Why Business-to-Business Commerce Prefers EDI

by Dr. Ralph F. Wilson
Web Commerce Today, Issue 4, November 15, 1997

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This article contains older information. Go here for newer information on ecommerce and selling online.

For Big Company procurement department, to fax or mail a simple purchase order and deliver it to a supplier can be expensive. Big Company saves substantial money by automating its accounting and purchasing functions for electronic ordering. It's also expensive for Small Company supplier or vendor to receive a purchase order, acknowledge receipt, and key the purchase order into its accounting system. Since Big Company seeks the lowest possible prices from Small Company, it has a vested interest in helping them increase efficiency. Often Big Company will propose to its vendors and suppliers a means of sending and receiving purchase orders electronically:  EDI (Electronic Data Interchange).

Since Big Company uses a completely different accounting system than Small Company, the two companies can't talk to each other directly. EDI provides a common standard data format. Both companies translate between their accounting system and the EDI format using a computer translation program.

Traditionally, large companies and service bureaus developed expensive dedicated VANs (Value Added Networks) to transmit EDI data, but these days more and more are using the Internet as the means of transmission, saving a great deal of money and making it possible for Small Company to meet Big Company's trading requirements.

What transactions can you transmit using EDI? The most common standard, ANSI X12, lists hundreds of document types but the most commonly used are:

• Invoice (810)
• Purchase Order (850)
• Purchase Order Acknowledgment (855)
• Functional Acknowledgement (997)

Acknowledgements are important, especially with the occasional unreliability of the Internet, so that both parties are sure of what the other has agreed to do. To get an idea of the complexity of such documents, take a look at the structure of data fields for an invoice

Security is typically accomplished by using SSL-secure Web servers for form-based systems, and S/MIME for EDI documents transmitted via e-mail.

While companies have used VANs for years, the Internet is being used to transmit EDI documents in three basic ways:

Company to Company	Large EDI-enabled trading partners transmit EDI documents prepared using traditional EDI translation software over the Internet using software such as Premenos Templar
Hub and Spokes	A larger company will set up an EDI server at its location, which trading partners can access over the Web with proprietary software such as Premonos WebDox which allows both EDI via e-mail as well as using Web-based forms.
EDI Service Bureau	Client-members use a Web browser to transmit EDI documents to other client-members. Bigger service bureaus may integrate their existing VANs (used by larger companies) with their new Web-only system (used by smaller companies). Some of these online services are industry-specific, others are general. Example: GE TradeWeb

How will EDI help your small to medium business?

1. If you have customers who prefer EDI, you may receive more business from larger customers, since they will save money dealing with you.
2. You might also gain new trading partners by being part of a trading community such as GE TradeWeb.

Neither of these approaches requires you to purchase expensive software to map your accounting system's documents to EDI, which you'll probably want to delay until EDI commerce becomes a significant slice of your company's revenues.

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See our EDI glossary for definitions.

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