What Is EDI?

A Deeper Look Into the World of Electronic Data Interchange

The majority of large-scale, business-to-business (B2B) transactions are done via Electronic Data Interchange (EDI). After all, an enterprise processing hundreds of thousands of supplier transactions per day can save billions of dollars by eliminating costs associated with the purchase, printing, handling, processing, and delivery of paper documents.

Today, even medium-sized businesses are beginning to realize the benefits of EDI. Aside from cost savings and increased efficiency, adopting EDI gives them access to large-scale suppliers and customers that are already connected via EDI.

But, what exactly is EDI and how does it benefit enterprises?

What Is EDI?

Electronic Data Interchange is a process for transferring information between systems using standardized electronic formats to enable computers to process the information while minimizing or completely eliminating the need for human intervention.

In a traditional B2B transaction, for example, the purchaser 1) generates the purchase order, 2) prints it, and 3) mails or faxes the printed purchase order to the vendor. The vendor then 1) prepares the invoice, 2) prints it, and 3) mails or faxes the invoice to the purchaser. Upon receipt of the invoice, the purchaser then has to input the invoice into his system to process and finalize the procurement.

With EDI, paper documents are eliminated and human intervention is minimized. In the same transaction, the purchaser simply inputs the procurement details into his computer system, which sends it straight to the vendor’s own systems. The invoice is automatically created in the vendor’s computer system and sends it straight back to the purchaser’s system for processing.

How EDI Works

Network

In order for EDI to work, the computer systems of two businesses must be able to communicate directly with each other. In our example, the purchaser’s computer systems must be connected with the vendor’s through a network.

Data between two computer systems can be exchanged by setting up peer-to-peer networks such as a direct EDI, through serial links, or through the internet. Other common EDI network arrangements between business partners include: EDI via Value-Added Network (VAN), File Transfer Protocol over VPN (FTP/VPN), Secure FTP, and Applicability Statement ver. 2 (AS2) and other secure internet protocols.

Standard Format

Since EDI minimizes human intervention, the computer systems must also be able to understand each other and the information flowing between them. Because of this, EDI documents must follow a standard format understandable by both computer systems.

Fortunately, several EDI standard formats and languages are being used across regions and industries. For example, ANSI is mostly used in the US while the Electronic Data Interchange for Administration, Commerce and Transport (EDIFACT) language is used outside the US. Other standard formats include ebXML and TRADACOMS. It is important to note that EDI standard formats also have different versions. For example, ANSI has an ASC version 12 (ASC X-12) specification. Business partners must agree on both the format and version they are going to use.

Benefits of EDI

EDI already has various applications in different industries. In shipping, EDI is used to process bills of lading and shipping notices. In insurance, EDI is used to exchange client information and even insurance agents’ commission reports.

Businesses all around the globe are realizing the following benefits of EDI:

Speed

• Information is exchanged in a matter of minutes instead of days or weeks
• Processes are streamlined; time-consuming activities such as printing, handling, and filing documents are eliminated

Accuracy

• Human intervention is reduced leading to fewer human errors such as document mishandling and illegible handwriting

Cost efficiency

• Expenses related to producing, reproducing, and delivering paper documents are eliminated including printing, copying, filing, storage, postage, and even manpower costs
• Costs due to human error such as filing the wrong order and illegible documents and faxes are minimized

Overall business strategy

• Transactions are done in real-time enabling faster and better-informed decision-making
• Businesses are given access to suppliers and customers which are already connected via EDI
• Enterprises are able to respond faster to changing customer needs with up-to-date information
• Better business relationships arise from faster and more efficient transactions

What’s Next?

Enterprises looking for increased efficiency and cost-savings in its operations should consider adopting EDI. As more businesses get connected via EDI, they will also get greater access to a larger market of customers and suppliers. Today, EDI is designed not only to streamline operations but also to interconnect businesses.