EDI Fundas

ISBN 9780989613606

2013, 2014 GXS Inc. All rights reserved. This book may not be reproduced, in wholeor in part, in any form (except by reviewers for the public press), without written per-mission from the publisher, GXS Inc., 9711 Washington Blvd., Ste. 700, Gaithersburg,MD 20878.

EDI B

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ACKNOWLEDGMENTS

I

WANT

TO

TAKE

this opportunity to thank the many peo-ple who kindly gave of their time and expertise to offertheir helpful suggestions. Without the support of so manyco-workers over so many years this book could not havebeen written.

In particular, I express my appreciation to Steve Keifer,who inspired and encouraged me to undertake this pro-ject, and Ruth-Ann Femenella-Rich, who was availableevery step of the way to ensure its success.

I also thank Ellie Thatcher, Debbie Scott, Denise Oak-ley, Karin McNair, John Radko, Mark Morley, AlisonWelles, Mike Wang, Bob Heidish, and Carey Wachtel forreviewing all or sections of the manuscript and offeringvaluable suggestions.

Josh Studley, an intern, was of great assistance in com-pleting many of the tedious tasks that must be done inorder to produce a good product. Finally, I thank Dome-nic Calabrese, my friend of many years and a former man-ager at the U.S. Department of Education, for reviewingthe manuscript and offering his insights.

I thank you all.

TABLE

OF

CONTENTS

Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

1. What Is EDI? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3The EDI Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Sending EDI Documents . . . . . . . . . . . . . . . . . . . . . 7Receiving EDI Documents . . . . . . . . . . . . . . . . . . 10The Benefits of EDI . . . . . . . . . . . . . . . . . . . . . . . . 13

2. What Are EDI Documents and Standards? . . . . . . . 21ANSI X12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22UN/EDIFACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Common Business Documents . . . . . . . . . . . . . . . 26Manufacturing-Specific Documents . . . . . . . . . . . 28Logistics EDI Documents . . . . . . . . . . . . . . . . . . . 29Financial EDI Transactions . . . . . . . . . . . . . . . . . . 30

3. What Are Your Communications Options? . . . . . . 33Direct Connection Model . . . . . . . . . . . . . . . . . . . 34Network Model . . . . . . . . . . . . . . . . . . . . . . . . . . . 35Most Commonly Used

Communications Protocols . . . . . . . . . . . . . . . . 38FTP with VPN . . . . . . . . . . . . . . . . . . . . . . . 40SFTP and FTPS . . . . . . . . . . . . . . . . . . . . . . 41AS2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

4. Which Business Processes Typically Benefit from EDI? . . . . . . . . . . . . . . . . . . . . . . . 45

Procurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46Shipping and Receiving . . . . . . . . . . . . . . . . . . . . . . . . 49Invoicing and Payments . . . . . . . . . . . . . . . . . . . . . . . . 53

5. What Does an EDI Document Look Like? . . . . . . . . . . . 61Data Elements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63Segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64Envelopes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

6. How Does a Company Implement an EDI Program? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

Do-It-Yourself Model . . . . . . . . . . . . . . . . . . . . . . . . . . 72B2B Managed Services Model . . . . . . . . . . . . . . . . . . . 78How Three Companies Implemented EDI . . . . . . . . 80

Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

EDI Basics

FOREWORD

1

BILL

CLINTON

once observed, The price of doing the sameold thing is far higher than the price of change. Compa-nies that are slow to adapt new technology to their busi-ness processes may find themselves consigned to the pro-verbial dustbin of history.

Businesses have invested in technology such as Enter-prise Resource Planning (ERP) systems to automate inter-nal business processes, including accounts payable andreceivable, inventory control, and intra-company com-munication. However, many of these same companies areslow to automate their business-to-business transactions,such as the exchange of purchase orders, invoices, andbills of lading.

Electronic commerce (e-commerce) is the exchange ofinformation via electronic media such as the Internet andprivate communications networks. There are two types ofe-commerce: Business-to-Business (B2B) and Business-to-Consumer (B2C). Almost every day, each of us experi-ences B2C e-commerce, such as when we book airlinetickets or hotel reservations online and then receive anelectronic confirmation. This book focuses on electronic

2 EDI Basics

data interchange (EDI), the most commonly used B2B e-commerce technology.

In todays business environment, EDI remains a game-changer across all industries, including retail, banking,manufacturing, high-tech, and services. For many compa-nies it has become the lifeblood of their business, makingthem more efficient, driving down costs, and increasingcustomer satisfaction. It is the means by which they candifferentiate themselves from their competition. UsingEDI, a manufacturer in Detroit, Michigan can send a pur-chase order to its supplier in Japan, receive an electronicdocument indicating that the item is out-of-stock, andimmediately react by sending the purchase order to analternative supplier in Brazilall in just minutes. Thishigh level of visibility that is enabled by the use of EDI iscritical to business success.

EDI Basics

introduces you to this electronic way ofdoing business so that you can participate knowledgeablyin the conversation at your company about moving awayfrom the old, manual processes.

The pages that follow answer the questions: What isEDI? How does it work? What does it take for your com-pany to get started?

* 1 * 1 * 1 *

WHAT

IS

EDI?

In this chapter, you will learn:

The definition of EDI

How the EDI process works for sending and receiving documents

The benefits of EDI

3

ELECTRONIC

COMMUNICATION

has changed the way com-panies conduct business with each other. Business-to-business (B2B) electronic commerce (e-commerce), whichincludes EDI, XML (Extensible Markup Language), andonline catalogues, has enabled the integration of compa-nies throughout the world into communities of businesspartners (often called trading partners) with benefits forall. In todays business environment, B2B integration is akey to success; in fact, many companies will no longer dobusiness with you if you cant do business electronically.

While many businesses have incorporated emails andfaxes into their B2B communication, these processes stillinvolve human handling and are thus slow and prone toerror. Although they provide improvements over postalmail-based processes, they lack the power and function-ality of e-commerce.

4 EDI Basics

Figure 1.1 shows a simplified scenario in which abuyer faxes or mails an order to a supplier, who then faxesor mails an invoice back to the buyer.

Figure 1.1: Manual Document Exchange

As you can see, this manual process involves a lot ofpaper, people, and time. Mail can be slow and paper doc-uments can be misplaced or lost. Once received, mailedand faxed documents must be manually entered into acomputer application, a process that frequently results inerrors. And even though an email is sent electronically, ittoo must be entered manually, because the computerapplication has no way of knowing where each piece ofdata needed is located within the email. Having people

Manual, paper-based processes are slow, error-prone, and costly.

1.

What Is EDI? 5

involved slows down the processing of the documentsand also introduces errors.

In the 1960s, the railroad industry, which needed tofind a faster and more efficient way to communicate infor-mation about goods being transported, began to send thisdata electronically. Other businesses realized the value ofelectronically exchanging information and so, beginningin the 1980s, many industries adopted EDI, the electronicexchange of standard-formatted business documentsbetween computers. At first, only those businesses thatcould afford large mainframe computers were able to par-ticipate. But with the advent of the personal computer andthen the availability of the Internet, use of EDI becameavailable to all companies regardless of size.

Electronic Data Interchange (EDI) is the computer-to-computer exchange of business documents, such as pur-chase orders and invoices, in a standard electronic formatbetween business partners, such as retailers and their sup-pliers, banks and their corporate clients, or car-makers andtheir parts suppliers.

The most common documents exchanged via EDI arepurchase orders, invoices, and advance ship notices. Butthere are many others, such as bills of lading, customsdocuments, inventory documents, shipping-status docu-ments, and payment documents.

Because EDI documents are processed by computers,the computers program must know where to find eachpiece of information in the incoming document and the

Electronic Data Inter-change (EDI) is the com-puter-to-computer exchange of business doc-uments, such as purchase orders and invoices, in a standard electronic format between business part-ners.

6 EDI Basics

format of that data. For example, are the numbers in-cluded in the data integer (e.g., 12) or decimal (e.g., 12.0)?Are the dates in the form mmddyy or mmddyyyy? Just astwo speakers of different languages (for example, one whospeaks only English and one who speaks only Japanese)cannot hold a conversation, two business systems, eachwith its own proprietary format rather than a common for-mat, cannot exchange data with each other. Thus, a com-mon, standard format is the language by which busi-nesses communicate with each other via their computers.

EDI standards have been developed by organizationsof concerned businesses to identify needs, create plans tomeet those needs, and come to an agreement on the pro-posed standards. Subcommittees continually meet to pro-pose new standards or changes in response to evolvingbusiness requirements. There are several EDI standards inuse today. The most common cross-industry standards areANSI, primarily used in the United States, and EDIFACT,primarily used in Europe and Asia. In addition, there arestandards for specific industries, such as SWIFT for bank-ing and RosettaNet for high-tech.

Lets now look at how the EDI process works.

The EDI Process

Today, all types of business documents for industries suchas retail, automotive, high tech, logistics, and banking canbe exchanged using EDI. These documents can flow from

EDI standards provide a common data format, enabling computers to communicate.

There are several EDI standards in use today along with standards for specific industries. See Chapter 2 for further details.

1.

What Is EDI? 7

the senders computer straight through to the appropriateapplication on the receivers computer (e.g., the ordermanagement system), where processing can begin imme-diately.

With a fully integrated EDI system, the process canlook like thisno paper, no people, and almost no time:

As you can see from Figure 1.2, sending and receivingEDI documents can be a seamless and efficient way toconduct business.

Sending EDI Documents

To send an EDI document, you need to identify the data,create an EDI document, and transmit it.

Step 1: Identify the data

The first step is to identify the data you want to includein the purchase order, invoice, advance ship notice, etc.The sources of data and the methods available to generate

Figure 1.2: EDI Document Exchange

EDI document exchange is from computer to computerno people or paperwork involved.

8 EDI Basics

the electronic document can include: (1) computer pro-grams that extract data from system databases, such asfrom a retailers purchasing system or a shipping com-panys logistics system; (2) computer programs that ex-tract data from spreadsheets; and (3) people keying in thedata via web-form data entry screens.

Step 2: Create the EDI document

In the next step, software converts your internal datainto the EDI standard format. This requires specializedtranslation software that defines how your internal data isto be mapped (i.e. correlated) to the EDI format (see Figure1.3).

Figure 1.3: Creating the EDI Document

To send an EDI document: Identify the data to be

sent; Convert data into EDI

format using translation software;

Transmit the EDI document to your business partner.

1.

What Is EDI? 9

Translation software is available to suit just about anycomputing environment and budget, from large systemsthat handle thousands of transactions daily to PC-basedsoftware that need only process a few hundred or fewertransactions per week.

Step 3: Transmit the EDI document

There are two basic ways to transmit an EDI docu-ment. The first option is to send it directly to your businesspartner, usually via the Internet. The other option is to usethe services of an EDI Network Services Provider, inwhich case you send the EDI document to the Provider,who then makes it available to your business partner.Using a Provider is often the easiest and best approachwhen you have many business partners, each using a dif-ferent communications protocol (rules) that you wouldotherwise need to accommodate. See Figure 1.4.

Figure 1.4: EDI Transmission Options

See Chapter 3 for more details on the various EDI communications protocols.

Two transmission options:1. Send your documents

directly to business partners.

2. Connect to an EDI Network Services Provider, who will make your documents available to your business partners.

10 EDI Basics

Receiving EDI Documents

Receiving an EDI document is basically the reverse of thesending process. (1) You receive the transmitted EDI doc-ument; (2) your system converts the EDI data for yourinternal system; and (3) the data is fed into your internalsystem for processing, such as into a banks payment orig-ination system or a suppliers order management system.

Step 1: Receive the transmitted EDI document

As with sending a document, there are two basic op-tions. You can receive the EDI document directly fromyour business partner or you can use the services of an EDINetwork Services Provider, in which case your Providerreceives the EDI document from the sender and thenmakes it available to your internal system.

Step 2: Convert the EDI document for Your Internal System

Software now converts the data from the incomingEDI document into the format used by your internal sys-tem. This requires specialized translation software thatdefines how the EDI data is to be mapped (i.e. correlated)to your internal data format.

The same specialized translation software that is usedto create EDI documents for sending is used in the receiv-ing process (see Figure 1.5).

See Chapter 3 for more details about your com-munications options.

For a discussion of trans-lation software, see p. 76.

1.

What Is EDI? 11

Step 3: Feed data into your internal system for processing

Your computer application can now automatically feedthe translated data into your system, such as your ordermanagement system, for immediate processing. Or, oftenfor smaller companies that havent fully integrated EDIwith their internal systems, the incoming data is madeavailable either as a report or on the computer screen.

Summary

Thus, there are several options available to you when con-figuring an EDI system for your business. You can per-form data conversion in-house or use the services of an

Figure 1.5: Converting the EDI Document

To receive an EDI document:1. Receive the transmitted

document;2. Convert the EDI format

into your internal format using translation software;

3. Feed the data into yourinternal system for pro-cessing.

12 EDI Basics

EDI Network Services Provider. You can transmit yourdocuments directly to your business partners via theInternet or transmit via an EDI Network Services Pro-vider. Or, you may use a combination of these options inorder to satisfy the requirements of your various tradingpartners.

Figure 1.6 below provides an overview of an EDI pro-cess in which the sender and the receiver each manages itsown data conversion processes.

Figure 1.6: EDI Process Overview

Many companies use a combination of trans-mission approaches. They: Send EDI documents

directly to their largest-volume partners;

Use an EDI Network Services Provider to exchange EDI documents with others.

1.

What Is EDI? 13

The Benefits of EDI

EDI has helped simplify and improve commerce betweentrading partners for more than thirty years and its benefitscontinue to expand as it improves business processes suchas electronic procurement, automated receiving, elec-tronic invoicing, and electronic payments. EDI can helpyour company reduce the cost of personnel and officespace, improve data quality, speed up business cycles,improve efficiency, and provide strategic business bene-fits. Lets look at the benefits that businesses across allindustries are realizing by using EDI.

REDUCED

COSTS

: EDI reduces the costs of personnel,supplies, and office and storage space. Since paperdocuments are replaced by EDI transactions, ex-penses associated with paperprinting, reproduc-tion, storage, filing, postage, and document re-trievalare all reduced or eliminated. Movingfrom a manual to an EDI process frees up personnelto concentrate on other aspects of the business. Amajor apparel manufacturer, after expanding itsEDI program to include all its small retailers, wasable to free up almost an entire warehouse for othercompany business due to reduced paperwork andpersonnel requirements.

1

Research has consistently shown that EDI costsat most one-third of its paper-based equivalent. AU.S. manufacturer of electronic communications

Ten minutes can be saved inthe handling of each invoicewhen they are received elec-tronicallyresulting in totalsavings of 120 million Eurosper year. This is equivalent topotential savings of morethan 2,000 man-years of workper year.

Global StandardsOrganization

2

14 EDI Basics

components reported a reduction in its order pro-cessing costs from $38.00 per order to $1.35 usingEDI.

3

A major UK standards organization reportsthat EDI can save businesses at least 14 per order,8.5 per invoice and 12 per order using a despatchadvice [advance ship notice]. It further reportsTen minutes can be saved in the handling of eachinvoice when they are received electronicallyresulting in total savings of 120 million Euros peryear.

4

IMPROVED

DATA

QUALITY: When bad data makes itsway into your internal systems, such as your ac-counts payable or transportation managementsystems, the results have a negative impact on yourbusiness. This includes overpayments, late orunderpayments resulting in additional fees, lost rev-enue due to delays, and poor customer service. It hasbeen estimated that data quality problems cost U.S.businesses more than $600 billion dollars a year.5

The root of most data errors is the keying in ofdata from a paper document into your internal sys-tem. First, if the paper document is handwrittenrather than computer-generated, it may be difficultto read, leading to input errors or phone tag toobtain clarification, both of which can cause delaysin the business cycle. Even when the document istyped or computer-generated and thus legible, key-

[With EDI] the error rate im-proved from 20% to less than1% and with 99.3% com-pleteness . Ocean carriersare now managing 10,000loads per year, fewer than 10per week that require errorresolution by the retailer.

Director of Logistics,Major U.S. Home-

improvement Retailer7

Many AP departments devotemore than 25% of their timeto error resolution of invoicesthat dont reference a PO orhave quantity and/or pricediscrepancies.

Leading MarketResearch Firm6

1. What Is EDI? 15

ing errors can still occur. In the order entry process,these errors can result in shipping the wrong prod-uct, in the wrong quantity, at the wrong price, to thewrong address.

The electronic capture of business documentsenables critical business data to be fed directly intoyour internal systems without relying on error-prone, manual re-keying, which is required whenyou use paper-based or email-based processes.Research has shown, for example, that with paper-based processes as much as five percent of the dataon an invoice is inaccurate.8 Having more accuratedata means that the entire supply chain is more effi-cient.

SHORTER BUSINESS CYCLE: We have just discussed howmanual data entry can greatly slow the businesscycle. In addition, when using postal mail, yourdocuments will take days to arrive. Sometimes, itmay be weeks before you discover that the mail hasbeen lost. Moreover, in the United States, at somepoint, Saturday delivery may be ended, whichmeans that those businesses operating on week-ends will have to wait even longer for their impor-tant documents to arrive. Delivery services such asUPS and Federal Express are very reliable but quitecostly. And even with faxes, documents can remainat the fax machine or sit on someones desk beforeany action is taken.

It takes a document sent bymail two weeks to reach [our]Canadian suppliers. An in-voice transaction moving viaEDI takes place in a matter ofminutes.

Manager, Global EDICommunications,

Chrysler Group LLC9

16 EDI Basics

In contrast, EDI transactions can be exchangedin minutes instead of the days or weeks associatedwith postal mail. Furthermore, there is significanttime saved by the elimination of data re-keying andits high error rate, which results in time-consumingcorrective actions.

For many companies that use EDI, transactionsthat used to take five days using paper can be com-pleted in under an hour. This reduced cycle timeleads to faster payments and thus improved cashflow. Cash is no longer tied up in inventory or goodsin transit and, therefore, can be applied to otherareas of the business. A major automobile manu-facturer reduced a key cycle time by 97 percenta30-day process was reduced to a mere 24 hoursand a major retailer reduced order-cycle time by 75percent from 24 days to 6 days.10 Some estimatessuggest that EDI can result in 30 percent fasterdelivery time to customers.

IMPROVED BUSINESS EFFICIENCY: The benefits ofstreamlining processes with EDI can have a rippleeffect throughout many of the operations of a busi-ness. Automating paper-based tasks frees staff toconcentrate on higher-value tasks and providesthem with the tools to be more productive.

For example, the use of EDI leads to less re-working of orders and invoices resulting from the

Each day, between 8 AM and3 PM, 150 ordersmostlyEDIare processed electron-ically, sent to the warehouseand gone by midnight withvery few people involved. Insuch an aggressively compet-itive market, supply chain ef-ficiency and the consequentcustomer responsiveness is afundamental benefit of EDI tous.

Planning Director atBernard Matthews Ltd.11

1. What Is EDI? 17

elimination of errors due to manual data entry,invalid data, or missing data. EDI ordering andshipping provide greater visibility into the supplychain, leading to fewer stock-outs and resulting lostsales. EDI invoicing enables buyers to process andapprove invoice payments faster. This allows buy-ers to take full advantage of timely payment dis-counts, which in turn means improved cash flowfor the suppliers.

The use of EDI reduces order processing anddelivery times, enabling organizations to reducetheir inventory levels. In fact, research indicatesthat by sending even just half their purchase orderselectronically, companies can realize at least a 20-percent inventory-level reduction.12 In the automo-tive industry, which relies heavily on Just-in-Timemanufacturing, the exchange of EDI documents isan absolute necessity. Its speed and accuracy are atthe heart of a Just-in-Time environment.

IMPROVED DATA SECURITY AND EASE OF AUDITING: Inthis highly competitive, international world ofbusiness, data security is paramount to the successof a company. Documents that circulate in an officeor that can be changed by several people may not besecure. With fully integrated EDI, in which dataflows directly from computer to computer, datacan be exchanged in a highly secure environment.

EDI is integral to a successful Just-in-Time (JIT) strategy to increase efficiency and reduce inventory costs by receiving materials used in production only as they are needed.

18 EDI Basics

In addition to keys and passwords to protect thedata, encryption and decryption programs areused, so that even during the few seconds it takesto transmit the data from sender to receiver thedata is secure. Even when an EDI Network ServicesProvider is used to perform translation, there canbe encryption at rest programs, so no one at theProviders data center can see or violate the data. Ofcourse, in todays environment, it is necessary forcompanies to install firewalls in their own data cen-ters to prevent hackers from stealing data. But thisis true of internal systems, whether you use EDI ornot.

Corporate auditing is made easier and fastersince the EDI process eliminates many of the dis-crepancies and problems that can creep into a paper-based system. Moreover, all the EDI transactionscan be made easily available to the auditor in re-ports, thereby improving accuracy and reducingproductivity loss during the auditing process.

STRATEGIC BUSINESS BENEFITS: Beyond the direct costand time-saving benefits of EDI described above,EDI provides the foundational technology that,when combined with other collaborative com-merce capabilities available today, enables dra-matic strategic benefits. For example, in todaysfast-paced business environment, electronic trans-

EDI is integral to [our] trackrecord of sustained growth. Amarker of this success is thefact that in the recent past[we have] managed to in-crease [our] market share infour of [our] five core catego-ries.Business Systems Analyst

at Daniels Group13

1. What Is EDI? 19

actions enable real-time visibility into transactionstatus. This, in turn, enables faster decision-makingand improved responsiveness to changing cus-tomer and market demands.

In some industries, EDI enables businesses toadopt a demand-driven business model ratherthan a supply-driven one, because it shortens thelead times for product enhancements and new-product delivery, streamlines the ability to enternew territories and markets, and provides a com-mon business language that facilitates the commu-nication and collaboration of businesses through-out the world.

Moreover, EDI promotes corporate social re-sponsibility and sustainability by eliminating paperfrom the supply chain and replacing paper-basedprocesses with green electronic alternatives. Thiswill both save you money and make your companypart of the solution to our overall carbon foot-print.

As we have seen, the benefits of using EDI are manyand have a far-reaching effect throughout the company.Later, in Chapter 4, we will examine how EDI brings ben-efits to specific business processes, such as ordering,invoicing, receiving, and payments.

As the companys use of EDIincreased, [we] halved thenumber of administrationstaff, and maintained thislevel while the company ex-panded its trading partnersto over 100. Today, 90 per-cent of the company's busi-ness is transacted electro-nically via EDI.

Planning Director atBernard Matthews Ltd.14

EDI MILESTONES

1970s Businesses experiment with proprietary forms of EDI.

1973 FTP communications protocol published.1975 First EDI standard released for transportation

industry (referred to as TDCC standard).1981 ANSI X12 EDI published for some industries,

including retail sectors and banking.1982 ANSI X12 EDI standard published for cross-

industry with North American focus.Major retail and auto companies begin to demand use of EDI by suppliers.

Late 80s Industry-specific subsets of X12 published.Large businesses widely adopt standards-based EDI.International EDI standard starts development (UN/EDIFACT).

1996 EDI documents exchanged across the Internet.2000 Proprietary XML-based approaches developed.

EDI solutions for small and medium-size businesses developed.

2001 AS2 communications protocol published.U.S. Dept. of Defense mandates electronic invoicing for all contractors.European Union mandates that electronic invoicing be accepted by all members.

Present EDI continues to be adopted globally as the foundation for end-to-end automation of business processes.

* 2 * 2 * 2 * WHAT ARE EDI DOCUMENTS

AND STANDARDS?

In this chapter, you will learn:The role of EDI Standards when exchanging EDI documentsThe most commonly used EDI documents in the procure-to-pay, order-to-cash, manufacturing, logistics, and financial business processes

21

AN EDI DOCUMENT is simply an electronic version of apaper document that adheres to the rules of a standardformat. When two companies use the same EDI standardformat for their business documents, their computersspeak the same language. This enables the exchange ofdocuments between the computers without human inter-vention.

EDI StandardsMany EDI standards are available, but ANSI X12 is mostcommonly used in North America, while EDIFACT ismost commonly used throughout the rest of world.

There continues to be confusion as to whether or notXML is an EDI standard. XML is not actually a standardat all; it is a powerful language that gives a company a

22 EDI Basics

great deal of flexibility in defining and constructing busi-ness documents, such as the documents defined by ANSIand EDIFACT. A major structural difference betweenXML and EDI is that whereas EDI is based upon strictrules governing the position of data within a file, data in anXML file is not bound to a specific location and is insteadidentified by tags, such as 300 to indicate a quantity value of 300. This results in XML filesbeing much larger than their comparable EDI files. Somestandards, such as RosettaNet, are based on XML.

At one point, it was expected that XML would replaceEDI. However, many businesses that have investedheavily in EDI, which is efficient and works extremelywell, see no need to spend the money to reinvent thewheel. Thus, EDI will be a mainstay for business into theforeseeable future.

The ANSI and EDIFACT standards can be appliedacross all industries. Subsets of these standards, such asVICS and EANCOM, have been developed to meet thespecial requirements of certain industries. These subsetsdefine industry-specific documents, data fields, and rules.

The two most common EDI standards are:

ANSI X12In 1979, the American National Standards Institute

(ANSI), which had been founded to oversee the creation,promulgation and use ofnorms and guidelinestoensure competitiveness of U.S. businesses, formed the

2. What Are EDI Documents and Standards? 23

Accredited Standards Committee (ASC) X12 to developuniform standards for the inter-industry electronic ex-change of business transactions. From its inception, ANSIX12 was designed to support companies across differentindustry sectors in North America. Today there are hun-dreds of thousands of companies worldwide using X12EDI standards in daily business transactions.

Two examples of ANSI subsets currently in use are:

AIAG: The AIAG standard was developed by theAutomotive Industry Action Group (AIAG) for theNorth American automotive industry.

VICS: The Voluntary Inter-industry Commerce Stan-dard (VICS) is used by the general merchandiseretail industry in North America, including thou-sands of department and speciality retail stores,mass merchandisers, and their respective suppliers.

UN/EDIFACTThe Electronic Data Interchange for Administration,

Commerce and Transport (EDIFACT) was developedwith versions for individual European countries. Underthe auspices of the United Nations, and with input fromthe American National Standards Institute (ANSI), a UN/EDIFACT standard was developed to address the inter-national business community. Today, this is the most com-mon standard used by European businesses. Two exam-ples of EDIFACT subsets currently in use are:

24 EDI Basics

EANCOM: Developed in 1987 by GS1, a global stan-dards body, EANCOM is a subset of UN/EDI-FACT. The key benefit of this standard is that itincorporates the European Article Number (EAN),a system of product codes to identify productsthroughout the world. This greatly facilitates inter-national trade, since a company can easily order anitem from a supplier anywhere in the world with-out knowing the specific item code used by theinternal system of that particular supplier. EAN-COM was originally developed for the retail sectorand has subsequently grown to become the mostwidely used UN/EDIFACT subset. It is now usedin a variety of other industry sectors such as healthcare, construction, and publishing.

ODETTE: The ODETTE message standard was devel-oped by the Organisation for Data Exchange byTele Transmission in Europe (ODETTE), specifi-cally for the automotive industry in Europe.

Other standards include:HIPAA: The Health Insurance Portability and Account-

ability Act (HIPAA) was enacted by the U.S. Con-gress. A key component of HIPAA is the establish-ment of national standards for electronic health-care transactions and national identifiers for pro-viders, health insurance plans, and employers. Thestandards are meant to improve the efficiency and


effectiveness of the U.S. health care system by en-couraging the widespread use of EDI. The HIPAAEDI transaction sets are based on ANSI X12.

RosettaNet: The RosettaNet standard, based on XML,was developed by a consortium of major computer,consumer electronics, semi-conductor manufac-turers, and telecommunication and logistics com-panies. It facilitates industry-wide global supplychain processes.

SWIFT: The Society of Worldwide Interbank Finan-cial Telecommunication (SWIFT) developed a finan-cial messaging network between banks and otherfinancial institutions for a standards-based ex-change of financial information. The SWIFT docu-ment standard governs aspects of financial activity:payments, trade services, and securities.

Tradacoms: Introduced in 1982, Tradacoms is an EDIstandard primarily used in the UK retail sectorthat utilizes the product code system developed bythe UK Article Numbering Association. Thoughsuperseded by EANCOM, it is still used by manybusinesses in the UK today.

VDA: VDA is a standard developed by the Germanautomobile association, Verband der Automobil-industrie. VDA standards are used by companiessuch as VW, Audi, Bosch, Continental, and DaimlerAG.

26 EDI Basics

Common Business DocumentsThe document standards discussed above define hun-dreds of business documents from which different indus-try groups select those that pertain to their business. Thedocuments used most commonly, however, deal with theprocure-to-pay and order-to-cash processes. Some of themost frequently used documents are listed below withtheir ANSI numerical and EDIFACT six-letter name iden-tifiers:

PRODUCT CATALOG (832/PRICAT): A document pro-vided by a supplier to its customers, containing alist of products and services available, includinginformation such as description, pricing, quantitiesavailable, and unit of measure. The buyer can thendirectly issue a purchase order for items in theproduct catalogue. This document is extremelypopular in the retail industry.

PURCHASE ORDER (850/ORDERS): A document issuedby a buyer to a seller that defines the terms of saleunder which the buyer will purchase the sellersgoods. This document can also be used as a blanketpurchase order against which the buyer can issuean EDI Material Release (830/DELFOR) for partialdeliveries as needed throughout the life of the pur-chase order.

Most commonly used EDI documents:

Purchase Order Advance Ship Notice Invoice

Others frequently used:

Product Catalog Purchase Order

Acknowledgment Remittance Advice


PURCHASE ORDER ACKNOWLEDGMENT (855/ORDRSP):Confirmation to the buyer that the supplier will befilling the purchase order as requested.

ADVANCE SHIP NOTICE (856/DESADV): An electronicversion of a printed packing slip that tells a buyerthat goods have been shipped, how they havebeen packed, and the estimated arrival time. TheAdvance Ship Notice document is also referred toas a Delivery Notice or Despatch Advice. This ex-tremely important document is at the core of manyautomated business processes, such as EvaluatedReceipt Settlement, drop shipping, and Just-in-Time delivery. These and other business processesare discussed in more detail in Chapter 4.

INVOICE (810/INVOIC): A request for payment forgoods or services that communicates to a buyer thespecific items, prices, and quantities. Payment termswill usually accompany the billing information.

REMITTANCE ADVICE (820/REMADV): A notificationfrom a buyer to a supplier that payment has beenmade, usually via electronic funds transfer. Receiptof this document enables suppliers to reconcilewhich invoices have been satisfied by any givenpayment.

Industry research identifiesthat the sector can save 12per order in cost if the Ad-vance Ship Notice is sent totrading partners before theorder is delivered.

Global StandardsOrganization1

28 EDI Basics

In addition, there is a special EDI document that is not abusiness document, but serves to streamline the EDI pro-cess:

FUNCTIONAL ACKNOWLEDGMENT (997/CONTRL):Often referenced as an FA, this is an electronicreceipt from the receiver of an EDI transmissionto its sender to indicate simply that the EDI docu-ment was successfully received and read by thecomputer. It does not indicate that the receiver isacting upon the contents of the document. Otherdocuments acknowledge that the contents are be-ing acted upon, such as the Purchase Order Ac-knowledgment and the Purchase Order ChangeAcknowledgment.

Manufacturing-Specific DocumentsIn addition to the documents noted above, manufacturerssuch as original equipment manufacturers (OEMs) in theautomotive industry commonly use the following docu-ments with their suppliers:

PLANNING SCHEDULE/MATERIAL RELEASE (830/DEL-FOR): A forecast notification from the manufac-turer to the supplier of the materials needed for aperiod of time, for example, for the coming twentyweeks. When used by an OEM, this is not an actualorder; rather, it is a forecast to enable suppliers tomanage materials and other resources to ensure

Manufacturers such as OEMs commonly exchange:

Planning Schedule Shipping Schedule


that they can ship when the goods are finally or-dered. When used by other manufacturers, it canserve as both a forecast and a shipping schedulethat authorizes the supplier to ship the goods onspecific dates.

SHIPPING SCHEDULE (862/DELJIT): An authorizationfrom the manufacturer to the supplier to ship goodsaccording to a specific short-term schedule. It pro-vides detailed shipping requirements and addsmore specific instruction to the Planning Sched-ule/Material Release that may have been providedearlier.

Logistics EDI DocumentsThe Advance Ship Notice, described above under Com-mon Business Documents, is a central document in thelogistics process. It can be sent by the shipper to the recip-ient and/or by the carrier to the recipient. The followingdocuments are also commonly used:

FREIGHT DETAILS AND INVOICE (110 for air carriers, 210for motor carriers, 310 for ocean carriers and 410 forrail carriers /EDIFACT IFTMCS): Sent from thefreight carrier to the shipper to bill for shipmentservices. The document can include details of theitems being shipped, as well as other informationnormally found on an invoice.

Our leader companies used e-business connections with lo-gistics providers for 90% oftenders and orders. With pre-dictable commit times in thelogistics process, these compa-nies had 36% shorter order-to-delivery cycle times.

Market Research Report2

30 EDI Basics

CARRIER LOAD TENDER (104 for air carriers, 204 formotor carriers, 304 for ocean carriers and 404 for railcarriers / EDIFACT CONTEN): From the shipperto carriers, these documents have multiple uses,such as providing information needed by carriersto bid on freight services or by Customs to clearshipments. It contains information such as adescription of the goods, destination and othershipping instructions.

TRANSPORTATION CARRIER SHIPMENT STATUS MES-SAGE (214 for domestic, 315 for international/EDI-FACT IFTSTA): A notification by the carrier to theshipper or receiver regarding the status of a ship-ment. It can include the estimated date and time ofarrival, destination point, reasons for delays, andso on.

Financial EDI TransactionsThe following EDI transactions are commonly exchangedbetween the payers, payees, and their banks and/or otherfinancial institutions.

PAYMENT INSTRUCTION AND REMITTANCE ADVICE(820/REMADV): A notification from a business toits bank to make a payment. Payment can be madevia check or electronic funds transfer, such as Auto-mated Clearinghouse (ACH) or wire transfer.

Logistics documents commonly exchanged between shipper, carrier, and recipient: Freight Details and

Invoice Carrier Load Tender Transportation Carrier

Shipment Status


LOCKBOX (823/DEBADV): A document used by afinancial institution to share details about checkscollected in a wholesale or retail lockbox facility.This is used by a banks client, such as a credit cardcompany, that needs to collect payments frommany sources. This document is sent from the bankto its client with information about all the individ-ual payments received, enabling reconciliation ofeach account.

APPLICATION ADVICE (824/APERAK): A notificationfrom the financial institution to the payer that thereis a problem executing payment due to such factorsas incorrect routing or a wrong account number.

DEBIT AUTHORIZATION (828/DIRDEB): Sent from abusiness to its financial institution to authorizepayment of a debit request.

Financial documents frequently exchanged between payers, payees, and their banks or other financial institutions:

Payment Instruction Lockbox Application Advice Debt Authorization

* 3 * 3 * 3 *

WHAT ARE YOUR COMMUNICATIONS

OPTIONS?

In this chapter, you will learn:The basic approaches to connecting to your trading partners and how to choose the best one for your companyThe most commonly used communications protocols and the five factors you should consider when selecting the best one for your company

33

WHEN YOUR COMPANY exchanges business documentselectronically with your business partnersyour custom-ers, suppliers, logistics providers, and/or banksyouneed to make two major communications-related deci-sions. First, what is your overall approach for connectingto all your partners? And second, which of the variouscommunications protocols will you need to implement?

To help you make these decisions, this chapter will listthe basic approaches for connecting to your trading partnercommunity and the issues and benefits of each. After that,we present the most commonly used communications pro-tocols and how to decide which is best for your company.

Communications proto-cols are rules that govern the format and transmis-sion of data between com-puters.

34 EDI Basics

Direct Connection Model In the direct connection approach, you and your tradingpartner connect directly via the Internet using the samecommunications method or protocol. However, this ap-proach can become very complex and resource intensiveif your other trading partners are using different commu-nications protocols. Your system must then be able to sup-port each of these protocols.

This approach is most commonly used by large corpo-rations that have business partners with whom they ex-change a high volume of EDI documents.

If you choose to implement the direct connection model,you will need to purchase a software package that enablesyou to use all the agreed upon protocols, such as AS2,SFTP, FTPS. Then you will need to agree with each of yourpartners on (1) which of these communications methods orprotocols you and the trading partner will use and (2) thespecific protocol settings or options to be used whenexchanging your files of EDI documents.

Figure 3.1 illustrates the direct connection scenario.This model can be very complex due to the wide variety ofcommunications protocols that must be used and sup-ported. Very few businesses today connect directly to alltheir trading partners.

The direct connection model is most often used by large corporations that exchange high volumes of EDI documents.

3. What Are Your Communications Options? 35

Network Model An alternative to the direct connection model is to workexclusively through an EDI Network Services Provider,which, in the days prior to the Internet, was referred to asa Value-Added Network (VAN). Many businesses use thenetwork model to shield themselves from the complex-ities of supporting varying communications protocolsrequired by different business partners.

In the network model you have just a single connec-tion to your Provider for all your EDI transactions and allyour trading partners, using whatever protocol you pre-fer, such as AS2 or one of the secure FTP protocols. Youdont have to worry about which protocols your partners

Figure 3.1: Direct Connection Model

Using an EDI Network Services Provider shields you from the complexities of supporting multiple communications protocols.

36 EDI Basics

are using. At the same time, your business partners alsoconnect to a Provider, either the same one you are usingor a different one. If different, most Providers will connectto each other in order to complete the EDI file exchange.

In this way, each partner makes an independent deci-sion regarding its preferred communications protocol,relying on the Provider to mediate the differences betweenthe various trading partner protocols. There are additionalbenefits to using an EDI Network Services Provider, suchas ensuring data security, validating the identity of thesender (non-repudiation), and providing audit informa-tion, reporting, backup, and recovery. Using a Provideralso relieves all community members of the resource-intensive responsibilities for resolving communicationsissues.

The EDI Network Services Provider charges transac-tion fees for these services, to a large extent based upon thevolume of transactions handled. Your business is stillresponsible for generating and processing all EDI docu-ments exchanged, which means you must have highlyskilled EDI personnel. However, you do not need the spe-cialized communications resources required in the directconnection model.

The graphic below illustrates the EDI network modelin which you and your business partnerseach of youusing your own preferred communications protocolexchange EDI documents using an EDI Network ServicesProvider.

Our B2B trading partnernetwork has reduced our cap-ital commitment and im-proved inventory manage-ment, while enabling us toreact more quickly to custom-er enquiries.

Integration Team Leader at NXP Semiconductors1


Direct or NetworkWhich is better?Use of the EDI network model for 100 percent of an EDItrading community was extremely popular before the riseof the commercial Internet. Today, many businesses use acombination of the two approaches. In order to save onProvider transaction fees, they connect directly via theInternet to the trading partners with whom they exchangethe highest volume of transactions, using one or two pre-ferred protocols. They will also leverage the EDI NetworkServices Provider, with its benefits, for trading with theirlarge number of lower-volume trading partners, as well aswith those partners using a communications protocol theycannot support.

Advocates of the direct connection approach arguethat it is much cheaper than using an EDI Network, par-ticularly for high volumes of EDI documents. However,when calculating your overall costs, you must factor in the

Figure 3.2: Network Model

38 EDI Basics

cost of purchasing, managing, and maintaining the addi-tional communications software and the cost of highlyskilled personnel with expertise in secure Internet com-munication, as well as in EDI. Furthermore, as the size ofyour community grows, you will need additional re-sources to implement and support each new trading part-ner. You need to continually monitor communications,manage trading partner calls, and resolve issues quickly.All these vital processes are resource and time intensive.

Most Commonly Used Communications ProtocolsThe rapid growth of the Internet to the point of near uni-versal connectivity is now enabling business partners tocommunicate and exchange files more easily than everbefore, although sometimes at the expense of other re-quirements, such as security, privacy, and manageability.Therefore, when you choose a communications protocolsuch as AS2 or FTP for exchanging business documents viathe Internet, you need to choose carefully.

In order for two computers, whether within your com-pany or across the Internet, to exchange files or docu-ments, your system needs special file-handling softwarethat follows certain communications rules (protocols). Ifyou communicate directly (see p. 34), both you and yourpartner must use the same protocol. If you communicatedirectly with many partners, each of which uses a differentprotocol, you will need software that supports each one of

See Chapter 6 for a comprehensive review of the tasks involved in implementing an EDI program.


those protocols. This is a major reason why many compa-nies select the network modelit shields them from thiscomplexity.

There are five key factors you should consider whenselecting the best communications protocol for your com-pany:

DATA SECURITY: When you are dealing with docu-ments that contain sensitive data, you must be surethat while they are being transmitted across theInternet, they are safe from others who may try tointercept and read them. Each communications pro-tocol takes a different approach to securing informa-tion. Some protocols encrypt everything in the trans-mission (channel encryption), whereas othersencrypt only the actual data (payload encryption).

NON-REPUDIATION: Repudiation refers to the ability toconfirm that a document was actually sent by thesender indicated within the file being exchanged.This also serves as proof when business partnersdeny having sent you a document.

MESSAGE MANAGEMENT: When you exchange docu-ments with your business partners, you need toknow whether the documents were successfullyreceived and decrypted. For example, a major fac-tor in determining whether you get paid is whetheryour partner received the bill. Or, if youre trying toplan for the arrival of a shipment at your receiving

Five factors to consider when choosing a commu-nications protocol:

1. Will it keep the data safe from hackers?

2. Can you be confident that the sender is legitimate?

3. Does it let you know whether your partner has successfully received your transaction?

4. Does it require lots of resources to install and maintain?

5. Will your version work with your partners version?

40 EDI Basics

dock, getting a shipment notice is crucial. Thus, con-firmation of receipt for EDI documents is extremelyimportant for businesses to operate efficiently.

EASE OF SETUP AND USE: Different protocols may neces-sitate different levels of resources to install andmonitor its operation on a day-to-day basis.

INTEROPERABILITY: Many software vendors offer ver-sions of each protocol. However, versions of thesame protocol provided by two different vendorsmay not always be able to communicate with eachother. So, when you and your partners select a pro-tocol, you must be sure of interoperability.

Below is a list of the most commonly used communi-cations protocols for the exchange of EDI documents viathe Internet and how well each addresses the five key fac-tors listed above. Any of these can be used to connect tobusiness partners directly (direct connection model) or toconnect to them via an EDI Network Services Provider(network model).

FTP (File Transfer Protocol) with VPN (Virtual Private Network)

FTP was the first robust, reliable file transfer protocoldeveloped and is still used today by many businesses,particularly for file exchange within a company. How-ever, FTP by itself does not provide the security needed fordocuments exchanged with other companies over the

FTP with VPN Security

Non-repudiationMessage Management

Ease of UseInteroperability


Internet. For this reason, businesses that use FTP use it inconjunction with VPN software to provide the securitylayer needed.

However, neither FTP by itself nor FTP with VPN pro-vides non-repudiation or message management. More-over, interoperability may be an issue because there aremany different ways of implementing VPN on your sys-tem, as well as possible differences in versions of VPN.Although FTP with VPN does not address all five factors,you can use it to connect to an EDI Network Services Pro-vider, which then provides the non-repudiation, messagemanagement, and interoperability required.

SFTP (Secure File Transfer Protocol) and FTPS (File Transfer Protocol Secure)

Both SFTP and FTPS are secure Internet protocols. Themajor difference is in how each provides security and per-forms encryption. The security layer used by SFTP wasdeveloped by the Internet Engineering Task Force, whilethe security layer used by FTPS was developed by the Inter-net browser company Netscape.

Both protocols encrypt the data while in transit, keep-ing it safe while moving over the Internet, and then decryptit upon arrival at its destination. However, neither providesnon-repudiation or message management. As with FTPwith VPN above, interoperability is a major issue, and againyou can use either to connect to an EDI Network Services

SFTP and FTPS Security

Non-repudiationMessage Management

Ease of UseInteroperability

42 EDI Basics

Provider, which then provides the non-repudiation, mes-sage management, and interoperability required.

AS2 (Applicability Statement 2)

AS2 was developed specifically to overcome the limita-tions of the other security protocols listed above. In addi-tion to providing a high level of data security, it addressesnon-repudiation, message management, and interopera-bility. It was developed by the Internet Engineering TaskForce (IETF). The major boost to its usage was when it wasmandated by Walmart as the only acceptable communica-tions protocol for suppliers wishing to do business withthem. Its usage soon spread to other major businesses.

Lets look at how AS2 addresses non-repudiation,message management, and interoperability.

NON-REPUDIATION: AS2 uses a system of keys toensure non-repudiation. A private key is used byone business to encrypt its digital signature (a spe-cial identity code) on a file being transmitted. Thatcompanys public key is provided to all its businesspartners for use in decrypting the digital signature.No other key will work, thus verifying the identityof the sender.

INTEROPERABILITY: AS2 is backed by the DrummondGroup, an organization that certifies that versionsfrom different vendors are compatible. Thus, youare guaranteed that if you buy any two products

AS2 SecurityNon-repudiationMessage Management? Ease of UseInteroperability


from the list of Drummond-certified products, theywill work together well.

MESSAGE MANAGEMENT: AS2 provides a status mes-sage called the Message Disposition Notification(MDN), which informs you that the transmissionwas successfully received, decrypted, and verified.

There are several challenges to successfully imple-menting AS2. AS2 is a push protocol, meaning docu-ments are sent as soon as they are available and the busi-ness partner must be ready to receive them. The recipientsserver must be up and running 24x7, with personnel readyto troubleshoot any communications issues. In addition,management of the private and public encryption keysused for non-repudiation and security adds another layerof complexity to its operation. Moreover, because AS2 ismuch more sophisticated than the other protocols, a highlyskilled staff will be needed to support it.

In summary, you have several choices when selectinga secure communications protocol for your EDI docu-ments. AS2 best addresses all the key requirements, butrequires a higher level of commitment. Because of its fullfunctionality, many companies opt to use AS2 for ex-changing EDI documents when connecting to both theirdirect connection partners and to an EDI Network ServicesProvider for the rest of their partner community. If you useone of the other secure protocols, then use of a Providershould be considered in order to address the gaps in capa-bilities.

AS2 requires:

24x7 dedicated server 24x7 highly skilled

support personnel Management of public

and private encryption keys

AS2 has the most func-tionality, but requires a higher level of commit-ment.

Many companies use AS2 for direct connect partners and an EDI Network Services Provider for the rest of their trading community.

* 4 * 4 * 4 *

WHICH BUSINESS PROCESSES TYPICALLY

BENEFIT FROM EDI? In this chapter, you will learn:

How EDI can streamline the procurement processHow EDI can streamline the shipping and receiving process, including a look at cross-docking, drop shipping, and direct store deliveryHow EDI can streamline the invoicing and payment process, including the non-PO and evaluated receipt settlement processes

45

AS WE HAVE SEEN, EDI enables organizations to reducecost and inefficiency resulting from manual, transaction-based processes. By automating the exchange of databetween applications across a supply chain, EDI canensure that business-critical data is sent on time, everytime; is securely sent to or received from trusted tradingpartners; can be tracked in real-time; and can be auditedafter the event. In todays highly competitive world, theuse of B2B technology such as EDI may be the differencebetween success and failure.

46 EDI Basics

We will now discuss how EDI can streamline threecommon business processes: procurement, shipping andreceiving, and invoicing and payment.

Procurement Procurement was the first business process for which theuse of EDI was widely adopted across industries. Typi-cally, a companys Enterprise Resource Planning System(ERP) or other back-office system automatically generatesthe purchase order. It is also common to order goods froman electronic catalogue. In the latter process, after negoti-ating specific terms and prices with a customer, the sup-plier creates an electronic catalogue for that specific cus-tomer, which may be on the suppliers system, hosted byan EDI Network Services Provider, or sent to the customerfor integration with its procurement system. An employeeor the procurement system accesses the catalogue andplaces the order, which then automatically triggers thecreation of the EDI Purchase Order.

The basic EDI document flow in the procurement pro-cess involves four key documents: the Purchase Order, thePurchase Order Acknowledgment, the Purchase OrderChange, and the Purchase Order Change Acknowledg-ment (see Figure 4.1).

The buyer transmits an EDI Purchase Order to thesupplier. A supplier can then send a Purchase OrderAcknowledgment back to the buyer, in which the sup-

EDI can help streamline three common business processes:

Procurement Shipping and Receiving Invoicing and Payment

4. Which Business Processes Typically Benefit? 47

plier agrees to fulfill the order according to the terms ofthe purchase order.

Figure 4.1: Basic EDI Document Flow in the Procurement Process

If the supplier is unable to meet all the purchase orderrequirements, the Purchase Order Acknowledgment canprovide information as to which portions of the order canbe fulfilled. The buyer can then transmit a Purchase OrderChange document when there is a need to change theoriginal purchase order, due either to a change in thebuyers needs or because the supplier cannot meet all therequirements in the original purchase order. The supplierthen sends a Purchase Order Change Acknowledgmentback to the buyer. Use of the Purchase Order Change andPurchase Order Change Acknowledgement documents

48 EDI Basics

simplifies a process that otherwise, when handled manu-ally, can be very complex. In fact, in some industries suchas the general merchandising segment a purchase order isoften changed four or more times.

Upon receipt of each document, the EDI system auto-matically sends a Functional Acknowledgment to notifythe sender that the document was successfully received.

Automating the exchange of purchase order-relateddocuments provides numerous benefits:

Faster, more accurate order-to-receipt process due tothe elimination of slow, error-prone manual ordering;

Reduction or elimination of resource-intensive andtime-consuming order status inquiries by both buyerand seller due to the use of EDI status documents thatprovide you with new visibility into your supplychain;

Increased buyer flexibility due to the speed and accu-racy of the EDI process. For example, the buyer canquickly seek alternative suppliers when a purchaseorder cannot be fulfilled;

Higher levels of satisfaction by the seller, the buyer,and the buyers customers resulting from the benefitsabove.

Baosteel, the largest steel producer in China, stated that the main driver for implementing and extend-ing e-business applica-tions was the need to align processes toward custom-er-centric operations. Baosteel successfully im-proved workflow opera-tional efficiency by 60%, reduced order cycle time by 20%, and drove down process costs.1

We are now far more respon-sive to the needs of our cus-tomers. As a result, we're notonly reaping the impressivetime- and cost-saving bene-fits, but also improving ourcustomer relations. With lessadministration time and im-proved document accuracy wecan focus our time on address-ing more qualitative issuesaround the way we do busi-ness.

Director of ITat Organic Farm Foods2


Shipping and ReceivingEDI enables goods to be shipped in a timely and accuratemanner according to ever-changing buyer-specific require-ments. This is vital to a manufacturer operating in a Just-in-Time (JIT) environment and to a retailer with a contin-uous replenishment program (CRP) for its inventory. Thecritical document in support of all shipping processes isthe Advance Ship Notice (ASN), which lists the details ofa shipment of goods due to arrive from a supplier, a third-party logistics provider (3PL), or a fulfillment agent. Typ-ically, the ASN includes much of the information that wasincluded on the buyers original purchase order. It alsoincludes carton identifications, content descriptions, andtransportation details. New uses are continually found forthe ASN. For example, some companies use data in theASN to help them generate the Customs 10+2 ImporterSecurity Filing for international shipments entering theUnited States.

EDI documents such as waybills from air and rail car-riers, EDI status updates from truckers, and Bills of Ladingfrom ocean carriers can enable both the shipper and thereceiver to see where the shipment is in transit. This en-ables them to take any action required, such as expeditedshipments when there is a delay.

The ASN often works together with the barcoded ship-ping label that suppliers affix to the carton/pallet/boxesbeing shipped. The identifying numeric characters of the

Companies that receive EDIASNs prior to receipt of goodssave approximately 12 perorder.


50 EDI Basics

barcode are also included in the ASN document, whichcan be read into the buyers warehouse management sys-tem (WMS). When a shipment arrives, receiving personnelscan the barcode affixed to the pallet of goods. The bar-code is then automatically matched against the records in

Figure 4.2: Basic EDI Document and Goods Flow in the Shipping Process

the warehouse management system to verify shipmentaccuracy. As a result, inventory levels are updated andwarehouse personnel are notified where to forward the re-ceived goods.

Although the ASN is the most popular shipping trans-action, there are many other EDI transportation docu-

The ASN document is a critical component for improving the efficiency of warehouse/distri-bution center processes.


ments that are used in the supply chain, particularly forinternational freight. For ground, air, or ocean shipmentsthere are specific EDI load tender documents used byshippers to solicit bids from transportation carriers toprovide delivery services. The carrier selected to makethe delivery can provide EDI delivery status updates toboth shipper and receiver. In some cases, the carrier willsend shipment status updates as the goods reach differentpoints in the supply chain.

For the retail industry, the ASN enables suppliers toparticipate in cross-docking, drop shipping, and directstore delivery (DSD) initiatives.

CROSS-DOCKING: The majority of goods received intodistribution centers are not destined to stay verylong. Often, shipments are to be forwarded toanother location, such as a nearby manufacturingplant, a retail store, or a customer location. In thepractice known as cross-docking, goods are imme-diately moved from the receiving dock to the out-bound dock. Informed by the ASN and the barcodeas to what has arrived and where, the warehousemanagement system can now route cartons inter-nally through automated conveyor systems forcross-docking. The use of the ASN in the cross-docking process can significantly reduce inventoryacross the supply chain.

The use of the ASN in the cross-docking process can significantly reduce in-ventory across the supply chain.

52 EDI Basics

DROP SHIPPING: The ASN document is a critical com-ponent of a successful drop shipping process. Withdrop shipping, after a consumer places an order ona retailers website, the retailer sends an EDI Pur-chase Order directly to the supplier for fulfillment.Some retailers even provide the supplier with cus-tom-branded packaging materials to create theappearance of the package having been shippeddirectly from the retailer. The supplier includes allrequired paperwork, such as special packing-listforms and return label, with the shipment. The sup-plier ships the package directly from its ware-house to the consumer and sends an EDI Invoiceand ASN to the retailer. The ASN includes the car-rier tracking number, as well as other drop ship-ping information. The retailer then notifies the con-sumer of the shipment, usually via email, and pro-vides the tracking number of the shipper (e.g., UPS,FedEx, DHL) so that the consumer can link to theshippers site for additional status updates. Theconsumer receives the goods, at which point thecarrier updates the shipment status as delivered.

Another EDI document that is integral to thedrop shipping process is the Inventory Advice,which notifies the retailer of product availability.This enables the retailer to be confident that con-sumer orders can be filled.

In the drop shipping process the supplier ships the package directly from its warehouse to the con-sumer and sends an EDI Invoice and ASN to the retailer. The ASN includes the carrier tracking num-ber, as well as other drop shipping information.


DIRECT STORE DELIVERY (DSD): In the highly compet-itive retail market it is vital that there is alwaysstock on hand to meet consumer demand. Thedirect store delivery model enables a retailer toorder goods for delivery directly to its stores, by-passing the retailers distribution centers and thusshortening delivery time. This is especially impor-tant for perishable items such as produce and bakedgoods, when delays in shipment mean shorter shelflife. The key to this process is a section of the EDIPurchase Order that enables the buyer to specifymultiple store destinations with quantities for each,all in a single document. The supplier processes theEDI Purchase Order, ships directly to each store, andsends a separate ASN for each shipment.

Using EDI in the shipping and receiving processesenables both the supplying and receiving companies tocompete in a business environment in which efficientdelivery of goods to the right place at the right time is keyto success. Also crucial to both is quick and seamlessinvoicing and payment.

Invoicing and PaymentsFinance teams are increasingly focusing on streamliningthe accounts payable (AP) department to achieve furthercost efficiencies, improve visibility into financial perfor-mance, and reduce the risk of both internal and external

[With EDI] what previouslytook up to 5 days now takes afew minutes.


The key to the direct store delivery (DSD) process is a section of the EDI Pur-chase Order that enables the buyer to specify mul-tiple store destinations with quantities for each.

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fraudulent activity. Eliminating the mountains of paperinvoices received from non-EDI suppliers is clearly animportant first step.

Many countries have enacted legislation that permitsan electronic invoice (e-invoice) to serve as legal evidenceduring tax audits, removing the need to keep paper orig-inals. In order to more efficiently collect taxes and to pre-vent tax avoidance, governments throughout the world,including those of Mexico, Brazil, and Denmark, havemandated the use of e-invoicing for the public sector.Within the United States, some federal agencies, e.g., theDepartment of Defense and the Department of VeteransAffairs, have mandated e-invoicing. Today, e-invoicing isbecoming the way to do business for both governmentalagencies and the private sector, whether the company issmall, medium, or large.

While e-invoicing regulations are often similar in pur-pose, the specific requirements frequently vary by coun-try. For example, EDI invoices must adhere to country-specific regulations for data format, data storage, and dataaccess requirements. Some of the legal requirements for e-invoicing that differ from one European Union member toanother include: (1) Digital Signatures: some countries,such as Spain, require EDI invoices to be digitally signed(using an encrypted code) in order to guarantee their ori-gin and integrity; (2) Archiving: many countries requirethe archiving of EDI invoices for extended time frames,e.g., Germany requires data archiving for ten years and the

The European Associations ofCorporate Treasurers identi-fied the average processingcost of a paper invoice acrossEurope to be around 30 Euro.It also determined that by us-ing e-invoicing, an 80% costsavings is possible. Confirm-ing this data, initial case stud-ies also indicate that e-invoic-ing has proved to reduce thecost of processing one invoiceto less than 5 Euros.



UK requires six years; (3) VAT Compliance: VAT (Value-Added Tax) rules in Europe vary widely by country.

There are three typical models for the invoicing andpayments process. The most common, particularly in theretail industry, involves the generation of a purchaseorder and an invoice. In the second model, an EDI Pur-chase Order is not generatedjust an EDI Invoice. And inthe third model, the reverse is true: an EDI Purchase Orderis generated, but no EDI Invoice.

STANDARD MODEL: EDI Purchase Order and EDIInvoice: In a fully automated invoicing and pay-ment process (see Figure 4.3): (1) the suppliersorder management system processes the incomingEDI Purchase Order and, once the order is filled, (2)the accounts receivable system generates andsends an EDI Invoice. The invoice is received andprocessed by the buyers accounts payable systemafter receipt of goods or performance of service.The AP organization reviews and approves theinvoice. (3) A few days before the invoice is due, theAP team will generate an EDI Payment Order/Remittance Advice, which is sent to the buyersbank for (4) payment via the Automated Clearing-house Network (ACH). (5) When the suppliersbank receives payment, it generates another EDIRemittance Advice informing the supplier thatpayment has been made.

Companies with automatedmatching of invoices to POsreport processing costs 36%lower than other firms.

Market Research Firm6

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NON-PO INVOICE: In some instances, particularly forservices provided, there is no purchase order tostart the procurement process. This may occur, forinstance, when there is a long-term standing con-tract to provide services, such as office leasing orelectrical utility services. There are two process dif-ferences from the standard invoicing process pre-viously described. First, since there is no EDI Pur-chase Order, the company providing the servicecannot use content from an EDI Purchase Order togenerate the EDI Invoice. Thus, the EDI processbegins with invoice creation by the service pro-vider. This is commonly referred to as a non-PO

Figure 4.3: Basic Invoice and Payment Process

By using electronic process-ing instead of manual process-ing, you save on average$7.70 on PO based invoices,$7.10 on Non-PO based in-voices, and $8.90 on all otherinvoices.

Market Research Firm7


invoice. Second, since a purchase order, whichoften functions as automatic pre-authorization forforthcoming invoices, was not generated, theseincoming EDI Invoices must first go through apayment approval workflow process.

EVALUATED RECEIPT SETTLEMENT (ERS): The EvaluatedReceipt Settlement process, which is known inEurope as Self-Billing, was pioneered in the UnitedStates by the automotive industry to streamline theprocure-to-pay process with high-volume, trusteddirect materials suppliers. The ERS process hassince been widely adopted throughout other man-ufacturing sectors. In this model, once the purchaseorder has been received, the supplier (for example,a parts supplier in the automotive industry) fills theorder and sends an ASN (Advance Ship Notice).However, no EDI Invoice is generated. Upon re-ceipt of the shipment, the buyer matches the infor-mation from the ASN against the original purchaseorder and the actual goods received to automati-cally calculate the payment. The payment processthen proceeds as in the standard model.

In addition to the standard buyer/supplier invoicingand payment models detailed above, other payment sce-narios can leverage EDI. Financial institutions use thepower of EDI to process the tens of thousands of financialtransactions each day. With such volumes, EDI is crucial to

The internal labor cost ofmanually matching paper in-voices to purchasing and re-ceiving documents averages$5.22 per transaction, accord-ing to Soltec data. The esti-mated processing cost perinvoice drops to $2.14 for or-ganizations that have invest-ed in automated tools such asimaging and electronic datainterchange (EDI), and plum-mets to $.071 per invoice inenterprises with mature ERSprocesses in place.

AP Matters8

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ensuring that correct payments are made to the correctaccounts at the correct time. For example, businesses mustmake payments to suppliers, deposit payroll for employ-ees, and issue dividends to investors. Large corporationsoften use EDI and other standards to instruct their banksas to when, to whom, and how to make these payments.ANSI X12 and EDIFACT are popular options for paymentinstructions. There are also a number of standards uniqueto the financial services industry. ISO 20022 XML, SWIFTMT, and MX messages are used globally. In addition, eachcountry may promulgate unique payment instructions,such as NACHA (United States), CFONB (France), andCliOp (The Netherlands).

Regardless of which invoicing and payment process isused, both the buyer and the supplier realize benefits fromusing an EDI-based approach. The benefits to the buyerinclude:

REDUCED COSTS: Companies that have automatedtheir accounts payable process have realized majorcost savings. For example, invoice processing costscan be reduced by as much as 80 percent with theelimination of sorting, registering, and manualdata entry.9

By using SWIFT, GE Corpo-ration increased reliability, en-hanced security and control-lership, translating into 406percent ROI.

SWIFT case study10

Per Employee in the AP De-partment, typically just 5,00015,000 paper invoices can beprocessed per year. Therefore,the direct staff costs in the APdepartment already vary be-tween 515 Euros per invoice.Further costs are generated inthe paper-based workflow andarchiving. Analysis in someorganisations showed that onaverage 6 invoice copies aregenerated and archived decen-tralised in the files of the secre-taries and heads of depart-ments.

E-invoicing/e-billingConsulting Firm11


IMPROVED CASH MANAGEMENT AND RISK MANAGE-MENT: Real-time access to invoices and improvedaccuracy enable a company to better predict out-bound disbursements and cash flow. In addition, e-invoicing programs typically result in fewer dupli-cate payments, payment penalties, and overpay-ments.

MAXIMIZED DISCOUNTS: EDI invoicing enables a com-pany to process and approve invoices morequickly, enabling a business to take full advantageof timely payment discounts, such as a two-percentdiscount for payment within ten days of invoicereceipt or other prorated discount schedules.

IMPROVED RELATIONSHIPS WITH SUPPLIERS: Faster,more accurate payments to suppliers result in theability to forge more strategic relationships andensure better customer service.

The benefits to the supplier include:

FASTER PAYMENTS: E-invoicing eliminates mail delaysand customers can easily route invoices for fasterapproval and processing since electronic invoicescan automatically pass into the customers invoiceapproval workflow system. Invoices are less likelyto get lost and there are fewer exceptions. As aresult, invoices can be paid in a timelier manner.

Companies using more elec-tronic connections with cus-tomers have 13 percent shorterdays sales outstanding (DSO).Market Research Report13

In larger organisations, it isnot unusual to benefit froman additional 1.5 Euro dis-count per E-Invoice on aver-age.

E-invoicing/e-billingConsulting Firm12

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REDUCED COSTS: Companies that have automatedtheir accounts receivable process have realizedmajor cost savings due to savings in postage, mate-rials, processing, and storage. Further savings re-sult from a reduction in reprint requests and cus-tomer service calls. In addition, electronic invoicesenable the implementation of a fully electronic pay-ment system, thereby eliminating the costly pro-cessing of paper checks.

INCREASED PRODUCTIVITY: Utilizing electronic deliv-ery of invoices, suppliers can verify that buyershave received their invoices and the time and dateof receipt, thus reducing the need for status calls.

* 5 * 5 * 5 *

WHAT DOES AN EDI DOCUMENT LOOK LIKE?

61

In this chapter, you will learn:How EDI documents are constructed from data elements, segments, and envelopes

AN EDI DOCUMENT needs to contain all the informationthat would be in the paper document of the same type. Forexample, in a purchase order you need to specify yourcompany name, address, phone and fax numbers, and theproducts you wish to purchase, the quantity of each prod-uct, dates for delivery, and so on. In an EDI document,each individual piece of information is called a data ele-ment. We call each line of data elements a segment. Asingle EDI business document such as a Purchase Order,Invoice, or Advance Ship Notice is called a transactionset or message.

What makes the EDI document different from anemail is that each data element is in a specific position ona specific line or segment. For example, if the EDI rule isthat your companys address will always be found afterthe first asterisk on a segment that begins with the codeN3, any EDI computer program in the world can now

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theoretically find your address by simply looking for asegment beginning with N3 and reading after the firstasterisk. Obviously, documents can be very complex. Forexample, how do you indicate multiple addresses formultiple locations? Thats where the beauty of an EDIdocument comes in. It has rules for doing virtually every-thing.

When you create an EDI document such as a PurchaseOrder, you must adhere to the strict formatting rules of thestandard you are using, such as ANSI X12 or EDIFACT.These rules define exactly where and how each piece ofinformation in the document will be found, that is, inwhich segment and in what position within that segment.In this way, when the EDI translator on the receiving com-puter reads an incoming EDI Purchase Order, it willimmediately know where to find the buyers companyname, the purchase order number, the items beingordered, the price for each item, and so on. The data willthen be fed into the receivers order management systemin the proper internal format without requiring any man-ual order entry.

Figure 5.1 shows a sample paper purchase order andhow it would look after translation into the ANSI X12 EDIformat and EDIFACT EDI format respectively.

The beauty of an EDI document is that it has rules for doing virtually everything, no matter how complicated the in-formation or the busi-ness process.

5. What Does an EDI Document Look Like? 63

Data ElementsThe EDI standard sets the rules for the type and format ofeach data element in a document. For example, the datatype might be numeric for the quantity of goods ordered,alphanumeric for your address, and date format for thedelivery date. The standard also provides codes that indi-cate the format or types of certain data elements. For exam-ple, because businesses today trade in a global economy,it is necessary to have a code to indicate the currency asso-ciated with any data elements expressing prices or costs.

Figure 5.1: Sample Paper Purchase Order

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One code can indicate that prices are expressed in U.S. dol-lars, another in Euros, another in yuan, and so on.

SegmentsIf you were filling out information on a purchase order,you would expect to see groups of related data. For exam-ple, see Figure 5.2, which shows a paper purchase order inwhich only one item is being ordered. Note that there arefour sections, each providing a different set of information:

In an EDI document, each section is described by one ormore segments; each segment consists of one or more dataelements. Each segment begins with a segment identifier(e.g., ST, BEG, N1, in ANSI; UNH, BGM, DTM in EDIFACT)that describes the type of data elements that follow. Thedata elements within each segment are separated by a dataelement separator, such as an asterisk(*) or a plus sign(+).

Figure 5.2: Purchase Order Sections


The ANSI X12 document for the above XYZ purchaseorder would look like this. (The numbers (1) to (4) corre-spond to the numbered sections in Figure 5.2.)

ST*850*54001 ST, to indicate start of a transac-tion setin this case the 850 pur-chase order

BEG*00*SA*4768*65*20120930 BEG, to indicate the beginning ofthe PO, specifically (1)

N1*SO*XYZ Company N1, a name segment (2)

N3*123 Main Street N3, to provide street address

N4*Fairview*CA*94168 N4, to provide city/state/zip

PO1*1*100*EA*27.65** PO1, to provide line item detail (3) VN*331896-42

CTT*1*100 CTT, to provide summary datafor the PO (4)

SE*8*1001 SE, to indicate the end of the PO

The EDIFACT document for the above XYZ purchaseorder would look like this:

UNH+SSDD1+ORDERS:D: UNH, to indicate start of message03B:UN:EAN008 in this case ORDERS

BGM+220+4768+9 BGM, to indicate the beginning ofthe PO message

DTM+137:20120930:102 DTM, to indicate the date/timeperiod (1)

NAD+BY+5412345000176::9 NAD, to identify the buyer code++XYZ COMPANY+ corresponding to the name/123 Main Street+ addressFairview+CA+94168+US

(2)

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LIN+1+1+331896-42:VN LIN, to describe line item detail (3)

QTY+1:100:EA QTY, to define the quantity

PRI+AAA:2765 PRI, to define price

UNS+S UNS, section control segment to separate line item detail from summary information

CNT+2:100 CNT, to provide the number of line items (4)

UNT+10+SSDD1 UNT, to indicate the end of the PO

For each type of business document, the EDI standarddefines:

The segments that may be included and whetherthey are mandatory, optional, or conditional (con-ditional segments can be included only if anothersegment or data element is included);

For each segment, the data elements that may beincluded (for each piece of information on a paperdocument there is a corresponding EDI data ele-ment); these data elements are defined in the stan-dards dictionary and each standard has its own dic-tionary;

The required sequence of the segments and data ele-ments; and

How many times a segment or group of segments(loop) may be repeated.


EnvelopesOnce all the segments are assembled according to a pre-scribed sequence, they form a complete electronic docu-ment or transaction set.

There are times when a business may need to send justone document to a business partner and other times whenit may need to send hundreds. EDI provides a way ofsending either one or multiple documents destined forone trading partner in a single file. We call this conceptenveloping because it

EDI Fundas

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