Electronic Data Interchange (EDI)

Concept of Electronic Data Interchange (EDI)

Traditionally, the transfer  of data from one company  to another  has been by paper documents. This is known as a paper-based system. These documents have to be manually forwarded and entered to the destination computer.

Electronic Data Interchange (EDI) is the electronic exchange of standard business  information, in standard formats, between computers. EDI eliminates  the need  for a paper-based system by providing an electronic link between companies. This  reduces  data entry  tasks and improves  business cycle times.

Electronic Data Interchange (EDI)Electronic Data Interchange (EDI) is the electronic transfer of structured  business documents in an organization  internally  among  groups of departments or externally  with its  suppliers, customers and subsidiaries. The  documents likely  to be used in  EDI  are invoices, purchase orders, shipping  requests, acknowledgements and payments. EDI is  quite different  from generic correspondence  like e-mail and involves the exchange  of specific  documents  with management and tracking procedures designed to efficiency.

The information  that EDI handles includes, for example, purchase order  and invoices .However, any type  of business document can be sent, providing  it conforms to current industry, national or international  format standards.

Examples of current users of EDI  include automatic teller machine(ATMs) in banks  where EDI is used for transferring  and withdrawing funds between  different  bank  accounts, airline reservation systems, stock  exchange transactions and car  reservation systems.

Use of Electronic Data Interchange (EDI)

The data  from one computer  is normally not in a form suitable to be entered directly  into  another computer. The data may have to be arranged  differently before  it can be  entered into another computer  or some items of  data may not be needed  at all. With  EDI, all the data  is converted  into an agreed standard format  before it is sent  over the network. The computer  that receives  the data can then  extract the information it requires.

Using EDI implies  three things:

  1. Information  is transferred  electronically  rather than on paper. This  means that there is no need to enter  the data manually  in the destination computer.
  2. Information  is transferred  between  trading  partners  who have negotiated  trading agreements and have formalized their  data  transfer system.
  3. Information  that  is transferred  complies  with agreed standard for  the format  of the content  and the transmission  control mechanisms.

How Electronic Data Interchange (EDI) Works ?

Regardless of the format chosen, companies using Electronic Data Interchange (EDI) communicates  with their  trading  partners  in one of two ways:

  1. They exchange data with several  trading  partners directly.
  2. They  interact  with multiple  companies  through  a central  information    clearing-house.

Basically, here is how  EDI  works:

  • Prior to any computer work, representatives of two companies  interested  in exchanging  data electronically  meet to specify  the applications  in the EDI standard , which they will implement.
  • Each company adds Electronic Data Interchange (EDI) programs to its computer  to translate  company data into standard  formats for transmission, and  for the reverse translation on the data it receives.
  • Then, as often as operationally required the two companies exchange data electronically in the standard formats.

The data transmitted originates  from records in the sender’s database after the sender conforms  that the receiver is an authorized recipient for such data. The  sender composes a transmission  formatted  in the EDI standards; the receiver translates  the formatted message  to a computer record to be processed and used internally. All transmissions are checked  both  electronically and functionally and the protocol  includes procedures  for error detection and correction. Once a company has established standardized communications with another company, it  is now in a position  to communicate with any other company that is also using the EDI standards.

Electronic Data Interchange (EDI) Security

Today, in paper-driven systems there are many checks to ensure that the expected clerical errors are detected  and corrected  the scrutiny of the pieces of paper  by experienced clerical staff, for example, often identifies errors made by trading partners. In an Electronic Data Interchange (EDI)  system, it is necessary to replace these procedures with new procedures that are at least as effective. The replacement not only involves the trading partners but also  the other parties in the EDI system.

Security  procedures  will be in place for each party to the EDI system, it is  necessary to ensure that these procedures  when taken together  will provide  security  to the whole. Each  of the parties  contributing to the whole system  will have different priorities-security is more important  to some organizations  than to others. Absolute security  is impossibility, mistakes will happen, machines do break down, software does  contain bugs. Management therefore needs to determine how acceptable commercial security  can be achieved  in a cost-effective  way.