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.

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