CHAPTER 9

ELECTRONIC DATA
INTERCHANGE

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 OUTLINE
1. INTRODUCTION

1. WHAT IS ELECTRONIC DATA INTERCHANGE?

2. EDI USERS AND TYPES OF ACTIVITIES

Who Uses EDI?
Types of EDI Activity
Business Processing Considerations
3. WHERE DOES INFORMATION TECHNOLOGY FIT IN?

4. WHAT IS NEEDED TO IMPLEMENT EDI?

EDI Methodology
EDI Implementation Considerations
5. INTERNATIONAL CONSIDERATIONS
Standards
Communication Connectivity

6. IS EDI FOR YOU?

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INTRODUCTION

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 INTRODUCTION
Technology continually offers new and innovative
techniques that affect companies and individuals:
1. Cordless telephone
2. Video games
3. Facsimile (fax) machines
4. Answering machines
5. Notebook computers
6. Electronic mail (e-mail)
7. ATM card
We are in the midst of the e-communications era
One innovation is electronic data interchange
causing major changes in how companies conduct business

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WHAT IS ELECTRONIC
DATA INTERCHANGE
(EDI)?

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 WHAT IS ELECTRONIC DATA
INTERCHANGE?
A Definition From Book:
EDI is computer-to-computer communication
using a standard data format to exchange business
information between companies.
Ex:
Consider the Postal System

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 WHAT IS ELECTRONIC DATA
INTERCHANGE?
A Definition From Net:
(EDI) is about doing business and carrying out
transactions with your trading partners
electronically.

EDI covers most things that are traditionally done

using paper-based communication.

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 NORMAL BUSINESS
ELIGIBILITY
VERIFICATION CUST
SERVICE
ALLIANCE
DETROIT MI

SERVICE
CLAIMS CLAIMS
PROCESSING
ALLIANCE
DETROIT MI

CUST
ENROLLMENT SERVICE

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 EDI Delivery
270 FUNCTIONAL
GROUP INTERCHANGE EDI
VAN

837 FUNCTIONAL
GROUP
INTERCHANGE

834 FUNCTIONAL
GROUP

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EDI Example

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EDI Example

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EDI Example

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EDI Example

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EDI Example

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EDI Example

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EDI Example

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EDI Example

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EDI Example

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EDI Example

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EDI Example

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EDI Example

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EDI Example

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EDI Example

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EDI Example

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EDI Example

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EDI USERS AND TYPES
OF ACTIVITIES

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 EDI USERS AND TYPES OF
ACTIVITIES
SECTION OUTLINE:
Who Uses EDI?

Where is uses EDI?

Types of EDI Activity

Business Processing Considerations

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 EDI USERS AND TYPES OF
ACTIVITIES
Who Uses EDI? (From Book)
Companies of all types and sizes are able to utilize EDI.
Ex. Some large corporations specify EDI :

Use as the communication method of choice

Federal Government

Automakers
suppliers to send all purchase orders and invoices electronically
Industry
banking

healthcare

retailing

travel

Manufacturing

insurance

Government
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 EDI USERS AND TYPES OF
ACTIVITIES
Who Uses EDI? (From Net)
Any company that (buys, sells goods, services) can
potentially use EDI.

Because it supports the entire business cycle

EDI can streamline the relationship that any

company has with its (customers, distributors,
suppliers)

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 EDI USERS AND TYPES OF
ACTIVITIES
Where Is Uses EDI?
Sample EDI application areas
EX:
Purchasing
Inventory
Billing
Distribution
Price notification
Financial
Freight rate notifications
Sales & cash management

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 EDI USERS AND TYPES OF
ACTIVITIES
Types of EDI Activity
Currently EDI is primarily used for:
Purchase orders
Bills of lading
Invoices
Healthcare claims
Financial exchanges

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 EDI USERS AND TYPES OF
ACTIVITIES
Types of EDI Activity
Difference between EDI & electronic funds transfer (EFT)

EFT is also used to exchange information electronically.

Financial EDI is the exchange of payment and bank balance information

between a company and its bank or another company.

EFT is the exchange of information between two banks that results in value
being transferred.

It is possible for financial EDI to be bank to bank, but EFT does no bank-
to-company exchanges.

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 EDI USERS AND TYPES OF
ACTIVITIES
Business Processing Considerations

EDI is changing the way companies do business

shifting the ordering process from a snail-like

paper-intensive system to a computerized one

The nature of business relationships, both internal and

external, is changing
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 EDI USERS AND TYPES OF
ACTIVITIES
Business Processing Considerations
Ex:
A salesperson who used to receive and write orders has

become a product advisor

Customers conducting business with firms that have

multiple divisions now request centralized electronic
transmission

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EDI USERS AND TYPES OF
ACTIVITIES

PAPER vs EDI
Document Transaction
Little Envelope Functional Group
Big Envelope Interchange
Postal Service VAN
Courier Delivery Point-to-Point
Human Audit Machine Audit
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 WHERE DOES
INFORMATION
TECHNOLOGY FIT IN?

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 WHERE DOES INFORMATION
TECHNOLOGY FIT IN?
EDI is not simply a technical tool or technique

It offers change and new ways of conducting business

The involvement and role of the IT organization would be

the same as for other business projects but entails
crossing company boundaries

IT cannot be the sole implementer of EDI; it must be a

business and technical team effort.

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 WHERE DOES INFORMATION
TECHNOLOGY FIT IN?
EDI should have its own architecture fixed to the
companys strategic way.

This EDI architecture at a minimum should be designed

to handle any system:
Integration elements
Systematically
Address security levels
Communications connectivity to use

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 WHERE DOES INFORMATION
TECHNOLOGY FIT IN?
The EDI different between criteria and needs:
handling multiple data formats

multiple system interfaces

provides better support to the various Bus. Processing

It may be necessary to designate an EDI

Coordinator responsible (planning & coordinating) all EDI activity within the
company.

The size of the firm and the extent of EDI activity :

deciding whether an additional full-time position is necessary

It is recommended that someone coordinate the EDI effort,

regardless of the size of the effort, so that results are not
fragmented throughout the company.
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WHAT IS NEEDED TO
IMPLEMENT EDI?

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 WHAT IS NEEDED TO
IMPLEMENT EDI?
SECTION OUTLINE:
EDI Methodology

EDI Implementation Considerations

Business Strategic Planning

Build External Company Relationships
Ensure Commitment and Acceptance
Legal and Tax Implications

Standard Data Formats

EDI Data Standards History
Standard Group Types

Implementing Standards
Data Standards Software

Establishing Electronic Connections

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 WHAT IS NEEDED TO
IMPLEMENT EDI?
Some companies and vendors make implementing EDI
sound simple, but in reality there is more to it than
electronically sending information to another company

EDI Methodology
The EDI project methodology guidelines are the same as for
any project. The stages are:
1. Planning and business requirements definition
2. Functional requirements
3. Design and build
4. Testing
5. Installation
6. Feedback and review

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 WHAT IS NEEDED TO
IMPLEMENT EDI?
Business Strategic Planning

Before starting any EDI adventure, it is important to

establish a vision and mission for the company and its
EDI commitment

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 WHAT IS NEEDED TO
IMPLEMENT EDI?
Business Strategic Planning

Questions that must be answered are:

Why are we pursuing EDI?

What do we expect from its usage?

Who will be our EDI partners?

What information do we want to exchange?

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 WHAT IS NEEDED TO
IMPLEMENT EDI?
Business Strategic Planning

The effort would be minimal and the benefits of EDI

would not be fully realized

It is always best to keep it simple by installing a project in

small manageable pieces, using a pilot program

Business may want to continually improve its work

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 WHAT IS NEEDED TO
IMPLEMENT EDI?
Build External Company Relationships:
EDI project from other company projects is that EDI
entails teaming with another company, known as a trading
partner

A trading partner must be an active participant in each

phase and both partners must cover the same activities

Timing, cooperation, and coordination between the trading
partners are critical components of a successful
implementation.

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 WHAT IS NEEDED TO
IMPLEMENT EDI?
Ensure Commitment and Acceptance

It is important that all levels of management participants be
educated on EDI:
employees
team participants

This helps define business requirements in solving business
concerns.

Education also helps in overcoming the fear of change and
promotes eventual acceptance.

The overall goals and objectives of the project must be explicitly
defined and top management must commit to the project before
moving on to functional requirements.

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 WHAT IS NEEDED TO
IMPLEMENT EDI?
Legal and Tax Implications
a company should seek advice from legal and tax experts.

The IRS is trying to help auditors eliminate paper files

IRS rules vary based on the company

Some basic questions that must be answered are:

Is the original document required?
Are original signatures necessary?
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 WHAT IS NEEDED TO
IMPLEMENT EDI?
Legal and Tax Implications (con.)
What information must be retained for tax or legal purposes?
How long must the information be kept?

How long does the company have to present the information?

Will a copy of the document need to be recreated or will a
report displaying the required information suffice?

It is better to be safe than sorry; consult appropriate

authorities for clear, concise answers before eliminating
paper. Microfiche and imaging are other alternatives when
storing archival information.

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 Standard Data Formats
Introduction

EDI Data Standards History

Standard Group Types

Standard Group Types

Implementing Standards

Data Standards Software

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 Standard Data Formats
One benefit of EDI is that it forces industries to
standardize:

Terminology
Usage

How information is recorded

Presented by creating a dictionary of industry terms and usage

The data must be clear, concise, and unambiguous

between companies

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 Standard Data Formats
EDI Data Standards History

The EDI data standards process began in the United States

with the transportation industry during the mid-1970s

In the early 1980s, the American National Standards

Institute (ANSI) initiated efforts to define a single set of
standards for EDI that could be applied across industries

These standards are known as the ASC X12 standards .

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 Standard Data Formats
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
INVOICE# P989320
BIG*900713*1001*900625*P989320N/L 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

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 Standard Data Formats
Standard Group Types:
Various standard groups have been formed to establish
standards unique to their industries.

These groups usually consist of major companies that

communicate electronically with each other or compete with
one another.

The purpose is to establish a common language throughout the

industry.

This text will not attempt to explain all the different standards
and meanings of the data.

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 Standard Data Formats
Implementing Standards
An attempt to implement standard data formats is
underway, but many firms still use proprietary formats

This forces companies to support multiple formats for the

same business document

a company must be able to identify the sending company,

determine the type of business transaction

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 Standard Data Formats
Data Standards Software
The cost of software that supports translating information into
the standard data formats has dropped.

As more and more firms pursue EDI software, vendors are

offering products that perform this function.

This eliminates the cost of developing in-house customized

programs and maintaining reformat programs

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Establishing Electronic Connections
In addition to a standard data format, it is mandatory that the
companies computers are able to talk to one another.

This sounds simple but it can be complex. EDI entails the use
of special translation and communications software.

When connecting computers, companies must consider the

communications method and protocol that will be used to
transmit information, as well as security and business
recovery.

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Establishing Electronic Connections
Protocol: A set of standards for exchanging information
between two computer systems or two computer devices.

Communications protocol: A list of communications

parameters (settings) and standards that govern the transfer of
information between computers using telecommunications.
Both computers must have the same settings and follow the
same standards to avoid errors.

Communications program: An application program that turns

your computer into a terminal for transmitting data to and
receiving data from distant computers through the telephone
system

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 INTERNATIONAL
CONSIDERATIONS

Standards

Communication Connectivity

Advantages and Disadvantages of EDI

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 INTERNATIONAL
CONSIDERATIONS
Standards
EDI is not used only in the United States or North America.

Data format standardization efforts are taking place in the

United States (ANSI) and internationally (ISO).

Until there is one common standard base, EDI implementation

must be flexible enough to handle multiple standards for the
same type of document

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 INTERNATIONAL
CONSIDERATIONS
Communication Connectivity
When dealing with international communications, there are
numerous concerns other than the obvious language and cultural
barriers

In some countries, telephone lines are government regulated and are

not as efficient as in the United States.

When the government runs the show, acquiring permission from

telecommunications authorities for equipment connection often
causes delays.

Another concern is the level of data security available and the right
of ownership during transmission.

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 INTERNATIONAL
CONSIDERATIONS
Advantages EDI Disadvantages EDI

Reduces the flow of paper Standardizes programs and

between organizations procedures

Lack of a common understanding

Improves productivity and limited education

Allows for more efficient

disbursement of information Complex to use

Improves accuracy of information Difficult to quantify return return on

and reduces errors investment 64
Benefits of EDI (From Net)

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 IS EDI FOR YOU?
Companies should be wary of vendors that try to convince them
how easy and inexpensive it is to implement EDI.

This is partially true, but before spending money, all

implications and expenditures should be considered.

Communication costs, ongoing maintenance, hardware costs,

data volumes, and data availability should be investigated
before investing.

A word of warning: it is difficult to quantify costs and determine

a return on investment for using EDI because it is a complex
system which affects multiple business functional areas.

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 Questions For Students
1. What is mean EDI ?

2. Who Uses EDI ?

3. Where Is Uses EDI ?

4. What are types of EDI activity ?

5. What is Difference between EDI & electronic funds transfer (EFT) ?

6. What are EDI project methodology guidelines are the same as for any project ?

7. Is EDI Standard Data Formats? (Yes/No) and explain and give one example?

8. What is Benefits of EDI ?

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