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Applications of EDI(Electronic Data Interchange) in Business | Fundamentals of E-Commerce

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EDI applicationsEDI applications in Business,
Fundamentals of E-commerce Notes | Sixth Semester,
BSc.CSIT | Tribhuvan University (TU)

EDI Applications in Business
Although EDI was developed to improve transportation and trade, it has spread everywhere. In short, EDI has grown from its original (and somewhat limited) use as expediter of the transfer of trade goods to facilitator of standard format data between any two computer systems.
An examination of EDI usage in various industries provides insight into the business problems that EDI is attempting to solve. We will present four very different scenarios in industries that use EDI extensively:

  1. International or cross-border trade,
  2. Financial EDI or electronic funds transfer (EFT),
  3. Health care EDI for insurance claims processing, and
  4. Manufacturing and retail procurement.

Let us describe the EDI business applications briefly:

1. International or cross-border trade
EDI has always been very closely linked with international trade. Over the last few years, significant progress has been made toward the establishment of more open and dynamic trade relations. Recent years have brought the General Agreement on Tariffs and Trade (GATT); the Free Trade Agreement (NAFTA) among the United States, Canada, and Mexico; and the creation of the European Union. These developments have meant the lifting of long-standing trade restrictions. Many countries, and in particular developing countries, have made significant efforts to liberalize and adjust their trade policies. In this context, trade efficiency, which allows faster, simpler, broader and less costly transactions, is a necessity. It is a widely held view that trade efficiency can be accomplished only by using EDI as a primary global transactions medium.

2. Financial EDI or electronic funds transfer (EFT)
Financial EDI comprises the electronic transmission of payments and remittance information between a payer, payee, and their respective banks. This section examines the ways business-to-business payments are made today and describes the various methods for making financial EDI payments.

Financial EDI allows businesses to replace the labor-intensive activities associated with issuing, mailing, and collecting checks through the banking system with automated initiation, transmission, and processing of payment instructions. Thus it eliminates the delays inherent in processing checks.

Types of Financial EDI: Traditionally, wholesale or business-to-business payment is accomplished using checks, EFT, and automated clearinghouses (ACH) for domestic and international funds transfer. ACH provides two basic services to industrial and financial corporate customers (including other banks): (1) fast transmission of information about their financial balances throughout the world, and (2) the movement of money internationally at rapid speed for settlement of debit/credit balances. Banks have developed sophisticated cash management systems on the back of these services that essentially reduce the amount of money companies leave idly floating in low-earning accounts.

Thus, three principal types of noncash payment instruments currently used for business-to-business payments: checks, electronic funds transfers, and automated clearinghouse (ACH) transfers.

3. Health care EDI for insurance claims processing
Providing good and affordable health care is a universal problem. In 1994, the American public spent $1 trillion on health care, nearly 15 percent of the gross domestic product (GDP). National health care expenditures have risen by 10.5 percent each year for the past eight years—more than double the rate of increase in the consumer price index. It is estimated that $3.2 billion in administrative savings are expected to be achieved by switching from being paper-based to an EDI implementation. Employers could save $70 million to $110 million by using EDI for enrollment and to certify that a prescribed procedure is covered under the subscriber’s health insurance contract.

4. Manufacturing and retail procurement
Both manufacturing and retail procurement are already heavy users of EDI. In manufacturing, EDI is used to support just-in-time. In retailing, EDI is used to support quick response.

Just-in-Time and EDI: Companies using JIT and EDI no longer stock thousands of large parts in advance of their use. Instead, they calculate how many parts are needed each day based on the production schedule and electronically transmit orders and schedules to suppliers every day or its some cases every 30 minutes. Parts are delivered to the plant “just in time” for production activity.

Quick Response and EDI: Taking their cue from the efficiencies manufacturers have gained from just-in-time manufacturing techniques, retailers are redefining practices through the entire supply chain using quick response (QR) systems. For the customer, QR means better service and availability of a wider range of products. For the retailer and suppliers, QR may mean survival in a competitive marketplace. Much of the focus of QR is in reduction of lead times using event-driven EDI. Occurrences such as inventories falling below a specified level immediately trigger a chain of events including automatic ordering from one company’s application directly into the other’s application. In QR, EDI documents include purchase orders, shipping notices, invoices, inventory position, catalogs, and order status.

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