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Electronic Data Interchange (EDI) is the process of sending documents (Ex. Purchase orders, invoices, etc.) from one company to another in a predetermined format that thereby allows it to be automatically entered into the receiving company to be processed. This process minimizes human error and thereby makes both companies more efficient and also decreasing costs. Both companies will need to use an EDI translator software, communication software, and hardware for data transfer (VAN, dedicated line, or EDI on internet), and a legal agreement between the two companies on how to resolve issues. The sending company will use the EDI translator to convert their document (Ex. Purchase order) into EDI compatible data then use communication software to send in the receiving company through VAN, direct line, or EDI through the internet. The receiving company then will receive the data through the communication software, send it through the EDI translator then it will be in the company data format to create the order.
There are many benefits with companies implementing EDI in their corporations. Some of these benefits include accuracy, better customer service, improved inventory management, decrease in costs, and better cash flow (quicker payments). Companies will have more accurate accounting records due to the fact there will be reduced clerical errors. Companies will bypass the human error factor by the data being directly transferred from one company to another. Another benefit will be improved customer service because companies will be able to fulfill orders faster. Also, companies will be able to better manage their inventory. Time will be reduced to stock inventory, companies will be able to minimize inventory.
There are many benefits with corporations using EDI there are some challenges that are created with the ability of the company to audit and control the integrity of the data. I believe with each of these challenges there are controls to ensure the integrity of the data and still have the ability to audit the information.
Businesses typically have human signatures on business contracts, purchase orders, receiving documents, etc., but with EDI there are no longer human signatures to verify the transactions took place. Therefore, there needs to be a way to verify the identity of the data being sent is authentic and authorized. The control measure for this is through the identification of the machines sending the data (digital certificates) and non-repudiation, which verifies the document was sent or received by the intended user. There can also be a notification when any unauthorized machines try to access data. The second difficulty I would like to address is related to data integrity and confidentiality. Companies need to be assured that the data quality cannot be altered during transmission and cannot be accessed by unauthorized users. The control mechanisms for this issue are by the use of encryption and the use of passwords/IDS for users. The last issue I would like to address related to difficulties in data processing in EDI is Auditability. Traditionally in accounting we use an audit trail which is simply a paper trail of documents that allows us to track transaction activities. When companies use EDI there are no paper documents so then how are able to audit transactions? To overcome this problem system must provide electronic audit trails to verify past transactions, which they can. An audit log can used to log who has accessed the system along with date and time along with creating daily or weekly back-ups of the system. Also, with the EDI transaction set, which can be implemented by the use of a header and trailer record. The headers and trailers contain important information that then can be checked with batch control tickets.
I believe with the continued growth of E-commerce that EDI will continue to be more important in the future business world. Especially as smaller companies are able to use internet-based EDI instead of the costlier VAN, which only large corporations can tend to afford.
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