2019-20 IV [Link].

II E- UNIT-
Sem. Commerce 4
INTER ORGANIZATIONAL COMMERCE AND EDI
Objective
:

 To expose to Electronic Data Interchange (EDI) Problems.

Syllabus:
Inter organizational Commerce- EDI (Electronic Data Interchange), EDI
implementation, Value Added Networks (VAN).

Learning Outcomes:
 Identify Electronic Data Interchange Problems.

Electronic Data Interchange (EDI):

 Electronic Data Interchange (EDI) is the computer-to-computer

exchange of business documents in a standard electronic format
between business partners.
 EDI was developed in 1960s for documentation accelerating the
movements to shipments and transportation.

Definition Electronic Data Interchange (EDI):

EDI is the transmission, in a standard syntax, of unambiguous information

of business or strategic significance between computers of independent
organizations.[American National Standards Institute].
(Or)
EDI is the interchange of standard formatted data between computer
application systems of trading partners with minimal manual intervention.
[UN/EDIFACT Training guide]
(Or)
EDI is the transfer, of commercial and administrative data using an agreed
standard in electronic format as EDI message. [European model]
(Or)
EDI is the electronic transfer from one computer to another of computer
process able data using an agreed standard to structure the data.
[International Data Exchange Association]
EDI Layered Architecture:

EDI Layered Architecture specifies four layers:

1. The semantic (application) Layer describes the business application.
2. The standard translation layer Specifies business form structure so
that information can be exchanged
3. The packing (or transport) layer explains How the business form is
sent, e.g. post, UPS, fax.
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4. The physical network infrastructure Layer provides Dial-up lines,
Internet, value-added network, etc.

EDI Semantic layer Application level services

EDI Standard layer EDIFACT business form standards

ANSI X12 business form standards

EDI transport layer Electronic mail X.435 ,MIME

POINT TO POINT FTP, TELNET

World Wide Web HTTP

Physical layer Dial –up lines, internet ,I-way

FIG 4.1 : Layered architecture of EDI

1. EDI semantic layer:

 This layer describes business applications that is driving EDI
 For a procurement application, this translates into requests for
quotes, price quotes, purchase orders, acknowledgements, and
invoices.
 In this layer communication between organizations is done
through software. So the companies can view the data in the
software present at their end computer system.
 So all organizations must follow universal EDI standards that
layout acceptable fields of business forms.

2. EDI Document standard layer:

EDI standard forms:

1. X12 Standard, ANSI (American national standard institute).

2. EDIFACT, developed by United Nations Economic Commission for

Europe (UN/ECE).

EDIFACT-Electronic data Interchange for

Administration Commerce and
Transport.

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 Trading partners Sem.
should use a compatible Commerce
format for 4
EDI
document exchange.

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 It specifies business form structure and to some extent influence
content seen at the application layer.
 Example: purchase order name field x12 standard might be to hold
50 characters and 75 characters field produced name truncating
during translation from application layer to document standard
layer.

3. EDI Transport layer:

 It corresponds with non electronic activity of sending business

from one company to another company .It can send using postal
service ,registered mail and certified mail and email etc.
 Generally EDI transport layer chooses email as the carrier services.

4. EDI Physical layer:

 It describes the physical devices which involved in transaction.

 They use various devices like dial –up systems, internet, I-WAY.

EDI versus Email:

Electronic Data Interchange (EDI) is the computer-to-computer

exchange of business documents in a standard electronic format
between business partners. EDI replaces postal mail, fax and email.

Electronic Data Interchange(EDI) Electronic mail

1. There is typically no human is 1. Human involvement is there
involved in the processingof is processing of information.
the
information.
2. Interface is software to software 2. A human to software interface is
orientation involved at a minimum of one end of
the interchange.
[Link] is structured in 3. Data is not necessarily structured
software understandable in software understandable way.
way
4. The interchange is composed by The message is composed by a human
one software for interpretation and
by software. /or interpreted by a human.
5. If a reply is involved, it is 5. Here reply is composed by a human
composed by software to and/or interpreted by a human.
be interpreted
by
software.

Table 4.1 :- EDI Vs E-Mail

EDI in Action:
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The idea behind EDI is very [Link] seeks to take what has been a
manually prepared form or a form from a business application,
translates that data into standard electronic format, and transmits it.

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Information flow without EDI

Fig 4.2 :- Information flow without EDI

The fig shows the information flow when paper documents are
shuffled between organizations via the mailroom

 When the buyer sends a purchase order to a seller, the

relevant data extracted & recorded on a hard copy.
 This hard copy is forwarded to several steps, at last manually
entered into system by the data entry operators
 This process is somewhat overhead in labor costs & time delays.
 The reproduction of information also increases the risk of
errors caused by incorrect data entries.
 It is quite possible to exchange the information in its
electronic format by means of other carriers such as magnetic
tapes, diskettes etc.,
Information flow with EDI:

Fig 4.3:- Information flow with EDI:

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The EDI transactions for a purchase, shipment, and corresponding
payment are as follows:

Step 1: Buyer’s computer sends purchase order to seller’s

computer.

Step2: Seller’s computer sends purchase order confirmation to

buyer’s computer.

Step 3: Seller’s computer sends booking request to transport company’s

computer. Step 4: Transport company’s sends booking confirmation

to seller’s computer. Step 5: Seller’s computer sends advance ship

notice to buyer’s computer.

Step 6: Transport Company’s sends status to seller’s

computer. Step 7: Buyer’s computer sends Receipt advice

to seller’s computer. Step 8: Seller’s computer sends

Invoice to buyer’s computer.

Step 9: Buyer’s computer sends payment to seller’s computer.

In some firms are adopting EDI as a fast, inexpensive, and safe

method of sending invoices, purchase orders, customs documents,
shipping notices, and other frequently used business documents.

Tangible benefits of EDI are:

 EDI can be cost and time saving system. The automatic transfer of
information from computer to computer reduces the need to rekey
the information.
 It reduces costly errors, its transactions produce
acknowledgements of receipt of data.
 For companies dealing with thousands of suppliers and tens of
thousands of purchase orders a year, the savings of EDI are
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It has the following benefits:

1. Reduced paper based system:
2. Improved problem resolution and customer services:
3. Expanded customer/supplier base

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1. Reduced paper based system:
 EDI reduced effort and cost spent on papers for maintaining
records, paper- related supplies, filing cabinets and other storage
systems since it is automated.
 EDI also reduced postage bills because of the amounts of paper
that no longer need to sent.
 It does not require any paper related supplies and other modes of
things. It uses Inexpensive manner of system.
2. Improved problem resolution and customer services:
 EDI minimize the time, companies spend to identify and resolve
inner business problems. Example: some problems come from data
entry errors.
 Many problems that arise due to data-entry errors somewhere
along the way, and EDI can eliminate many of them.
 EDI can improve customer service by enabling the quick transfer
of business documents and a marked decrease in errors.
3. Expanded customer/supplier base:
 Many large manufacturers and retailers with the necessary clout
are ordering their suppliers to institute an EDI program.
 Like to get order from unknown company and build bridges to
other companies .it evaluates new products.

EDI Software Implementation

EDI software has four layers:

1. Business application

2. Internal format conversion.

3. EDI translator

4. EDI envelope for document messaging.

These four layers package the information and send it over the
value added network to the target business, which then reverses the
process to obtain the original information.

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Company A Company B

Business Business
application application
Internal Internal
format format
conversion conversion
EDI translator EDI translator
EDI envelope EDI envelope
for for
document document

Modem Modem

Private Value added network

(VAN) (or)

Public

Fig 4.4 : How EDI works.

Assume that the message flows from company A to trading partner
company B. Before company B can receive and process the message
content, the message has to go through several intermediary steps.

1. EDI Business Application layer.

2. EDI Translator layer.

3. EDI Communication layer.

1. EDI BUSINESS APPLICATION:

 In first step of EDI process is to create a document i.e. ex: invoice-in

software application.
 This software application then sends document to an EDI translator
which automatically reformats the invoice into an agreed-on EDI
standard.
 If company A and company B software's are from different vendors
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then translator integrate Commerce 4

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 If both the EDI translator and business application are on the same
type of computer, the data will move faster and more easily from one
to another.
 The translator creates a document in electronic envelope called "EDI
package". It has a mailbox id for company trading partner.

Enter the EDI translator The translator wraps

information in the software changes the document in an
EDI form specified the EDI form to fit electronic envelope
for that particular the EDI standard "EDI package" that has
business that the target an ID for your partners.
transaction. application

Fig 4.5 : The preparation process followed by the application software.

2. EDI Translator layer:

 Translation is an integral part of the overall EDI solution.

 Translators describe the relationship between the data elements in

the business applications and the EDI standards.

 The translator ensures that the data are converted into a format
that the trading partner can be use.

 If EDI is done without translation, companies run a great risk of

transmitting data that the trading partners may not be able to
read.

Example: If a word processing file is uploaded and the recipient tries to

open it in a database program, the result is a mess of characters instead
of expected information.

In olden days there are only few EDI translators are available .so large
companies wrote their custom EDI translators.

Custom translators have the following disadvantages:

1. A custom translator is very restrictive. It is often design for one

trading partner and limited transaction sets.
2. Custom translator is very difficult to update.
3. Custom translator is unsupported.
3. EDI Communication layer:

 The communications portion-dials a phone number for value added

network service provider or other type of access methods are
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There are three main types of EDI access methods are available.

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1. Direct dial or modem to modem connection,
2. Limited third-party value-added network.
3. Full service third party VANS.
This network could be private networks or public networks, ex: Internet

Direct dial or modem to modem connection:

 Direct dial systems are simplest and most common.

 The user has direct access to partner’s modem and communicates
by using the modem to dial the modem of the other party,
 It is a direct computer to computer transfer of document such as
uploading and downloading through modem.
 It follows a standard format such as ASCII text.
Limited VANS:

 They provide the services similar to e-mail.

 They provide basic technical services such as protocol conversion,
data error detection and correction.
 The functioning of limited VAN is if they receive purchase order,
read ID on the envelope, place it in the correct trading partners
mailbox.
Full third-party services:

 E-mailboxes and associated extra features are the heart of the third
party services.
 Extra features include providing security and document tracking.
Value -Added Networks (VANs):

 A VAN is a communication network that typically exchanges EDI

messages among trading partners.
 It provides other services, including holding messages in
“electronic mailboxes", interfacing with other VANs, and
supporting many telecommunication modes and transfer
protocols.
 The VAN "electronic mailbox" is a software feature into which a
user deposits EDI transactions and then retrieves those messages
when convenient.
 VANs have allowed companies to automatically and securely
exchange purchase orders, invoices and payments.
 When a company sends an EDI transaction, it arrives a message
storehouse on the VAN to await pickup by the destination
company.
 VAN can safeguard the transaction network.

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Illustration of functioning of VAN:

Figure 4.6 : Functions of a Third Party VAN

 Company A puts an EDI message for trading partner

manufacturing Company B in the VAN mailbox at a date and time
of its choosing.
 The VAN picks up the message from the mailbox and delivers it to
trading partners B's mailbox, where it will remain until trading
partner B logs on picks it up.
 Trading partner B responds to trading partner A in the same fashion.
 This cycle repeats itself on weekly, daily or hourly as needed. This
service is referred to as mail-enabled EDI.
 The disadvantages of EDI -enabling VANs are they are slow and
high priced, charging by the number of characters transmitted.
Advantages of Value Added Networks:
1. Faster Transaction Processing: VAN can improve the speed
at which transactions are completed. By transmitting data
electronically, information moves instantly from point A to
point B, providing faster access to operating information.
2. Better Communications: VAN reduces the costs associated
with business communications. It decreases the need for
paper transfers, and allows tasks such as ordering inventory
and processing payments to be completed more efficiently
through electronic means.
3. Cost of Implementation: VAN may not be cost effective for many
small to medium-sized businesses.
Disadvantages of Value Added Networks:
EDI enabled VANs are slow and high priced, charging by the
number of characters transmitted. Whether a company really
needs a VAN is a question. For example: A business that wants to
use EDI with some fifty trading partners has several
communication choices.
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1. Company can buy a multiport modem capable of handling fifty
incoming phone lines, each allow its trading partner to
communicate directly as its convenience.
2. The company can use a single modem with a phone line and
arrange a tightly controlled schedule of its trading partners.
Ex: 12 AM for trading partner B, 12:11 AM for trading partner and so
on.
3. The company can establish an electronic mailbox on a VAN and
require each trading partner to use the VAN for sending and
retrieving EDI messages.
VAN Pricing Structures
 Customers can pick and choose from array of VAN services and
billed accordingly. These services include EDI translation
software and support, EDI to tax support, e-mail capability, inter-
VAN connectivity and transmission of x.12 documents.
 Typically VAN services involve 3 types of costs namely
1. Account start-up costs.
2. VAN usage.
3. VAN to VAN interconnect costs.
Account start-up costs
Opening an account with a VAN incurs start-up costs
as well as other variable costs such as mailbox/ Network Fees. Network
usage fee applies whether or for the services are used. Network fee also
includes mailbox fee for maintaining an account and a password. Each
account has mailbox through which companies exchange EDI data.
The overall start-up costs vary depends on EDI readiness of
organization, number of trading partners and line attachment options
and software application options.

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Fig 4.7. VAN Network usage fees Commerce 4

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VAN usage

 VANs charge session fees based on use of their services. VANs

charge for both sending and receiving data.
 The customer pays according to volume of usage. Usage means
number of transactions sent or received by customer or trading
partners.
 Some VANs allow users to bundle several transaction
sets( purchase order, invoice, acknowledgement) into single
envelope just like sending several invoices in a single envelope.
 Other VANs open interchange and charge for each transaction set
in th envelope. VAN generally charges a kilo character fee
according to size of packet.
 VAN assesses envelope fees for each EDI packet or interchange
envelope sent or received.

Fig 4.8:- Transaction fee structure

 The session fee is a variable cost related to envelope/message fee
delivery of functionality similar EDI documents.

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Assignment-Cum-Tutorial
Questions
SECTION-A: Objective Questions
1. is the electronic transfer from one computer to another of
computer process able data using an agreed standard to structure the
data.[CO4]

2. EDI stands for . .[CO4]

3. EDI transport layer chooses as the carrier services. [CO4]

4. provide communication exchanges of EDI messages among

trading partners.[CO4]
5. VAN act as a third party in between customer and the supplier or any
other two business entities. [TRUE / FALSE ][CO4]

6.
is becoming widely accepted as the foremost international
standard.[CO4] EDI
7. have allowed companies to automatically and securely
exchange their purchase orders, invoices, payments etc.,[CO4]
[Link] secure EDI transmission on Internet[CO4] [ ]
a) MIME is used b) S/MIME is used c) PGP is used d) TCP/IP is used.
9. EDI over Internet uses.[CO4] [ ]
a) MIME to attach EDI forms to e-mail messages
b) FTP to send business forms
c) HTTP to send business forms
d) SGML to send business forms
10. EDI requires [CO4] [ ]
a) Representation of common business documents in computer readable forms

b) Data entry operators by receivers

c) Special value added networks

d) Special hardware at co-operating Business premises.

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SECTION-B: Subjective Questions

1. Define Value Added Network (VAN).[CO4][L1]

2. Outline EDI layered architecture with a neat diagram.[CO4][L2]
3. Demonstrate EDI process using VAN.[CO4][L2]
4. Explain how EDI works.[CO4][L2]
5. Illustrate tangible benefits of EDI.[CO4][L2]
6. Discuss EDI software implementation with a neat diagram.[CO4][L2]

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