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Electronic Data Interchange

19 January, 2016 - 12:35

Computer and communications technology have been successfully applied by organizations to improve accuracy and control and to eliminate paper within their Information Systems applications. However, direct, paperless business communication between organizations had been slowed by a lack of transmission and presentation standards. What this often meant was that an organization used its computer technology to prepare a purchase order (PO), for example, completely without paper and human intervention—an efficient, fast, and accurate process. But, the PO had to be printed and mailed or faxed to the vendor. Then, at the vendor, the PO had to be sorted from other mail in the mailroom, routed to the appropriate clerk, and entered into the vendor’s computer. The efficiency, timeliness, and accuracy gained by the automated purchasing process at the originating organization were lost through the mailing and reentry of the data at the vendor.


One technology that permits streamlining data communication among organizations is that of electronic data interchange (EDI). Electronic data interchange (EDI)is the computer-to-computer exchange of business data (i.e., documents) in standardized formats that allow direct processing of those electronic documents by the receiving computer system. Technology Application 4.2 describes some general uses of EDI, and Figure 4.5 depicts typical EDI components. The numbers in circles are cross-references to corresponding locations in the narrative description.

Application Software (circles 1 and 7)

An originating application prepares an electronic business document, such as a purchase order (PO). At the destination organization, an application processes the business data. For example, the originating application’s PO would be processed as a customer order in the destination organization’s Order-to-Cash process.

Translation Software (circles 2 and 6)

An application’s electronic business document must be translated to the structured EDI format that will be recognized by the receiving computer. Figure 4.6 depicts the translation process. The figure shows a specimen PO as it might appear as a conventional paper document and then illustrates how the PO is transformed into an EDI transaction standard, referred to as transaction set 850. Translation sets are the generally accepted representation standard for EDI and are described in Appendix A.

Technology Application 4.2

General Uses of Electronic Data Interchange

Case 1

Total Home Entertainment (THE) viewed the Internet as a new opportunity to expand their EDI services to the 12,000 retail outlets in the U.K., as well as some 2,000 outlets outside the U.K., that the company services. THE is a supplier of over 200,000 home entertainment products such as videos, CDs, and books. Most of the retail outlets that THE provided its products to were small, independent stores that were ill prepared to deal with the complexities of EDI. Further, these small stores also represented the biggest growth area for THE. The Web Factory, a London-based solution provider for custom EDI Internet solutions helped THE construct an Internet interface that simplified the EDI communication process for its customers (the retail stores) and became a vehicle for locking in customers to its product. The results have helped keep THE at the forefront of the retail industry in the U.K.

Case 2

Perhaps the biggest change in EDI in recent years is being driven by the Internet. Several companies are racing toward the development of Internet services to provide links from Internet sites to EDI sites. One of the leaders in the development of such an approach has been a consortium of Netscape Communications Corp. and GE Information Services, which has launched Actra. The system uses business document gateway software (BDG) to translate EDI forms to Internet formats. The Actra system is designed to run off Netscape servers. A major challenge in building such an EDI to Internet connection is business event data security. The BDG software employs Secure Multipurpose Internet Mail Extension (S/MIME) and Secure Sockets Layer (SSL) standards to ensure adequate security is achieved. Sources: David Baum, “Entertaining with EDI,” Byte (August 1997); Michael Moeller, “Partners Get Actra Together,” PCWeek (January 13, 1997).

Communications Network (circles 3 and 5)

One method for communicating electronic messages between business partners would be to establish a direct computer-to-computer link between the origination computer and one or more destination computers. This kind of interface could be accomplished through a leased or dedicated communication line with each trading partner, or through a communications network in which one of the partners—let’s say a large manufacturer—serves as the “hub” of the network, and its suppliers and other trading partners are the network “spokes.” However, communications system incompatibilities may require that one partner or the other purchase communications hardware or software, making this a costly option. Further, agreeing on such details as what time of day to send and receive data from trading partners makes this option difficult to manage.

An alternative is to use an EDI service bureau—an organization that acts as an intermediary between a large hub company and its suppliers. The EDI service bureau generally works with smaller suppliers reluctant to acquire in-house translation and communications software. In such a case, the translation software and communications software reside on the service bureau’s computer system. For a fee, the service bureau takes EDI messages from the hub, translates the messages into formats that are usable by the suppliers’ computer applications, and forwards them to the suppliers. In the other direction, the bureau translates suppliers’ paper documents—such as shipping notices or invoices—into EDI format and sends the electronic documents to the hub. Service bureaus are declining in use due to easily accessed and relatively inexpensive Internet-based options.

Figure 4.5 Electronic Data Interchange Transaction Set 

Review Question

Explain how electronic data interchange is used to link two companies’ business processes together.

Figure 4.6 Electronic Data Interchange Transaction Set 

Value-Added Network (VAN) Service (circle 4)

Rather than connecting to each trading partner, an organization can connect to a value-added network(VAN) service. A VAN service acts as the EDI “postman.” An organization can connect to the VAN when it wants, leave its outgoing messages and at the same time, pick up incoming messages from its “mailbox.” A VAN is a network service that provides communications capabilities for organizations not wishing to obtain their own communications links. VANs are also dropping in popularity due to Internet-based options for EDI.

As shown in Figure 4.5, one of the several functions that the VAN will perform is to translate the message from one communications protocol to another, if necessary.

Review Question

Explain how value-added networks (VANs) are used to simplify electronic data interchange between two or more companies.


EDI and Business Event Data Processing

If we consider the implications of EDI for business event data processing, one of the main advantages is the significant reduction in need for interaction between purchasers and salespeople, coupled with the standard implementation of online transaction entry (OLTE). With EDI, both source document capture of business event data and subsequent keying in of the source document are eliminated for the selling organization as OLTE activities are initiated and completed by the linking purchaser. This eliminates any risk of erroneous data entry from within the selling organization. Keep in mind that EDI may be completed through traditional modes using dedicated communications lines, but are increasingly moving to the Internet.

You should be careful, however, not to make assumptions as to the mode of business event data processing. You will recall from our earlier discussion that OLTE can be used with both periodic and immediate modes of processing. The same holds true for the core business processing activities in an EDI environment. The business event data are frequently processed using an online real-time system, but many organizations also choose to do the bulk of the processing steps using periodic mode as well—particularly with batching of business event data for more efficient processing. It is worth noting also that particularly when batch processing is being used, there may be the need for online transaction processing (OLTP) approaches to handle order and payment confirmation activities during acceptance of the externally generated OLTE transmission—in other words, the customer may need an immediate confirmation that the order has been accepted and the business event will be completed by the vendor.

When trading partners communicate with each other electronically, they also discover that they have to communicate internally in new ways to achieve the full benefit of EDI. That is, EDI forces an organization to assume that all information flows, both internally and externally, are instantaneous. Accordingly, for many, EDI—along with other enabling technologies such as electronic document management—has been the catalyst for change in a firm’s basic business processes.

Technical Insight 4.1 presents some management, operational, and control issues associated with EDI.