Introduction:

1. EDI (Electronic Data Interchange) can be defined as the exchange of documents in standardized electronic form, between organisations in an automated manner, directly from a computer application in one organisation to an application in another.
2. It can also be defined as computer-to-computer exchange of structured data, sent in the form that allows for automatic processing with no manual intervention.
3. The type of documents exchanged by EDI includes business transactions such as orders, invoices, and delivery advice and payment instructions as a part of EFT (electronic funds transfer).

Description:

1. There are 2 key elements in basic EDI. Firstly, electronic documents replace their paper counterparts. Secondly, the exchange of documents takes place in a standardized format.
2. In a typical EDI application to support purchasing, an EDI system is integrated with the existing purchasing system at the customer side.
3. When a customer enters a new purchase request into the purchasing system, a corresponding request is received by the sender’s EDI system, which then constructs an electronic purchase order document and transmits it to the supplying company.
4. Originally, all EDI transactions were sent over dedicated communication channels, which meant that such channels had to be set up between any pair of organizations wishing to use EDI between themselves.
5. To alleviate between this bottlenecks, third party organizations have emerged offering value added networks (VAN’s). These VANs take care of the transmission details between subscribers.
6. When the purchase order is received at the supplying company, over a dedicated connection, via a VAN, or via the Internet, it is processed by the receiver’s EDI system. This system transforms the message as required and inputs it into the receiver’s enterprise system. Once in that system, the new order is handled just as any other order would be.

Relevance of EDI to companies:

1. Currently EDI still accounts for the bulk of business transactions, and has proved to be very reliable and capable in a wide range of industries.
2. EDI has been successful in reducing the supply chain costs of large enterprises by automating the batch processing of information related to orders, invoices and deliveries.
3. Traditional EDI is able to automate many fundamental business transactions such as purchase orders and invoices, it suffers from many problems such as:
4. Fixed transaction sets: This rigidity makes it extremely difficult to deal with normal evolution necessary for companies introducing new products and services.
5. Resilience to change: EDI standards are defined by standard bodies that are structurally ill equipped to keep up with the rapid pace of change in the various business sectors they impact.
6. Reliance on proprietary communication networks: EDI message are mainly carried on proprietary communication networks that are relatively expensive and that have compatibility problems when communicating across networks.
7. Encapsulation of business rules into transaction sets: One of the biggest problems of EDI is that it considers processes as an integral part of transaction set. It does not separate processes or business rules from the content and structure of the data.
8. EDI still continues to play an important role in business in traditional supply chain relationships between trading partners.
9. Large organizations that have invested heavily in large and sophisticated EDI systems are unlikely to reengineer their business processes and reinvest in new systems to facilitate new technologies such as XML.
10. Common practise nowadays is that companies install XML-EDI translators on Web servers to allow EDI and XML to work together.