E-COMMERCE [ELECTRONIC DATA INTERCHANGE] EDI

Electronic Data Interchange EDI – is the exchange of business documents between any
two trading partners in a standard or structured, machine readable form. EDI is used to
electronically transfer documents such as purchase orders, invoice, shipping bills, and
communicate with one another. A Specified format is set by both the parties to facilitate
transmission of information. Traders use Electronic Data Interchange EDI to exchange
financial information in electronic form. Electronic Fund Transfer facility provided by
banks is an example of Electronic Data Interchange EDI. EDI helps to eliminate paper
based
system, reduces data entry task and improves business cycle.

EDI stands for Electronic Data Interchange. EDI is an electronic way of transferring
business documents in an organization internally, between its various departments or
externally with suppliers, customers, or any subsidiaries. In EDI, paper documents are
replaced with electronic documents such as word documents, spreadsheets, etc.

EDI Documents

Following are the few important documents used in EDI –

 Invoices
 Purchase orders
 Shipping Requests
 Acknowledgement
 Business Correspondence letters
 Financial information letters

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Steps in an EDI System

Following are the steps in an EDI System.

 A program generates a file that contains the processed document.

 The document is converted into an agreed standard format.
 The file containing the document is sent electronically on the network.
 The trading partner receives the file.
 An acknowledgement document is generated and sent to the originating
organization.

Components of Electronic Data Interchange EDI

 Standard Document Format – A standard format agreed upon by both parties

which do not require complicated hardware or software to access information. Both
parties communicate directly through a business application.

 Translator and Mapper – A translator is used to convert the raw data into
meaningful information according to specifications provided by a mapper. A
mapper is used to create conversion specification. It compiles the specification and
then gives instructions to the translator on how to convert the data.

 Communication Software – Communication software is used to transmit data and

convert business documents into a standard format. It follows a standard
communication protocol which is incorporated in the software.

 Communication Network – A communication network provides a direct link

between trading partners who are will to exchange business documents through
Electronic Data Interchange EDI.
 Modem – It is a hardware device that transmits data from one computer
to another.
 VAN – A network that connect the computer system of one
organization to another.
 Point to Point link – A direct communication link between two
computers.

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Applications of Electronic Data Interchange EDI

 Retail Sector – In the retail sector profit margins usually depend upon
efficient inventory management. EDI provides a structured way to maintain
and replenish goods stocked at a retail outlet. Retailers use a common
model stock for each shop location and the point of sale stock position is
updated continuously and data in fed via EDI enabled SCM (supply chain
management) network. The EDI software monitors all the logistics and
makes updates in the original stock.

 Manufacturing Sector – EDI ensures effective and efficient management

of materials required for production of a commodity. In manufacturing
sector EDI facilitates Material requirement planning and just in time
manufacturing. The Inventory position of OEM is constantly updated
through EDI and the supplier is notified about shortage of materials. This
helps the supplier to plan and schedule supply according to requirements
of the manufacturer. The suppliers respond via EDI with an ASN to identify
the parts/materials to be delivered and the approximate delivery time and

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as soon as the shipment is delivered at the production plant the inventory is

updated again.
 Automobile Sector – In automobile sector EDI is used to keep customers
updated with the current product and pricing information during the
purchase cycle. An advance shipping notice is transmitted through EDI to
the customers to prepare a loading schedule and to ensure proper receipt
of the product. The customer may also make payment on receipt of goods
via EDI to speed up the payment process.
 Financial Sector – In the financial sector EDI replaces the labour intensive
activities of collecting, processing and dispersing payments with an
electronic system. It facilitates the flow of payment between the bank
accounts of trading partners without requiring any human intervention. A
payee`s bank account is electronically credited and the payer`s account is
electronically credited on the scheduled day of payment; such an exchange
is known as electronic fund transfer (EFT).

 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. Having people involved
slows down the processing of the documents and also introduces errors.

Instead, EDI documents can straight through to the appropriate application on

the receiver’s computer (e.g., the Order Management System) and processing
can begin immediately. A typical manual process looks like this, with lots of
paper and people involvement:

The EDI process looks like this — no paper, no people involved:

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 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 ship notices. But there
are many, many others such as bill of lading, customs documents,
inventory documents, shipping status documents and payment documents.

 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. A standard
format describes what each piece of information is and in what format
(e.g., integer, decimal, mmddyy). Without a standard format, each
company would send documents using its company-specific format and,
much as an English-speaking person probably doesn’t understand
Japanese, the receiver’s computer system doesn’t understand the
company-specific format of the sender’s format.

There are several EDI standards in use today, including ANSI, EDIFACT,
TRADACOMS and ebXML. And, for each standard there are many deferent
versions, e.g., ANSI 5010 or EDIFACT version D12, Release A. When two
businesses decide to exchange EDI documents, they must agree on the specific EDI
standard and version.
Businesses typically use an EDI translator – either as in-house software or via an
EDI service provider – to translate the EDI format so the data can be used by their
internal applications and thus enable straight through processing of documents.

 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

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Features of EDI
To maximize the strategic value and ROI of your EDI software investment, you need a
solution that maximizes automation, minimizes manual intervention and can smoothly
and cost-effectively meet your changing business needs. That makes the following
features paramount:

 Robust, proven integration with your business system. EDI is among the
highest-value integrations in your accounting systems environment because
this eliminates time-consuming, error-prone manual effort that would
otherwise be necessary to get orders, invoices and other EDI data in and out
of the accounting system. Integrating EDI with a business system streamlines
your order processing workflow for improved productivity and
responsiveness to customers, while saving time and money. The more trading
partners you have, the more operational costs you’ll save through EDI and
ERP integration. Conversely, an EDI system that does not integrate becomes
a cost of doing business that offers little value-add.
 A simple, seamless user experience. Business users in departments like
customer service and shipping need to process EDI transactions efficiently
and accurately, without having to become EDI experts. You should be able to
manage EDI ―by exception‖ so that transactions are automated unless
exceptions occur. You should also be able to automatically schedule everyday
tasks like importing and exporting EDI documents to and from your
accounting system. More automation means faster processing and less
errors—which, for suppliers and distributors, means happier customers and
fewer chargeback’s.
 Scalability and configurability for your specific needs. Look for an EDI
software provider that allows you to implement only the features you need
now, with the option to add more capabilities (e.g., support for remote
warehouse/3PL documents) on-demand in the future. Configurability to your
specific accounting/ERP environment and business processes without
customizations that could complicate your upgrades is also crucial. You want
a proven, turnkey implementation and upgrade path that minimizes risk as
your accounting and ERP environment changes.
 Lowest total cost of ownership. A low initial cost doesn’t mean that TCO
will be low also. Monthly network charges can vary widely, for example.
Likewise, many providers charge for updating trading partner mapping
specifications, which change all the time. What about monthly maintenance
fees? These costs can add up fast as a business grows. Are these included in
the support contract or are they extra?
 Easy on boarding of new trading partners. Growing companies need to
onboard new EDI trading partners quickly and smoothly. Make sure an EDI
provider offers prebuilt templates and rules to make on boarding and
compliance with major retailers and other partners quick and painless. Make
sure also that it’s easy to create partner-specific business rules.
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 Single-vendor product support

You want an EDI software solution that is developed, maintained and
supported end-to-end by the same vendor. In particular, many EDI companies
own only the EDI translator software and rely on systems integrators for their
ERP integrations. A third party might also support the VAN you’re using.
This can result in support problems and an increased risk of product
obsolescence.
 Web-based and managed services options
EDI for small businesses, and even large companies, is more and more
commonly web-based. Choosing EDI ―in the cloud‖ compounds the
advantages of a web-based accounting/ERP system, like faster time-to-value,
reduced IT complexity, and ubiquitous access to data and fewer firewall,
security and connectivity worries.

Advantages of an EDI System

Following are the advantages of having an EDI system.

 Reduction in data entry errors. - Chances of errors are much less while
using a computer for data entry.
 Shorter processing life cycle - Orders can be processed as soon as they are
entered into the system. It reduces the processing time of the transfer
documents.
 Electronic form of data - It is quite easy to transfer or share the data, as it is
present in electronic format.
 Reduction in paperwork - As a lot of paper documents are replaced with
electronic documents, there is a huge reduction in paperwork.
 Cost Effective - As time is saved and orders are processed very effectively,
EDI proves to be highly cost effective.
 Standard Means of communication - EDI enforces standards on the content
of data and its format which leads to clearer communication.
 Expedite transmission -Information is transmitted from one organization to
another organization efficiently and swiftly.
 Automated Data entry-Data is entered automatically by EDI software. For
instance, when purchase order (PO) from one company is received by another
company. Sales order (SO) is automatically generated at other company’s
system with the help of EDI software.
 Receipt verification-Receipt verification can easily be done with help of EDI
software. No human intervention is involved so there are minimal chances of
error or delay.
 Data Validation-Data validation is automatically done.
 Availability of free software-Free software’s are available depending upon
the EDI format chosen. For example- In TRADACOMS EDI format, Price
Information file and order files are available for free.
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 Low cost-Lower administrative, resource and maintenance cost.

 Faster processing-With the help of EDI, business processes can be executed
at a much faster rate as compared to the traditional method sending
information.
 Building long-term relationships-EDI helps in building long term
relationships with trading partners and hence helps in business growth.
 Reduction in error-EDI has discarded manual data entry and paperwork. So
there are minimal chances of error.

Drawbacks of EDI

 Expensive-Setup and maintenance of some of the formats of EDI is

expensive.
 Initial setup is time consuming-Initial cost to setup EDI is time consuming.
 EDI standard changes-The business process depends on EDI standard
format. If any of the standard format changes then the business process has to
be changed accordingly.
 System electronic protection-An EDI enabled system needs electronic
protection from viruses, hacking, malware and other frauds.
 Staff training cost-Staff needs training in order to run EDI enabled software.
Investment has to be done in training.
 Proper backup-should be maintained as the whole data depends on EDI. In
case of any crash of EDI system, proper backup has to be maintained and
extra cost is required for it.
 Limit your trading partners-Some organization stops doing business which
don’t use EDI. For instance, Wal-Mart prefers to do business only with those
organization which uses EDI.

IMPLEMENTING EDI

It has defined six steps to successfully implement EDI technology in an organization:

 Complete understanding of EDI: The depth of knowledge a company

acquires on EDI depends on the internal efforts spent. If no external
consultants are hired then the level of knowledge should be high. One method
to gain knowledge is to join one of the groups developing standards. (e.g. EDI
Council of Australia)

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 Agreed on standards with business partners: After finding a suitable

business partner, agreements should be made concerning standards,
transactions to be exchanged, message syntax, file transfer protocol etc.
 Modifying existing systems: The host computer applications should be
modified so that EDI information is incorporated or integrated directly
into the applications. Good EDI software should provide an application
interface to many different applications.

 Translate data: Various translation modules are required to translate

transactions into EDI messages according to the EDI standard being used.
The translation is required of the data into the EDI format as well as
translation of data from an EDI package into a format compatible with the in-
house application.
 Prepare communications: A network connection to various trading partners
is required via either a Value Added Network (VAN) or direct connection.
 Management and audit of the whole process: Consistent management and
auditing of the entire process must be established and maintained. The tasks
include archiving transactions, inspecting error logs and ensuring security of
the system.

Benefits of Implementing EDI

The benefits available by using EDI are being realized by a large number of companies, many of which
transmit a substantial percentage of their transaction volume via EDI. For companies using I/CEDI, UCS
or VICSEDI on a volume basis, the realization of available benefits can result in a definite competitive
advantage.

Users report benefits in the following major areas.

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 Reduced Lead Time/Quick Response: EDI can provide a direct reduction in the
ordering/shipping time cycle. This benefits both customer and supplier.

 Warehouse Efficiencies: In addition to the benefits cited above relating to warehouse

operations, the following benefits are also being realized in this traditionally high-cost
area:

 Transaction Handling/Processing Accuracy: The automated procedures associated with

EDI result in a reduction in transaction errors and resulting corrective action, including the
following:

 Administrative and Clerical Costs: One of the major goals in creating EDI was to reduce
the great volume of business paperwork and many of the clerical tasks involved in
handling the processing of paper documents. Many users have realized substantial
productivity improvements and/or direct cost savings in their office operations by reducing
or eliminating the costs.

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TYPES OF EDI COMMUNICATION

EDI Com is simply a contraction of EDI communications and is often used when
discussing the means of exchanging EDI data with your trading partners. When a
business implements EDI the focus is always on the transactions, but eventually the means
of exchanging these transactions must be discussed. This is where EDI com comes into
play. There are a number of means of implementing EDI com ranging from traditional
EDI com strategies based on EDI VANs to more modern, direct EDI com methodologies
like AS2 communications. Regardless of how you implement EDI com your business will
need to ensure that the EDI com methodology you select is compatible with the VAN or
trading partners you do business with. There are a number of EDI com strategies that
your business can implement.

IMPLEMENTATION OF EDI COMMUNICATION WITH TCP/IP PROTOCOLS

There are two kinds of communication reconciliation in the case of EDI implementation
through a service provider.

One is between the company and the provider and involves the company’s own file
formats.
The other between the service provider and the company’s partner, according to
the Communication Datasheet described above.

During the use of EDI communication protocols with often unknown names pop up
frequently. All of them primarily serve data transmission, but this function can be
complemented by further identification and security functions.

 Applicability Statement (AS2): uses the same signing, encryption, and MDN
conventions used in the original AS1 protocol.
 AS2 messages are usually sent across the internet using the HTTP or HTTPS
protocol.
 AS2 has been widely deployed as a point to point connectivity method.
 AS2 offers many advantages over standard HTTP, including increased
verification, and security achieved through the use of receipts and digital
signatures.
 AS2 transactions and acknowledgements also occur in real-time, increasing
the efficiency of document exchanges.
 The U.S Company Wal-Mart was one of the first companies to help drive the
adoption of AS2 across the retail sector.

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 Odette File Transfer Protocol (OFTP): was developed to offer a standard

communication platform for the European automotive industry and has been in use
since the mid-1980s.
 OFTP has also seen adoption across the retail, white goods, manufacturing,
government, transport, insurance and banking industries to name but a few.
 The OFTP protocol is very simple to use, consisting of only fourteen
commands.
 The protocol is extremely efficient, allowing large transmission windows to
be utilised whilst incorporating file restart, data compression and security.
 OFTP has been designed to allow companies to communicate easily via point
to point connections.
 Odette File Transfer Protocol version 2.0(OFTP 2.0): is the latest version of the
OFTP standard and has been designed from the outset to be used across the
internet.
 OFTP2 offers a number of benefits over OFTP including data compression,
exchange of digital certificates (to improve security of transmissions) between
trading partners.
 It allows the handling of very large files (over 500 GB) and offers support for
additional character sets such as Chinese and Japanese.
 To date, OFTP has mainly been used in Europe however as OFTP2 has been
designed to operate across the internet it can help trading partners connect to
one another all over the world.
 Many automotive manufacturers in Europe have been running OFTP2 pilot
projects since 2008 and it is expected to be widely deployed across
production projects during 2010.
 File Transfer Protocol (FTP): is a standard network protocol used to exchange and
manipulate files over a TCP/IP based network such as the internet.
 FTP is built on client-server architecture and utilises separate control and data
connections between the client and server applications.
 FTP is also often used as an application component to automatically transfer
files for internal functions within programs.
 FTP can be used with user-based password authentication or with anonymous
user access.
 File Transfer Secure Protocol (FTSP): is an extension of FTP which adds support
for the Transport Layer Security (TLS) and the Secure Sockets Layer (SSL)
cryptographic protocols.
 FTPS should not be confused with SFTP, an incompatible secure file transfer
subsystem for the Secure Shell (SSH) protocol.

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 It is also different from Secure FTP, the practice of tunnelling FTP through an
SSH connection
 Secure File Transfer Protocol (SFTP): is a network protocol that provides file
access, file transfer and file management functionality over any reliable data
stream.
 It was designed as an extension to the Secure Shell protocol (SSH) version
2.0 to provide secure file transfer capability, but it is also intended to be
usable with other protocols as well.
 SFTP can be used in a number of different applications such as secure transfer
over Transport Layer Security (TLS) and transfer of management information
within VPN applications.
 This protocol assumes that it is run over a secure channel, such as SSH, that
the server has already authenticated the client and that the identity of the
client user is available to the protocol.
 Hyper Text Transfer Protocol (HTTP): is used to request and transmit files,
especially web pages and web page components, over the internet or other computer
networks.
 In HTTP, web browsers typically act as clients, while an application running
on the computer hosting the web site acts as a server.
 HTTP is typically implemented across TCP/IP however it can be
implemented on top of any other protocol on the internet, or on other
networks.
 Hyper Text Transfer Protocol Secure (HTTPS): is a combination of the Hypertext
Transfer Protocol with the SSL/TLS protocol to provide encryption and secure
identification of the server.
 HTTPS connections are often used for payment type transactions across the
internet and for the exchange of sensitive information between corporate
business systems.
 Eb XML Messaging Service (EBMS): offers a secure and reliable SOAP/Web
Services based packaging, routing and transport protocol as defined by the ebXML
specifications.
 The ebMS is an open standard and as such is communication protocol neutral
although the most common underlying protocols are HTTP and SMTP.
 ebMS essentially offers a way to exchange ebXML based B2B documents
between different business applications using SOAP/Web services.

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