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Electronic Data Interchange and the Transfer of Transactional Information

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  • 0:05 Electronic Data Interchange
  • 3:05 Implementing EDI
  • 5:50 Lesson Summary
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Lesson Transcript
Instructor: Paul Zandbergen

Paul has a PhD from the University of British Columbia and has taught Geographic Information Systems, statistics and computer programming for 15 years.

Electronic Data Interchange is a set of rules that describe how electronic business is conducted over a computer network. Learn how EDI replaces the paper documents that used to be part of most business transactions.

Electronic Data Interchange

Let's say you're the manager of a supermarket, and you are responsible for placing orders with suppliers to make sure you have enough of each product in store. Every day, you keep track of the sales records and determine the orders for the next day. Some items, like dairy and fresh produce, you order almost every day. Other items, like cereal and canned soup, you only order once a week. If you run a busy supermarket, you will likely have a few dozen orders each week.

Now consider how you would place these orders. You could call each supplier and tell them your order, but that would take a lot of time and it would be relatively easy to make mistakes. You could email your list to suppliers every day. That would be faster and less prone to errors but still somewhat cumbersome.

Most of your orders are very repetitive. They are with the same suppliers and consist of the same types of items. The only thing that changes is exactly how many items you need and when you need them to be delivered. What if there was a system where you could load up a typical order, make some quick changes and hit 'send?' The ordering system should be connected to the billing and shipping system, so that you will immediately get to see your invoices and when your orders are going to be delivered. That would save you a lot of time.

What you need for this is a specialized communication system between your computer and the computer of the supplier or vendor. This system needs to follow a standard procedure for communications between the computers. Electronic data interchange, or EDI, is a set of rules that describes how electronic business is conducted over a computer network.

This can be relatively simple, such as the exchange of formatted messages between two computers. However, EDI also describes more complex interactions, such as the exchange of data related to the purchasing of goods, creating invoices, receiving payments, shipping and delivery information, tracking, warranty and others.

EDI essentially replaces the paper documents that used to be part of most business transactions. When a customer places an order online with a vendor, the rules of EDI are used to establish the connection between the customer's computer and the vendor's computer. The basic idea behind EDI is that output from one system can be used directly as the input into another system - without manual intervention. EDI reduces costs, labor and errors associated with manually processing orders and invoices.

EDI has become so widely used that it was adopted as a standard by the National Institute of Standards and Technology. EDI is used for very specific types of business transactions between organizations. You don't need EDI for sending email or sharing files over a network.

Implementing EDI

When EDI is used, the data exchanged must be in the format specified by the sender and receiver. For this to work, all computers involved in the exchange of data must have communication software installed, and all computers must be connected to a network.

There are two ways to implement EDI between customers and vendors:

1. A direct link between the computer systems of the customer and the vendor.

This requires that both the customer and vendor set up and manage specialized communication software. This solution is more typical for large organizations with the technical staff to implement and manage this type of system and for organizations that do a lot of business with each other.

2. Using a third-party clearing house to convert the data and perform related services.

In this approach, customer and vendors typically use web-based software from the third party without having to worry about installing and managing specialized communication software. This solution is typical for smaller organizations with limited technical staff and resources.

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