What Is Electronic Data Interchange (EDI)? Meaning, Types, and Applications
Electronic data interchange (EDI) is the direct exchange of business documents (invoices, quotes, etc.) between two computers using a fixed standard.
- Electronic data interchange (EDI) is defined as 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.
- Businesses can use various EDI codes to facilitate B2B processes and transactions.
- This article explains how EDI works, its various types, and its applications.
Table of Contents
What Is Electronic Data Interchange (EDI)?
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
Source: Cleo
In EDI transactions, information flows straight from one organization’s computer application to another’s computer program. The transaction entails the following:
- Data elements: These are distinct pieces of information such as firm name, product code, quantity, and price. Each EDI standard comprises a specification for each data element inside every transaction set, which determines the data type (numeric, alphanumeric, date, time), minimum and maximum permissible length, and any related ‘code values’ (e.g., currency exchange code component for prices).
- Segments: This refers to logically related sets of data components such as order number, volume, units, or price linked with a product inside a purchase order. A segment is always preceded by a segment ID, which indicates the type of material or information components comprising the segment.
- Envelopes: This encapsulates transaction sets for transmission. Each transaction set is included in a separate message envelope, whereas a cluster of transaction sets (such as a group of bills) is enclosed in a group envelope.
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.
How was EDI developed?
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.
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How does electronic data interchange work?
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:
- The buyer determines the purchase and generates the purchase order but does not print it.
- EDI software generates an electronic purchase order and automatically communicates it to the supplier.
- The supplier’s order entry system promptly updates the database upon receipt of the purchase order.
- The supplier’s system generates and dispatches an acknowledgment to confirm receipt.
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:
- Data transformation: Data transformation capabilities take fields such as naming conventions, location, currency value, parts metrics, and quantities and map them from business application formats into standardized documents and vice versa.
- Batch support: These capabilities support large EDI message batches by enabling senders and receivers to wrap and unwrap transactions. The transactions can then be grouped from or split into several divisions or areas of a trading associate’s business.
- Routing EDI transactions: After a message is de-enveloped, routing mechanisms are required to sort the messages for different groups and deliver them to the appropriate targets. Message transformation may also be required to get the message into the correct format for its destination.
- Adhering to trading partner agreements (TPAs): A TPA clarifies terms and conditions, establishes standards for business documents, and defines communication and business protocols between trading partners.
Why is EDI important?
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.
- Conserve time and save money by automating a process that was previously completed manually using physical documents.
- Increase efficiency and output by sharing and processing more business documents in less time and with greater precision.
- Minimize mistakes via strict standardization, ensuring data is appropriately structured before entering business processes and applications.
- Connect electronic documents to various IT systems to assist data gathering, transparency, and analysis, facilitating traceability and reporting.
- Drive positive client experiences by facilitating rapid transaction execution and timely, dependable service and product delivery.
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.
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Types of EDI
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:
EDI Types
1. Direct EDI
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.
2. Value-added Network (VAN)-enabled EDI
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.
3. Applicability Statement 2 (AS2)-enabled EDI
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.
4. Web EDI
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.
5. Mobile EDI (emerging)
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.
6. Outsourced EDI
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.
7. Indirect EDI
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.
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Applications of Electronic Data Interchange
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 Applications
1. Greater agility in manufacturing
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.
2. Better demand-to-supply mapping in retail
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.
3. Digital process enablement in financial services
Via electronic systems, EDI simplifies payment collection, processing, and disbursement. It facilitates the automatic transfer of funds between the checking accounts of business associates.
4. Increased automation of business processes
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.
5. Seamless vendor interactions in the high-tech industry
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.
6. Smarter compliance adherence in the automotive industry
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.
7. Less waste for the ecommerce sector
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.
8. Improved outcomes in healthcare
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.
9. Prevention of errors in the supply chain
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.
10. EDI in the internet of things (IoT)
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:
- Quotes (EDI 840 for requests and EDI 843 for responses)
- Advance shipment notices (EDI 856)
- Bills of lading (EDI 211)
- Invoices (EDI 810)
- Transportation carrier shipment status message (EDI 214)
- Purchase orders (EDI 850)
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Takeaway
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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