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7.07 - EDI – Overview

Electronic Data Interchange [EDI] is “The exchange of structured business data between computer-based applications in different organisations by means of telecommunications using agreed message standards.” At its most basic level, EDI can be used to replace paper documents. More imaginatively, it can be used to simplify administrative operations and support new ways of supporting trading relationships.


EDI provides a company with the opportunity to improve its relations with suppliers and customers by building a formal information bridge between the organisations. These links can be of vastly higher quality than verbal or paper based communications. EDI is applicable between independent companies and internal communications between related business units and sites of the same company.

Originally EDI was only applicable for the trading transactions related the commercial aspects of business. Now the standards and protocols have been extended to include the more complex technical and CAD/CAM data. Trading data relates to commercial processes such the ordering and administration of goods and services and is characterised by concise transactions which flow comparatively regularly. It primarily falls into three categories: ordering, delivery and settlement as shown below:-

Pattern of supply communications

Ordering includes enquiries, quotations, orders, acknowledgements and schedules. Delivery includes advising despatch, shipping instructions, labelling, international shipment, customs and port clearance, and delivery acceptance. Settlement includes invoicing, crediting, payment and providing statements.

The Issues and Problems

A number of issues and problems arise for companies seriously intending to use EDI as part of their business strategy and processes. Chief among them are the following:-

  • How technically should the interchange be achieved? With a large number of customers and suppliers as most business have, how does an organisation limit the effort required in establishing and running the connections?
  • The transmission of information can use a variety of systems and protocols, among them public switched telephone networks, public switched data networks and leased lines from commercial telecommunications companies. Links can also be provided from valued –added network suppliers using proprietary transmission standards or open standards. These organisations also provide technical advice and support.

An Approach to EDI

EDI applies information Technology to enhance business effectiveness. Because EDI changes the nature of trading relationships and potentially their legal status, its introduction and planning of the individual links should be led by the commercial manager who owns the particular relationships. The Information Technology department should have a supporting role only.

The drive to introduce EDI should come from the commercial part of a business strategy where objectives will have been set to improve quality, improve service levels, reduce lead times, increase market share or to replace operating costs. Each of these requires simplified and effective business processes with rapid information exchange.

Existing information flows between companies have built-in procedures and checks (and miss-understandings) because of the impreciseness and uncertainty of traditional apparatus. A worthwhile project involving EDI will simplify processes and procedures before applying the technology.

The implementation is simplest if there is a separation of the EDI technology from the applications that take advantage of it. This can be done by installing a gateway which takes care of all the communication and message management on behalf of all of the applications.

The solution of these issues involves the development of standards for the content and transmission of electronic messages.

  • Standard Message formats between trading partners. These have been developed by a number of trading groups, and standards are usually known by their acronym such as ODETTE standards for motor industry communications, TRADERCOMM for companies in other industries, EDIFACT for open systems standards.
  • Standards and protocols exist for the control and routing of electronic information across networks.

Many application packages, such ERP, MRP, Customer and Supplier Management (CSM) have additional modules to handle Electronic Data Interchange.

Implementing EDI

Unfortunately, there is more than one standard in each of the key areas in which the company has business dealings. The most effective approach to limiting these problems for companies wishing to use EDI is for the company or an outside suppler to provide and electronic “Gateway” between the organisation and the outside world. These gateways generally accept a variety of communications and message format standards and translate these into a single neutral form for use by the organisation. Gateways are commonly used to interface large networks to the outside world but smaller PC supported gateways are available to enable smaller companies and agents to link with their suppliers and customers.

EDI Project Preparation

Any project which aims to produce financial and commercial improvements requires careful preparation. This is particularly true with EDI where the Technology is relatively simple but where the commercial implications are extensive. Preparation falls into four logical steps:-

  1. Brief business managers on the EDI opportunity. They shall, in turn shall set the strategy and commercial objectives of the project.
  2. Study the existing processes and communications that are in the scope of the project. This will identify potential benefits and the current weaknesses that can be rectified immediately and processes that can be improved with faster and more precise information flows.
  3. Review study results. The necessary immediate actions should be taken and decide whether EDI should be used at all. If the route forward does involve EDI set more specific objectives for the next phase of work.
  4. Plan the commercial and technical implementation. This will involve selecting the various trading partners, devising a contract framework and interchange agreement, training requirements and architecture of the solution.

EDI Project Implementation

Implementation consists of four steps which can be run in parallel:-

  1. Start discussions with trading partners via seminars, individual presentations, discussions, negotiations and training. The outcome will be agreements to trade using EDI and an agreed basis for EDI trading.
  2. Define in detail the business applications for the exchange of data.
  3. Provide and EDI gateway to link the business applications with the communications networks. The destination suppliers and customers may need help with the installation of their gateways.
  4. Bring all the strands together. Implement the mechanisms, train the support staff and introduce any new process and procedures associated with the project.

Longer Term Impact of EDI

Long term advantage can be gained if the use of EDI is developed within a continuous improvement context.

Further Reading