Electronic Data Interchange Essay, Research Paper
Electronic Data Interchange
One of the more commonly accepted definitions of Electronic Data Interchange, or EDI, has been “the computer-to-computer transfer of information in a structured, pre-determined format.” Traditionally, the focus of EDI activity has been on the replacement of pre-defined business forms, such as purchase orders and invoices, with similarly defined electronic forms.”1
EDI is the electronic exchange of information between two business concerns in a specific predetermined format. The exchange occurs when messages that are related to standard business documents, such as Purchase Orders and Customer Invoices are exchanged. The business community has arrived at a series of standard transaction formats to cover a wide range of business needs.
“Each transaction has an extensive set of data elements required for that business document, with specified formats and sequences for each data element. The various data elements are built up into segments such as vendor address, which would be made up of data elements for street, city, state, zip code, and country.”1
All the transactions are then grouped together, and are “preceded by a transaction header and followed by a transaction trailer record. If the transaction contains more than one transaction, many purchase orders can be sent to one vendor, several transaction groups would be preceded by another type of record, referred to as a functional group header, and would be followed by a function group trailer.”1
One of the first places that EDI was implemented was in the purchasing operations of a business. Before the implementation of EDI, a purchasing system would allow buyers to review their material requirements, and then create purchase orders, which would be printed out and mailed. The supplier would receive the purchase order, and manually enter it into their customer shipping system. The material would be shipped, and an invoice would be printed, which would then be mailed back to the supplier.
In this example, even if the purchased materials were shipped and received on the same day the purchase order was received, the cycle time could be as much as a week, depending on the mail and the backlog at the supplier’s order entry system.
With the introduction of EDI, this scenario changed dramatically. Purchasing agents would still review their material requirements and create their purchase orders, but instead of printing them out and mailing them, the purchase orders would be transmitted directly to the suppliers over an electronic network.
On the supplier’s end, the transaction would be automatically received and posted. This new process could allow the shipment of material on the same day the purchase order was sent. Suppliers could send their shipping documentation electronically to the buyer in the form of a shipment notification, providing the buyer with accurate receiving documents prior to the actual arrival of the material. The supplier gained an additional advantage as well, since now the invoice could be sent directly to the customer’s accounts payable system, speeding payment to the supplier.
Speed, Accuracy and Economy are the benefits of EDI. Whether execution of EDI was in the area of purchase orders, advanced shipment notification, or automatic invoicing, several immediate advantages could be realized by exchanging documents electronically.
Information moving between computers moves more rapidly, and with little or no human interference. Sending an electronic message across the country takes minutes, or less. Mailing the same document will usually take a minimum of one day. Courier services can reduce the time, but increase the cost. Facsimile transmissions work well for small documents, but for several hundred pages, it’s not a feasible option.
When alternate means of document transfer are used, they suffer from the major drawback of requiring re-entry into the customer order system, admitting the opportunity of keying errors. However, information that passes directly between computers without having to be re-entered eliminates the chance of transcription error. There is almost no chance that the receiving computer will invert digits, or add an extra digit; thus ending the human error element.
The cost of sending an electronic document is not a great deal more than regular first class postage. Add to that the cost reductions afforded by eliminating the re-keying of data, human handling, routing, and delivery. The result is a substantial reduction in the cost of a transaction.
Expense, Networking Complexity, and Alternatives are the drawbacks of EDI. Although these benefits are convincing, actual acceptance and execution of EDI was far less common than might be expected. For all the benefits, the technological problems of EDI presented a number of major stumbling blocks.
“Computers, especially mainframes, and their business application systems were complex and expensive. Primarily serving the “on the edge” functions of a business, they were not regarded as being fully joined into all business activities”. 2
Traditionally, the mainframe-computing consciousness was viewed as an information reservoir. EDI required that information technology be extended beyond core functions. So while there were substantial savings to be gained from the use of EDI, the cost of re-designing and deploying software applications to conform EDI into an existing portfolio of business applications was high enough to offset the anticipated advantages.
The need for telecommunications capability posed a second major barrier for EDI implementation. Beyond the computer, a basic requirement of EDI is a means to transmit and receive information to and from a wide variety of customers or suppliers. This required a large investment in computer networks.
Unlike the mail, to send electronic documents there must be a specific point-to-point electronic path for the document to take. “Companies were either required to develop extensive, and expensive networks, or rely on intermittent point-to-point modem communication.”2
Because of the technological complexity and cost of implementation, cheaper alternatives hurt the widespread use of EDI. To gain some of the advantages of EDI without the high price of computer hardware, software and networks, many innovative alternatives were developed. “Overnight courier service, facsimile machines, and the ability to give customers limited access to mainframes through dumb terminals provided quick and reasonably priced alternatives to inviting a major alteration of business environments.” 3
The past decade has seen an enormous change in the computing environment in most businesses, with the new breed of small, inexpensive and powerful personal computers. With the PC, computers have literally moved out of the basements and back rooms, and onto the desktops, and there has been a reduction in price.
“A client based computer, or server can be obtained today for about the same cost as a small mini-computer of 10 years ago, but the same dollars are now buying a machine that has mainframe computing capability in a PC-sized box. PC’s are now economical enough that their price approaches the same cost per user as a dumb terminal did attached to that same mini-computer.” 3 The same improvements are found in the area of communications. It is now commonplace for computer users in retail stores to access computers many hundreds of miles away. Now, the terminal or PC on a desk in a steel plant may actually be using data from several computers, each in a different location.
“Advances in networking and client-server environments have encouraged the awareness that while information is surely one of the most valuable assets of any business, information that is shared within and between companies becomes a most powerful asset.” 4
Businesses have spent millions of dollars on computer technology to automate production processes. “Computer-assisted manufacturing systems, such as one might find in the grocery industry, have become commonplace. It is now possible for inventory consumption to be known immediately, and the impact of that consumption on purchasing requirements and master production scheduling can be recalculated continuously.”4
Computers can now be used to simulate factory production, optimizing processes and allowing engineers to determine the best utilization of equipment and personnel. If there is a sudden shift in demand, what will be the impact of major changes to production schedules? However, it does very little good to alter a production schedule if the supply line cannot react to the changed demand.
“As the automation processes inside the four walls of manufacturing plant reached maturity, it became apparent that to gain the full benefits of the increased speed and flexibility could not be achieved as long as the process of receiving raw materials, and distributing finished products remained unchanged.”5
In applications of EDI, recalculating raw material requirements on an hourly basis offered little improvement as long as the ordering of raw materials was still based on traditional methods of placing purchase orders. The rapid shift in production frequently would mean hours on the phone obtaining material. While the manufacturing floor could operate on a “just in time” basis, the purchasing department would frequently have to operate on a “just in case” basis. In an emergency, obtaining material would have to rely on the “whatever it takes” methodology: premiums, surcharges, and special deliveries.
Businesses began to push the boundaries of EDI. The initial performance of EDI looked at the documents used in business, and replaced them with electronic documents. However, this performance did not address how the documents were being used. It merely automated the method.
“The need for greater speed and flexibility led the business analysts to take a serious look at how the documents were being used, and this led to an overhaul in the way the documents are being used. Analysis has looked not at replacing the documents, but at eliminating them altogether. With this approach, a new partnership between the customer and supplier was born. Rather than have purchasing agents review raw material requirements and place purchase orders, purchase orders can be placed automatically, based on pre-determined inventory levels.” 7
The Kroger Company has begun to make their inventory levels available to their suppliers via EDI, “allowing the supplier to adjust their own production schedules to respond more quickly to their customer’s needs. With bar coding and point-of-sale data collection, replenishment of retail inventory or shipment of finished products can now be triggered by information collected right at the cash register.” 7 With the changes in the computer technology and the increase in information technology, they both play a role in today’s manufacturing, distribution and service environments, “along with changes in business philosophy, has changed the definition of Electronic Data Interchange. The definition must now be more encompassing than merely the rapid transmission of electronic documents.”8
EDI must now be viewed as “an enabling technology that provides for the exchange of critical data between computer applications supporting the process of business partners by using agreed-to, standardized, data formats”.8 EDI is no longer merely a way to transmit documents. It is a means to “move data between companies that will be used by computer systems to order materials, schedule production, schedule and track transportation, and replenish stock.”7
To remain competitive in today’s economy, businesses are being forced to re-evaluate the way they do business with their customers and their vendors. The focus of these relationships has moved towards greater speed through shorter transaction cycles.
With the dramatic increases in performance of computer technology, the impact of some of the drawbacks that led to limited execution of EDI have being reduced. What used to require mainframe power can now be handled on computers that fit conveniently on or under the desk, and can operate in the office, warehouse, production floor or use by a route man.
There is a revolution going on in the software industry. The elapsed time from conception to deployment of new software is being dramatically reduced. Software developers can now produce packages that can run on a variety of hardware platforms, allowing them concentrate on delivering greater functionality and flexibility to their software packages, rather than spending valuable development time and dollars on customization.
“This revolution in hardware speed, power and flexibility, combined with an increasingly selection of high-quality software products allows business to get a higher return for each dollar they invest in computer technology. It has allowed business to solidify the information needs of their own processes.”7
With improvements in their own processes, progress can come to a halt if the supply and distribution chain is not on the same page. So as the processes have been put under control, it has also forced management to focus on opportunities in their customer and supplier relationships – the area EDI ignored.
The revolution in computer technology has led to another revolution… “The replacement of dictatorial or adversarial relationships between customers and suppliers with information partnerships. In fact, for some time in the vocabulary of EDI, two businesses engaged in electronic trading of information have been referred to as “trading partners.”9
The problem was it took management a long time to realize that partnership had to extend much further than just agreeing to trade electronic versions of paper documents. By breaking down the barriers between vendors and customers, another order of increase in speed and flexibility could be introduced.
“The true value of EDI comes when business can begin to trade or share information. The scenario of EDI performance painted a picture where commonly used paper documents were replaced by electronic versions of the same documents. Purchase orders, shipment notifications, invoicing, and accounts payable began to participate in the process.”9
The business of preparing the electronic documents is easily the most demanding part of setting up EDI in any business. The varieties of methods available to generate the electronic documents are as different as there are businesses and applications, which include…transcribing data, enhancing existing applications, and purchasing software
The Kroger Company has several hundred suppliers, and the chance of getting them all to agree upon the Kroger’s definition of a purchase order format was not going happen, “particularly if since those suppliers are also dealing with hundreds of other customers. This would require a unique set of rules for each partnership. The resulting chaos would quickly drive customers and suppliers alike to return to paper forms regardless of the benefits or savings.” 7
The solution has been found in the evolution over the last two decades of a comprehensive set of national and international standards. “These standards, typically developed by specific industry or business groups, have provided commonly agreed upon formats for use in virtually every type of business communication.”3
These standards provide a structured way of organizing information in a “transaction” format with definitions for the format and placement of each separate piece of data. “Translation to a standard format can be accomplished by internal systems or it can be done by a separate package of software. Regardless of the means you choose for translation, the end result of the process will be an output file generated in a specific format that any subscriber to the standard can understand.”3
In a simple one-to-one EDI relationship, transmitting data can be as simple as making a modem connection, and sending the file. However, this would become impractical with more than just a small number of vendors. If a manufacturer has to send out thousands of PO’s each week to hundreds of suppliers; it would require a small army to transmit all of their PO’s. Even if the manufacturer had an extensive network available, successful transmission would require that all vendors be linked into the network.
Providing a connection to the sender’s computer to allow receivers to log on and collect their data would be one way to avoid these problems, but it poses a serious security problem. It will work on a limited basis, but only with controls, including separate hardware to isolate the system being accessed by third parties. Few companies would accept these approaches, for any extensive use of EDI. If these alternatives were required, chaos would reign, and once again most EDI users would quickly return to preparing printed documents, so that they could rely on the mail to distribute all their documents.
Fortunately, the EDI user doesn’t have to rely on either of these alternatives. They can turn to third party network services, commonly referred to as “Value Added Networks” or VAN’s. The VAN functions as a clearing house for electronic transactions, in effect serving as a private electronic mail service. The VAN routes each vendor’s data to their own electronic mailbox.
The VAN provides an answer to the pressing problem of security. It allows trading partners to be secure in the knowledge that the can trade information, but at the same time avoid giving information away. Neither party has access to the other’s systems, but can still freely exchange agreed-upon information. In addition, a full service VAN can provide other services, including translation, standards compliance checking, and EDI software to ease the implementation process.