EDI and Electronic Commerce in Banking:
Extract (1): The EDI Process
Extract's Table of Contents:
Introduction
One of the key factors in the successful use of EDI is the recognition that it is primarily a business, rather than a technical, issue.
 The use of EDI and, in fact, all forms of electronic commerce, should be based on a clear and established business objective such as reducing inventory, lowering personnel costs, speeding up access to information or reducing errors. EDI is a tool, facilitated through technology. In fact, the components of EDI technology are becoming commodity products, leaving changing the business process and the associated costs as the primary force and considerations.
EDI can invoke a major change to the culture of any organisation (often even more than the impact it has on the organisation's systems). Therefore, implementation should be aimed at minimising and controlling the human impact of the process. To appreciate the business and cultural impacts fully, however, the technical processes and information flows need to be understood.
The four main elements of an EDI system are:
- Mailbox;
- Communications;
- Translator; and
- Applications Interface.
Mailbox
One of the main components of any EDI application is the mailbox. An EDI mailbox is similar to an electronic mailbox or a voice-mail system but is more "intelligent" and allows for more control. The business reasons for this include:
- EDI involves the exchange of structured business data - such as purchase orders, invoices and remittance documents. The mailbox needs to be capable of checking messages to ensure that they conform to specific data standards, thus eliminating EDI junk mail.
- EDI is based on the principle that machine-readable data can pass directly from the output of one computer to the input of another without the need for human intervention. Access to the data must, therefore, be controlled and EDI mailboxes must be able to identify both the sender and receiver so that access can be denied to unauthorized parties.
- In some cases there may be a need for data manipulation at the mailbox level. Certain fields or elements may need to be inserted or deleted to allow the data to proceed to another point.
Beyond these specific activities, the EDI mailbox must also store and retrieve data, and allow "timeshifting" so that the processing times of several trading partners can be accommodated and conflicts minimised. For example, the purchasing system of a buyer may run at 10:00 hours, whereas the order entry system of a seller may run at 16:00 hours. In the past, one organisation would have to change its processing time or default to a paper input/output mode in order to accommodate the other. An EDI mailbox should be able to eliminate this.
The mailbox should allow data to be picked up and delivered through different communications protocols and at different speeds. For example, a large company operating a mainframe protocol may deliver a message on a high-speed data-link at 56 kilobits per second, whereas the receiving company may be quite small and may use a PC protocol at 2,400 bits per second. An EDI mailbox should be able to minimise the problems associated with such diverse systems. The communication process should be independent of data storage. Although a simple concept, this technology has only been available since the mid-1980s.
It is also possible for an EDI relationship to be established without the use of a mailbox. This is known as a point-to-point or direct relationship and both parties agree to send information directly to each other, without an intermediary. This is usually the preferred method when there is only one or two trading partners, or when there is such a large volume of data that a mailbox would slow things down. In such cases, it is improbable that the trading partners would bother to convert data into a standardised EDI format as this too would be time consuming and inefficient. It is far more likely that a proprietary link would be established and an electronic order entry system used - a non-EDI form of electronic commerce.
Communications
Communications refers to the methods used to transfer the electronic data in EDI. Telecommunications is the usual method used; however, computer tape exchange can be used. There are problems associated with tape exchange because a key element in EDI is the positive or negative acknowledgment of the receipt of the transaction in an automated and rapid fashion. This means that for each electronic document, a corresponding response which confirms that the transaction was accepted or declined is returned to the sender. Where a tape transfer is used, the only methods of acknowledgment are human controlled and are, therefore, not suited to an automated EDI application.
As mentioned previously, the use of EDI mailboxes provides a great deal of flexibility in the use of telecommunications. In fact, almost any type of modern telecommunications protocol can be used. This is also true of the telephone line speed that is used. Generally, a standard business telephone line can accommodate a data transfer rate of up to 28,800 bits per second. A rate faster than this requires a dedicated leased line and is much more expensive. If a mailbox is used, the data from both the sender and receiver can be placed in the mailbox at their own selected speed, based on their own needs, volumes and costs.
If two organisations wish to communicate without a mailbox, they have to spend time resolving problems of communications speed, data transmission protocols, timing, passwords and log-on password IDs, etc. EDI data standards also have to be agreed. This can be a time-consuming and frustrating experience which has to be repeated with every trading partner.
Translator
EDI is accomplished through the use of a common, standardised format. This is facilitated through the use of translation software. This type of software is commercially available for almost any system, of any size. The cost can range from a few hundred dollars for a PC version to tens of thousands of dollars for a mainframe version. The function, however, is the same and is relatively straightforward in all cases - to convert data from a proprietary format to a common, recognised, standard form. The receiver can then use a translator to read the data into its own system without having to modify its base application.
Industry Standards
The most prevalent cross-industry EDI standard in use - primarily in North America - is the American National Standards Institute (ANSI) Accredited Standards Committee (ASC) X12. ANSI X12, or simply X12 for short, is recognised worldwide as a major standard for EDI. There is an established data dictionary and syntax associated with it (which act like the English language dictionary and grammar) that provide the structure and substance for EDI relationships (see Chapter 2 for more details).
The other major standard used for EDI is EDIFACT (EDI for Administration, Transport and Commerce), which is being developed by the United Nations. It is used to a greater extent in Europe than in North America but recent developments at ANSI have resulted in a move towards an alignment of its data dictionary and syntax by 2000. This should make the exchange of ANSI and EDIFACT messages relatively straightforward.
There are other standards which are industry specific - for example, UCS in the food and drugs industry, and WINS in the warehousing industry. These are not used for financial services, however, as they do not have payment facilities.
An organisation may believe it has the most efficient, productive system but, as long as there are other non-identical systems, the only compromise is to use a translator.
One advantage of using a translator is that an organisation can make changes to its system without affecting any of its trading partners. Changes can be made within the company, between the base application and the translator, that do not affect the translator.
Unfortunately, even with standards, there is room for interpretation and disagreement between trading partners which requires further effort. The process of establishing a common understanding of the data through the translator is called mapping. This can be done in one of two ways:
- Through an industry action group that establishes an implementation guide which is the common interpretation of the standard for all participants in that industry. This may mean compromise by some participants but eliminates confusion and argument insofar as is possible.
- Between a group of trading partners, usually initiated by the buyer or the dominant participant. The dominant party tends to have more influence, however.
Applications Interface
Once a data map has been established and the translator has been purchased and installed, there still remains the final and most critical step in the EDI process: integrating the data into the base application through an application interface. This is the single most important, and most difficult, area of the EDI process.
In order to benefit from the use of EDI, the data must flow from the translator directly into or out of the application - irrespective of the type of base application (ie whether it is a purchase order system, an order entry system, accounts payable or accounts receivable). If data has to be rekeyed at any point, there is an increase in the potential for error, in the cost of the operation itself and in the cost of operating surplus devices such as printers and keyboards that EDI should have eliminated.
The application interface may be part of either the translator or the base application. Either way, it may require a significant amount of effort to integrate the data into the application. In many cases, operating problems or idiosynchracies are often discovered when this is undertaken. Most commercial translators can be adapted to create suitable file output from, or receive input for, the base application. The key to an effective EDI implementation is to identify the application interface as the primary point of reference and build controls and management processes that address the company's requirements around this.
Value Added Networks (VANs)
There are a number of companies that provide facilities for the transfer and management of electronic messages between trading partners, acting essentially as public data networks. Value added networks (VANs), however, provide not only the message transfer capability but also a number of services to assist the trading parties in managing their data.
Most VANs provide communications and mailboxing facilities as their basic services. They may also provide a form of access-control security by ensuring that passwords and log-on IDs are correctly used. Some networks also allow the movement of encrypted or authenticated data.
Beyond these basic levels of service, EDI-specific VANs provide a number of additional services which enable businesses to maintain their EDI programmes, including:
- Translation software;
- Network interconnection;
- Trading partner profiling;
- Supplemental communications support and network monitoring; and
- Education/Consulting.
Translation Software
EDI translation software can be installed and sited on the client's computer system or on that of the VAN. In the early days of EDI, when client-site software was less reliable and more expensive than it is today, messages were often sent in proprietary format to the VAN, via a mailbox, and subsequently translated. Now, with a large variety of software providers supplying very robust and relatively-inexpensive software, the provisioning of the software (along with the set-up and training at the client's own premises) is the preferred option.
Network Interconnection
Until the late 1980s, in order to trade electronically with a large number of trading partners, an EDI hub would have to subscribe to, and manage the technology needed to connect to, a large number of different VANs. This was extremely costly and time consuming and created a significant barrier to the entry of new EDI participants. The transfer of data between two companies using different VANs was extremely unreliable. In addition, both the sender and receiver paid full fees to their respective VANs.
An agreement was struck in 1989, however, which effectively resolved the issue. Most major VANs agreed to subscribe to the "sender pays" philosophy, as is the case in telephone calls between multiple carriers. A more reliable and better-managed interconnection facility was developed and EDI users can now choose from any major VAN and be assured that the message will arrive at its destination in a timely manner. However, should a message not arrive, the carrier's liability is similar to that of a telephone company's - only for the cost of the call.
An emerging communications technology standard called X400 aims to create a more effective tracking facility by enveloping the message in an ever increasing data wrapper which ensures that the message has tracing and handling data as it travels through multiple networks. Even newer technologies, such as the TCP/IP protocol used for the Internet, stand to create additional communications choices.
Trading Partner Profiling
Many EDI users request their VANs to provide and maintain a database of their trading partners. A primary reason for this service is to maintain the integrity of trading partners - to eliminate EDI junk mail. Such a database can also provide a secondary checkpoint for the hub - to ensure that all outgoing messages are to valid trading partners. This is particularly valuable when transactions are originating from an accounts payable system, and the validity and correctness of individual payments is of paramount importance.
Supplemental Communications Support and
Network Monitoring
Some VANs provide other communications activities such as dial-out and broadcast message management. These services enable the message originator to "send" an EDI message to a trading partner and the receiver to reach out and pick up messages that are not yet in its mailbox.
Education/Consulting
With the focus in EDI shifting from the technology to the business requirements, there has been an increase in the need for an organization to understand the procedural changes that are necessary for successful EDI operations and the impact that such operations will have on the organization itself. Many VANs, along with a growing number of consulting companies, provide high-quality business-process-change reviews, and management-oriented EDI and electronic commerce education. Planning and the setting of objectives are two of the most critical elements in successful EDI implementation. This is particularly so as electronic commerce technology becomes "plug and play".
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