Just-In-Time (JIT) order
business information. Starting there,				process

Samuel Morse's patented code was the single				methodology. With Just-in-Time, a company
method used to communicate across				can avoid stock-outs and/or obsolete

the lines.In 1948 during the Berlin Airlift,				inventories, reduce lead times on ordering
thousands of tons of food and consumables				from suppliers and reduce inventory
were
				carrying costs. Whether implementing a
needed to be air freighted. The task of				subset or the whole of JIT process
coordinating these consignments (which
				methodology, EDI is what makes Just-In-Time
arrived with differing manifests, languages				possible and allows it to be feasible.
and numbers of copies) was addressed
				With the proper agreements between trading
by devising a standard manifest.In the late				partners, a manufacturer can
1950's and early 1960's the rise of computer
enabled companies to store				determine the current sales of their buyers
				and their buyers' current inventory
and process data electronically, companies
needed an expedient method to				levels. Therefore the manufacturer can
				forecast probable future sales and plan
communicate the data. This method was
realized by the widespread use of				production and their own purchasing
				accordingly. Obviously there will
computer telecommunications. Using				occasionally
telecommunications, companies could
				be wild fluctuations that will disturb this
transmit data electronically over telephone				scenario, but it does help the manufacturer
lines, and have the data input directly
				to accurately plan production, and the
into a trading partner's business				purchaser to know that their needs will more
application. These electronic interchanges
				likely be met by their
improved response time, reduced paperwork,				suppliers.Just-In-Time helps the manufacturer
and eliminated the potential for				communicate quickly and inexpensively with

transcription errors. Computer				their suppliers, who may be using the same
telecommunications, however, only solved part				forecasting to meet the requirements of
of
				their customers.Disadvantages of EDI
the problem.
				The biggest disadvantage implementing EDI is
Early electronic interchanges were based on				it reveals inefficient business
proprietary formats agreed between two
				practices. If a company's business process
trading partners. Due to differing document				was inefficient before EDI, they will be
formats, it was difficult for a company
				multiply with the implementation of EDI.
to exchange data electronically with many				The original purpose of EDI was to save
trading partners. What was needed was a
				money and time. When used improperly, EDI
standard format for the data being				does neither, and actually wastes both.Costs
exchanged. In 1968 the United States				of EDI

Transportation Data Coordinating Committee				Prices for EDI applications vary from free
(TDCC) was formed, to coordinate the				(for very simple one-function products) to

development of translation rules among four				several thousands of dollars for
existing sets of industry-specific				full-function applications. The final price
				you pay
standards.In the mid 1970's, it was clear
that the TDCC standards were not enough, and				depends upon several things:
work
				The Expected Volume of Electronic Documents.
began for national EDI standards. The				Generally speaking,
Electronic Data Interchange Association
				low cost EDI packages handle only a few
(EDIA), a non-profit organization set out to				documents and trading partners. Midrange
serve as an administrator for several
				EDI packages can be a little more expensive,
different industry groups. Each industry				but handle a much larger volume of
served has a committee to determine new
				EDI. If you anticipate multiple documents
standards, modify existing ones, and pass				or trading partners, a midrange EDI
the information on to the EDIA for
				system is a much better choice.The Amplitude
publication and distribution. EDIA was asked				of the EDI Translation Software. Some
to develop a set of standards				products look

applicable to the grocery industry. The				like a bargain, but as your EDI needs grow,
first such standard is The Uniform				hidden costs (such as having to

Communication Standard (UCS) which was				purchase new transaction sets) suddenly
applied to an actual transaction by the				appear. You may pay more for a program

Quaker Oats Company in 1981.In 1979 the				with an integrated mapper, but you'll avoid
American National Standards Institute (ANSI)				purchasing overlays and maps in the
Accredited Standards
				future.Implementation Time. Some
Committee (ASC) was formed. It included				applications are easier to learn and use
representatives from transportation,
				than others. But as above, the easier to
government & computer manufacturer				lean the less the software package can
industries, The committee's first meeting
				handle. The more time you spend in
took place in Rosslyn, Virginia with the				training, the more time it takes to get into
goal to create a set of standard data formats
				production mode. If your time frame is
				tight, and you are sure the documents you
based on the TDCC structure that:
				will be using are static, look for a
- were hardware independent;				translator that doesn't require training
				before
- were unambiguous, such that they could be
used by all trading partners;				implementation.

- reduced the labor-intensive tasks of
exchanging data (e.g., data re-entry);
				Fees vary from Software Company to Software
- allowed the sender of the data to control				Company. Ignoring
the exchange, including knowing if and
				the hidden costs mentioned above, you can
when the recipient received the				expect the following ongoing charges:
transaction.In 1982, Version 1 of the ANSI
ASC certified release of draft X.12 standards
was
				Maintenance Fees. Most companies charge an
published.At about the same time, the U.K.				annual maintenance
Department of Customs and Excise, with the
				fee that is usually a percentage of the
assistance of SITPRO (the British				translator's list price. This fee should
Simplification of Trade Procedures Board),				include
was
				software updates, standards updates,
developing its own standards for documents				technical support, and customer service.VAN
used in international trade, called				Charges. If you use a Value Added Network
				(VAN), you will be
Tradacoms. These were later extended by the
United Nations Economic Commission				billed for transmitting data similar to
				making a long distance phone call. Some also
for Europe (UNECE) into what became known as
the GTDI (General-purpose Trade
				bill you for connect time. A fast modem
Data Interchange standards), and were				helps to lower transmission costs.Mailbox
gradually accepted by some 2,000 British				Fee. Most VANs charge a monthly fee for
				maintaining a
exporting organizations.Problems created by
the trans-Atlantic use of two different (and				mailbox on their network. Some base billing
largely				on the document (25 cents per

incompatible) sets of standardized documents				document transmitted). Others charge based
have been addressed by the				upon the number of characters in each

formation of a United Nations Joint European				document.
and North American working party

(UN-JEDI), which began the development of
the Electronic Data Interchange for				EDI can at times take much longer than
				expected. Remember, you are working with
Administration, Commerce and Transport
(EDIFACT) document translation				another company and you have no control over
				their priorities or business practices.
standards.Early on, Value Added Networks
(VANs) served as an "electronic post office"				Your priority may be to implement a Purchase
for				Order (850) with Wal-mart, but their

buyers and suppliers that needed to exchange				priority may be implementing the Advance
data. For example, Company A could				Ship Notice (856). You need to

send an electronic purchase order to the VAN				implement a Remittance Advice (820) with
and Company B could go to the VAN				Wachovia yet their Remittance Advice

to pick it up. If Company B claimed it did				specialist is on Maternity leave and her
not receive the purchase order, the VAN				replacement only knows Lockbox (823).Despite
				its few disadvantages, EDI has proven to be a
would serve as a third-party intermediary				powerful backbone that supports today's
and would validate whether the purchase				Electronic Commerce. Companies all over the
				world utilize EDI's
order had in fact been picked up or not.
That is the type of "value-add" these				versatility and flexibility to communicate
				with each other. And with the promise of
networks provided.Despite the benefits, VAN
EDI had limited adoption because it was				the Web, which offers much lower
cost-prohibitive				connectivity costs, and the lower costs of
				PCs and
for most companies to deploy. Before
Internet EDI became available, approximately				simpler software, EDI is opening its doors
				to smaller companies. Moreover, XML, an
80% of the suppliers in any given supply
chain were communicating with their				open standard for sharing data, is starting
				to appear as a method of EDI coding
customers manually via fax, telephone and
snail mail because they could not afford				standards, which could provide technical
				clarity across industries and nations
the investment required for VAN EDI. This
resulted in inefficiencies throughout the				around the world.Christopher Alexander is a
				lead developer at CE InterWeb Solutions and a
supply chain including: lost or mis-keyed				Managing
purchase orders, late invoices, out-of-
				Partner at Consolidated Energies.He has been
stocks, etc.With the advent of secure				developing advanced eCommerce applications
Internet EDI, companies of every size are now				with EDI since 1997.

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What is EDI?