EDI is the electronic exchange of business documents between the computer systems of business partners, using a standard format over a communication network. EDI is also called paperless exchange.
Implementing EDI benefits both the sender and the receiver. It is a mutual effort, and its benefits are maximized by sharing information in a timely manner. The benefits include
Reduced data entry errors. EDI does not involve data entry at multiple points. In the traditional process, a sender creates a purchase order on the system, prints the order, and then faxes or mails it to
a trading partner. The receiver then rekeys the same information on his or her computer. The process is prone to data entry errors. This procedure is repeated when invoicing takes place. With EDI, data goes directly from one computer to another without involving a human being.
Reduced processing cycle time. The biggest advantage is the reduced processing time of the complete cycle. As soon as orders are entered into the system, they can be processed on the receiving side in seconds. There is a considerable savings in the processing time of document transfer.
Availability of data in electronic form. Data from EDI is in electronic form, which makes it easy to share across the organization. For example, a purchasing department can use the data to evaluate vendors, or a marketing department can use the data to analyze the trends and demands of customers.
Reduced paperwork. The entire EDI process can be handled without using a single piece of paper. Some companies believe that they must have appropriate paperwork for audits and legal issues. In its Paperwork Reduction Act, the IRS recognizes the electronic form as a valid legal document as long as the vendor or supplier can prove the origin and show complete trails on how data was generated. A company needs to have controlled processes to handle data flowing in and out. This ruling has created some tough auditing requirements, but complying with them is worth the effort.
Reduced cost. Time is money. Any savings in time is directly linked to savings in money. The initial cost of an EDI setup is certainly higher compared to the paper process, but over a long period it is very cost?effective. In the long term, the overall cost of exchanging business documents in paper form can cost anywhere from $10 to $15 per transaction. If the process has to be repeated for some reason (for example, if an invoice is lost), it can cost around $45. On the flip side, the average cost of
an EDI transaction is close to $2.
Reduced inventories and better planning. Companies do not have to keep a safety stock for the time taken with order processing. Changes to planning schedules can be communicated instantaneously. MRP (Material Requirements Planning) can take into account a shipment in transit as soon as an Advance ship notice (EDI 856) transaction is received.
Standard means of communication. Because EDI enforces standards on the contents of data, uniform naming standards and field sizes have emerged. Such consistency leads to clearer communication and less ambiguity.
Better business processes. Compared to traditional methods of exchanging business documents, EDI is certainly a better way of communicating with your trading partners. Companies are willing to share information and participate in inter?organizational issues. This environment enhances supply?chain management.
Competitive advantage. In many cases, companies that have implemented EDI have an advantage over their competitors, especially when dealing with government agencies or large corporations. For example, potential vendors must use EDI to bid for certain government contracts. The procurement divisions in government agencies publish their RFPs (Request for Proposal) on the EDI network. In addition, large retailers and corporations discourage doing business with a business partner if the partner cannot send EDI transactions. The same holds true for the automotive industry. To be a certified auto?industry vendor, an organization must be able to communicate electronically. Trying to clear goods through customs is truly a nightmare if the necessary documentation is not in EDI format and has not been sent in advance.
