The Basics of Electronic Commerce and Electronic Document Interchange (EDI)

EDI is often defined as the computer-to-computer exchange of formatted business transactions in a standard format. Like other modes of electronic communications such as fax and electronic mail, EDI allows you to send information over public or private communications links.

Unlike other modes of electronic communications, EDI enables your business to automatically process information it receives, thereby eliminating clerical tasks and possible data entry errors. An EDI-enabled system, for example, can read information from an incoming invoice such as net total, vendor name or address, and send it directly to your accounting application for payment preparation. This ability to keep information flowing directly to and from applications is what makes EDI such a powerful business tool.

Electronic commerce means using EDI for the end-to-end use of electronic transactions throughout the business cycle, so the user takes full advantage of transactions in electronic form.

Major EDI applications are often found in procurement functions, i.e., the buying and selling of goods and services, but EDI can also be used within a wide variety of business applications. Businesses can use it for inventory management; quality control between outsourced plants and headquarters; insurance claims management; and much more. A government can use EDI to exchange any type of transaction with others, businesses or individuals including purchase orders, tax forms, licensing applications, and mandatory reports. It can use EDI or related applications of information technology to disseminate public information or share information with other governments or organizations. These broad uses of EDI all fall under the definition of electronic commerce.

This EC/EDI primer provides an overview of the essential elements of EC/EDI and the potential benefits it might offer to your organization. In this guide, we focus primarily on the use of electronic commerce in procurement. This is where most EDI use begins.

The following discussion contrasts EC/EDI-enabled purchasing from traditional methods and reviews the other key issues in implementing EDI within a business or government agency.

How Does EDI Differ From Traditional Purchasing Methods?

The basic EDI transaction process is generally comprised of the following distinct activities:

A company issues a business transaction from one of its internal business systems, such as a purchasing system.
The transaction is translated into a standard format that a supplier (referred to as a "trading partner") will understand. (The format is compliant with ANSI X12 or EdiFact European standards for electronic business transactions.) Separate translation software is usually used for this.
The transaction is sent to the supplier via a value added network (VAN), that enables the controlled exchange of electronic documents. (Many VANs offer different electronic exchange options to trading partners for EDI transactions, including private networks and the Internet -- usually encrypting transactions over the Internet.)
The vendor receives the transaction and translates it into a format to print out or into a format that is acceptable by his automated business system, such as an order processing system.
The vendor usually sends back an electronic acknowledgment (997) so that the sender knows the transaction was received, processed and was in the proper format.

Using EDI, formatted electronic transactions can be exchanged between buyer and seller. All transactions follow a standard format agreed to by the parties involved. EDI supports increased flexibility in the structure of the purchasing process.

What are standard EDI Formats?

If new formats for electronic transactions had to be developed and agreed upon by every two companies wanting to exchange transactions electronically using EDI, few if any companies would be able to use EDI and the implementation process would be painfully slow. That is why so many companies exchange electronic transactions in standard EDI formats. Each trading partner can take the transaction out of its own business application, translate it into the standard format, and send it to another trading partner. In turn, when a transaction is received, the trading partner finds it in a predictable, standard format, and can you standard translation software to move it to the format needed for internal business applications.

There are two public standards for EDI transaction formats, ANSI ASC X12 and UN/EDIFACT. Most EDI transactions are exchanged in these formats. With the introduction of the Web, there are now many other formats being proposed and used.)

In 1979, the American National Standards Institute (ANSI) chartered a committee known as the Accredited Standards Committee (ASC) X12 to develop national standards for most types of business documents. The Data Interchange Standards Association serves as the secretariat of the X12 standards.

The standard X12 EDI document format is called a transaction set. Commonly referred to as the electronic equivalent of a paper document, a transaction set is actually more like a document template. For example, a transaction set for a purchase order will contain several mandatory items such as space for the serial number, address and total. You can also select from a long list of optional items, such as delivery date, to create a customized electronic document that meets your particular needs.

Some common transaction categories (and an example of each and the X12 transaction set number) include:

X12 transaction sets are updated annually based on three meetings of ASC X12 members. Any company (or government) can be a member of X12 for a fee; it is a voluntary organization. There are 1,000s of organizational members of X12, but most users of X12 are not actually members. There is no need to be a member to receive the standards and use them.) Each update of X12 is assigned a new Version and Release Number. For example, 3050, means Version 3, Release 5, which was issued in 1996. Many users of X12 do not use the most current version and release because their trading partners have started with older version/releases and found them adequate. This means that one company might have to handle multiple versions/releases of X12 in dealing with dozens of trading partners, because sometimes a trading partner (e.g., a customer) may dictate which version/release it will use.

Some industry associations have developed industry-specific subsets of the ASC X12 standards. (Many of these were actually developed prior to X12 and have subsequently merged with X12.) These include:

Other industries with significant EDI usage are aerospace, government, electrical and electronics, education, transportation and health care.

As mentioned above, international standards setting for EDI occurs under the aegis of the United Nations (UN). The international standard is called UN/EDIFACT (EDI for Administration, Commerce and Transport). Standards are developed and maintained regionally by UN/EDIFACT Boards representing Africa, Asia, Australia/New Zealand, Eastern Europe, Western Europe and Pan America. Twice each year the representatives from these boards convene to recommend standards to the UN for publication. The ASC X12 body is the United States' UN/EDIFACT representative.

What are Implementation Conventions for EDI Transaction Standards?

EDI transaction standards offer users dozens of options. For example, in the transaction set standard for Purchase Order, a user can choose from over 160 "segments" of data, each including up to 6 or many more fields (called data elements); with up to hundreds of codes permissible in each data element. Only a small percentage of these segments are mandatory. No company would actually use every one of these -- but each company (or industry) will be able to find what it wants! Usually an industry or other group of trading partners defines which optional segments they will use in purchase orders they exchange, defined by segment, data element and even by codes acceptable within a data element. That way, the transactions exchanged are much smaller and more manageable.

Unfortunately, this means there is an extra step in using EDI: a trading partner must know which "implementation convention" or "guide" its trading partner is using for which version and release of X12 (usually one version/release each year). One can see how using X12 can be very complicated. And this is why most EDI users use translation software to sort out all of these implementation conventions!

Why Do I Need EDI Translation and Management Software?

Translation software makes using EDI much simpler. It is needed to convert or map your organization's information to the standard formats you have selected. Because your trading partners may be using various document standards (X12 and EDIFACT) , different versions and releases of these standards, and different implementation conventions, you will want a translation software package that can easily support multiple standards and multiple release levels. Most translation packages do support these many complications and are updated annually with new versions and releases of the standards. Hence these packages often cost more than a business new to EDI would expect.

Some packages offer users menu-driven electronic templates resembling your existing business documents to input information to the translation program. Or, your application can send the necessary information directly.

The translation package maintains a profile of each trading partner. This includes information on which particular transaction set to use, how to send documents and which version/releases and implementation conventions are used. Using such profiles, the program passes pertinent trading partner information along with the translated business document to the communications software.

As the interface between your staff, your applications and the communications software, the translation software package also performs a variety of other transaction management functions. These include archiving incoming EDI transactions so they can be selectively recalled (or deleted) at a later date, generating reports to satisfy auditing requirements and monitoring the status of all transactions that have been sent and received. The package will automatically (if you choose this option) create and send a "functional acknowledgment" (X12 997) back to the sender of every transaction set you receive and translate. This acknowledgment process is a very important control in the X12 process. It is like receiving a "return receipt" for every transaction you send.

What Communications Options Exist?

To exchange electronic transactions, you must use some electronic exchange method and some type of communications software. Most translation software integrates with communications software packages to make the exchange process seamless. Communications software requirements (and packages) will vary depending on which type of electronic network you plan to use. Many VANs provide such software as part of their service.

Two modes of electronic exchange are possible; Batch, where documents are first grouped together and then sent in sequence and Event Driven; where each document is sent as soon as it is passed to the communications software. Most EDI users use batch exchanges, exchanging documents at different frequencies, from every few minutes to once daily.

How Do Value Added Networks (VANs) Fit In the Picture?

You also will need to establish communications links between your EDI system and those of your trading partners. Unless your company plans to exchange business documents with only one or two customers, it is usually advantageous to implement EDI via a single connection to a value-added network (VAN). Some (but by no means all) VANs (e.g.,GEIS - GE Information Services) provide interconnect services to many other VANs so you can communicate with thousands of different companies, both domestically and internationally, without concern for hardware compatibility. A VAN can provide your organization with electronic mailbox service that allows you to send and receive documents at your convenience.

To exchange EDI transactions over a VAN, you must choose its EDI services. These recognize X12 transaction addressing so your transactions are delivered correctly. This addressing is different from electronic mail addressing.

Can I Use the Internet and the World Wide Web for EDI?

Because of the low prices and easy access the Internet provides, some businesses are opting to exchange their EDI transactions via the Internet. They are several ways to do this. Unfortunately no uniform way prevails as of yet. Some companies simply use the Internet to exchange files that contain their transactions (using FTP) and can encrypt and compress such exchanges, making them secure. This requires special software and often customized programming to fit into a smooth-running EDI process where transactions are exchanged many times a day. Companies can also use Internet electronic mail for the exchange, but unless they use a variety of encryption methods, these exchanges are generally less secure than using a VAN.

What Value Added Services Can VANs supply?

Businesses may use a variety of value-added services to help screen and manage transactions or provide information in electronic form related to the transaction. Value added services may be provided by VANs directly or by separate firms.

Examples of value-added services provided include;

What are the benefits of using EDI?

Doing business electronically can result in many benefits for your organization, including enhanced strategic relationships, reduced purchase prices and procurement costs, better customer service, shorter lead times and lower inventory levels. By automating communications between your organization and your trading partners, electronic data interchange (EDI) can help you realize these benefits and position your company for a competitive advantage.

The benefits of EDI fall into two categories: (1) tactical, enabling your organization to cut operating costs and increase efficiency; and (2) strategic, putting distance between your organization and the competition.

Specific tactical benefits which can arise from the successful implementation of EDI include:

Reduced purchase prices, procurement and inventory costs
Delivery of documents in seconds instead of days with far less likelihood of them getting lost or damaged, thus improving customer service and reducing postage and express delivery service costs
Shortened order lead times while eliminating clerical tasks and possible keying errors
A broad choice of system configurations, from PC-based to mainframe-based systems
Customization of forms to meet your needs and the needs of your trading partners
Communication across industry sectors with one common standard
The ability to electronically communicate with thousands of companies without concern for hardware compatibility
Complete auditing, billing and security functions.

Strategic benefits stem from;

The ability to serve customers better, which for private sector firms can raise the value of their products or services and help increase market share.
The capability to track market trends as they develop, leading to focused, more responsive market strategies and the ability to anticipate future needs or take advantage of efficiency or cost reduction opportunities.

How do we successfully implement EDI in our company?

Executive commitment is the most important factor in determining the success of an EDI program. By its very nature, EDI can change the way a organization does business. To enable such beneficial changes, the executive driving a company's EDI program must build a common understanding regarding EDI among all affected departments, divisions and other organizational units.

An EDI implementation consists of an internal and an external phase. During the internal phase, your organization selects and implements the necessary translation and communications software and services, accomplishes the appropriate applications integration and determines what procedures and guidelines are needed to support electronic business practices.

The external phase involves motivating your trading partners to participate in your program. Although the number of companies using EDI is constantly growing, you may still have to sell EDI to your trading partners. Moreover, you will need to coordinate your program with those of your trading partners, agree on EDI terms and conditions and test your systems.

In selecting an EDI VAN and translation software, you should consider the requirements of both phases. Your EDI vendor not only should be able to provide solutions for your internal EDI implementation, but also should be able to support your trading partner enabling/implementation efforts.

How Should We Select a VAN?

For most users, including small businesses, the most practical way to establish communications is by subscribing to a Value-Added Network (VAN). In addition to operating 7 days a week, 24 hours a day (in most cases), VANs provide some or all of the following advantages:

One toll-free or local call to a VAN connects you to all other Trading Partners;
Provide an electronic mailbox where messages are routed, stored, and forwarded;
Are accessible to you regardless of physical location at any time of day or night;
Support reliable connectivity to your trading partners via varying communications speeds and protocols;
Provide security and technical support for your transactions including audit trails; and
Typically offer other value added services such as WEB based management tools.