What is EDI

Electronic Data Interchange (EDI) is the automated, computer-to-computer exchange of standard electronic business documents between business partners over a secure, standardized connection.

Let's break down this EDI definition, piece by piece, to give you a full sense of what EDI is and means.

Computer-to-Computer

  • EDI replaces manual B2B communications, such as postal mail, fax and email.
  • Documents flow directly from the sender's computer application (e.g. a logistics system) to the receiver's computer application (e.g., an order management system).

Traditional Manual Process

Traditional Manual Document Exchange Process

Automated EDI Process

EDI Document Exchange Process

Business Documents

  • 1000s of standard business transaction documents can be sent automatically using EDI.
  • Some common examples include: purchase orders, invoices, shipping statuses, customs information, inventory documents and payment confirmations.

EDI Document Example

Standard EDI Format

  • EDI documents are processed by computers and use standard, computer-friendly formats.
  • Standards describe each piece of data and its format (e.g., type of document, parties involved, actions to take, mmddyy).
  • Standards eliminate company-to-company variations, allowing each business partner's computer system to speak a common language.
  • There are a variety of EDI standards for various industries, regions and use cases - each with different versions, so EDI partners must use the same standard and version
  • Popular standards include: ANSI X12 in the U.S., UN/EDIFACT globally and industry-specific standards, such as HIPAA

EDI Standards

Business Partners

  • The exchange of EDI documents is typically between two different organizations, referred to as business partners or trading partners.
  • Example: Company A may buy goods from Company B. Company A sends Purchase Orders to Company B, which sends Invoices and Shipment Notices to Company A.

Secure, Standardized Connection

  • EDI uses a range of secure protocols to facilitate the secure exchange of EDI documents.
  • Partners must use the same, agreed-upon protocol to exchange EDI files or work with an intermediary who can facilitate exchanges if the partners use different protocols.
  • Some protocols require more EDI technology infrastructure than others, but EDI software now facilitates exchanges with minimal investment.
  • The protocols range from long-established technologies, such as FTP, to web-based EDI via AS2, API-based systems, such as AS4, and other options, such as mobile EDI.

Automation

  • EDI messages can be sent automatically using pre-configured workflows.
  • Businesses typically use EDI translators - either as software or via an EDI service provider - to translate EDI documents for use in internal applications, enabling automated processing.
  • Processes can be extended to work with data integration and workflows within an organization.
  • Example: once a company receives an EDI Purchase Order, the logistics system generates a task for warehouse staff to move goods from inventory to shipping.

EDI Facilitates Business Process Automation

EDI vs. Traditional Paper or Email Communications

To illustrate the meaning of EDI, or electronic data interchange, let's compare how a typical purchasing transaction would go between two trading partners using traditional paper or email communications vs. using EDI.

Traditional methods:

  • The buyer either receives a notification in his system to place an order, or, after querying the inventory, determines he needs to place an order.
  • The buyer enters data onto the screen of a purchasing system to create the PO, prints and mails it or emails it to the vendor.
  • The vendor receives the PO, either days later or via email (along with a long list of other communications) and manually enters it into the sales order system.
  • The vendor prints an invoice and encloses it with the shipment and/or sends it separately by mail or email.
  • The buyer manually enters the invoice into the accounts payable system.

In this example, a paper system can add a week of back-and-forth shipping time to the process. Both email and paper are susceptible to manual data entry errors, lengthening order time.

EDI process:

  • The buyer's procurement system, which uses EDI, auto-generates and sends an EDI-formatted PO when inventory reaches a pre-specified level.
  • In minutes the vendor's sales order system, using EDI software, receives the EDI PO.
  • The supplier's system automatically notifies their shipping department to send goods.
  • Once the goods are packed and ready to ship, the shipping system generates an Advanced Ship Notices (ASN) to send to the buyer's receiving department
  • The vendor's ERP system then generates an EDI invoice to transmit to the buyer's accounts payable system

The entire EDI process can be completed in an hour.