Page 264 - Electronic Commerce

Business-to-Business Activities: Improving Efficiency and Reducing Costs

organization. These emerging networks of firms are more flexible and can respond to
changes in the economic environment much more quickly than hierarchically structured
businesses. The roots of Web technology for business-to-business transactions, however,
lie in a hierarchically structured approach to inter-firm information transfer: electronic
data interchange.

ELECTRONI C D ATA I NTERCHANGE 239
In Chapter 1, you learned that electronic data interchange (EDI) is a computer-
to-computer transfer of business information between two businesses that uses a standard
format of some kind. The two businesses that are exchanging information are trading
partners. Firms that exchange data in specific standard formats are said to be EDI
compatible. The business information exchanged is often transaction data; however, it can
also include other information related to transactions, such as price quotes and order
status inquiries. Transaction data in business-to-business (B2B) transactions includes the
information traditionally included on paper documents. The data from invoices, purchase
orders, requests for quotations, bills of lading, and receiving reports accounts for more
than 75 percent of all information exchanged by U.S. trading partners. EDI was the first
form of electronic commerce to be widely used in business—beginning some 20 years
before anyone used the term “electronic commerce.”
Understanding EDI is important because most B2B electronic commerce is based on
EDI or adapted from EDI. It is also important because EDI is still the single most
commonly used technology in online B2B transactions. The dollar amount of EDI
transactions today is about equal to that of all other B2B transaction technologies
combined. This section provides a brief history of EDI and explains how it works. It also
explains why EDI is better than processing mountains of paper transactions.

Early Business Information Interchange Efforts
The emergence of large business organizations in the late 1800s and early 1900s brought
with it the need to create formal records of business transactions. By the 1950s,
companies were using computers to keep records of internal transactions, but information
flows between businesses required paper documents (purchase orders, invoices, bills of
lading, checks, remittance advices, and so on) because one company’s computers could
not communicate with other companies’ computers. Generating these paper forms (by
hand or as printed computer output), mailing them, and then having recipients enter the
data from them into their computer systems was slow, inefficient, expensive, redundant,
and unreliable. By the 1960s, businesses with large transaction volumes had begun
exchanging information with each other by shipping punched cards or reels of magnetic
tape. During the 1960s and 1970s, data communications technologies improved, allowing
businesses to transfer much of this intercompany information over telephone lines instead.
Although these information transfer agreements between trading partners increased
efficiency and reduced errors, they were not an ideal solution. Because the data
translation programs that one business wrote would frequently not work on other
businesses’ computers, each company participating in these information exchanges had to

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