ELECTRONIC DATA INTERCHANGE

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CHAPTER 9CHAPTER 9ELECTRONIC DATA ELECTRONIC DATA

INTERCHANGE INTERCHANGE

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OUTLINE OUTLINE

1.1. INTRODUCTION INTRODUCTION

1.1. WHAT IS ELECTRONIC DATA INTERCHANGE? WHAT IS ELECTRONIC DATA INTERCHANGE?

2.2. EDI USERS AND TYPES OF ACTIVITIES EDI USERS AND TYPES OF ACTIVITIES • Who Uses EDI?Who Uses EDI?• Types of EDI Activity Types of EDI Activity • Business Processing Considerations Business Processing Considerations

3.3. WHERE DOES INFORMATION TECHNOLOGY FIT IN? WHERE DOES INFORMATION TECHNOLOGY FIT IN?

4.4. WHAT IS NEEDED TO IMPLEMENT EDI? WHAT IS NEEDED TO IMPLEMENT EDI? • EDI MethodologyEDI Methodology• EDI Implementation Considerations EDI Implementation Considerations

5.5. INTERNATIONAL CONSIDERATIONS INTERNATIONAL CONSIDERATIONS • Standards Standards • Communication Connectivity Communication Connectivity

6.6. IS EDI FOR YOU?IS EDI FOR YOU?

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INTRODUCTIONINTRODUCTION

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INTRODUCTIONINTRODUCTION

Technology continually offers new and innovative Technology continually offers new and innovative techniques that affect companies and individuals: techniques that affect companies and individuals:

1.1. Cordless telephoneCordless telephone2.2. Video gamesVideo games3.3. Facsimile (fax) machinesFacsimile (fax) machines4.4. Answering machinesAnswering machines5.5. Notebook computersNotebook computers6.6. Electronic mail (e-mail)Electronic mail (e-mail)7.7. ATM cardATM card

We are in the midst of the e-communications eraWe are in the midst of the e-communications era One innovation is electronic data interchangeOne innovation is electronic data interchange

causing major changes in how companies conduct businesscausing major changes in how companies conduct business

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WHAT IS ELECTRONIC WHAT IS ELECTRONIC DATA INTERCHANGEDATA INTERCHANGE

(EDI)?(EDI)?

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WHAT IS ELECTRONIC DATA WHAT IS ELECTRONIC DATA INTERCHANGE?INTERCHANGE?

A Definition From Book:A Definition From Book: EDI is computer-to-computer communication EDI is computer-to-computer communication

using a standard data format to exchange business using a standard data format to exchange business information between companies.information between companies.

Ex:Ex: Consider the Consider the Postal SystemPostal System

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WHAT IS ELECTRONIC DATA WHAT IS ELECTRONIC DATA INTERCHANGE? INTERCHANGE?

A Definition From Net:A Definition From Net: (EDI) is about doing business and carrying out (EDI) is about doing business and carrying out

transactions with your trading partners transactions with your trading partners electronically. electronically.

EDI covers most things that are traditionally done EDI covers most things that are traditionally done using paper-based communication. using paper-based communication.

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NORMAL BUSINESS

ELIGIBILITYVERIFICATION

SERVICE CLAIMS

ENROLLMENT

CUSTSERVICE

CUSTSERVICE

CLAIMSPROCESSING

ALLIANCEDETROIT MI

ALLIANCEDETROIT MI

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270 FUNCTIONALGROUP

INTERCHANGE

EDI Delivery

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FUNCTIONALGROUP

FUNCTIONALGROUP

INTERCHANGE EDIVAN

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EDI Example EDI Example

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EDI USERS AND TYPES EDI USERS AND TYPES OF ACTIVITIESOF ACTIVITIES

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EDI USERS AND TYPES OF EDI USERS AND TYPES OF ACTIVITIESACTIVITIES

SECTION OUTLINE:SECTION OUTLINE: Who Uses EDI?Who Uses EDI?

Where is uses EDI?Where is uses EDI?

Types of EDI ActivityTypes of EDI Activity

Business Processing ConsiderationsBusiness Processing Considerations

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Who Uses EDI? (From Book)Who Uses EDI? (From Book) Companies of all types and sizes are able to utilize EDI.Companies of all types and sizes are able to utilize EDI. Ex. Some large corporations specify EDI : Ex. Some large corporations specify EDI :

Use as the communication method of choiceUse as the communication method of choice Federal GovernmentFederal Government Automakers Automakers

• suppliers to send all purchase orders and invoices electronicallysuppliers to send all purchase orders and invoices electronically Industry Industry bankingbanking healthcarehealthcare retailingretailing traveltravel ManufacturingManufacturing insuranceinsurance GovernmentGovernment

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Who Uses EDI? (From Net)Who Uses EDI? (From Net) Any company that Any company that (buys, sells goods, services(buys, sells goods, services)) can can

potentially use EDI. potentially use EDI.

Because it supports the entire business cycleBecause it supports the entire business cycle

EDI can streamline the relationship that any EDI can streamline the relationship that any company has with its company has with its (customers, distributors, (customers, distributors, suppliers)suppliers)

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Where Is Uses EDI?Where Is Uses EDI? Sample EDI application areas Sample EDI application areas EX:EX:

• PurchasingPurchasing

• InventoryInventory

• BillingBilling

• DistributionDistribution

• Price notificationPrice notification

• FinancialFinancial

• Freight rate notificationsFreight rate notifications

• Sales & cash managementSales & cash management

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Types of EDI Activity Types of EDI Activity Currently EDI is primarily used for:Currently EDI is primarily used for:

• Purchase ordersPurchase orders

• Bills of ladingBills of lading

• InvoicesInvoices

• Healthcare claimsHealthcare claims

• Financial exchangesFinancial exchanges

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Types of EDI ActivityTypes of EDI Activity

Difference between EDI & electronic funds transfer (EFT)Difference between EDI & electronic funds transfer (EFT)

EFT is also used to exchange information electronically. EFT is also used to exchange information electronically.

Financial EDI is the exchange of payment and bank balance information Financial EDI is the exchange of payment and bank balance information between a company and its bank or another company. between a company and its bank or another company.

EFT is the exchange of information between two banks that results in value EFT is the exchange of information between two banks that results in value being transferred.being transferred.

It is possible for financial EDI to be bank to bank, but EFT does no bank-It is possible for financial EDI to be bank to bank, but EFT does no bank-to-company exchanges. to-company exchanges.

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EDI is changing the way companies do businessEDI is changing the way companies do business

shifting the ordering process from a snail-likeshifting the ordering process from a snail-like

paper-intensive system to a computerized onepaper-intensive system to a computerized one

The nature of business relationships, both internal and The nature of business relationships, both internal and external, is changingexternal, is changing

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Ex:Ex: A salesperson who used to receive and write orders A salesperson who used to receive and write orders

has become a product advisorhas become a product advisor

Customers conducting business with firms that have Customers conducting business with firms that have multiple divisions now request centralized electronic multiple divisions now request centralized electronic transmissiontransmission

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Document Transaction

Little Envelope Functional Group

Big Envelope Interchange

Postal Service VAN

Courier Delivery Point-to-Point

Human Audit Machine Audit


PAPER vs EDI

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WHERE DOES WHERE DOES INFORMATION INFORMATION

TECHNOLOGY FIT IN?TECHNOLOGY FIT IN?

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WHERE DOES INFORMATIONWHERE DOES INFORMATIONTECHNOLOGY FIT IN?TECHNOLOGY FIT IN?

EDI is not simply a technical tool or techniqueEDI is not simply a technical tool or technique

It offers change and new ways of conducting businessIt offers change and new ways of conducting business

The involvement and role of the IT organization would be The involvement and role of the IT organization would be the same as for other business projects but entails the same as for other business projects but entails crossing company boundariescrossing company boundaries

IT cannot be the sole implementer of EDI; it must be a IT cannot be the sole implementer of EDI; it must be a business and technical team effort. business and technical team effort.

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WHERE DOES INFORMATIONWHERE DOES INFORMATIONTECHNOLOGY FIT IN?TECHNOLOGY FIT IN?

EDI should have its own architecture fixed to the EDI should have its own architecture fixed to the company’s strategic way. company’s strategic way.

This EDI architecture at a minimum should be designed This EDI architecture at a minimum should be designed to handle any system:to handle any system: Integration elementsIntegration elements Systematically Systematically Address security levelsAddress security levels Communications connectivity to useCommunications connectivity to use

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WHERE DOES INFORMATION WHERE DOES INFORMATION TECHNOLOGY FIT IN?TECHNOLOGY FIT IN?

The EDI different between criteria and needs:The EDI different between criteria and needs: handling multiple data formats handling multiple data formats multiple system interfaces multiple system interfaces provides better support to the various Bus. Processingprovides better support to the various Bus. Processing

It may be necessary to designate an EDI It may be necessary to designate an EDI Coordinator responsible (planning & coordinating) all EDI activity within the Coordinator responsible (planning & coordinating) all EDI activity within the

companycompany..

The size of the firm and the extent of EDI activity :The size of the firm and the extent of EDI activity : deciding whether an additional full-time position is necessarydeciding whether an additional full-time position is necessary

It is recommended that someone coordinate the EDI effort, It is recommended that someone coordinate the EDI effort, regardless of the size of the effort, so that results are not regardless of the size of the effort, so that results are not fragmented throughout the company.fragmented throughout the company.

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WHAT IS NEEDED TO WHAT IS NEEDED TO IMPLEMENT EDI?IMPLEMENT EDI?

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SECTION OUTLINE:SECTION OUTLINE: EDI MethodologyEDI Methodology

EDI Implementation ConsiderationsEDI Implementation Considerations Business Strategic PlanningBusiness Strategic Planning Build External Company RelationshipsBuild External Company Relationships Ensure Commitment and AcceptanceEnsure Commitment and Acceptance Legal and Tax ImplicationsLegal and Tax Implications

Standard Data FormatsStandard Data Formats EDI Data Standards HistoryEDI Data Standards History Standard Group TypesStandard Group Types Implementing StandardsImplementing Standards Data Standards SoftwareData Standards Software

Establishing Electronic ConnectionsEstablishing Electronic Connections

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Some companies and vendors make implementing EDI Some companies and vendors make implementing EDI sound simple, but in reality there is more to it than sound simple, but in reality there is more to it than electronically sending information to another companyelectronically sending information to another company

EDI MethodologyEDI Methodology The EDI project methodology guidelines are the same as for The EDI project methodology guidelines are the same as for

any project. The stages are:any project. The stages are:1.1. Planning and business requirements definition Planning and business requirements definition 2.2. Functional requirements Functional requirements 3.3. Design and build Design and build 4.4. Testing Testing 5.5. Installation Installation

6.6. Feedback and reviewFeedback and review

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Business Strategic PlanningBusiness Strategic Planning

Before starting any EDI adventure, it is important to Before starting any EDI adventure, it is important to establish a vision and mission for the company and its establish a vision and mission for the company and its EDI commitment EDI commitment

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Questions that must be answered are:Questions that must be answered are: Why are we pursuing EDI? Why are we pursuing EDI?

What do we expect from its usage? What do we expect from its usage?

Who will be our EDI partners? Who will be our EDI partners?

What information do we want to exchange? What information do we want to exchange?

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The effort would be minimal and the benefits of EDI The effort would be minimal and the benefits of EDI would not be fully realizedwould not be fully realized

It is always best to keep it simple by installing a project in It is always best to keep it simple by installing a project in small manageable pieces, using a pilot programsmall manageable pieces, using a pilot program

Business may want to continually improve its work Business may want to continually improve its work

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Build External Company Relationships:Build External Company Relationships: EDI project from other company projects is that EDI EDI project from other company projects is that EDI

entails teaming with another company, known as a trading entails teaming with another company, known as a trading partnerpartner

A trading partner must be an active participant in each A trading partner must be an active participant in each phase and both partners must cover the same activitiesphase and both partners must cover the same activities

Timing, cooperation, and coordination between the trading Timing, cooperation, and coordination between the trading partners are critical components of a successful partners are critical components of a successful implementation. implementation.

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Ensure Commitment and AcceptanceEnsure Commitment and Acceptance It is important that all levels of management participants be It is important that all levels of management participants be

educated on EDI:educated on EDI:• employeesemployees• team participantsteam participants

This helps define business requirements in solving business This helps define business requirements in solving business concerns. concerns.

Education also helps in overcoming the fear of change and Education also helps in overcoming the fear of change and promotes eventual acceptance. promotes eventual acceptance.

The overall goals and objectives of the project must be The overall goals and objectives of the project must be explicitly defined and top management must commit to the explicitly defined and top management must commit to the project before moving on to functional requirements.project before moving on to functional requirements.

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Legal and Tax ImplicationsLegal and Tax Implications a company should seek advice from legal and tax experts. a company should seek advice from legal and tax experts.

The IRS is trying to help auditors eliminate paper filesThe IRS is trying to help auditors eliminate paper files

IRS rules vary based on the companyIRS rules vary based on the company

Some basic questions that must be answered are:Some basic questions that must be answered are: Is the original document required? Is the original document required? Are original signatures necessary? Are original signatures necessary?

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Legal and Tax Implications (con.)Legal and Tax Implications (con.) What information must be retained for tax or legal purposes? What information must be retained for tax or legal purposes? How long must the information be kept? How long must the information be kept? How long does the company have to present the information? How long does the company have to present the information? Will a copy of the document need to be recreated or will a Will a copy of the document need to be recreated or will a

report displaying the required information suffice?report displaying the required information suffice?

It is better to be safe than sorry; consult appropriate It is better to be safe than sorry; consult appropriate authorities for clear, concise answers before eliminating authorities for clear, concise answers before eliminating paper. Microfiche and imaging are other alternatives when paper. Microfiche and imaging are other alternatives when storing archival information.storing archival information.

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Standard Data FormatsStandard Data Formats Introduction Introduction

EDI Data Standards HistoryEDI Data Standards History

Standard Group TypesStandard Group Types

Standard Group TypesStandard Group Types

Implementing StandardsImplementing Standards

Data Standards SoftwareData Standards Software

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Standard Data FormatsStandard Data Formats

One benefit of EDI is that it forces industries to One benefit of EDI is that it forces industries to standardize:standardize:

Terminology Terminology Usage Usage How information is recorded How information is recorded Presented by creating a dictionary of industry terms and usagePresented by creating a dictionary of industry terms and usage

The data must be clear, concise, and unambiguous The data must be clear, concise, and unambiguous between companiesbetween companies

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EDI Data Standards HistoryEDI Data Standards History

The EDI data standards process began in the United The EDI data standards process began in the United States with the transportation industry during the mid-States with the transportation industry during the mid-1970s1970s

In the early 1980s, the American National Standards In the early 1980s, the American National Standards Institute (ANSI) initiated efforts to define a single set of Institute (ANSI) initiated efforts to define a single set of standards for EDI that could be applied across industriesstandards for EDI that could be applied across industries

These standards are known as the ASC X12 standardsThese standards are known as the ASC X12 standards. .

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Standard Data FormatsStandard Data FormatsASC X12S/94-172 FORMAT*Source: DISA 1994 Publications Catalog, Data Interchange Standards Association, Inc., Alexandria, VA.

ASC X12 FORMAT SAMPLE INVOICE CONTENT/NOTES

ISA*00*0000000000*01*01*PASSWORDME *01*123456789bbbbbb*987654321bbbbbb* 890714*2210*U*00204*000000008*0*P*N/L

Outside Envelope (Interchange Control Header, ISA)

GS*IN*012345678*087654321*900509 *2210*000001*X*002040N/L

Inside Envelope

ST*810*0001N/L Invoice

BIG*900713*1001*900625*P989320N/L

DATE ORDER DATE INVOICE# CUSTOMER ORDER#

7/13/90 6/25/90 1001 P989320

N1*BT*ACME DISTRIBUTING COMPANYN/L N3*P.O. BOX 33327N/L N4*ANYTOWN*NJ*44509N/L

CHARGE TO Acme Dist. Company P.O. Box 33327 Anytown, NJ 44509

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Standard Group Types:Standard Group Types: Various standard groups have been formed to establish Various standard groups have been formed to establish

standards unique to their industries. standards unique to their industries.

These groups usually consist of major companies that These groups usually consist of major companies that communicate electronically with each other or compete with communicate electronically with each other or compete with one another.one another.

The purpose is to establish a common language throughout the The purpose is to establish a common language throughout the industry. industry.

This text will not attempt to explain all the different standards This text will not attempt to explain all the different standards and meanings of the data. and meanings of the data.

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Implementing StandardsImplementing Standards An attempt to implement standard data formats is An attempt to implement standard data formats is

underway, but many firms still use proprietary formats underway, but many firms still use proprietary formats

This forces companies to support multiple formats for the This forces companies to support multiple formats for the same business documentsame business document

a company must be able to identify the sending company, a company must be able to identify the sending company, determine the type of business transactiondetermine the type of business transaction

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Data Standards SoftwareData Standards Software The cost of software that supports translating information into The cost of software that supports translating information into

the standard data formats has dropped. the standard data formats has dropped.

As more and more firms pursue EDI software, vendors are As more and more firms pursue EDI software, vendors are offering products that perform this function. offering products that perform this function.

This eliminates the cost of developing in-house customized This eliminates the cost of developing in-house customized programs and maintaining reformat programs programs and maintaining reformat programs

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In addition to a standard data format, it is mandatory that the In addition to a standard data format, it is mandatory that the companies’ computers are able to “talk” to one another. companies’ computers are able to “talk” to one another.

This sounds simple but it can be complex. EDI entails the use This sounds simple but it can be complex. EDI entails the use of special translation and communications software. of special translation and communications software.

When connecting computers, companies must consider the When connecting computers, companies must consider the communications method and protocol that will be used to communications method and protocol that will be used to transmit information, as well as security and business transmit information, as well as security and business recovery. recovery.

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Protocol: Protocol: A set of standards for exchanging information A set of standards for exchanging information between two computer systems or two computer devices. between two computer systems or two computer devices.

Communications protocol: Communications protocol: A list of communications A list of communications parameters (settings) and standards that govern the transfer of parameters (settings) and standards that govern the transfer of information between computers using telecommunications. information between computers using telecommunications. Both computers must have the same settings and follow the Both computers must have the same settings and follow the same standards to avoid errors. same standards to avoid errors.

Communications programCommunications program: : An application program that turns An application program that turns your computer into a terminal for transmitting data to and your computer into a terminal for transmitting data to and receiving data from distant computers through the telephone receiving data from distant computers through the telephone system system

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INTERNATIONAL INTERNATIONAL CONSIDERATIONSCONSIDERATIONS

Standards

Communication Connectivity

Advantages and Disadvantages of EDI

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StandardsStandards EDI is not used only in the United States or North America. EDI is not used only in the United States or North America.

Data format standardization efforts are taking place in the Data format standardization efforts are taking place in the United States (ANSI) and internationally (ISO). United States (ANSI) and internationally (ISO).

Until there is one common standard base, EDI implementation Until there is one common standard base, EDI implementation must be flexible enough to handle multiple standards for the must be flexible enough to handle multiple standards for the same type of documentsame type of document

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Communication ConnectivityCommunication Connectivity When dealing with international communications, there are When dealing with international communications, there are

numerous concerns other than the obvious language and cultural numerous concerns other than the obvious language and cultural barriersbarriers

In some countries, telephone lines are government regulated and In some countries, telephone lines are government regulated and are not as efficient as in the United States. are not as efficient as in the United States.

When the government runs the show, acquiring permission from When the government runs the show, acquiring permission from telecommunications authorities for equipment connection often telecommunications authorities for equipment connection often causes delays. causes delays.

Another concern is the level of data security available and the Another concern is the level of data security available and the right of ownership during transmission. right of ownership during transmission.

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Advantages EDIAdvantages EDI Disadvantages EDIDisadvantages EDI

Reduces the flow of paper Reduces the flow of paper between organizations between organizations

Standardizes programs and Standardizes programs and procedures procedures

Improves productivity Improves productivity Lack of a common understanding Lack of a common understanding and limited education and limited education

Allows for more efficient Allows for more efficient disbursement of information disbursement of information Complex to use Complex to use

Improves accuracy of information Improves accuracy of information and reduces errors and reduces errors

Difficult to quantify return return on Difficult to quantify return return on investment investment

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Benefits of EDI (From Net)

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IS EDI FOR YOU?IS EDI FOR YOU? Companies should be wary of vendors that try to convince Companies should be wary of vendors that try to convince

them how easy and inexpensive it is to implement EDI.them how easy and inexpensive it is to implement EDI.

This is partially true, but before spending money, This is partially true, but before spending money, allall implications and expenditures should be considered. implications and expenditures should be considered.

Communication costs, ongoing maintenance, hardware costs, Communication costs, ongoing maintenance, hardware costs, data volumes, and data availability should be investigated data volumes, and data availability should be investigated before investing. before investing.

A word of warning: it is difficult to quantify costs and A word of warning: it is difficult to quantify costs and determine a return on investment for using EDI because it is a determine a return on investment for using EDI because it is a complex system which affects multiple business functional complex system which affects multiple business functional areas. areas.

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Questions For Students Questions For Students 1.1. What is mean EDI ?What is mean EDI ?

2.2. Who Uses EDI ?Who Uses EDI ?

3.3. Where Is Uses EDI ?Where Is Uses EDI ?

4.4. What are types of EDI activity ?What are types of EDI activity ?

5.5. What is Difference between EDI & electronic funds transfer (EFT) ?What is Difference between EDI & electronic funds transfer (EFT) ?

6.6. What are EDI project methodology guidelines are the same as for any project ?What are EDI project methodology guidelines are the same as for any project ?

7.7. Is EDI Standard Data Formats? (Yes/No) and explain and give one example? Is EDI Standard Data Formats? (Yes/No) and explain and give one example?

8.8. What is Benefits of EDI ?What is Benefits of EDI ?

ELECTRONIC DATA INTERCHANGE

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