Full-Form of EDI (Electronic Data Interchange)
Full form of EDI is Electronic Data Interchange. It can be defined as a digital transfer of information or documents such as invoices, purchase orders, bills of exchange, shipping notices, etc in an electronic format (soft copy) between sellers and buyers and it also allows an entity to virtually communicate with other entities (national and international) anytime and anywhere irrespective of the mismatching time zones.
How does it Work?
- An EDI system stores company’s full information. The details about inventory levels, re-order, invoicing, purchasing, billing, etc. are all stored in an EDI system. It facilitates trading between a buyer and a seller by taking into account data like unique pricing, ship to addresses, etc.
- EDI even uses standard data to ensure that the buyer’s requests and requirements are in sync with that of the customers. The orders are successfully placed, and the transaction is executed without any interruptions.
- This software uses relevant data, and when a purchase request is received from the buyer, the data is transformed to fit the suppliers’ system. The valuable information is then used to generate the documents.
Mike, a purchasing manager of ABC stores, is in charge of preparing orders for the store. He prepares an order and translates the same into electronic documents (or EDI 850). After the formatting of EDI 850 is done, the same is virtually transmitted to XYZ (supplier). XYZ receives the electronic data interchange 850 orders from ABC stores and processes the purchasing order.
- Direct EDI – This is also regarded as a point-to-point electronic data interchange, and it helps build an individual connection with each trading partner. It is mostly used between suppliers with a huge customer base and a multitude of business transactionsBusiness TransactionsA business transaction is the exchange of goods or services for cash with third parties (such as customers, vendors, etc.). The goods involved have monetary and tangible economic value, which may be recorded and presented in the company's financial statements..
- EDI via VAN – This is a private network that enables the interchange of electronic documents between two trading partners.
- EDI via AS2 – This enables the secured transmission of data via the internet.
- Web EDI – This uses a standard internet browser for conducting EDI.
- Mobile EDI – This is not much in use due to mobile devices or the underlying security issues with them.
- EDI Outsourcing – This is also regarded as Managed Services, and it allows organizations to make use of external resources for managing their EDI environment daily.
The two widely used electronic data interchange standards are American National Standards Institute/Accredited Standards Committee X12 (ANSI ASC X12) – generic, and EDI for Administration, Commerce, and Transport (EDIFACT) – generic international.
- Standard Document Format – It is a type of standard format to which both the trading parties agree, and it does not require complicated software or hardware for accessing information.
- Translator and Mapper – The translator is used to convert raw data into more meaningful information while the mapper is used to create conversion specifications.
- Communication Software – It is used to transmit data and convert business documents such as invoices, purchase orders, etc. into a standard document format.
- Communication Network offers a direct link between the buyer and the seller, who agreed upon exchanging business documents through electronic data interchange.
- Retail Sector offers a structured way of maintaining and replenishing goods stocked at a retail outlet.
- Manufacturing Sector – It offers a systematic way of in-time manufacturing and planning concerning material requirements.
- Automobile Sector – It helps the automobile industry to keep its customers aware of the on-going product and pricing details throughout the purchase cycle.
- Financial Sector – It helps the financial sector replace labor-intensive activities on collecting and dispersing payments through an electronic system.
- Real-Time Processing – It enables the users to experience real-time processing of business information and transactions. This speeds up the business cycleBusiness CycleThe business cycle represents the expansion and contraction of the economy that occurs due to ups and downs in the gross domestic product (GDP) of a country. It is experienced over the long term and goes parallel with the natural growth rate. up to 61% and allows the companies to execute a transaction in a matter of a few minutes instead of a pro-longer duration, which could be days or weeks or a month.
- Fewer Chances of Stock-Out, Cancellations, and Re-Worked Orders – It enables the companies to process business documents in real-time and with full accuracy. Thus, leading to fewer chances of stock-out, cancellations, and re-worked orders.
- Lower Costs – This helps minimize the costs of travelling, documentation, printing, storage, filing, reproduction, postage, etc.
- Strengthens Relationships Between Trading Partners – EDI applications shortens delivery time and bring about a lot of transparency in transactions. This helps the suppliers gain the buyers’ trust and build profound relationships with them in a matter of short time.
- Expensive – These applications are expensive. The installation of EDI applications in an organization is very complicated and costly too. This is why most organizations highly disregard the installation of EDI applications into their systems despite the advantages it has to provide.
- Network Complexity – Another disadvantage of installing EDI applications is that it generates the requirement to have extensive telecommunications capability. This may not be a problematic scenario for well-doing companies, but it becomes huge trouble for small and medium-sized companies.
- This is the short form used for electronic data interchange. The key advantages of installing an EDI application are that it was highly adaptable, simplifies processes, minimizes costs, brings transparency, co-ordinates processes, etc.
- However, the installation of EDI could turn out to be expensive for small and medium scale companies. Companies that are willing to install EDI applications will need to make a huge investment in their computer networks. Companies that cannot afford to make such an investment will only leave with a choice of relying upon the intermittent point-to-point modem communications.
This has been a guide to the Full Form of EDI i.e. (Electronic Data Interchange). Here we discuss the examples of EDI, types, and how it works along with components, applications, benefits, and limitations. You may refer to the following articles to learn more about finance –