E-commerce

Unit3- Electronic Data

Interchange (EDI)
 What is EDI?
• Electronic Data Interchange (EDI) is the direct
computer-to-computer exchange of business
documents (business transactions) in a standard
electronic format between one or more mutually
agreeable business partners. This is a business-to-
business (B2B) type of E-Commerce.
• Information stored in one computer is translated
by software programs into standard EDI format
for transmission to one or more trading partners.
Trading partner’s computer, in turn, translates the
information using software programs into a form
they can understand. There is no human
involvement in the processing of the information.
 Characteristics of EDI
Computer-to-computer– EDI replaces postal mail,
fax and email. While email is also an electronic
approach, the documents exchanged via email must
still be handled by people rather than computers.
Business documents – These are any of the
documents that are typically exchanged between
businesses. The most common documents
exchanged via EDI are purchase orders, invoices and
advance shipping notices and commission sales
reports, as well as other important or classified
information.
 Characteristics of EDI
 Standard format– Because EDI documents must be
processed by computers rather than humans, a standard
format must be used so that the computer will be able to
read and understand the documents. Without a standard
format, each company would send documents using its
company-specific format and, EDI system doesn’t
understand the company-specific format.
 Business partners – The exchange of EDI documents is
typically between two different companies, referred to as
business partners or trading partners. For example,
Company A may buy goods from Company B. Company A
sends orders to Company B. Company A and Company B
are business partners.
 Electronic Data Interchange (EDI)
 A typical manual process looks like this, with lots of paper and
people involvement.
 Electronic Data Interchange (EDI)
• The EDI process looks like this — no paper, no
people involved.
 Basic Infrastructure for EDI
 format standards to facilitate automated processing by
all users,
 translation software to translate from a user's
proprietary format for internal data storage into the
generic external format and back again,
 value-added networks (VAN) to solve the technical
problems of sending information between computers,
 inexpensive microcomputers to bring all potential
users—even small ones—into the market, and
 procedures for complying with legal rules. It has only
been in the past several years that all of these
ingredients have fallen into place.
 EDI Format standard
 Standards provide a common syntax, set of rules, and
procedures for their maintenance and enhancements.
 EDI standards are agreements between users of EDI on how
data is to be formatted and communicated.
 Early EDI efforts in the 1960s used proprietary formats
developed by one firm for exclusive use by its trading
partners.
 This worked well until a firm wanted to exchange EDI
documents with other firms who wanted to use their own
formats. Since the different formats were not compatible,
data exchange was difficult.
 To facilitate the widespread use of EDI, standard formats were
developed so that an electronic message sent by one party
could be understood by any receiver that subscribes to that
format standard.
 EDI Format standard
 EDI standards presently define and support more than 200
business documents derived from industry and government
working groups. They provide a framework from which new
standards can be derived as well as a data base of elements to
be used in the creation of new standards.
 In general, EDI formatting standards address the following
issues:
 What documents can be communicated electronically;
 What information is to be included;
 What sequence the information should follow;
 What form the information (i.e., numeric, ID codes, etc.) should
use; and
 The meaning of the individual pieces of information.
 Two Most Competing EDI
Standards
American National Standards Institute (ANSI)
X12
EDIFACT developed by UN/ECE, Working
Party for the Facilitation of International
Trade Procedures
 ANSI ASC X12
 In 1979, the American National Standards Institute (ANSI)
chartered the Accredited Standards Committee (ASC) X12 to
develop uniform standards for inter-industry electronic data
exchange of business transactions, namely electronic data
interchange.
 The data is grouped to represent all the information required
for a particular business function, such as a purchase order.
 ASC X12 specifies business forms by defining standard data
elements with dictionaries that specify name, length of data
field, description, data type, and meaning.
 A group of standards subcommittees are in place to advise,
critique, and monitor the development of all X12 formats and
make these formats available for business or government use.
 UN/EDIFACT
 United Nations/Electronic Data Interchange for
Administration, Commerce and Transport is the international
standard that was developed by the United Nations.
 EDIFACT consists of data elements (a value), segments (a
logical group of data elements), and messages (a collection of
segments relating to a business function), and rules for
combining them.
 The EDIFACT standard provides a set of syntax rules to
structure, an interactive exchange protocol and provides a set
of standard messages which allow multi-country and multi-
industry exchange of electronic business documents.
 EDIFACT is widely used across Europe, mainly due to the fact
that many companies adopted it very early on.
 Translation software

Translation software makes EDI work by

translating data from the sending firm's
internal format into a generic EDI format.
Translation software also receives a sender's
EDI message and translates it from the generic
standard into the receiver's internal format.
 Need of Value Added Networks
 When firms first began using EDI, most
communications of EDI documents were directly
between trading partners.
 Unfortunately, direct computer-to-computer
communications requires that both firms 1) use similar
communication protocols, 2) have the same
transmission speed, 3) have phone lines available at
the same time, and 4) have compatible computer
hardware.
 If these conditions are not met, then communication
becomes difficult if not impossible.
 A value-added network (VAN) can solve these
problems by providing an electronic mailbox service.
 Need of Value Added Networks
 A value-added network (VAN) is a private network
provider hired by a company to facilitate electronic data
interchange (EDI) and/or provide other network services
such as message encryption, secure email and
management reporting.
 A Value-Added Network (VAN) simplifies the
communications process by reducing the number of parties
with which a company needs to communicate. The VAN
accomplishes this by acting as an intermediary between
business partners that share standards based or proprietary
data.
 By using a VAN, an EDI sender need only learn to send and
receive messages to or from one party: the VAN. Since a
VAN provides a very flexible computer interface, it can talk
to virtually any type of computer; it can process EDI with
hundreds of trading partners. In addition, VANs provide
important security elements for dissemination of
information between parties.
 Computers
• The fourth building block of EDI is inexpensive
computers that permit even small firms to
implement EDI. Since microcomputers are
now so prevalent, it is possible for firms of all
sizes to deal with each other using EDI.
 Procedures for Complying With
Legal Rules
• Legal rules apply to the documents that accompany a
wide variety of business transactions. For example, some
contracts must include a signature or must be an original
in order to be legal.
• If documents are to be transmitted via EDI, companies
must establish procedures to verify that messages are
authentic and that they comply with the agreed-upon
protocol.
• In addition, EDI requires companies to institute error-
checking procedures as well as security measures to
prevent unauthorized use of their computer systems.
 Web How EDI works?
There are Five basic steps to sending EDI
documents:
1. Sender prepare the documents,
2. Sender translate the documents into EDI format,
3. Sender connects and transmits the EDI documents
to business partner.
4. Receiver (business partner) receives the EDI
document
5. Receiver translates back the EDI document to the
original business documents format.
Web How EDI works?
 How EDI works?
 Electronic Data Interchange (EDI) is the computer-to-computer
exchange of structured information, by agreed message
standards, from one computer application to another by
electronic means and with a minimum of human intervention.
 When sending an EDI document, both parties (trading
partners) must adhere to the same set of rules. These
standards define where and how the information from the
document will be found. Translation software processes the
information differently for sent and received messages and
performs a complete audit of each step to ensure information
is sent or received in EDI format.
 When the translator on the receiving computer reads a
document, it knows where to find the buyer's company name,
order number, purchase items and price, for example. This
information is then sent to the receiver's order entry system
without necessitating manual order entry.
 EDI vs. E-mail
S.N EDI E-mail
1 EDI is an acronym of Electronic Data E-mail is an acronym of electronic mail
interchange
2 EDI (Electronic Data Interchange) is E-mail system is basically used for sending
the transfer of data from one message electronically to individuals or
computer system to another by group of individuals in an inter and intra
standardized message formatting, office environment.
without the need for human
intervention.
3 EDI is typically used between E-mail system just distributes any types of
businesses to transfer info such as message by electronic means from one
purchase orders, invoices, routing sender to one or more recipients via a
instructions, pricing, etc. between network.
the 2 companies.
4 EDI documents must be processed Since e-mail messages are processed by
by computers rather than humans, a human, there is no such predefined
standard format must be used so standard format and message
that the computer will be able to standardization rule.
read and understand the
documents.
 EDI vs. E-mail
S.N EDI E-mail
5 EDI provides communication No such obligation in e-mail system.
between only those trading
partners that agree to exchange
business documentation in EDI
transactions.
6 EDI message can be automatically E-mail gives ability to receive and respond
processed by receiving computer message. There is human intervention.
without any human intervention or
interpretation or re-keying
7 EDI Van converts companies’ data No such conversion is need in e-mail
into an agreed format through system.
access in a set of protocol type.
8 Under high-secure protection, E-mail system is not secured as EDI system
Digital certificate for verification is
also required in EDI services.
Therefore, EDI services prevent bulk
mails and virus data which occur in
the email delivery.
 EDI Benefits
• EDI continues to prove its major business value by
lowering costs, improving speed, accuracy and
business efficiency.
• The greatest EDI benefits often come at
the strategic business level.
• The major benefits realized from implementing EDI
are listed below.
1. Cost savings
2. Speed and accuracy
3. Increase in business efficiency
4. Strategic business level
 EDI Benefits
• Cost savings:
– Expenses associated with paper, printing, reproduction, storage,
filing, postage and document retrieval are all reduced or
eliminated when you switch to EDI transactions.
– Errors due to illegible faxes, lost orders or incorrectly taken
phone orders are eliminated, saving your staff valuable time
from handling data disputes
• Speed and accuracy:
– EDI can speed up your business cycles (reduce the order-to-cash
cycle time) improving business partner transactions and
relationships. Exchange transactions in minutes instead of the
days or weeks of wait time from the postal service
– Improves data quality, reduction in transactions with errors—
eliminating errors from illegible handwriting, lost faxes/mail and
keying and re-keying errors
 EDI Benefits
• Increase in business efficiency:
– Automating paper-based tasks allows your staff to
concentrate on other higher-value tasks and provides
them with the tools to be more productive
– Quick processing of accurate business documents leads to
less re-working of orders, fewer stock outs and fewer
cancelled orders
– Automating the exchange of data between applications
across a supply chain can ensure that business-critical data
is sent on time and can be tracked in real time. Sellers
benefit from improved cash flow and reduced order-to-
cash cycles
– Shortening the order processing and delivery times means
that organizations can reduce their inventory levels
 EDI Benefits
• Strategic business level:
– Enables real-time visibility into transaction status. This in
turn enables faster decision-making and improved
responsiveness to changing customer and market
demands, and allows businesses to adopt a demand-
driven business model rather than a supply-driven one
– Shortens the lead times for product enhancements and
new product delivery
– Streamlines your ability to enter new territories and
markets.
 EDI Roles and Application Area
• EDI is used across many different industry sectors. It
is applied to address many different business
processes and industry challenges.
• Following are different scenarios in industries that
use EDI extensively:
1. International or cross-border trade
2. Electronic funds transfer
3. Health care EDI for insurance claims processing
4. Manufacturing & retail procurement
5. Ticket, Hotel
 Role of EDI in international or
cross-border trade
• EDI has always been very closely linked with
international trade. EDI facilitates the smooth flow of
information and it reduces paper work. EDI benefits
for international trade are:
– Reduced transaction expenditures
– Quicker movement of imported & exported goods
– Improved customer service through “track & trace”
programs
– Faster customs clearance & reduced opportunities for
corruption, a huge problem in trade
 Interbank Electronic Funds
Transfer (EFT)
EFTS is credit transfers between banks where funds
flow directly from the payer’s bank to the payee’s
bank.
The two biggest funds transfer services in the United
States are the Federal Reserve’s system, Fed wire, &
the Clearing House Interbank Payments System
(CHIPS) of the New York clearing house.
Automated Clearinghouse (ACH) transfers are used
to process high volumes of relatively small-dollar
payments for settlement in one or two business
days.
 Health care for insurance
claims processing
 EDI is becoming a permanent fixture in both insurance &
health care industries as medical provider, patients, & payers
 Electronic claim processing is quick & reduces the
administrative costs of health care.
 Using EDI software, service providers prepare the forms &
submit claims via communication lines to the value-added
network service provider
 The company then edits sorts & distributes forms to the
payer. If necessary, the insurance company can electronically
route transactions to a third-party for price evaluation
 Claims submission also receives reports regarding claim status
& request for additional Information
 Manufacturing & retail
procurement
 In manufacturing, EDI is used to support just-in-time.
 In retailing, EDI is used to support quick response
 Companies using Just-In-Time (JIT) & EDI calculates how
many parts are needed each day based on the production
schedule & electronically transmit orders.
 EDI leads to Quick Response to both supplier and customer
– For the customer, QR means better service & availability of
a wider range of products
– For the retailer & supplier, QR may mean survival in a
competitive marketplace
– Much focus of QR is in reduction of lead times using event-
driven EDI
 EDI in Automotive Industry
JIT and Lean Manufacturing processes are central to
the smooth running of many production lines around
the world and EDI provides a fast and efficient way to
transfer business documents in order to support
these types of manufacturing processes.
Providing visibility of inventory levels and notification
of when shipments are due to arrive at the
production line are critical to making JIT and Lean
manufacturing processes a success.
 EDI in Financial Services Industry
 Financial services firms relies on the ability to manage
complex information flows whether processing payables and
receivables, supporting post-trade securities flows,
transmitting merchant settlement files, or enabling group
benefits eligibility claims.
 The growth of international trade has created
interdependencies between buyers and suppliers across
geographies, resulting in the globalization of the financial
supply chain. Complexities arise when working across
international boundaries, including differences in currencies,
regulations and accounting practices. EDI mitigates these
complexities by aligning financial supply chain information
flows with the movement of goods in the physical supply
chain.
 EDI in Retail Industry
 The retail sector has enjoyed the benefits of EDI for decades.
Pioneered by the likes of Walmart and Proctor & Gamble in
the 1980s, vendor managed inventory (VMI) has become a
driving force for the industry to cut costs while increasing
customer service. It is the concept at the core of the grocery
industry’s “quick response” approach to product flow across
the supply chain.
 In VMI, the supplier makes the main inventory replenishment
decisions for the consuming organization. The result is that
the supplier has much greater control of inventory, leading to
less waste or over-supply and the replenishment cycle often
moves from monthly to weekly or daily, increasing customer
service.
 Security and Privacy issues of EDI
Confidentiality requires that all communications
between parties are restricted to the parties involved
in the transaction. This confidentiality is an essential
component in user privacy, as well as in protection of
proprietary information and as a deterrent to theft of
information services.
Confidentiality is concerned with the unauthorized
viewing of confidential or proprietary data that one
or both of the trading partners does not want known
by others. Confidentiality is provided by encryption.
 Layers of EDI
• EDI is the structured transmission of data
between organizations by electronic means.
• The architecture of EDI is divided into four
layers-
1- Application Layer
2- Standards translation Layer
3- Transport Layer
4- Physical Network Infrastructure Layer
 Semantic (Application) Layer
• The Semantic layer describes the business
application that is driving EDI. This layer of EDI
translates business application into request for
quotes, purchase orders, acknowledgement
and invoices.
• This layer is specific to a company, and the
software it uses. i.e. the user interface and
content visible on the screen are tailored or
customized to local environment.
 Standard Translation Layer
• To facilitate the transfer of computer files between
two “trading partners’ requires that the computer
application of both sender and receiver use a
compatible format EDI.
• Both trading partners must use a standard format of
EDI and a translation software application that
creates an EDI file format data.
• There are two competing standards
– American National Standards Institute(ANSI)X12
– EDIFACT developed by UN/ECE
 Packing (Transport) Layer
• Transport layer is a non electronic way of
sending the business documents from one
company to another company similar to mail,
postal services or private career,
telecommunications, fax etc.
• Now a days the transportation method for EDI
is more complex with compare to e-mail.
– Emphasis of EDI is on automation
– EDI also need to follow certain protocol and legal
status
 Physical (Infrastructure) Layer
• The physical layer of EDI also called the
infrastructure layer.
• This layer defined the component
communication path (Dial up lines) Internet,
value-added network, etc for EDI data
transaction.
• It describes the network structure of EDI that
support e-commerce in which information can
be build and what are the communications
established over which EDI data transfer from
one customer to other customers.
 Security and Privacy issues of EDI
Encryption is the process of scrambling of data
(transforming plain text or data into cipher text) that
cannot be read by anyone other than the sender and
receiver. Encryption prevents hackers from viewing
data that is transmitted over telecommunications
channels. There are two basic encryption schemes,
private-key and public-key encryption.
Security and Privacy issues of EDI
EDI Authentication
– Both parties should feel comfortable that they are
communicating with the party with whom they
think they are doing business. A normal means of
providing authentication is through the use of
passwords.
– The latest technology to provide authentication is
through the use of digital certificates that function
much like ID cards. The digital certificate has
multiple functions, including browser
authentication.
 Security and Privacy issues of EDI
 EDI Data Integrity
– Data sent as part of a transaction should not be modifiable in
transit. Similarly, it should not be possible to modify data in
storage. Data integrity is a guarantee that what was sent by the
sender is actually what is received by the receiver. This is
necessary if there is a need to ensure that the data has not been
changed either inadvertently or maliciously.
– The normal mechanism for acquiring data integrity is for the
sender to run an algorithm against the data that is being
transmitted and to transmit the result of the algorithm
separately from the transmission. Upon receipt of the
transmission, the receiver runs the identical algorithm and then
compares the results. If the results are identical, then data has
not been modified.
 Private-key encryption
• Private-key encryption requires that both sending
and receiving parties have the same private digital
encryption keys to encrypt and decrypt message. The
sender encrypts the data using a key.
• The receiver then decrypts the message using the
same key. There are several disadvantages to private-
key encryption. In order to remain secure, the keys
must be changed periodically (requires a different set
of keys for each transaction) and the users must be
in contact with sender as to the actual keys being
used.
 Public-key encryption
• Public-key encryption is gaining wide spread acceptance as
the preferred encryption technology. With public-key
encryption, a message recipient generates a matched set of
keys, one public key and one private key. The recipient
broadcasts the public key to all senders or to a public location
where the key can be easily retrieved. Any sender who needs
to send the receiver an encrypted message uses the
recipient's public key to encrypt the message.
• The private key, which is held in private by the recipient, is the
only the key that can be used to trace messages encrypted
with the matched public key. This schema requires that the
private key cannot be generated from the public key.
Public Key Cryptography Case
 Characteristics of Public-key
Encryption technology
 Public key cryptography solves private key encryption
problem of having to exchange secret key
 It uses two mathematically related digital keys – public
key (widely disseminated) and private key (kept secret by
owner)
 Both keys (public and private) are used to encrypt and
decrypt message
 Once public key is used to encrypt message, same key
cannot be used to decrypt message
 For example, sender uses recipient’s public key to
encrypt message; recipient uses his/her secret private
key to decrypt it
 Evolution of EDI as Driver of E-
Commerce
 In fact, B2B e-commerce did not originate with the Internet,
but root technologies such as EDI were first developed in mid-
1970s and 1980s.
 EDI is a broadly defined communications protocol for
exchanging documents among computers using technical
standards developed by the American National Standards
Institute (ANSI X12 standards) and international bodies such
as the United Nations (EDIFACT standards).
 EDI was developed to reduce the cost, delays, and errors
inherent in the manual exchanges of documents such as
purchase orders, shipping documents, price lists, payments,
and customer data.
 Evolution of EDI as Driver of E-
Commerce
EDI has evolved significantly since 1980s. Initially, EDI
focused on document automation (first stage).
Procurement agents created purchase orders
electronically and send them to trading partners,
who in turn shipped order fulfillment and shipping
notices electronically back to the purchaser. Invoice
payment and other documents followed.
These early implementations replaced the postal
system for document transmission, and result in
same-day shipping of orders, reduced errors, and
lower costs.
 Evolution of EDI as Driver of E-
Commerce
The second stage of EDI development began in the
early 1990s, driven largely by the automation of
internal industrial processes and movement toward
just-in-time production and continuous production.
 The new methods of production called for greater
flexibility in scheduling, shipping, and financing of
supplies.
To support the new automated production processes
(lean-manufacturing) used by manufactures, EDI was
used to eliminate purchase orders and other
documents entirely, replacing them with production
schedules and inventory balances.
 Evolution of EDI as Driver of E-
Commerce
 In the third stage, of EDI, beginning in the mid 1990s,
suppliers of large manufacturing firms were given online
access to selected parts of the purchasing firm’s production
and delivery schedules, and under long term contracts were
required to meet those schedules in their own without
intervention by firm purchasing agents.
 These systems required standardization of business processes
and resulted in automation of production, logistics, and many
financial processes.
 This third stage of EDI introduced the era of continuous
replenishment. For instance, Wal-Mart and Toys“R”Us
provide their suppliers with access to their store inventories,
and the suppliers are expected to keep the stock of items on
the self within pre-specified targets.
 Evolution of EDI as Driver of E-
Commerce
 Today, EDI must be viewed a general enabling technology that provides for
exchange of critical business information between computer application
supporting a wide variety business processes.
 EDI is an important industrial network technology, suited to support
communications among a small set of strategic partners in direct, long-
term trading relationships.
 The technical platform of EDI has changed from mainframe to personal
computers; the telecommunications environment is changing from private
dedicated networks to the Internet (referred to as Internet-based EDI or
just Internet EDI).
 Most industry groups are moving from XML as the language for expressing
EDI commercial documents and communication. EDI is developing through
new standards and integration with Internet technologies to achieve
Internet EDI.
 Limitation of EDI
 The strength of EDI is its ability to support direct
commercial transactions among strategically related
firms in an industrial network, but this is its weakness as
well.
 EDI is not well suited for the development of electronic
marketplaces where thousands of suppliers and
purchasers meet in a digital arena to negotiate prices.
 EDI supports direct bilateral communications among a
smell set of firms and does not provide for price
transparency among a large numbers of suppliers, does
not scale easily to include new participants, and is not
real time communications environment.
 Limitation of EDI
• It is instead a “batch processing” environment in which
messages are exchanged in batches (although even this
feature is changing as EDI moves towards XML and
Internet).
• EDI dos not have a rich communication environment that
can simultaneously support e-mail messaging, sharing of
graphics documents, network messaging, or user friendly
flexible database creation and management.
• EDI is also an expensive proposition, and staff of
dedicated programmers is required to implement it in
large firms; in some cases, a considerable amount of time
is also needed to program existing enterprise system to
work with EDI protocols.