INTRODUCTION TO EDI : PART I
EDI BACKGROUND
Electronic data interchange (EDI) is not a new development or technology but is expanding in many ways to replace paper transactions across all aspects of a business trading partner relationship (the relationship between the entities involved in the transfer of data). The expansion of EDI accelerated in the 1990s and into the 21st century. It now affects virtually every part of the cash flow time line—from the order process to payments. It affects every area of business—logistics, purchasing, production, marketing, order management, international operations, and finance. In this chapter, we distinguish “traditional EDI”, from evolving forms of electronic commerce that include new variations of EDI.
Traditional EDI involves the use of special data standards, networking, and software to exchange messages between computer applications and trading partners. In finance applications, the ability to manage EDI payments through the banking system is also a characteristic of financial EDI. As discussed in this chapter, finance managers can use EDI for receivables and payables applications, in addition to treasury programs.
As EDI evolves over the next decade, it will be more closely tied to developments in electronic commerce whereby technologies such as the Internet, electronic communication gateways, and comprehensive banking services will be merged. EDI and EC (electronic commerce) implementation often requires a significant commitment of time and resources, and it may also involve a cultural change in the way that work processes occur within a firm.
Benefits achieved by large firms and organizations committed to EDI range from six to nine figures of dollar savings annually. These benefits derive from at least eight different sources, including cycle and error rate reduction, labor savings, reduced storage and transaction costs, reduced uncertainty, and enhanced security. Firms successful in implementing EDI often take a reengineering approach to streamline work-flows and processes by using EDI as an enabling technology.
In 1991, Chrysler Corporation announced at an automotive industry meeting of manufacturers and suppliers that it had saved over $1 billion in inventory and handling costs by implementing just-in-time manufacturing with EDI. In 1997, Allegiance Healthcare Corporation (formerly Baxter Healthcare) claimed that it was using EDI to deliver more than 900,000 boxes of medical supplies to over 6,000 locations, and that the average Allegiance customer was saving $450,000 annually in operating expenses. (Guis and Browning, 1997). These are but two examples of the estimated 300,000 organizational locations that use EDI in North America (Faulkner & Gray, Inc., 1999). This chapter summarizes the components and uses of EDI and shows how it can be used to leverage treasury management strategy.
EDI is a demonstrated use of technology and procedures that has revolutionized the flow of information surrounding the cash flow timeline. In a full EDI relationship, a buyer firm may send a request for a quote to a potential supplier, with the response in a quote or contract form. A firm order is placed with a purchase order, followed by delivery notices, receipt of goods reports, and carrier documents, as the transaction moves from the order process through the delivery process. Finally, the seller firm typically initiates a settlement process with invoicing followed by payment from the buyer firm. EDI transactions thus encompass the entire cash flow timeline from the order phase through production and delivery to financial settlement (see Exhibit I).
Exhibit I: Settlement Phase of Timeline
Traditional EDI is the computer application-to-application transfer of data in a structured format between two or more trading partners. Most North American EDI messages use a structured format based on the ANSI (American National Standards Institute) ASC X12 Committee standards for EDI. Outside North America, a second generic standard called EDIFACT (EDI for Administration, Commerce, and Transport) is used to structure the data. The use of standardized formats means that EDI data must be converted or translated into data formats that business computer applications require. Specialized software and networks are used for this purpose.
Many EDI transactions are based on familiar business documents, such as purchase orders and invoices that flow between a buyer firm and a seller firm. In fact, traditional EDI began with business-to-business exchanges of data in proprietary company formats during the 1960s. Today, EDI transactions include messages such as mortgage applications, student loan status reports, and consumer debit messages that span government, third-party agents, and banks, and even individuals in their usage.
Unstructured electronic communications, including traditional paper fax and most forms of e-mail are not considered to be EDI. This is due to the lack of standardized data formats and because most fax and e-mail is designed to communicate between persons, and not between computer applications. However, the dividing lines between EDI and other forms of electronic commerce are blurring with the advent of technology that converts forms of electronic media into each other. For instance, an EDI message can be sent in an e-mail envelope, or as an automated fax. “Internet VANS” (discussed in the section on communications) may also translate electronic forms into ANSI X12 formats on behalf of users. One might argue that someday soon all computer applications and communications will talk to each other without the need to “translate” into specific EDI data formats. However, this is unlikely to happen in the near future, because most computer applications still require data to be in a specific form to process the data.
EDI is not a recent innovation and, in fact, had its beginnings in the Berlin Airlift of 1948. Edward A. Guilbert, one of the officers involved in logistical operations in Berlin, is generally credited with being the “father of EDI.” Guilbert developed a system of exchanging data based on crude methods of tracking materials during the airlift; these were known as BUSAP, or Business System Applications. This EDI-like data structure was then used between DuPont Corporation and Chemical Leahman Tank Lines as the first known transmission of EDI in the business world. (Crowley, 1993).
In the late 1960s, corporations began to exchange order and production information in electronic formats between themselves. Sears Roebuck and its supplier, Whirlpool Corporation, began one of the first exchanges using a computer-to-computer transmission of pending orders. This was printed out on a paper tape and contained data proprietary to Sears’ applications. American Hospital Supply installed proprietary terminals in the ordering departments of key hospital clients to facilitate faster delivery of medical supplies, using a data format proprietary to American Hospital. Ford Motor began to transmit lists of needed parts and supplies to key “Tier One” suppliers in Ford format. But the first transmissions were limited to one-to-one communication because of a lack of data standards and available networks for expanded communication.
The transportation industry was the first industry to recognize that common formats, rather than proprietary data standards, would allow expansion of data across multiple trading partners. In 1968, the Transportation Data Coordinating Committee (TDCC) was formed in Washington, D.C., to develop industry standards for motor carriers, railroads, and ocean and air carriers. In 1975, these standards were produced and first used by railroads to track rail car usage across multiple railroads. Other transactions, such as carrier invoices, quickly followed. In the mid 1970s, industries such as warehousing, chemicals, automotive, and grocery joined in the EDI effort and began producing their own industry formats and networks.
Because many large corporations had business requirements that crossed multiple industries, an increasing need developed by the late 1970s for a cross-industry data standard and for networking and software to support a generic data standard for business. In 1979, ANSI formed the ASC (Accredited Standards Committee) X12 Committee to develop business data formats used across all industry groups.
During the 1980s and 1990s, the use of EDI expanded into many industries and business applications that were based on manual and paper processing. Industry EDI standards for retail (UCS standards), apparel (VICS standards), warehousing (WINS standards), and transportation (TDCC standards) were combined under the ANSI ASC X12 umbrella in 1991. These previously separate standards groups were now able to expand EDI messaging into new applications, while avoiding redundancy in message development and maintenance.
EDI also expanded in the 1990s into service industries such as health care, government, insurance, mortgage banking, and educational and non-profit organizations. As a result, EDI is now widely used across virtually every business and organizational segment in North America. A 2002 deadline set by the U.S. Federal Government mandates that the health care industry comply with EDI standards for electronic exchange of claims, payments, eligibility, and status reports as a result of the Health Insurance Portability and Accountability Act of 1996 (HIPAA). As a result, thousands of health care providers, laboratories, insurers, and third party clearinghouses are currently implementing industry guidelines for EDI based on ANSI X12.
During the next decade, EDI is expected to expand into consumer applications using Internet and plastic card technology linkages for communications. Although some analysts believe that Internet protocols and applications will replace EDI, it is more likely that Internet and XML (Extensible Markup Language) will augment traditional EDI for small trading partners and web site to application interfaces. Since EDI solves the problem of sharing data and using generic data structures across both trading partners and different internal computer applications, there will be no replacement for it unless a new universal set of standards, secure communications environment, and control procedures can be developed.
ANSI was formed in 1918 to oversee the development of national voluntary standards in the United States. The ANSI organization does not develop standards itself but ensures that procedures and consensus processes are followed before a standard is approved for the United States For example, the size of a light bulb’s thread is an ANSI product standard that ensures that light bulbs and appliances will work together regardless of the manufacturer, if the products are sold in the United States. The ASC X12 of ANSI was chartered in 1979 to develop uniform standards for inter-industry exchange of business transactions. The ASC X12 body meets three times each year to develop and maintain EDI standards. (Data Interchange Standards Association, 1997).
DISA (Data Interchange Standards Association) is the secretariat of ASC X12 with responsibility for publishing annual releases of the standards each December. Each release contains all draft standards for trial use (DSTUs) approved for publication through the preceding October meeting of ASC X12. There are currently over 300 draft transactions approved for publication by DISA. Draft standards undergo the ANSI-required public review process approximately every five years, at which time they become approved ANSI standards.
In ANSI standards terminology, each document or message in standard format is called a transaction set. Examples of approved draft transaction sets are the purchase order, invoice, health care claim, ship notice/manifest, and functional acknowledgment (which is used for special transactions between trading partners). Each draft ASC X12 transaction has a three-digit designation to identify it uniquely. Examples of commonly used ASC X12 transactions are shown in Table 1.
Table 1
ASCX 12 Transactions
|
Identifier
|
Transaction Set
|
|
850
|
Purchase order
|
|
810
|
Invoice
|
|
856
|
Ship notice/manifest
|
|
820
|
Payment order/remittance advice
|
|
837
|
Health care claim
|
|
997
|
Functional acknowledgment
|
Transaction sets are constructed from
data segments, or specific records of information containing
data elements defined in the X12.3 Data Element Dictionary. Transaction sets are transmitted to trading partners as functional groups of similar transaction sets (e.g., four purchase orders) bounded by a group header segment and a group trailer segment. (See Exhibit B for a listing of ANSI standards terminology.)
Standards Terminology
-Exhibit B
A data segment contains logically related data elements in a defined sequence: a segment identifier (or “tag”), one or more data elements with each preceded by a data element separator, and a segment terminator and a data delimiter. A data delimiter is a special purpose character defined between EDI trading partners to separate data elements within a data segment. The most common data delimiter is an asterisk (*). The data element is the smallest unit of information in the ANSI standards. Each data element is identified by a reference number relating to the Data Dictionary, which specifies data element name, description, type, and minimum/maximum length.
ANSI uses syntax rules to define specifically where and how data segments and elements are used within a transaction set. Depending on the transaction, the use of a particular data segment may be mandatory or optional, but the ordering of segments within the transaction is rigidly defined. Similarly, data elements may be mandatory, optional, or conditional, depending on their use within a particular data segment. Data elements and segments are variable, rather than fixed in length, which makes ANSI EDI messages much more robust and flexible across many different computer applications, compared to proprietary data standards.
Within the ASC X12 syntax for transaction sets, internal looping of groups of records or segments may be used to designate multiple occurrences of data within a hierarchy. For example, multiple product line items within a purchase order or multiple payees within a payment order form loops of segments within a transaction set. ASC X12 also specifies special data segments for beginning and ending a transaction, called a header and trailer (ST and SE segments).
A key benefit of the ANSI standards lies in control devices built into the standards. Within a message, control segments and elements are used to count occurrences of data and to match control numbers beginning and ending a transaction. Hash totals of volumes, amounts, and weight may also be calculated in transactions. In addition, special transactions called functional acknowledgments may be sent between trading partners to (1) acknowledge receipt of a message (such as an invoice), (2) provide notification of syntax errors, and (3) indicate acceptance or rejection. This gives EDI users much more security and control than is available with paper and manual processing.
For an EDI message to move electronically from one trading partner to another, EDI envelopes must be used to identify the trading partners and the type of transactions. ASC X12 standards specify that a group of transactions (e.g., two purchase orders) must be surrounded by a functional group envelope, composed of a header and trailer record. The header record is a single segment called a GS, and the trailer is a segment denoted GE. Similarly, an outer envelope surrounds the entire transmission of functional groups (e.g., a group of purchase orders and a group of requests for quotes) transmitted to a trading partner. This outer envelope which is called an interchange, is also composed of two data segments, with an ISA segment header and an IEA segment trailer (see Exhibit III ).
UN/EDIFACT stands for United Nations EDI for Administration, Commerce and Transport, which was approved as an international standard in 1986 under the authority of the United Nations Economic Commission for Europe. The purpose of EDIFACT standards is to create a single international EDI standard “flexible enough to meet the needs of government and private industry.” (Data Interchange Standards Association, 1997).
EDIFACT “messages” correspond to ASC X12 transaction sets. Messages that are approved by EDIFACT developers and approval boards are called United Nations Standard Messages (UNSM) and are published in UN/EDIFACT directories. Today, there are over 120 UNSMs available for use with international trading partners.
Many industries have developed extractions or “subsets” of the ASC X12 draft standards for use in specific industry implementations. These are published in a format similar to the ANSI standards by groups such as UCS for grocery, VICS for retail, AIAG for automotive , and WINS for warehousing. A corporation seeking to implement EDI is strongly advised to use industry standards where they exist to streamline the implementation process. Other industries that have standards or implementation guidelines available include:
· Chemicals;
· Petroleum;
· Utilities;
· Telecommunications;
· Health care;
· Mortgage;
· Insurance; and
· Distributors.
Exhibit III
[PRINTER FRIENDLY VERSION]
