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Essentials of EDI in supply chain management

Electronic data interchange (EDI) applies to many different business aspects. Learn three ways EDI has streamlined supply chain management.

Businesses rely on electronic data interchange to make data transfers quicker and more efficient. The benefits of EDI can easily be applied to supply chain management.

Here's how EDI has streamlined supply chain management.

Understanding what EDI is

Before understanding what EDI is in the context of supply chain management, it's important to first answer the question "What is EDI?"

EDI is the exchange of data and business documents from one computer system to another. Standard formats must be used for specific items, such as purchase orders, acknowledgements, advanced ship notices and invoices, among others.

Benefits to supply chain management

EDI provides a neutral format and protocol for supply chain management. EDI doesn't require custom communications links between dissimilar systems. Instead of writing a unique interface between two systems -- such as SAP and Oracle, SAP and Infor, Oracle and Infor -- each developer can simply write one link to EDI and all participating systems can exchange documents seamlessly, as long as they all work to the same standard.

EDI provides a neutral format and protocol for supply chain management.

EDI offers three essential benefits for supply chain operations:

  • Documents are created directly in the business system and transmitted immediately to the receiving system.
  • With little or no manual data entry and handling, the main source of delays and errors is virtually eliminated.
  • Paperwork is being phased out and complete electronic records are maintained within the system. This reduces both labor and cost.

The EDI specification accounts for the majority of transactions for ordering and supply chain documentation. EDI transactions are translated in order to conform to each company's internal processes and ERP systems.

EDI standards

There are several EDI standards or document formats currently in use around the world.

These include:

  • The American National Standards Institute version (ANSI X12), which is commonly used in North America;
  • United Nations EDI for Administration, Commerce and Trade (EDIFACT), which is most commonly used in Europe;
  • TRADACOMS, which is predominantly used in the United Kingdom; and
  • The Organization for Data Exchange by Tele-Transmission in Europe (ODETTE) protocol, also called ODETTE File Transfer Protocol (OFTP), which is unique to the automotive industry.

Companies also rely on the Applicability Statement 2 (AS2) protocol to send EDI documents over the internet. In order to maintain security, AS2 encrypts the messages and uses digital certificates to identify and validate the partners to the transactions.

EDI challenges

As of this writing, EDI capabilities are available as standard or optional features in most business systems.

However, implementing EDI can be somewhat challenging -- especially for smaller and less technically advanced companies. EDI implementation requires that companies coordinate with their trading partners to define the types of documents that will be exchanged, the specifics of how the formats and protocols will be used, the timing of the data exchanges and other details.

EDI history

The idea of electronic document exchange and the standard document formats -- the essence of EDI -- has existed for many years. Up until the late 1980s, EDI capabilities weren't built into typical MRP or ERP systems. Instead, companies had to build or purchase separate EDI applications and interface them to their business systems, then contract with a value-added network (VAN) to handle the communications on a store-and-forward basis. The VAN acted as an intermediary.

This was not especially quick, efficient or cheap. However, it was faster than traditional mail, greatly reduced handling and manual tasks and eliminated the majority of errors that often accompany manual processes. Large companies pushed EDI forward. Smaller companies used EDI sparingly, usually as a condition of doing business with their larger customers and trading partners.

Soon, EDI capability became a standard feature of business systems and a normal business practice. As the internet evolved and became an essential business tool, EDI also grew.

The latest versions of most business systems and ERP systems have EDI capabilities fully embedded in the applications through open design architecture and application programming interfaces.

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