EDI provides a way for companies to move the sales/credit function from the traditional, time-consuming manual operations of the past. Rapidly, EDI is becoming mandatory to survive in today's sales/credit function.
Electronic data interchange (EDI) is the exchange of information electronically between business applications (computer programs) in a structured format. The popularity of this technology has grown significantly in both North America and other countries and it may portend how a great majority of business transactions will be conducted in the future. Half of all mid- to large-size corporations already use EDI for at least some of their transactions. Small companies are also becoming more heavily involved as larger customers demand that they do so.
How is this new technology impacting working capital management? In its essence, working capital management deals with cash and information inflows and outflows. Accounts receivable, for example, arise because information (an invoice) has been sent out but cash has not yet been received. If companies change the characteristics of this information flow, working capital management may be expected to also change.
This article will discuss the possibly profound impact EDI will have on just one of these working capital areas: the credit/sales function. EDI does more than replace paper with electronic messages. In the area of credit and sales it may also:
1. Redefine the relationship between a seller, its sales representatives, and its customers;
2. Change how accounts receivable are applied and controlled;
3. Invalidate traditional credit terms and policies;
4. Shorten the cash/information inflow timeline;
5. Introduce new payment and collection systems; and
6. Possibly even change the way short-term funds flow in the capital markets
What EDI Does for Information Exchanges
While EDI is a relatively simple concept that has been around for at least 30 years, the technological barriers to easy implementation have been formidable. It has only been recently that the infrastructure has come into place enabling low cost EDI implementation across a wide number of potential users. Message standards are now well developed, translation software is available for almost every type of computer (packages start around $300), and value-added computer networks ease the problems that may arise when two computers try to talk to each other.
It is now possible for a customer's computer system, for example, to determine from an automated inventory system that parts need to be ordered. The system can draw together order information from existing data bases, form this information into an electronic purchase order, and send the standard-formatted purchase order to the supplier's electronic mail box. The supplier can retrieve the message, translate it into a format the supplier's system can understand, send an electronic acknowledgment back to the customer, and fill the order within minutes after the order has been initiated. The customer can then use an electronic message to cause cash to transfer into the supplier's bank account. Most of these steps can--at least theoretically--take place without human intervention and without errors.
By getting rid of the paper, an EDI transaction has the following impact on the information flow between a buyer and seller:
1. Information can be exchanged quickly (within minutes or hours).
2. Since there is no re-keying of information, error rates for EDI transactions can be low.
3. Since data is always in computer readable form, it is available for analysis and control at any point along its path.
4. Large amounts of data can be transmitted fairly inexpensively.
5. EDI messages may be translated by commercially available software programs from or into any desired format.
6. It is simple and inexpensive to acknowledge the receipt of an EDI message. …