Reprint - The
Missouri Society of CPAs
Volume 44, No. 8
by Stanley W. Kumer, CPA
Member of Information Technology Committee
BK Computer Consultants, Inc.
Shawnee Mission, Kansas
Today's competitive environment is pushing businesses
of all sizes to become more customer service oriented,
while at the same requiring them to reduce the cost of
operations. In many cases, EDI (Electronic Data
Interchange) can provide these solutions.
It is now possible for a company, using EDI
technology, to process one document that will trigger
such business transactions as sales orders,
confirmations, picking-lists, invoices and accounts
receivable statements. The difference between EDI and
the present system is that EDI transactions are all
carried out electronically.
What is EDI?
EDI is the electronic exchange of machine-processable,
content-standardized data between two companies. This
type of computer exchange is characterized by the
interchange of information without any human
interaction. Other forms of computer-to-computer
communications, such as fax and e-mail transmissions,
are not considered EDI transmissions because they
require the exchanged data to be re-keyed before it can
be further processed.
While EDI transactions can encompass a wide range of
information transfers, there is a high level of
cooperation required between businesses involved in EDI
relationships. This in helps solidify the "trading"
partnership because communication between the parties is
History of EDI
The initial EDI applications began in the early
1970s. The early adopters of EDI were primarily in the
retail, grocery, automobile, and garment industries.
Since 1983, there has been an increase in the variety of
industries using EDI. The U.S. government has applied
this technology to transact business with its vendors,
and both federal and state governments have adopted EDI
to assist in the collection of tax payments.
Benefits of EDI
Businesses using EDI can achieve significant cost
savings, including improvements in cash management and
reduced administrative costs. In addition, customer
relations improve due to faster response time and
reduced errors in processing orders.
Using EDI allows cash management to be more precise
than relying on traditional check transactions since the
timing of banking transactions is easier to predict.
Operating costs decrease because paper is reduced.
This affects administrative costs associated with
clerical duties: managing the documents, postage,
preprinted forms, duplicating and document retention.
Higher customer satisfaction can be achieved when
lower inventory levels are maintained. This is the
result of the vendor's faster response time and higher
accuracy on filled orders. The faster response time and
improvements in accuracy are a result of the orders
being processed directly from the customer's computer,
versus the traditional methods of taking orders by
voice, fax and printed communications.
Who Uses EDI
Companies that benefit from EDI technology typically
have orders listing many different items on one order, a
high volume of small orders or items that have a short
lead time. Companies participating in a mature EDI
program find that they receive and issue more orders,
but with smaller quantities.
Companies participating in EDI relationships are
vendors that supply to high volume retailers, such as K
Mart and WalMart. The vendors monitor the retail sales
volume of their inventory items, automatically
replenishing the stock as appropriate.
In the medical insurance industry, claims are filed
with the insurance company directly from the doctor's
office as a service to the patient. The insurance
company electronically notifies the doctor's office of
the claim that the insurance company will pay, which
allows the doctor to accurately bill the balance to the
How EDI Works
By definition, EDI involves one computer communicating
to another. This may be a problem due to the
incompatibility of two different computer systems. To
combat the incompatibility, standards were developed to
facilitate this inter-computer data exchange.
The EDI process involves several steps as the
transactions are sent back and forth between the
systems. The sending computer translates its business
transactions into a universally accepted EDI data
format. The EDI formatted data is then transferred to an
interceding computer that holds the transactions which
will be polled, or retrieved, by the company for whom
the transactions are intended. The receiving computer
translates the retrieved EDI formatted data into the
receiving system's format. Finally, the data is
processed by the receiving system. The multi-step
process is automated with the use of bridging software,
eliminating any human interaction.
Many types of interceding computer systems can be
utilized to process the EDI transactions. Structured
interceding computer systems are called VAN's (value
added networks). The VAN has the benefit of added
security because the data is accepted on behalf of one
company from another company based on a pre-established
relationship. The VAN often verifies the transactions
that appear to be valid EDI transactions. Trading
partners can also use an Internet e-mail address. This
is less costly, but more risky due to the lack of
This article has provided only a basic framework of
the business use of EDI technology. Regardless of the
size of the business, EDI can be a factor in offering
superior customer service while reducing the cost of