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.
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.
Most EDI communication takes place over the Internet, using either a direct link or a third-party service. However, some organizations use a private network, sometimes referred to as a value-added network, or VAN. A value-added network provides data security, transaction services, message formatting, communication protocols and other critical support for EDI to take place securely and efficiently. Private networks have declined in importance in favor of the Internet, but they are still in use. Some organizations, such as manufacturing companies or healthcare organizations, may operate private networks for improved efficiency or security.
A widely used alternative is to use a virtual private network, or VPN. A VPN extends a private network into a public network, such as the Internet. A VPN is a network in which some parts of the network use the Internet, but data is encrypted before it is sent over the Internet to indicate that it is a private network. A VPN makes it possible to secure EDI traffic over the Internet.
In comparison, a VAN uses a dedicated, private network for communications that does not rely on the Internet, while a VPN uses encryption and other security mechanisms to use the Internet for private communications. VPN is widely used for EDI communications as well as for other applications where secure connections are needed to a private network.
Electronic data interchange (EDI) is a set of rules that describe how electronic business is conducted over a computer network. EDI replaces the paper documents that used to be part of most business transactions.
Communications between computers can be accomplished using a direct link between the two computer systems or by using a third-party clearing house. Some organizations use a private network for EDI, sometimes referred to as a value-added network (VAN). A widely used alternative is to use a virtual private network (VPN), which extends a private network into a public network.
Following this video lesson, you will be able to:
- Define electronic data storage (EDI) and explain its purpose
- Describe two ways that EDI can be implemented between vendors and customers
- Explain the use of value-added networks and virtual private networks in EDIs