Electronic Data Interchange (EDI) is the electronic interchange of business information using a standardized format; a process which allows one company to send information to another company electronically rather than with paper. Business entities conducting business electronically are called trading partners.
Many business documents can be exchanged using EDI, but the two most common are purchase orders and invoices. At a minimum, EDI replaces the mail preparation and handling associated with traditional business communication. However, the real power of EDI is that it standardizes the information communicated in business documents, which makes possible a “paperless” exchange.
The traditional invoice illustrates what this can mean. Most companies create invoices using a computer system, print a paper copy of the invoice and mail it to the customer. Upon receipt, the customer frequently marks up the invoice and enters it into its own computer system. The entire process is nothing more than the transfer of information from the seller’s computer to the customer’s computer. EDI makes it possible to minimize or even eliminate the manual steps involved in this transfer.
The process improvements that EDI offers are significant and can be dramatic. For example, consider the difference between the traditional paper purchase order and its electronic counterpart:
|A Traditional Document Exchange of a Purchase Order||An EDI Document Exchange of a Purchase Order|
|This process normally takes between three and five days.||This process normally occurs overnight and can take less than an hour.|
|·Buyer makes a buying decision, creates the purchase order and prints it.
·Buyer mails the purchase order to the supplier.
·Supplier receives the purchase order and enters it into the order entry system.
· Buyer calls supplier to determine if purchase order has been received, or supplier mails buyer an acknowledgment of the order.
|·Buyer makes a buying decision, creates the purchase order but does not print it.
·EDI software creates an electronic version of the purchase order and transmits it automatically to the supplier.
·Supplier’s order entry system receives the purchase order and updates the system immediately on receipt.
· Supplier’s order entry system creates an acknowledgment an transmits it back to confirm receipt.