INFORMATION TECHNOLOGY
by Stanley W. Kumer, CPA
Member of Information Technology Committee
BK Computer Consultants, Inc.
Shawnee Mission, Kansas
Phone: 913-432-8686
Fax: 913-432-8668
E-Mail: bkcci@wwgv.com
 

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 enhanced.
 

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 patient.
 

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 transaction security.
 

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 operations.