In the quest to achieve a paperless society, electronic data interchange (EDI) has long been a leading technology. Ralph W. Notto, a leading chronicler of electronic commerce (see Challenge and consequence; forcing change to e-Commerce), has noted that EDI is and has been an essential component in such commerce. EDI predates the emergence of the Internet, now the chief electronic network connecting just about every business to every other. The first implementations of EDI were internal to companies, used private networks, and enabled a multi-location company to use a common accounting system regardless of location. Earliest uses of EDI were also heavily deployed to track parts inventories within a business—but also between a producer, its distributors, and, in turn, the dealers served by the distributors. These private networks were full-grown implementations of EDI in the sense that data were exchanged by means of wired and/or wireless networks and kept data in live format and therefore instantly accessible.

With the spread of small computers, EDI in the less automated form of exchanges of data on tape and on diskettes (and later on CDs) came into widespread use. This technique is still widely used in the exchange of electronic files between systems using the Internet; either e-mail or up/downloading to/from file transfer protocol (FTP) sites is used. Many EDI systems in use in the mid-2000s remain private and move data through private networks; many others utilize proprietary software, but the software uses Internet connections; yet other forms are special arrangements for data sharing making use of standard methods of Internet exchange. Large systems today invariably involve data encryption to ensure data security.

The driving force behind EDI is efficiency made possible by avoiding the handling and rekeying of data on paper. Electronic scanning of bar codes at the point of sale or in inventory taking and document scanning technologies combined with improvements in optical character recognition (OCR) systems have further contributed to EDI by replacing keying of some documents. Data capture, however, is still accomplished predominantly by human keying. A human interface is also typically necessary to check OCR results.

Electronic data interchange had its beginnings in the management of financial data. The technique, however, is rapidly expanding to documentary information and, in such areas as security and law enforcement, also to biometric data.


EDI was developed to solve the problems inherent in paper-based transaction processing and in other forms of electronic communication. In solving these problems, EDI is a tool that enables organizations to reengineer information flows and business processes. It directly addresses several problems long associated with paper-based transaction systems:

  • Time delays—Paper documents may take days to transport from one location to another, while manual processing methodologies necessitate steps like keying and filing that are rendered unnecessary through EDI.
  • Labor costs—In non-EDI systems, manual processing is required for data keying, document storage and retrieval, sorting, matching, reconciling, envelope stuffing, stamping, signing, etc. While automated equipment can help with some of these processes, most managers will agree that labor costs for document processing represent a significant proportion of their overhead. In general, labor-based processes are much more expensive in the long term than are EDI alternatives.
  • Accuracy—EDI systems are more accurate than their manual processing counterparts because there are fewer points at which errors can be introduced into the system.
  • Information Access—EDI systems permit myriad users access to a vast amount of detailed transaction data in a timely fashion. In a non-EDI environment, in which information is held in offices and file cabinets, such dissemination of information is possible only with great effort, and it cannot hope to match an EDI system's timeliness. Because EDI data is already in computer-retrievable form, it is subject to automated processing and analysis. It also requires far less storage space.


Several elements of infrastructure must exist in order to introduce an EDI system, including: 1) format standards to facilitate automated processing by all users, 2) translation software to translate from a user's proprietary format for internal data storage into the generic external format and back again, 3) value-added networks to solve the technical problems of sending information between computers, 4) inexpensive microcomputers to bring all potential users—even small ones—into the market, and 5) procedures for complying with legal rules. It has only been in the past several years that all of these ingredients have fallen into place.

Format Standards

To permit the efficient use of computers, information must be highly organized into a consistent data format. A format defines how information in a message is organized: what data go where, what data are mandatory, what is optional, how many characters are permitted for each data field, how data fields are ordered, and what codes or abbreviations are permitted.

Early EDI efforts in the 1960s used proprietary formats developed by one firm for exclusive use by its trading partners. This worked well until a firm wanted to exchange EDI documents with other firms who wanted to use their own formats. Since the different formats were not compatible, data exchange was difficult if not impossible. To facilitate the widespread use of EDI, standard formats were developed so that an electronic message sent by one party could be understood by any receiver that subscribes to that format standard. In the United States the Transportation Data Coordinating Committee began in 1968 to design format standards for transportation documents. The first document was approved in 1975. This group pioneered the ideas that are used by all standards organizations today.

North American standards are currently developed and maintained by a volunteer organization called ANSI (American National Standards Institute). The format for a document defined by ANSI is broad enough to satisfy the needs of many different industries. Electronic documents are typically of variable length and most of the information is optional. When a firm sends a standard EDI purchase order to another firm, it is possible for the receiving firm to pass the purchase order data through an EDI translation program directly to a business application without manual intervention. In the mid-2000s, international format standards were in force to facilitate international business activity as well.

Translation Software

Translation software makes EDI work by translating data from the sending firm's internal format into a generic EDI format. Translation software also receives a sender's EDI message and translates it from the generic standard into the receiver's internal format. There are currently translation software packages for almost all types of computers and operating systems.

Value-Added Networks (VANs)

When firms first began using EDI, most communications of EDI documents were internal or directly between trading partners. Unfortunately, direct computer-to-computer communication requires that both firms 1) use similar communication protocols, 2) have the same transmission speed, 3) have a common proprietary network, and 4) have compatible computer hardware. If these conditions are not met, communication becomes difficult if not impossible. A value-added network (VAN) can solve these problems by providing an electronic mailbox service. By using a VAN, an EDI sender need only learn to send and receive messages to or from one party: the VAN. Since a VAN provides a very flexible computer interface, it can talk to virtually any type of computer. This means that to conduct EDI with hundreds of trading partners, an organization only has to talk to one party. In addition, VANs provide important security elements for dissemination of information between parties.

Inexpensive Computers

The fourth building block of EDI is inexpensive computers that permit even small firms to implement EDI. Since microcomputers are now so prevalent, it is possible for firms of all sizes to deal with each other using EDI. Internet protocols, including standard formats such as HTML, have created a standard understood by computers of all makes running different operating systems—all of which are fully enabled to communicate across the Web.

Procedures for Complying with Legal Rules

Legal rules apply to the documents that accompany a wide variety of business transactions. For example, some contracts must include a signature or must be an original in order to be legal. If documents are to be transmitted via EDI, companies must establish procedures to verify that messages are authentic and that they comply with the agreed-upon protocol. In addition, EDI requires companies to institute error-checking procedures as well as security measures to prevent unauthorized use of their computer systems. Still, it is important to note that some sorts of business documents—such as warranties or limitations of liability—are difficult to transmit legally using EDI.

An example of a legal requirement is represented by the Public Health Security and Bioterrorism Preparedness and Response Act of 2002, known as the Bioterrorism Act. Manufacturers, processors, packagers, transporters, receivers, holders, and importers of food must establish and maintain records of all such transactions. As reported in Food Logistics, the Grocery Manufacturers Association (GMA) examined commonly used EDI systems to ensure that their record-keeping methods comply with the Bioterrorism Act. GMA found that EDI systems meet the challenge.


In at least some form (such as securing backups to computerized accounting and inventory data), most small businesses participate in EDI actively. Many use online order taking integrated with their own systems through proprietary software. Small businesses serving as suppliers to large organizations may participate in a number of EDI systems tied into their own computer systems using the Internet.


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