Electronic data interchange (EDI) is the direct exchange of business documents (invoices, quotes, etc.) between two computers using a fixed standard.
Chiradeep BasuMallick Technical Writer
August 15, 2023
Electronic data interchange (EDI) is the direct exchange of business-related documents between two computers based on a fixed standard with electronic counterparts of common documents such as purchase orders, request supports, invoices, etc.
How EDI Operates Between Two Business Partners
In EDI transactions, information flows straight from one organization’s computer application to another’s computer program. The transaction entails the following:
EDI is currently employed by businesses to exchange a multitude of document types, including purchase orders, invoices, requests for quotes, loan applications, and much more. In most instances, these businesses are trade partners that frequently exchange products and services as a component of their supply chains or business-to-business (B2B) partnerships.
In the 1960s, Army Master Sergeant Ed Guilbert devised a sort of electrical connection between shipping supply lines in the US Army so that rations could be delivered to troops in Berlin. Guilbert would take another 20 years to convert this paper-based approach toward standardizing commercial papers into an electronic mode of communication, which would eventually become EDI.
In 1968, the Transportation Data Coordination Committee (TDCC) was established in the US, initiating the development of electronic standards for the transportation sector. Since then, EDI has become a core technology in numerous industries, including automotive, manufacturing, healthcare, and retail.
The retail sector is a significant driver of EDI adoption. Walmart, Home Depot, JCPenney, Costco, and Sears require compliance from their vendors. These organizations and many others maintain rankings of all their suppliers, and EDI functionality is at the top of their list of requirements.
The content and format of documents are governed by EDI standards such as X12 and UN/EDIFACT (United Nations/Electronic Data Interchange for Administration, Commerce, and Transport). Every industry releases its own implementation recommendations for these standards. In the United States, X12 is the predominant standard, while EDIFACT is the predominant standard in Europe.
Relatively new languages such as JavaScript Object Notation (JSON) or Extensible Markup Language (XML) have evolved to work alongside EDI, which continues to be crucial to B2B processes even after 50 years.
Electronic data exchange operates in just minutes, utilizing either a software application or an external managed service to instantly transmit business documents in EDI standard format from computer to computer between trade partners.
Most EDI transactions begin with creating an electronic document using data from the business system(s), workbooks, or other associated operations. These documents employ standardized EDI forms, known as transaction codes, to facilitate their intake and utilization among several enterprises. Various organizations, notably Peppol and the Accredited Standard Committee X12 (ASC X12) develop EDI message standards.
For incoming transactions, an EDI solution ‘maps’ or translates the data supplied by supply chain partners such as suppliers, merchants, or transporters into a structure that the enterprise applications and/or users can comprehend and process. If your company has integrated EDI, data can also be automatically delivered to your ERP system, eliminating the necessity of retyping. This is in contrast to conventional file transfer techniques that require human verification. From there, automation facilitates the generation of response documents and the initiation of order processing workflows across the warehouse, accounts payment teams, and logistics partners.
Electronic data exchange enables businesses to meet compliance standards for distributors and retailers by ensuring that each existing document has complete information in the appropriate format. By ‘mapping’ data to satisfy these specifications, providers can easily meet customer expectations, streamline interactions, and save time.
As will be discussed in greater detail later in the article, various suppliers employ distinct EDI networks and technologies to transmit electronic documents.
A typical EDI process will have the following steps:
Implementing EDI might be difficult for certain businesses. The necessity to keep up with ever-evolving government regulations, guidelines, and modifications is one factor. Moreover, it is inherently complex since it must accommodate the varied intricacies of global business operations.
When implementing EDI technology, businesses must keep the following factors in mind:
EDI transactions are vital to B2B processes and remain the preferred way for businesses of all sizes to transfer documents and conduct transactions.
Conventional commerce partnerships depend on manual, time-consuming processes. They often request that your workforce monitor conversations and manually enter company data on purchase requisitions and invoices. This not only overburdens employees but also diminishes your supply chain visibility and reduces order processing speed. Consequently, it might be challenging to expand business operations.
EDI deployment is, therefore, critical for continued profitability and expansion for businesses of all sizes. EDI technology provides five important business benefits.
For large organizations, EDI enables using standards across trade partners to gain consistent advantages. Adherence to EDI facilitates greater integration between smaller enterprises and companies with deeper resources and more influence.
EDI can happen in various ways depending on the business use case and the parties exchanging the information (usually financial data and related documents).
The most notable types of EDI transactions are:
Direct EDI, often called point-to-point EDI, creates a single link between two business partners. In this methodology, users connect with every business partner individually. It offers control to business associates and is utilized most frequently between big customers and suppliers who conduct multiple daily transactions.
An option to the direct EDI framework is the EDI network service provider, also known as a value-added network (VAN), which was in operation even before the internet arrived.
This network approach is preferred by many businesses because it shields them from the ongoing challenges of maintaining the diverse communication protocols demanded by various business partners. VANs are private networks on which partners exchange electronic business documents. The VAN provider manages the network while providing businesses with mailboxes, enabling them to send and receive EDI documents.
AS2 is a network communications protocol that permits the transmission of data over the internet in a secure manner. It consists of two computers — a client and a server — communicating point-to-point via the internet. AS2 generates an ‘envelope’ for EDI data, enabling it to be transmitted securely over the internet employing digital certificates or encryption. This EDI type is easily accessible to all.
Web EDI refers to the process of completing an EDI transaction using a web browser. It mimics paper-based documents in a web form. Information-entry areas will be part of the form. After all pertinent information has been supplied, the document is instantly transformed into an EDI message and sent using secure internet protocols such as file transfer protocol secure (FTPS), HyperText Transport Protocol Secure (HTTPS), or AS2.
Traditionally, users have accessed EDI through a network, such as a VAN or the internet, to send and get EDI-related business documents. The adoption of mobile EDI applications has been constrained, in part, due to security concerns and limitations in screen quality or device size. Yet, a burgeoning sector is building EDI applications for mobile download. Oracle’s JD Edwards EnterpriseOne, for example, offers mobile EDI applications.
EDI outsourcing (EDI managed services) is a rapidly expanding solution that allows businesses to use outsourced EDI environment management specialists. This is partly driven by the requirement for businesses to interface with back-office business systems, such as enterprise resource planning (ERP) systems. This is also beneficial as many businesses do not like to devote internal capabilities to the continuing and repetitive tasks involved with EDI transactions.
An indirect EDI transaction is the communication between an ERP and customers, vendors, or third-party logistics service providers (3PL) through an EDI broker or value-added network. Initially, the message, including all the data you want from your business partners, is sent from the ERP to the broker or VAN. The broker then divides the message into additional forms — based on the preferences of your consumers or vendors — and distributes them to respective parties.
In a complex digital environment, the transmission of enormous volumes of data leads to delays, inaccuracies, and security breaches. EDI is the answer to these challenges since it facilitates the transmission of documents across businesses and computer systems. As a replacement for paper processes, the technology provides safe, encrypted data transfer, resulting in enhanced supply chain tracking, fewer errors, and lower data input time.
In the 1960s, the transportation sector adopted EDI to facilitate handling transactional data. However, its uses have since expanded beyond business and industry verticals due to its various advantages.
EDI facilitates the efficient management of materials necessary to create a product. The manufacturer’s inventory is continuously updated through EDI, and the supplier is advised of material shortages. The supplier also reacts via EDI, and the stock is updated as soon as the cargo is delivered. By improving supply and delivery, EDI supports maximum retail price (MRP) compliance and just-in-time production.
EDI offers a structured method for maintaining and replenishing retail inventory. Stock is continually updated at the point-of-sale (POS) terminal, and data is sent via EDI into the supply chain management (SCM) module. The EDI software also monitors all logistics and refreshes the original stock.
Via electronic systems, EDI simplifies payment collection, processing, and disbursement. It facilitates the automatic transfer of funds between the checking accounts of business associates.
EDI renders human intervention redundant and allows process automation to be the present-day reality. The advantages of automation include operations that operate nonstop and document-relevant information that needs to be entered just once into the distribution channel. This allows businesses to avoid duplicating tasks within the process flowchart.
Supply-chain systems of technology companies are mostly quite complicated. Particularly common in the high-tech industry is outsourced design and prototype functions. The ability of EDI to rapidly share documents with minimum human interaction in such a dynamic, complex environment significantly contributes to streamlining processes.
The purchase order is among the most commonly used papers in the automobile industry. This document includes all items ordered in transactions and their respective amounts. Using EDI, automotive companies can automate their systems to gain easy and rapid insights into orders, order adjustments, and inventories.
EDI frees personnel to concentrate on creativity, quality control, and customer service by automating numerous documentation-related tasks. This allows automotive companies to devote more resources toward R&D, quality assurance, and customer service.
In the years after the worldwide pandemic, several merchants and food service establishments have gone on to improve their operations. Many have had to transition toward ecommerce. With EDI, users can automate stock reordering and improve visibility into stock levels at any time, from just about any location. Using EDI means more precise inventory inspections for food service businesses, allowing them to purchase only what is necessary and spend less.
EDI has had a massive impact on the healthcare industry. Every day, healthcare organizations handle voluminous amounts of documentation, such as insurance claims, payment records, and patient information. An EDI program that removes the necessity of paper reduces employee manual effort. It improves the precision of the transmitted information, guarantees the security of the data, and saves time and effort for all, including physicians, insurers, and pharmacy employees.
EDI eliminates the need for businesses to manage separate lines of paperwork. This is a tremendous advantage since these individual documents can be the source of countless errors throughout the distribution system. EDI requires data to be put into the system only once, allowing users to avoid the need to retype data from forms physically. EDI also enables businesses to identify deviations from their typical patterns rapidly; for instance, an irregular order quantity can trigger an automatic alert.
EDI will be the primary document exchange function in emerging supply chains to accommodate modern technologies such as the internet of things (IoT) and blockchain . For instance, IoT sensors embedded into a shipment’s packaging and linked to periodical EDI 214 messages would improve the visibility of shipment status in near real-time. Integrated blockchain technology with EDI data may provide a common and centralized representation of the truth, which can swiftly settle or even prevent chargeback disputes.
Users can take advantage of various standardized EDI codes for different applications, such as:
Electronic data interchange has now become a staple for various business processes. It plays an essential role in supply chains, logistics, and asset management, helping businesses maintain visibility and accountability. Even as new data transfer modes appear, EDI will remain the foundation for business transactions and a key pillar for future systems.
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