The Fundamentals of Electronic Data Interchange

The Fundamentals of Electronic Data Interchange

Published On February 11, 2015 -   by

Although electronic data interchange (EDI) has existed for over 30 years, many companies have not yet taken advantage of its benefits. What is electronic data interchange and what are the benefits? Because EDI represents game-changing technology, DataEntryOutsourced recommends that you take a closer look – this DEO post discusses what you need to know.

What Is Electronic Data Interchange?

Let’s start with a basic definition of electronic data interchange: The electronic transfer of data from one computer system to another without human participation – for example, a buyer’s internal system might send a purchase order to a supplier’s internal system and then the supplier’s system subsequently sends an invoice to the buyer’s system. Think of it as a process that avoids the involvement of people and paperwork by virtue of one computer communicating with another. In order for this to happen seamlessly, however, specific standards for message and data structure must be observed. Without such EDI standards, one computer is effectively using a foreign language that the other computer cannot understand.

Why Use EDI?

The two primary benefits of electronic data interchange are usually inter-related – reduced errors and cost savings:

  • Error Reduction – Providing faster processing speeds while reducing “human error” is a powerful combination facilitated by EDI.
  • Expense Reduction – Fewer paper documents and human interactions create several potential sources of EDI cost savings.

Even though your company might need new resources to make EDI work, outsourcing to electronic data interchange experts such as DataEntryOutsourced is a viable strategy for ensuring that EDI expenditures are as cost-effective as possible. In some cases, EDI might not be “optional” at all – for example, just-in-time (JIT) production systems often require electronic data interchange capabilities for business partners.

How Does EDI Work?

To get started, you will need only internet access and internet capabilities. Here is a brief example of how electronic data interchange works.

Using an illustration involving your purchasing system, an approved purchase order would first be converted into the appropriate document format – an EDI 850 purchase order. This “PO” is then securely transmitted to your supplier via a Value Added Network (VAN) or the internet. If using the VAN transmission, your VAN connects with the supplier’s VAN. High-level encryption combined with user identification and passwords create multiple layers of data control and security. Various EDI applications along the way will edit and check for data accuracy.

Electronic Data Interchange Standards

As noted above, the presence or absence of appropriate EDI standards will be instrumental in determining your success or failure in electronic data interchange transactions. ANSI X12 is the accepted EDI standard in North America, and EDIFACT has been adopted in most other locations.

EDI compliance can be fulfilled by either outsourcing or buying the required components that typically include the following:

  1. Communication software
  2. VAN services
  3. Mailboxing
  4. Translation and mapping software
  5. Mapping labor
  6. Software upgrades as needed
  7. Ongoing testing with EDI partners

Specific electronic data interchange standards exist for a variety of unique documents required for EDI transactions. For example, ANSI 832 and EDIFACT PRICAT for product catalogs, ANSI 850 and EDIFACT ORDERS for a purchase order, and ANSI 810 and EDIFACT INVOIC for an invoice. When in doubt, it should be helpful to work with an expert EDI outsourcing partner such as DataEntryOutsourced to ensure full compliance.

Which Business Processes Are Most Suited for EDI?

When you are ready to adopt electronic data interchange as a tool for operating your business more cost-effectively, here are three of the most viable business process candidates to consider first for EDI implementation – shipping/receiving, invoicing/payment and procurement. The most logical choice among these three will depend primarily on your immediate needs. For example, if you are a manufacturing company wanting to enhance your role in a just-in-time environment, you should probably prioritize shipping and receiving as your number one candidate for electronic data interchange.

EDI has the real potential to be a game-changer for most companies, but you should expect to need expert help along the way. Whether electronic data interchange is new to your company or not, DataEntryOutsourced can help to make EDI a more effective part of your business operation. Please share your comments below and via social media. What do you think of EDI as a tool for taking your company to the next level?

– DataEntryOutsourced

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