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Electronic Data Interchange

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The concept Of EDI WITH THE HELP OF EXAMPLE:-

EDI Example:-

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Consider a moment to look at an example that highlights some of the difference between traditional paper document transactions and Electronic Data Interchange. One of the first places that many businesses implement EDI is in the exchange of a purchase order (PO). In the traditional method of processing a purchase order, a buyer or purchasing agent will go through a fairly standard procedure to create a purchase order, consisting of these steps:

  1. A buyer reviews data from an inventory or planning system.
  2. The buyer enters data into a screen in the purchasing system to create a PO.
  3. The buyer waits for the PO to be printed, usually on a special form.
  4. After the PO is printed, the buyer mails it to the vendor.
  5. The vendor receives the purchase order and posts it in their order entry system.
  6. The buyer calls the vendor periodically to determine if the PO has been received and processed.

When you add up the internal processing time required by the sender and receiver and then add a couple of days in the mail, the process normally takes between three and five days.

This assumes first that both the sender and receiver handled the PO expeditiously, and that at every point along the way there are no errors in transcribing data from a form to a system.

The EDI alternative now considers the same document exchange when a company places its purchase its purchase orders electronically using EDI;

  1. The buyers’ reviews the data and creates the purchase order, but does not print it.
  2. EDI software creates electronic versions of the PO and updates the system immediately upon receipt.
  3. The vendor’s order entry system receives the PO and updates the system immediately upon receipt.
  4. The vendor’s order entry system crease an acknowledgment and transmits it back to the sender to confirm receipt.

The fairly simple example illustrates just one of the many ways that businesses can profit by the implementation of Electronic Data Interchange.

Benefits/Advantages of EDI;-

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  1. Shortened Ordering Time: Paper orders have to be printed, enveloped and sent out by the customer’s post room, passed through the postal service, received by the supplier’s post room and input to the supplier’s order processing system. To achieve all this, reliably, in under three days would be to do very well. EDI orders are sent straight into the network and the only delay is how often the supplier retrieves messages from the system. Orders can be in the supplier’s system within a day, or if there is urgency the messages can be retrieved more frequently, for example, every hour.
  2. Cost Cutting: The use of EDI can cut costs. These include the costs of stationery and postage but these will probably be fully matched by the costs of running the EDI service. The principal saving from the use of the EDI is the potential to save staff costs.
  3. Elimination of Errors: Keying any information into a computer system is a source of errors and keying paper orders into the order processing system is no exception. EDI eliminates the source of errors. On the downside, there is no order entry clerk who might have spotted errors made by the customer the customer will get what the customer asked for.
  4. Fast Response: With paper orders, it would be several days before the customer was informed of any supply difficulty can be informed straightaway giving time for an alternative product to he ordered or an alternative supplier to be used.
  5. Accurate Invoicing: Just like orders, invoices can be sent electronically. EDI invoices have similar advantages to EDI orders in saved time and avoided errors. However, the major advantages in EDI invoice order and cleared for payment without the sort of queries that arise when paper invoices are matched to orders.
  6. EDI payment: Payment can also be made by EDI. The EDI payment. the system can also generate and EDI payment advised that can be electronically matched against the relevant invoices, again avoiding query and delay.
  7. Reduced Stock Holding: The ability to order regularly and quickly reduces the number of goods that need to be kept in a storeroom or warehouse at the shop or the factory.
  8. Cast Flow: Speeding up the trade cycle by getting invoices out quickly, and directly matched to the corresponding orders and delivers, can and should speed up payments and hence improve cash flow. Elimination of most invoice queries can be particularly significant in reducing delays in payments.
  9. Business Opportunities: There is a steady increase in the number of customers, particularly large, powerful customers that will only trade with suppliers that do business via EDI.
  10. Customer Lock-In: An established EDI system should be of considerable advantage to both customer and supplier. Switching to a new supplier requires that the electronic trading system and trading system to a new supplier requires that the electronic trading system and trading relationship be redeveloped, a problem to be avoided if a switch of the supplier is not essential.

Limitations/Disadvantages of EDI:

  1. Operating Procedures: Since EDI is a structured way of working, companies change operating procedures.
  2. Production and Purchasing Decision: Responsibilities may have to be changed during the introduction of the EDI system. Unless this system and the links with other systems are managed well, it is not possible for the data processing department to become involved in production and purchasing decisions.
  3. Transparent: Less transparent than paper-based systems.
  4. Flexibility: Certain EDI systems are highly flexible, others are very simple to implement.
  5. High Costs: Applications are costing o develop and operate; especially new entrants find this more difficult to have EDI.
  6. Limited Accessibility: It does not allow consumers to communicate or transact with vendors in an easy way.
  7. Rigid Requirements: Needs highly structured protocols, previously established arrangement, unique proprietary bilateral information exchange.
  8. Trading Partners involvement: If involves high dependence on the participation of trading partners. It is extremely difficult to get a high level of supplier compliance. EDI will be meaningless if your trading partner didn’t get involve using EDI system effectively.
  9. Difficult to agree on standards used: Even though there are widely accepted and widely used standards, these are no ways to force trading partners to accept these standards. Co-operation between trading partners is needed in order to develop a common rule to avoid differ in interpretation.
  10. Deviation of Management: Concentration of control of EDI causes management to rely more heavily on computer systems and places control in the hands of fewer individuals, potentially increasing risk.
  11. Data Processing, Application, and Communications Errors: Errors in computer processing and communications system may result in the transmission of incorrect trading information or the reporting of inaccurate information to management losses to trading partners.
  12. Reliance on third parties: The organization will become more dependent on third parties to ensure security over transactions and continuity of processing.
  13. Security Threats: EDI may share the same kinds of security threats associated with any electronic data communications and other e-commerce applications. A potential number of risks include the following:
  • Confidential information could be exposed to u authorized third parties or competitor.
  • The third-part staff could introduce invalid and unauthorized transactions.

The Communication Approach of EDI:-

The first technical element of the EDI system is the EDI software. It is a complete suite of software for creating, transmitting, receiving, managing and tracking EDI documents. It contains the tools needed to fine-tune EDI invoicing from the EDI document editing, to document review, to document selection.

The system design is comprehensive and can convert invoices, returns, change notice, statements, purchase orders, and title catalogs into the EDI format. If Pens and Things are to send an order from its production control system to packaging solutions it needs to code that order into the agreed EDI standard and ‘squirt’ it into the chosen VADS (Value Added Data Services). To pick up the order at the other end, packaging solutions have a similar need to extract the data from the network and to decode the data from EDI message into its order processing system.

The coding/decoding of EDI messages and interfacing with VADS is normally achieved using EDI software as shown in the figure;

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Sending an Order Using EDI Software: Technically EDI comes down to imports/exports to/from your system and some data communication. It is good practice to keep this imports/export as simple as possible and to concentrate on the impact of EDI on your system and organization. You will want one import/export in your system. You do not want to handle all the EDI details in the import/export module like you do not want to handle the logic of printer drivers in your application.

An organization that using EDI:

  1. Wal-Mart: An EDI link between Wal-Mart and one of its suppliers, Seminole Manufacturing Co. cut the delivery time of Seminole slacks by 50%. This resulted in a 31% sales increase of these slacks in the first 9 months after the link was established.
  2. General Motors: General Motors have integrated EDI electronic funds transfer at 30% of its assembly plants. Shipping receipts are sent electronically from the GM plant to an Electronic Data System computer center where they are matched against electronic invoice and purchase order. Suppliers group the shipping receipts, and one payment orders. Suppliers group the shipping receipts, and one payment is made. This single payment may represent dozens of different shipments to different plants. These payments are also performed electronically via Electronic Funds Transfers.
  3. JC Penney: Sales of Stafford suits jumped 59% after JC Penny to quickly replenish stock fast enough to meet demand while cutting their overall inventory of suits by 20%.
  4. Rockwell: Rockwell, a major automotive supplier received design change notifications directly from the automakers via EDI. Rockwell has been able to react faster to their inventory of finished goods. Parts now bypass their warehouse and go directly from their production lines to their shipping docks.
  5. Textile Industry: The Textile industry is beginning to fight back against Asian competition with EDI. While the US textile industry is hard-pressed to compete on a cost basis. EDI is helping them provide superior service. Service is making it easier and faster to do business with a US supplier.
  6. US Customs: US Customs accepts electronic customs documentation, in advance of goods shipments. This reduces port delay and provides a competitive advantage for those ports of entry that support EDI.
  7. Market Outlook: The Yankee Group, a Boston based market research group, estimates that 4/5 of all business transactions will be electronic by 2010. The EDI survey, published by input, found that 70% of Fortune 1000 sized businesses; universities and Public companies are currently using EDI. An additional 20% are planning EDI implementation.

Migration to Open EDI:-

It appears that the Internet and the transition to what is called by some Open EDI will change the economics of EDI by reducing setup and rollout costs. To extend that interoperability of networks increases the usability of EDI by making more potential trading partners available and accelerates the number of companies currently using EDI, generally through the services of either private networks or VANs. This presents three migration paths to users:

  • A nonuser becoming a private network/VAN user. This is the most common migration when companies are considering the additional use of EDI. Up to this time, this migration path has been the only route open to users.
  • A current EDI user who wishes to make a transition to Open EDI.
  • A non-EDI user who can make a direct transition to Open EDI.

Migration from manual systems to Open EDI offers opportunities to firms that are not part of established EDI networks and that wish to participate in the market. Depending on how Open EDI is defined, this third category of migration could turn out to be the most significant stimulus, as millions of small and medium-sized business and their customers begin to participate in electronic commerce via the Internet.

There are several ways to set up EDI:

  • A dedicated PC link to the EDI networks.
  • A group of computers via modems linking to the EDI network.
  • A dedicated server link to the EDI network.
  • Communication link could be:
  • Dial-up phone line (such as ISDN line or switched digital services)
  • A dedicated link to the network’s local hub point.

Required software:

  • Application software
  • Message translator –
  • Routing manager –
  • Communication handler Migration to Open EDI: The Internet and the transition to open EDI will change the economics of EDI by reducing setup and rollout costs.

Migration groups:

  • A nonuser becoming a private network/VAN user.
  • A current EDI user who wishes to make a transition to Open EDI.
  • A non-EDI user who can make a direct transition to Open EDI.
  • EDI transactions across the Internet in two ways: Email and FTP

The benefits:

  • Reduction of the cost of transferring EDI messages
  • Increase the performance
  • Supporting E-Commerce
  • Increase the interoperability of networks increasing the usability of EDI.
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