Cheat Sheet: Electronic Data Interchange

Wave bye-bye to piles of paper documents and hello to piles of savings

Electronic Data Interchange (EDI) - sounds like another deeply dull acronym to me.
It's more exciting than the name implies: EDI is a data standard that allows organisations to automatically exchange electronic documents, such as invoices, purchase orders or shipping notices.

Hence the name but why's that useful?
It is much faster and less wasteful than posting or faxing paper documents between businesses.

Sending information between EDI-compliant systems is a computer-controlled process whereby electronic documents are sent automatically from one organisation to another.

Businesses using EDI no longer have to rely on paper documents that need to be printed out, faxed or sent through the post and have information copied from them into computer systems. By doing away with these paper-based processes, EDI-compliant systems can eliminate a lot of time-consuming and expensive manual work.

What type of documents can be sent using EDI?
EDI standards exist for a wide range of documents but some common types of document that are sent between organisations using EDI standards include design specifications, fund transfers, invoices, purchase orders and shipping notices.

Give me an example of how EDI is used.
OK, imagine a supermarket goods manager who needs to order more milk from a supplier. First, he creates a purchase order on the supermarket's back end computer system.

EDI translation software on the supermarket's system then automatically extracts the relevant information from the purchase order and feeds it into a new electronic document, where the information is presented in a standardised EDI format.

This EDI document is then sent over a dedicated network connection or via the internet to the supplier. At the supplier's end, EDI translation software is able to understand the information in the document, thanks to its standardised layout, and convert it back into a purchase order on the supplier's back end computer system.

The whole process of the supermarket ordering milk from its supplier could be completed in hours rather than the days that it would take to send and key in details from a paper purchase order that had been posted between the two organisations.

Any business relying on a large number of suppliers would be able to save significant sums of money and staff time by setting up these automated EDI document exchanges.

There is also less chance of errors being made compared to a paper-based system as the number of steps in the process is reduced and EDI document transfer does not rely on any human input.

How can you get computer systems belonging to lots of different businesses to talk to each other?
A business's EDI translation software is able to understand the information contained in the EDI document it receives from an outside company because every EDI document will be presented in the same way.

The way information is presented in different types of EDI documents is determined by an EDI standard.

An EDI standard is a set of predetermined rules that dictates how each type of EDI document is put together, from what information is sent and how it is expressed to the way that the document is laid out.

For each document type the EDI standard determines what information is mandatory, what information is optional, the layout and what letters and numbers will be used to label that information.

There are several main EDI standards for transmitting data between organisations, including the widely used and UN-backed Edifact international standard to the Tradacoms standard that is widely used in the UK retail industry.

It is important for organisations to agree which EDI standard they will use to transmit information, how they will use the framework provided by the standard and to make sure that EDI labels relate to exactly the same information. For example the label 'B' in a shipping notice could relate to a box of products being shipped but one company could believe that each box held 120 products while a second company believes each box holds 140 units.

Checks and balances also need to be agreed to prevent situations such as a supplier filing an inflated invoice straight into a retailer's accounts payable system.

How much could I save with this EDI then?
A 2008 report by analyst house Aberdeen Group listed the savings that businesses could achieve by electronically exchanging purchase orders with their suppliers.

By switching from exchanging paper purchase orders to electronic purchase orders, businesses in Europe cut the cost of processing the average order from...