Electronic Data Interchange EDI – is the exchange of business documents between any two trading partners in a standard or structured, machine readable form. EDI is used to electronically transfer documents such as purchase orders, invoice, shipping bills, and communicate with one another. A Specified format is set by both the parties to facilitate transmission of information. Traders use Electronic Data Interchange EDI to exchange financial information in electronic form.
Electronic Fund Transfer facility provided by banks is an example of Electronic Data Interchange EDI. EDI helps to eliminate paper based system, reduces data entry task and improves business cycle.
Components of Electronic Data Interchange EDI
Standard Document Format – A standard format agreed upon by both parties which do not require complicated hardware or software to access information. Both parties communicate directly through a business application.
Translator and Mapper – A translator is used to convert the raw data into meaningful information according to specifications provided by a mapper. A mapper is used to create conversion specification. It compiles the specification and then gives instructions to the translator on how to convert the data.
Communication Software – A communication software is used to transmit data and convert business documents into a standard format. It follows a standard communication protocol which is incorporated in the software.
Communication Network – A communication network provides a direct link between trading partners who are will to exchange business documents through Electronic Data Interchange EDI.
- Modem – It is a hardware device that transmits data from one computer to another.
- VAN – A network that connect the computer system of one organization to another.
- Point to Point link – A direct communication link between two computers.
Advantages of Electronic Data Interchange EDI
- It is less costly than traditional system
- It aids in improved customers service and delivery
- It reduces error and clerical work.
- It improves business cycle
- It has a faster response time
- It aids in better planning and forecasting.
Applications of Electronic Data Interchange EDI
Retail Sector – In the retail sector profit margins usually depend upon efficient inventory management. EDI provides a structured way to maintain and replenish goods stocked at a retail outlet. Retailers use a common model stock for each shop location and the point of sale stock position is updated continuously and data in fed via EDI enabled SCM (supply chain management) network. The EDI software monitors all the logistics and makes updates in the original stock.
Manufacturing Sector – EDI ensures effective and efficient management of materials required for production of a commodity. In manufacturing sector EDI facilitates Material requirement planning and just in time manufacturing. The Inventory position of OEM is constantly updated through EDI and the supplier is notified about shortage of materials. This helps the supplier to plan and schedule supply according to requirements of the manufacturer. The suppliers respond via EDI with an ASN to identify the parts/materials to be delivered and the approximate delivery time and as soon as the shipment is delivered at the production plant the inventory is updated again.
Automobile Sector – In automobile sector EDI is used to keep customers updated with the current product and pricing information during the purchase cycle. An advance shipping notice is transmitted through EDI to the customers to prepare a loading schedule and to ensure proper receipt of the product. The customer may also make payment on receipt of goods via EDI to speed up the payment process.
Financial Sector – In the financial sector EDI replaces the labour intensive activities of collecting, processing and dispersing payments with an electronic system. It facilitates the flow of payment between the bank accounts of trading partners without requiring any human intervention. A payee`s bank account is electronically credited and the payer`s account is electronically credited on the scheduled day of payment; such an exchange is known as electronic fund transfer (EFT).