Many large companies require all their vendors to use EDI for handling
purchase orders, shippers and other documents so they need not handle all that
paperwork. Theoretically EDI is supposed to eliminate paper documents
entirely, electronically transferring document content directly from the
accounting system at one end into the accounting system at the other end.
In practice, this integration is difficult and expensive so it is rarely
complete even in larger companies.
EDI transactions travel over proprietary networks. In large company to large company EDI systems, the companies may be connected by dedicated phone lines over which the traffic flows, but this is not affordable for smaller companies.
A number of companies run VANs (Value Added Networks) over which EDI traffic from smaller companies runs. They are called "value added" because the company provides not just the network but services that translate your data into the format your customer wants it to be in.
Some big companies, particularly Walmart, do not allow you to use a VAN, so you must have a special (expensive) communications board installed in a PC at your company so you can communicate directly with their mainframes.
X12 is the standard for EDI documents, but all the big companies have tweaked the standard to conform to their own whim and fancy.
The EDI situation is starting to change, because there are several groups working on standards for EDI like transactions over the Internet using XML, SOAP, and other new languages. This is a fresh start, and a lot of people want to see it done right. If it is, it will be a boon to small businesses. Some of the terminology used with EDI and Internet EDI can be found in our glossary pages.
A small business using EDI to transact business with a large business will normally set up a computer to dial in to an EDI service provider (Harbinger, Sterling, QRS, Kleinschmidt, or the like). They will download from the service incoming documents which they will print and give to a clerk to be hand entered into the accounting system. Outgoing documents will be typed into a computer in the service provider's format and uploaded to the service providers computers, where they will be translated into the destination format and transmitted to the destination company. As you can see, this makes the advantages of EDI rather one sided, but the big guys could care less.
Some VANs will also send the documents to your company as a fax, and receive faxes from you which their own people will enter into the computers for transmission. Obviously they charge more for this service.
When setting up to do EDI, you need to find an EDI service provider who handles all the documents your customer requires for that specific customer. The service provider will have a list of the companies they service and which forms are available. If a form is missing, they may be willing to add it, but it may take a couple of months.
Small business accounting software has no directly supported EDI because each major customer and VAN has different formats and requirements. A customizable accounting system like Appgen can have custom EDI modules added to it, if the volume warrants.
As an example of costs, here are figures from one VAN.
Setup for first trading partner - $300
For fax documents, per document prices are higher.
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