6/2/2016

Traditional Vs. EDI Example

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The Transcript Trail with EDI

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EDI Layered Architecture

• EDI architecture specifies four

layers:
• the semantic (or application) layer,
• the standards translation layer,
• the packing (or transport) layer, and
• the physical network infrastructure
layer.

Fig: Layered Architecture of EDI

EDI Layered Architecture

• EDI architecture specifies four

layers:
• the semantic (or application) layer,
• the standards translation layer,
• the packing (or transport) layer, and
• the physical network infrastructure
layer.

Fig: Layered Architecture of EDI

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EDI Layers
Semantic Layer

 The EDI semantic layer describes the business application that is

driving EDI. For a procurement application, this translates into
requests for quotes, price quotes, purchase orders,
acknowledgments, and invoices.
 This layer is specific to a company and the software it uses. In
other words, the user interface is customized to local envi-
ronments.
 The information seen at the EDI semantic layer must be translated
from a company-specific form to a more generic or universal form
so that it can be sent to various trading partners, who could be
using a variety of software applications at their end.

EDI Layer…

 To achieve this, companies must adopt universal EDI

standards that lay out the acceptable fields of business
forms.
 What complicates matters is the presence of two
competing standards that define the content and
structure of EDI forms:
 the X12 standard, developed by the American National
Standards Institute (ANSI), and
 EDIFACT, developed by United Nations Economic Commission
for Europe (UN /ECE).

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Semantic Layer…

• When the trading partner sends a document, the EDI

translation software converts the proprietary format into
a standard mutually agreed on by the processing
systems.
• When a company receives the document, their EDI
translation software automatically changes the standard
format into the proprietary format of their document
processing software so that the company can manipulate
the information in whatever way it chooses to.

How EDI works?

 The idea behind EDI is very simple. EDI seeks to take a form from
a business application, translates that data into a standard
electronic format, and transmit it.
 At the receiving end, the standard format is "untranslated" into a
format that can be read by the recipient's application.
 Hence output from one application becomes input to another
through the computer-to-computer exchange of information.

 The result is an elimination of the delays and the errors inherent

in paper-based transactions.

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Info Flow without EDI

 Figure alongside shows the

information flow when paper
documents are shuffled between
organizations via the mailroom.

 When the buyer sends a purchase

order to a seller, the relevant data
must be extracted from the internal Fig: Information flow without EDI
database and recorded on hard copy.

 This hard copy is then forwarded to the seller after passing through several
intermediate steps.

 Sellers receive information in the form of letters and in some cases

a vast number of facsimiles.
 This information is manually entered into the internal information
systems of the recipient by data entry operators.
 This process generates a considerable amount of overhead in labor
costs and time delays.
 The reproduction of information also increases the risk of errors
caused by incorrect data entries.

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 This pervasive practice of converting digital data into hard copy

data that is reconverted into electronic information again on the
receiving end generates unnecessary costs.
 It is quite possible to exchange the information in its electronic
format by means of EDI.
 EDI can substantially automate the information flow and facilitate
management of the business process, as illustrated in Figure in the
figure below.

Fig: Information flow with EDI

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The EDI transactions for a purchase, shipment, and

corresponding payment are as follows:

Step 1: Buyer's computer sends Purchase Order to seller's computer.

Step 2: Seller's computer sends Purchase Order Confirmation to buyer's computer.
Step 3: Seller's computer sends Booking Request to transport company's computer.
Step 4: Transport company's computer sends Booking Confirmation to seller's computer.
Step 5: Seller's computer sends Advance Ship Notice to buyer's computer.
Step 6: Transport company's computer sends Status to seller's computer.
Step 7: Buyer's computer sends Receipt Advice to seller's computer.
Step 8: Seller's computer sends Invoice to buyer's computer.
Step 9: Buyer's computer sends Payment to seller's computer

Working Mechanism of EDI

Purchasing System
Ordering System
International Format
Conversion
EDI Translator
EDI Translator
EDI Envelope for
EDI Envelope for document messaging
document messaging Private VPN
or Public
modem Internet modem

Fig: How EDI Works?

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EDI Standards

 Two major standards:

1. ANSI ASC X12 Standards
2. United Nations EDIFACT Standards

American National Standards Institute chartered a new committee called

Accredited Standards Committee (ASC) X12 to develop a uniform standards for
cross-industry electronic communication.

EDI Standards

 X12 standard defined a set of documents, which is

referred as transaction sets, for a wide range of business
transaction forms.
 Each transaction is given a numeric code which is similar
to the way in most of the paper forms where form
numbers are assigned. For e.g. the transaction set 850 is
referred to Purchase Order, 810 is assigned to the invoice,
and so on.
 For each transaction sets in EDI, there is a document
which defines specification of that transaction set.

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EDI Standards | ANSI X12

Transaction Set Doc856ument Title Specification Number

850 PO X12.1
810 Invoice X12.2
C 840 Request for Quote X12.7
843 Response for RFQ X12.8
855 PO Acknowledgement X12.9
856 Ship Notice X12.10
861 Receiving Advice X12.12
830 Planning Schedule X12.14

Fig: EDI X12 Standards

EDI Standards | EDIFACT

 Defined by United Nation to extent EDI services in global

basis.
 UN has provided a set of international standard which is
defined under the general authority of UN Electronic Data
Interchange For Administration, Commerce and Transport
(EDIFACT) group.
 Combination of X12 standards and the Trade Data
Interchange(TDI) standard developed in United Kingdom
and used throughout Europe.

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EDI Standards | EDIFACT

 Syntax and Data dictionary are done by International

Standards Organization (ISO)
 Development of standards and the message registration is
responsible by the UN Economic Commission for Europe.

Benefits of EDI

 EDI can be a cost- and time-saving system, for many reasons. The automatic
transfer at information from computer to computer reduces the need to
rekey information and as such reduces costly errors to near zero.
 EDI transactions produce acknowledgments of receipt of data.
 For companies dealing with thousands of suppliers and tens of thousands of
purchase orders a year, the savings from EDI are significant.
 For example, RJR Nabisco figures that purchase orders that previously cost
between $75 and $125 to process now cost 93 cents. Companies can also pay
each other through "automated receipts settlement" or financial EDI,
whereby electronic purchase order acknowledgments and shipping notices
provide the data necessary for payment, further reducing paper.

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Benefits of EDI (From Net)

EDI Applications in various fields of Business

 Although EDI was developed to improve transportation and trade,

it has spread everywhere. In short, EDI has grown from its original
(and somewhat limited) use as expediter of the transfer of trade
goods to facilitator of standard format data between any two
computer systems.

 An examination of EDI usage in various industries provides insight

into the business problems that EDI is attempting to solve. We will
present four very different scenarios in industries that use EDI
extensively:

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EDI Applications in various fields of Business

 Although EDI was developed to improve transportation and trade,

it has spread everywhere.
 An examination of EDI usage in various industries provides insight
into the business problems that EDI is attempting to solve.
 We will present four very different scenarios in industries that use
EDI extensively:
1. International or cross-border trade,
2. Financial EDI or electronic funds transfer (EFT),
3. Health care EDI for insurance claims processing, and
4. Manufacturing and retail procurement.

1. International or cross-border trade

 Over the last few years, significant progress has been made toward the
establishment of more open and dynamic trade relations.
 Recent years have brought the General Agreement on Tariffs and Trade (GATT);
the Free Trade Agreement (NAFTA) among the United States, Canada, and
Mexico; and the creation of the European Union. These developments have
meant the lifting of long-standing trade restrictions.
 Many countries, and in particular developing countries, have made significant
efforts to liberalize and adjust their trade policies. In this context, trade
efficiency, which allows faster, simpler, broader and less costly transactions, is a
necessity.
 It is a widely held view that trade efficiency can be accomplished only by using
EDI as a primary global transactions medium.

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2. Financial EDI or electronic funds transfer

(EFT)

 Financial EDI comprises the electronic transmission of payments

and remittance information between a payer, payee, and their
respective banks.
 This section examines the ways business-to-business payments are
made today and describes the various methods for making
financial EDI payments.
 Financial EDI allows businesses to replace the labor-intensive
activities associated with issuing, mailing, and collecting checks
through the banking system with automated initiation,
transmission, and processing of payment instructions.
 Thus it eliminates the delays inherent in processing checks.

Types of Financial EDI

 Traditionally, wholesale or business-to-business payment is accomplished using

checks, EFT, and automated clearinghouses (ACH) for domestic and
international funds transfer.
 ACH provides two basic services to industrial and financial corporate
customers (including other banks):
 fast transmission of information about their financial balances throughout the world, and
 the movement of money internationally at rapid speed for settlement of debit/credit
balances.
 Banks have developed sophisticated cash management systems on the back of
these services.
 Thus, three principal types of noncash payment instruments currently used for
business-to-business payments: checks, electronic funds transfers, and
automated clearinghouse (ACH) transfers.

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3. Health care EDI for insurance claims

processing, and
 Providing good and affordable health care is a universal problem. In 2015, the
American public spent $5 trillion on health care, nearly 15 percent of the
gross domestic product (GDP).
 Nepal did allocated NRs. 2,50,00,00,000 for healthcare facilities according to
budget 2016.
 National health care expenditures have risen by 10.5 percent each year for
the past eight years—more than double the rate of increase in the consumer
price index.
 It is estimated that $3.2 billion in administrative savings are expected to be
achieved by switching from being paper-based to an EDI implementation.
 Employers could save $70 million to $110 million by using EDI for enrollment
and to certify that a prescribed procedure is covered under the subscriber's
health insurance contract.

4. Manufacturing and retail procurement.

 Both manufacturing and retail procurement are already heavy users

of EDI. In manufacturing, EDI is used to support just-in-time. In
retailing, EDI is used to support quick response.

Just-in-Time(JIT) and EDI:

 Companies using JIT and EDI no longer stock thousands of large parts in
advance of their use.
 Instead, they calculate how many parts are needed each day based on the
production schedule and electronically transmit orders and schedules to
suppliers every day or its some cases every 30 minutes.
 Parts are delivered to the plant "just in time" for production activity.

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4. Manufacturing and retail procurement.

Quick Response and EDI:

• Taking their cue from the efficiencies manufacturers have gained from just-
in-time manufacturing techniques, retailers are redefining practices through
the entire supply chain using quick response (QR) systems.
• For the customer, QR means better service and availability of a wider range
of products. For the retailer and suppliers, QR may mean survival in a
competitive marketplace.
• Much of the focus of QR is in reduction of lead times using event-
driven EDI.
• In QR, EDI documents include purchase orders, shipping notices,
invoices, inventory position, catalogs, and order status.

Security and privacy issues of EDI

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Security & Privacy Issues | EDI

 Since in the case of EDI, we are dealing with trade between countries
and corporations, issues of legal admissibility and computer security
are important.
 Companies that deal with EDI often retain the services of a lawyer
during the design of an EDI application so that the appropriate
evidentiary/admissibility safeguards are implemented.

Security & Privacy Issues | EDI

Legal Status of EDI Messages:

 There has been considerable debate concerning the legal status of
EDI messages and electronic messages in general.
 Although a lot of work is being done on legal framework, nothing
concrete has come out these efforts.
 No rules exist that indicate how electronic messages may be
considered binding in business or other related transactions.
 The establishment of such a framework is essential if EDI is to
become widespread.

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Security & Privacy Issues | EDI

Legal Status of EDI Messages..

 To understand the legal status better, let's take a quick look at con-
tract law.
 It distinguishes three modes of communication types:
 instantaneous communication,
 delayed communication via the U.S. Postal Service (USPS), and
 delayed communication via non-USPS couriers.
• Instantaneous, If the parties are face to face or use an instantaneous com-
munication medium such as the telephone, an offer or acceptance is held
operable when spoken.

Security & Privacy Issues | EDI

Legal Status of EDI Messages..

 Delayed (USPS and non-USPS): The "mailbox rule" provides that an
acceptance communicated via USPS mail or via telegram, mailgram,
and probably electronic messaging systems, is effectively
communicated when dispatched, or physically deposited in a USPS
and non USPS mailbox.
 Messaging systems combine features of both instantaneous and
delayed communications.
 A message's delay is a function of the specific application, message
routing, network(s) traversed, system configuration, and other
technical factors typically unknown to the user.

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So, who assumes liability?

Legal Status of EDI Messages..

 If the U.S. mail or an overnight express service does not deliver a

contract to the right addressee, it can be held responsible for any
business losses caused by the error. Of course, liability also depends
on the situation.
 In the case of EDI, however, the courts haven't decided who is liable if
an EDI network fails to transmit a document or transmits a document
to the wrong party. There is no legal precedence in this area (yet!).

Digital Signatures and EDI

 Messages might be time-stamped or digitally notarized to establish

dates and times at which a recipient might claim to have had access
or even read a particular message.
 Digital signatures must have the same legal status as handwritten
signatures (documents signed with digital signatures must be legally
binding).
 For example, an on-line "notarized time-stamping" service has been
suggested that would accept a message and return one showing the
date, time, and a digital signature binding the notarized message
content and received date and time to the digital public notary.

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Digital Signatures and EDI

 The digital signature provides a means for a third party to verify that
the notarized object is authentic.
 Digital signatures should have greater legal authority than
handwritten signatures.
 For instance, if a ten-page contract is signed by hand on the tenth
page, one cannot be sure that the first nine pages have not been
altered.
 If the contract was signed by digital signatures, however, a third
party can verify that not one byte of the contract has been altered.

EDI for e-commerce

• The economic advantages of EDI are widely recognized.

• But until recently, companies have been able to improve only discrete
processes such as automating the accounts payable function or the
funds transfer process.
• Companies are realizing that to truly improve their productivity they
need to automate their external processes as well as their internal
processes.
• This is the thrust of new directions in EDI.

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EDI for e-commerce

• New EDI services for electronic commerce are seen as the future
bridge that automates external and internal business processes,
enabling companies to improve their productivity on a scale never
before possible.
• EDI present information management solutions that allow companies
to link their trading community electronically—order entry,
purchasing, accounts payable, funds transfer, and other systems
interact with each other throughout the community to link the
company with its suppliers, distributors, customers, banks, and
transportation and logistics operations.

EDI for e-commerce

• Another goal of new EDI services is to reduce the cost of setting up an

EDI relationship. These costs are still very high because of the need
for a detailed bilateral agreement between the involved business
partners and for the necessary technical agreements. Therefore most
successful EDI implementations are either in long-term partnerships
or among a limited number of partners.
• With the advent of inter-organizational commerce, several new type
of EDI are emerging that can be broadly categorized as traditional
EDI and open EDI.

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EDI for e-commerce | Traditional EDI

 Traditional EDI replaces the paper forms with almost strict one-to-one
mappings between parts of a paper form to fields of electronic forms
called transaction sets. Traditional EDI covers two basic business
areas:
 Trade data interchange (TDI) encompasses transactions such as purchase orders, invoices, and
acknowledgments.
 Electronic funds transfer (EFT) is the automatic transfer of funds among banks and other
organizations.
 Today, traditional EDI is divided into two camps: old EDI and new EDI.
 Old EDI is a term created by those working on the next generation of
EDI standards in order to differentiate between the present and the
future.

EDI for e-commerce | Traditional EDI

 Old EDI refers to the current practice of automating the exchange of

information pertinent to the business activity.
 Information that is generated by the business process of one
computer is transferred electronically and effects a corresponding
business process in another computer.
 Old EDI is also used to refer to the current EDI-standardization
process (e.g., X12, EDIFACT) where tens of thousands of people in
groups (or working committees) all around the world are attempting
to define generic document interchanges (e.g., purchase orders) that
allow every company to choose its own, unique, proprietary version
(that is a subset of the original transaction set).

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EDI for e-commerce | Traditional EDI

 New EDI is really a refocus of the standardization process.

 With old EDI, the standardization is focused on the interchange
structure, on the transaction set in X12 or the message in EDIFACT.
 With new EDI the structure of the interchanges is determined by the
programmer who writes the business application program, not by the
lengthy standards process.

EDI for e-commerce | Open EDI

 Open EDI provides a framework where two potential trading partners

can whip out an EDI structure for their potential partnership in the
short time frame that it takes them to draw up and negotiate the legal
contracts.
 The increased interest in open EDT is a result of dissatisfaction with
traditional EDI.
 Open EDI is a business procedure that enables electronic commerce to
occur between organizations where the interaction is of short duration.
 In essence, open EDI is the process of doing EDI without the upfront
trading partner agreement that is currently signed by the trading
partners before they commence trying to do business by EDI.

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Standard Data Formats 47

Example of ANSI X12

ASC X12S/94-172 FORMAT*

Source: DISA 1994 Publications Catalog, Data Interchange Standards Association, Inc.,
Alexandria, VA.

ASC X12 FORMAT SAMPLE INVOICE CONTENT/NOTES

ISA*00*0000000000*01*01*PASSWORDME Outside Envelope (Interchange Control Header,
*01*123456789bbbbbb*987654321bbbbbb* ISA)
890714*2210*U*00204*000000008*0*P*N/L
GS*IN*012345678*087654321*900509 Inside Envelope
*2210*000001*X*002040N/L
ST*810*0001N/L Invoice
DATE ORDER DATE 7/13/90 6/25/90 1001
BIG*900713*1001*900625*P989320N/L INVOICE# P989320
CUSTOMER ORDER#
N1*BT*ACME DISTRIBUTING CHARGE TO Acme Dist. Company
COMPANYN/L N3*P.O. BOX 33327N/L P.O. Box 33327
N4*ANYTOWN*NJ*44509N/L Anytown, NJ 44509

Example of EDIFACT

UNB+IATB:1+1APPC+LHPPC+940101:0950+1’
UNH+1+PAORES:93:1:IA’ MSG+1:45’ IFT+3+?*XYZCOMPANY
AVAILABILITY?*’ ERC+A7V:1:AMD’ IFT+3+NO MORE FLIGHTS’ ODI’
TVL+240493:1000::1220+FRA+JFK+DL+400+C’
PDI++C:3+Y::3+F::1’ APD+74C:0:::6++++++1A’
TVL+240493:1740::2030+JFK+MIA+DL+081+C' PDI++C:4’
APD+EM2:0:1630::6+++++++DA’ UNT+13+1’ UNZ+1+1’

http://en.wikipedia.org/wiki/UN/EDIFACT

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International Considerations

Advantages EDI Disadvantages EDI

Reduces the flow of paper between
organizations Standardizes programs and procedures
Lack of a common understanding and
Improves productivity limited education
Need detailed bilateral agreement between
Collaboration is easy in long run trading partners.
Allows for more efficient disbursement of
information Complex to use
Improves accuracy of information and Difficult to quantify return return on
reduces errors investment

 In sum, firms are adopting EDI as a fast, inexpensive, and safe

method of sending invoices, purchase orders, customs documents,
shipping notices, and other frequently used business documents.
 The improved ability to exchange huge amounts of data in a fast
and effective manner tends to speed up business processes.

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