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About EDI

EDI is an abbreviation for Electronic Data Interchange. The basic definition of EDI is:

Computer-to-computer communication of business documents, in a standardized format, between two companies.

Although it has a technical-sounding name, EDI is fundamentally a business initiative, which has been developed over the past thirty years. It was pioneered by the transportation, retail, and grocery industries, in an effort to increase quality and customer service, and offer long-term cost benefits. EDI also represents a major step in creating a paperless office.

By replacing paper documents such as purchase orders or invoices, with its EDI “equivalent” – a computer-readable EDI document - four key benefits are realized:

  • 1) Accuracy is increased, since human intervention (the acts of entering and re-keying data) is eliminated
  • 2) Timeliness is increased (the electronic transmission of forms eliminates the delays inherent in conventional mail, or even Fax)
  • 3) Customer service is improved
  • 4) Bottom line costs are reduced

Definition Explained

A further breakdown of the definition of EDI helps explain this business initiative:

"Computer-to-computer" means that the data you send or receive from a bookstore (the most common examples are Invoices or Purchase Orders) is communicated via electronic transmission, without human intervention or interpretation.

"Business documents" means that you will use EDI for the exchange of specific documents only, such as Purchase Orders or Invoices.

"Standardized format" is at the heart of EDI. EDI requires you to follow standards that define the format and content of your business documents. When you start using EDI, your PO’s and Invoices will be converted by the EDI translation software program into the exact same format as those used by all other publishers using EDI. (The publishing industry EDI standards have been set by the BISAC - recently renamed BASIC - committee of the Book Industry Study Group). This means that each Purchase Order, Invoice, or Pack Slip will be completely readable by any computer used by any bookseller using EDI.

Summary of Definition

In summary: when you do business via EDI, you send business documents directly from one computer to another, the documents are in machine-processable form, the exchange is limited to documents, and the document exchange is governed by standards. 

Advantages over paper systems

EDI saves a company money by providing an alternative to, or replacing, information flows that require a great deal of human interaction and paper documents. Even when paper documents are maintained in parallel with EDI exchange, e.g. printed shipping manifests, electronic exchange and the use of data from that exchange reduces the handling costs of sorting, distributing, organizing, and searching paper documents. EDI and similar technologies allow a company to take advantage of the benefits of storing and manipulating data electronically without the cost of manual entry. Another advantage of EDI is the opportunity to reduce or eliminate manual data entry errors, such as shipping and billing errors, because EDI eliminates the need to rekey documents on the destination side. One very important advantage of EDI over paper documents is the speed in which the trading partner receives and incorporates the information into their system thus greatly reducing cycle times. For this reason, EDI can be an important component of just-in-time production systems. - Source: http://ecommerce.hostip.info/pages/384/Electronic-Data-Interchange-EDI.html
According to the 2008 Aberdeen report "A Comparison of Supplier Enablement around the World", only 34% of purchase orders are transmitted electronically in North America. In EMEA, 36% of orders are transmitted electronically and in APAC, 41% of orders are transmitted electronically. They also report that the average paper requisition to order costs a company $37.45 in North America, $42.90 in EMEA and $23.90 in APAC. With an EDI requisition to order costs are reduced to $23.83 in North America, $34.05 in EMEA and $14.78 in APAC.

Barriers to Implementation

There are a few barriers to adopting electronic data interchange. One of the most significant barriers is the accompanying business process change. Existing business processes built around paper handling may not be suited for EDI and would require changes to accommodate automated processing of business documents. For example, a business may receive the bulk of their goods by 1 or 2 day shipping and all of their invoices by mail. The existing process may therefore assume that goods are typically received before the invoice. With EDI, the invoice will typically be sent when the goods ship and will therefore require a process that handles large numbers of invoices whose corresponding goods have not yet been received.

Another significant barrier is the cost in time and money in the initial set-up. The preliminary expenses and time that arise from the implementation, customization and training can be costly. It is important to select the correct level of integration to match the business requirement. For a business with relatively few transactions with EDI-based partners, it may make sense for businesses to implement inexpensive "rip and read" solutions, where the EDI format is printed out in human-readable form and people, rather than computers, respond to the transaction. Another alternative is outsourced EDI solutions provided by EDI "Service Bureaus". For other businesses, the implementation of an integrated EDI solution may be necessary as increases in trading volumes brought on by EDI force them to re-implement their order processing business processes.

The key hindrance to a successful implementation of EDI is the perception many businesses have of the nature of EDI. Many view EDI from the technical perspective that EDI is a data format; it would be more accurate to take the business view that EDI is a system for exchanging business documents with external entities, and integrating the data from those documents into the company's internal systems. Successful implementations of EDI take into account the effect externally generated information will have on their internal systems and validate the business information received. For example, allowing a supplier to update a retailer's Accounts Payable system without appropriate checks and balances would put the company at significant risk. Businesses new to the implementation of EDI must understand the underlying business process and apply proper judgment.