Electronic Data Interchange
Electronic Data Interchange (EDI)
EDI is a form of automated data entry that supports operations by transferring documents between firms electronically. The essence of EDI is the ability to transfer data among computers from different companies. The goal is to connect to suppliers so that production orders can be sent automatically at substantially lower cost than traditional paper-based systems. Two basic methods are used to accomplish the transfer: (1) send the data directly from one computer to the other or (2) send the data to a third party that consolidates the data and sends it to the proper location. Early EDI implementations were based on direct connections as individual firms experimented with the technology. In both methods, two important
considerations exist: establishing the physical links and transferring data in a format compatible to all users. The first issue has largely been solved with the Internet. Today, EDI connections can be established through e-mail or Web site links.
For EDI to work, each company must translate its data into a form that can beused by the other companies. If one company like Wal-Mart or GM takes the lead and requires suppliers to send data via EDI, then they are free to define the base transaction objects. Suppliers must translate their objects into the appropriate EDI structure. Yet a supplier might need links to several customers. If each customer used different EDI definitions, the supplier must have a conversion system for each link. Someday it might be possible to create standards for EDI connections, forcing everyone to conform to one type of data definition. Although there is some progress in this area, firms with existing EDI systems will be reluctant to spend the money to convert their data.
The concept of EDI is closely tied to supply chain management (SCM) which revolves around purchasing, but also incorporates just-in-time delivery, searching for competitive pricing, and controlling and monitoring quality.
The Problem of Proprietary EDI. Led to slow acceptance of the technology. Solved with XML.
Most of the early EDI systems were created independently: one large company required suppliers to provide data and accept orders electronically. The goal was to cut the costs of transactions and speed up the ordering process. EDI arrangements also enable manufacturers to improve quality control and to implement just-in-time inventory systems. Suppliers were “encouraged” to adopt the EDI systems by threatening a loss of sales if the vendors did not comply.
With proprietary systems, the lead firm establishes the standards in terms of the hardware and the types and format of data to be exchanged. From the standpoint of the lead firm, these controls ensure that they are able to connect to each supplier with one standard technique.
EDI can be built from individual pair-wise links over proprietary connections. If the majority of transactions are between two companies, this method will work fine. If companies deal with many different suppliers or large customers, this method can cause problems when each link requires conversion to a different format.
To a supplier, proprietary systems created by one company can lead to problems. Imagine what happens when the supplier sells to several firms, and each firm requires the use of a different EDI system. In addition to the hassles of providing data in the proper format for each customer, the supplier’s employees would have to learn how to use several different systems. Purchasers face similar problems unless all of their suppliers follow a different standard.
Multiple proprietary systems lead to confusion and higher costs. Consequently, several companies have tried to push for standards that make it easier to share data.
Extensible markup language (XML) was developed to provide better Internet support for EDI. At its foundations, XML is a tag-based document that contains data. The tags indicate the type of data contained within the document. The document can have a hierarchical structure similar to the EDI standards, such as Order – OrderItem – Product. Various industry groups have been established standard document formats (data type definition or DTD) for common documents within their industries. Many software packages can read and write XML documents, so companiescan use diverse hardware and software and still communicate easily.
Software vendors have developed tools that incorporate XML automatically, and suppliers can purchase the software needed to handle the multiple connections to customers.