Seven Basic Quality tools documents

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Electronic Data Interchange

Rebecca Weaver, Original text on

            In a world increasingly dependent upon the quick and easy transfer of information, electronic data interchange has become a key resource for many businesses.  Originating approximately 25 years ago, electronic data interchange, or EDI, has allowed for less time-consuming, more efficient, and more effective transfers of data among businesses and their trading partners, customers, and suppliers.  This mini-tutorial will examine not only the basic principles of EDI and how they can apply to a business today, but also a real world example of EDI at work.

            According to Denis Howe in his Free On-line Dictionary of Computing, EDI is “the exchange of standardized document forms between computer systems for business use.”  Trading partners use EDI with either the American National Standards Institute (ANSI) X12 standard, or Electronic Data Interchange for Administration, Commerce, and Transport (EDIFACT), which is the United Nations’ global standard.  EDIFACT is by far the largest attempt at developing a global standard; however, there remains at this point some controversy over its implementation.  In any case, the ANSI X12 standard is used by businesses all over the United States, Canada, and Mexico in order to more efficiently and effectively connect them with their trading partners, suppliers and customers.  It is used primarily for electronic invoicing, purchase orders, acknowledgments, advance shipment notices, and other business transactions.  EDI eliminates the need for exchanging large volumes of paper documents, which can tend to be time consuming and have errors.

            EDI occurring between partners can either be done directly through the partners, or through an intermediary, such as a Value-Added Network Supplier (VAN).  Direct connections between the partners are accomplished simply by connecting the partners’ modems over a phone line. This can prove efficient and cost effective if you are looking to frequently transmit large amounts of data to only a few partners.  A downside to this may be the need to deal with various systems requirements among partners that are not compatible.  If this is the case, much time, effort, and computer communications knowledge may be necessary to deal with the incompatibility.

            A simpler way of handling EDI between partners may be the VANS, which are independent companies who offer their EDI services to other businesses.  Multiple transactions can be taken care of simply by contacting the VANS once a day.  The information is then relayed to the company’s partner or partners by the VANS, so that the company does not need to trouble itself with the extensive computer knowledge necessary to handle multiple transactions.  The VANS will also take care of the incompatibilities between the information systems of different trading partners so that the end-user does not need to be troubled by this.

            When selecting a VANS, there are several criteria a business needs to keep in mind.  Cost is a major consideration when choosing a VANS.  Since there is a fee for both sending and receiving transactions, the volume of transactions a business transmits needs to be taken into consideration.  Also concerning volume, the VANS selected must be prepared to handle the volume of transactions and at the same time ensure a reliable high-speed connection for the client.  The connection must also be secure, asking users to authenticate upon attempting to send or retrieve data.  Back-up and recovery services are important in that the VANS must remain operative even in the face of data processing problems, viruses, and any type of physical disaster.  Audit reports are also necessary.  They should be generated at least monthly on an individual basis about each file, in order to help manage the trail of data associated with each file.

            Another medium companies have started to use for their EDI needs is the Internet.  While this can be cost effective and efficient, it poses many challenges to all parties involved.  Both sender and receiver must install security software to ensure that data is not altered while traveling across the Internet.  Partners may have trouble with each other’s systems.  Transactions may be lost, and legal problems may ensue regarding who is responsible for the loss.

            As a result of the above concerns, Secure Communications Value-Added Networks (SCI-VANS) have been created.  They provide e-commerce solutions for business-to-business Internet transactions efficiently.  Also, they are cost-effective in that they provide a secure environment for transactions at a fraction of the cost of a traditional VANS.  Because of the increasing availability of SCI-VANS, it is estimated that by the year 2003, 9% of all business trading, which is the equivalent of about $1.3 trillion, will be conducted over the Internet.

            Moving back to EDI itself, EDI can be adopted at one of three levels.  The first of these is simply transforming a paper-based, automated information processing system into a simple EDI system.  An example of this would be using an electronic purchase order as opposed to a paper one.  The second level involves converting all existing paper documents into electronic format.  This could be done by performing electronic data fund transfers (EDFTs) through an EDI system to pay for purchases, as well as purchasing on-line.  The third level of implementing EDI is accomplished by reengineering business processes so that the EDI system is fully aligned with the business strategy.

            Looking to the real world for an example, 3M is a company that recognized its need for an EDI system and made good use of it.  In the late 1980s, Hal McDonald, 3M’s EDI specialist at the time, went to the top managers and informed them of the need.  While he could not prove cost savings then, he convinced the managers that EDI was a business necessity.  The VANS that 3M decided on were General Electric Information Services (GEIS), Control Data Corporation, and McDonnell Douglas Computer Systems Company.  They used the ANSI X12 standard for their electronic invoicing, purchase ordering and other transactions in order to work with 26 of their suppliers.  The suppliers and 3M split the costs of the transmissions.  This saved time for 3M, and improved efficiency as well.

            Today, 3M uses their EDI system to send and receive functional acknowledgments for all incoming and outgoing transactions among their trading partners.  The third party VANS they use today include GEIS, Sterling CommerceNET, Advantis Sears, Harbinger, and Transettlements.  3M now exchanges data through EDI with over 4000 trading partners.  They can send and retrieve data 19 times a day, Monday through Friday, and sometimes on weekends and holidays.

            More information on EDI can be found in any library, on the Web, and, if you are looking for company-specific implementations, most companies post some information about their EDI systems on their websites, as 3M does.  All in all, electronic data interchange is an effective and efficient way to improve the operation of a business through its data transactions, saving both time and money, and enhancing competition.

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