Every Thing You Ever Wanted to Know About EDI
By Brian Harris
December 1, 1998
ISDS 4800 Sec. 001
First of all what is EDI? Well EDI, or Electronic Data Interchange, is the transfer of business documents such as sales invoices, purchase orders, price quotations, etc. using a pre-established format in a paperless electronic environment. Usually this transfer occurs over VANs, Value Added Networks, but it is becoming increasingly popular over the Internet because of cost savings and ease of use. EDI has been around for approximately 30 years. The true genesis of EDI occurred in the mid-1960s, as an early attempt at implementing the fictional paperless office by companies in transportation, grocery and retail industry segments. Although EDI never eliminated paper documents, it decreased the number of times such documents were handled by people. Reduced handling resulted in fewer errors and faster transfers (Millman, 83).
EDI technology is rapidly changing the way business is conducted throughout the world. Firms that use EDI are more efficient and responsive to the needs of customers and partners and in many cases have jumped out ahead of the competition. Many businesses are already using EDI with suppliers and customers, and if your firm wants to do business with companies involved in Government Dealings EDI must be part of your business no later than January 1, 1999. In May of this year, the major industrial groups in charge of standards setting for EDI, have united behind a set of standards that will allow for seamless web-based forms using extensible markup language, similar to HTML, thereby increasing the accessibility of EDI for small businesses on the Internet (Campbell, 28).
An example of an application for EDI is filing tax returns with the Internal Revenue Service. The IRS offers several options for filing your tax return, one of which is filing electronically and receiving your refund by electronic funds transfer or direct deposit. The forms used are available in tax preparation software, which can be downloaded off the Internet or purchased by retail. The forms are filled out directly on a PC then transmitted to another computer, which acts as a midpoint to the IRS. The IRS receives your forms and can issue a refund without ever having to reprocess the data. By using this method you save yourself and the IRS time and money (Campbell, 28).
How EDI Works
Table came from Information Technology for Management by Turban, McLean and Wetherbe page 244.
Information, such as purchase orders for medical supplies, flows from the hospital’s information system into an EDI station, which consist of a PC, an EDI translator and a modem. From there, the information moves to a VAN (Value Added Network). The Van transfers the formatted information to the vendor, where the vendor side EDI translator converts it to a desired format (Turban, 244). An EDI translator does the conversion of data into standard format. An example of such formatting is shown below.
Table came from Information Technology for Management by Turban, McLean and Wetherbe page 243.
An average hospital generates about 15,000 purchase orders each year at a processing cost of about $70 per order. The health Industry Business Communication Council estimates that EDI can reduce this cost to $4 per order, potential yearly savings of $840,000 per hospital. The required investment ranges between $8,000 and $15,000. This includes the purchase of a PC with an EDI translator, a modem, and a link to the mainframe-based information system. The hospital can have two or three ordering points. These are connected to a value-added network (VAN), which connects the hospitals to its suppliers. (See figure on previous page)
The system can also connect to other hospitals, or to centralized joint purchasing agencies. (Turban, 244).
Benefits of EDI
There are numerous benefits associated with the adoption of EDI. Probably the most important and largest benefit is efficiency. By utilizing EDI businesses are able to streamline their whole supply chain process. Whether it is upstream to suppliers or downstream to customers, EDI eliminates repetitive tasks such as entering data multiple times and cuts costs of printing hard copies and transportation costs. EDI also allows you to send and receive large amounts of data quickly to or from anywhere in the world. Anywhere that there is access to the Internet there is access to EDI. For example a supplier could be located in Taiwan while the customer is sitting in Memphis, TN and in no more than a few seconds thousands of product order forms could be sent between the two without any errors or lost data. Companies in partnership agreements can gain access to one another’s shared databases to retrieve and store regular transactions. These partnerships tend to last for a long time as well because of the commitment of a long term investment and refinement of the system over a period of time. EDI creates a complete paperless Transaction Processing System environment, which saves money and increases efficiency. Collecting bills and making payments can be shortened by several weeks because the data doesn’t have to be reentered several time (Turban, 245).
There are other benefits to using EDI – security and validation. Using EDI is secure as long as it is not conducted over the Internet. The information is transmitted over a VAN and on to your partner, but never enters the realm of the World Wide Web. There are only three points of contact versus the millions of interconnections and links over the Internet. The use of EDI also provides a means of validation through time code embedded in the string of electronic codes that are attached to each file. It is time coded at every step in the transmission process. Imagine no longer having to rely on postmarks or call a package delivery service, or check to make sure a fax went through (Campbell, 28).
Disadvantages of using EDI
Despite all of the benefits of EDI there are still some disadvantages that have caused much criticism. First and foremost is the cost, the only companies that can really afford to utilize EDI to its fullest potential are the Fortune 1,000 and Global 2,000 firms (Millman, 83). Traditional EDI works fine in the larger enterprises because they have IS professionals to maintain the system, says Dennis Freeman, director of product marketing at Harbinger, an EDI software and services supplier in Atlanta. Those companies exchange business documents with their trading partners and save themselves a huge amount of money by not using paper, Freeman continues. For smaller companies, that process becomes much more daunting. They don’t want – nor can they afford to own a full-blown EDI server. For them, Internet-based EDI is a low-cost answer (Millman, 38).
Another disadvantage of EDI is there could be communication problems with trading partners who use different EDI software. Internet EDI has solved this problem but at the cost of decreased security which is a major issue right now not to mention that network capacity may be unsatisfactory.
EDI in the Federal Government. Under the Federal Acquisition Act (FASA), as of June 1, 1998 any organization that wanted to do business with the Department of Defense was required to register with the Centralized Contractor Registration (CCR) to receive government contracts. Companies with existing contracts did not have to register initially but the DOD will institute a system-wide electronic funds transfer payment system by January 1, 1999. By that time every contractor that wants to get paid must enter it’s register (Campbell, 29).
Resistance to The Adoption of EDI
The resistance behavior of some firms towards the adoption of EDI is still very evident today. Recently EDI has received much attention in the transportation and logistics literature, particularly in the area of shipper-carrier relationships. EDI is often considered an indicator of mutual cooperation between a carrier and a shipper, as well between a customer and a supplier in a supply chain. As people began viewing EDI as the glue that holds partnerships together, the decision to adopt (or not adopt) became a decision to be made by multiple firms rather than a single-firm decision. The use of EDI for transportation-related transactions by a shipper, for example, requires the use of EDI by its carriers. Similarly, if a retailer wants to use EDI for achieving higher operational efficiency, the use of EDI by its suppliers is a must. In other words, a successful implementation of EDI strategy (strategic use of EDI for achieving higher cost efficiency and improved customer service) greatly depends on whether a firm can persuade its trading partners to adopt the EDI system. Given these situations, firms pursuing the EDI strategy began feeling the need to learn effective ways of persuading their trading partners to adopt the EDI system (Suzuki, 36).
In an attempt to provide insights on how to persuade non-adopters to adopt EDI, numerous researchers conducted studies to determine the factors that influence the decision to adopt or not. Those studies are invaluable tools that firms can use to attempt to persuade their trading partners to adopt EDI. The studies, however, did not study why firms choose not to adopt EDI. Adoption and resistance behavior may seem to be opposite sides of the same coin but in fact there could be numerous reasons not to adopt EDI. For instance a firms business environment may not require the adoption of EDI, that doesn’t mean that firm is resisting EDI it just means it doesn’t need it. On the other hand if a firm has adopted EDI but only uses it for certain limited purposes, like the issue of bills of lading, despite repeated requests by its trading partners to increase usage that firm, although it has adopted EDI, still shows strong resistance.
In the studies there arose three main factors that contributed to a firms resistance to EDI. These factors were as follows: uncertainty, EDI standardization, and perceived EDI benefit. Each factor will be discussed in the following paragraphs.
The concept of uncertainty has been defined as the inability of a firm to forecast accurately the technical requirements of the EDI system in the relatively near future (Suzuki, 37). When there is a high level of unpredictability firms tend not to form long lasting agreements with other firms, such as those found in an EDI partnership, because they wish to retain the flexibility to terminate relationships whenever necessary. EDI increases the strength of the partner relationship therefore a firm is less likely to accept EDI sharing with its trading partners when that firm perceives a high degree of uncertainty in EDI technology.
EDI standardization refers to the distribution level of an industry wide EDI format. When Company exclusive (many different) EDI formats are more common in an industry, the EDI standardization in this industry is considered low. However, if the industry wide (standardized or similar) EDI formats are more common, the EDI standardization is high. The lack of EDI standardization is considered to be a major barrier towards the adoption of EDI. Firms with limited EDI knowledge can become confused with all of the different formats for EDI and be dissuaded from adopting EDI for their firm. Basically in industries where firms adopt their own EDI format other firms are less likely to accept EDI agreements because linking with these firms would require that firm to adopt more document formats.
Perceived EDI Benefit
EDI benefits have been discussed deeply in this paper, in literature, and just about every article or study about EDI. The lower the perceived benefit a firm has towards EDI the less likely that firm is to adopt the technology. If a firm believes that EDI has no benefit for that firm it may not and probably will not adopt EDI technology despite the pleadings of its trading partners or it may adopt the system but be reluctant to use it (Suzuki, 39). The most obvious benefits of EDI are speed and accuracy of data transmission but can and often do include improved customer service quality.
A successful implementation of EDI strategy greatly depends on whether a firm can persuade its supply-chain partners to adopt the EDI system. Convincing other parties to use the EDI system, however, may not be an easy task, because partners often show strong resistance to EDI usage. The study of resistance to the adoption of EDI indicated that firms tend to show stronger resistance to EDI when firms perceive a high level of uncertainty, low distribution rate of industry wide EDI formats and standards, and little benefits of using EDI for reducing processing time (Suzuki, 40). Therefore in order to successfully implement EDI across the entire supply-chain a firm must clarify the details of the agreement, adequately demonstrate the reliability and benefits of EDI, and insure a set global format that can be used anywhere.
While EDI may not be for everyone any other form of Electronic Commerce cannot match its benefits and popularity across all industries. EDI’s cost savings are the stuff of accounting legends. For example, RJR Nabisco estimates that the cost for processing a paper-based purchase order is almost $70, whereas the same transaction performed through EDI costs less than $1. Further, EDI’s single entry of transactions minimizes repetitive data entry and reduces keystroke errors. The almost instantaneous nature of an EDI transaction shortens the time between creating a purchase order and sending an invoice to seconds. Until recently, there were few alternatives to EDI that offered the speed, standardization, and acceptance in the global business community. Now, Internet-based EDI solutions, such as those found at Hewlett Packard (See figure below), promise to trim the cost and mass of EDI and add new life to an antiquated system (Millman, 83).
In the past, EDI adoption was a slow process because EDI exchanges were based on an exclusive company to company system. Now EDI on the Web will greatly accelerate exchanging business documents all over the Globe. As the prices of EDI plummet, interest continues to soar, which will bring about lower prices and offer more flexibility for companies conducting Internet commerce.
1) Campbell, A.J. Embracing Electronic Data Interchange Now Will Keep Your Company in Step With The Competition Business America, June 1998 p28(2).
2) Millman, Howard. A Brief History of EDI InfoWorld, April 6, 1998 p83(1).
3) Millman Howard. Easy EDI for Everyone InfoWorld, August 17, 1998 p38(1).
4) Suzuki, Yoshinori and Lisa Williams. Analysis of EDI Resistance Behavior Transportation Journal, Summer 1998 p36(9).
5) Turban, Efraim and Ephraim McLean and James Wetherbe. Information Technology for Management John Wiley ; Sons Inc. 1999 p 241-247.