Electronic Data Interchange(EDI)and Electronic Funds Transfer(EFT)
Electronic data interchange is an electronic transfer of documents between businesses. EDI was developed to enhance just-in-time (JIT) inventory management.
Example : Fofo Inc. is a medium-size manufacturer of toys that makes 25% of its sales to Lolo Company, a major national retailing firm. Lolo will obligate Fofo and other suppliers to use Electronic Data Interchange– EDI /EFT for inventory replenishment and trade payment transactions as opposed to the paper-based systems currently used Fofo would consider all of the following to be advantages of using EDI/EFT in its dealings with Lolo:
- Speed
- Elimination of clerical errors due to Elimination of repetitive clerical tasks and their costs.
- Improved business relationships, because of the mutual benefits conferred by EDI.
- Access to Lolo’s inventory balances of Fofo’s products. (Inventory information permits better coordination of production and deliveries).
- Better status tracking of deliveries and payment and instantaneous notification of deliveries.
- Reduction in the payment float for the supplier who receives the price of his inventory. EDI/EFT allows for instantaneous payment because EDI/EFT eliminates the period when payment is by electronic funds transfer (EFT).
Electronic funds transfer (EFT) : is a system in which funds are moved electronically between accounts without the use of a check. As an example through a terminal at a supermarket a customer’s payment is automatically charged (restricted) with a “debit card” against the Customer’s bank account before he leaves the store. Electronic funds transfer systems actually take the float out (eliminate the float) of both the receipts and disbursements.
EDI/EFT ⇒ is particularly useful when the buyer and seller are not geographically close to each other.
Disadvantages of EDI/EFT
- EDI entails the exchange of common business data converted into standard message formats. Thus, two crucial requirements are that: (1) the participants agree on transaction formats and (2) translation software should be developed to convert messages into a form understandable by other companies. Accordingly, establishing compatibility with Toto’s procedures and systems will require Fofo to resolve issues (overcome problems) regarding compatibility with its other procedures and systems. Thus Compatibility with Fofo’s other procedures and systems may be a Disadvantage.
- High initiation and maintenance costs.
- Security issues (regarding business information confidentiality).
- EFT is beneficial to the company from a cash receipts standpoint but not from a cash disbursements standpoint. Because Electronic funds transfer takes the Float out (eliminate) of both cash receipts and disbursements floats.