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Electronic Data Interchange (EDI) Explained

August 23, 2023

Electronic Data Interchange (EDI) is the standard electronic format for intercompany communication of business documents. It replaces paper-based documents like purchase orders and invoices, and offers automation opportunities that can save time and eliminate the costly errors associated with manual processing.

In an EDI transaction, information is transferred directly from a software application at one organisation to a compatible application at another. The EDI standards dictate the order and location of the information contained in a document format. This automation enables the rapid sharing of data that would otherwise take hours, days or even weeks in the hard copy format.

Now, industries make use of EDI integration to share many different document types, such as:

  • Purchase orders.
  • Invoices.
  • Quotation requests.
  • Loan applications.

In most cases, these organisations are trading partners. They engage in the frequent exchange of goods and services within their supply chains and B2B networks.

How does EDI work?

EDI transactions are defined by EDI message standards. There must be proper governance in place to ensure data quality. If any information is missing, or not in the correct location, the processing of the EDI document may not be carried out correctly.

EDI conversations always have standards at the foundation. There are several organisations that define the message standards for EDU, including:

  • Peppol.
  • The Accredited Standard Committee X12.
  • GS1.

The two basic types of EDI transmission are as follows. There are point-to-point (direct) connections, in which two systems connect via the internet with no intermediary. And there are value-added network (VAN) connections, wherein a third-party network manages the data transmission.

With regards to the EDI internet transmission protocols, there are several to know about, including:

  • Secure File Transfer Protocol (SFTP).
  • An HTTPS-based protocol.
  • Applicability Statement 2 (AP2).
  • Simple Object Assessment Protocol (SOAP).

The data elements for EDI include sender and receiver ID. Two or more related elements are combined in data segments to enhance their meaning. For example, CUSTOMERNAME is a combination of FNAME and LNAME. Meanwhile, envelopes structure different data types and carry sender/receiver address information. An EDI document/message flow describes the movement of EDI messages as they approach various inbound and outbound addresses. This movement is necessary for the execution of business processes, transactions and more.

EDI is not replaced by metalanguages. Instead, languages like XML or JSON complement EDI. Companies need to prepare themselves to be in a position to handle an ever-growing number of transmission options and document formats. A single global manufacturer may routinely handle around 55 different document types with partners numbering as many as 2,000.

Businesses handling B2B transactions report as many as 20% of those transactions producing errors when handled manually. Issues include clients submitting incorrect codes, causing a headache for client service teams. With the automation of EDU software, these errors are greatly reduced to facilitate faster and more efficient transactions.

How can EDI be implemented?

EDI can be challenging to implement for some enterprises. Government regulations, standards and updates are always shifting, and it can be difficult to keep up. EDI is also inherently complex, accommodating the needs of global businesses. For example, trading partners in a B2B network may each present individual requirements. Two partners may agree on a certain EDI document, but they may have different formatting requirements to be supported. These types of complexities lead many organisations to outsource their EDI needs.

Whether you handle EDI in-house or outsource it, a successful implementation requires a few basic conditions, capabilities and resources. Agreement on document types is one thing, along with common ground on the required hardware and software and the secure transmission methods. But an effective EDI implementation also requires:

Batch Enveloping/De-enveloping Capabilities

These facilitate large EDI message batches by enabling both senders and receivers to wrap and unwrap transactions. These transactions can then be placed in different divisions of a trading associate’s business.

Translation and Mapping Software

This is a software type that takes files like names and currency amounts and maps them from specific business application formats to standardised documents. It can also translate data in the other direction, when required.

Trading Partner Agreements (TPA)

This clarifies terms and conditions. It also establishes business document standards and defines the communications and business protocols between different trading partners.

Massage Routing Mechanisms

Following the de-enveloping of a message, the messages must be sorted into different groups using routing mechanisms in order to send them to the appropriate targets. This may also require message transformation to ensure messages are formatted correctly for the recipient.

What are the real benefits of EDI?

EDI transactions are essential for smooth, efficient B2B processes. They are emerging as the preferred means of document exchange and transactions between businesses of all sizes. Essentially, there are 5 fundamental business benefits of EDI technology

  1. It boosts efficiency and productivity because a greater quantity of documents are shared and processed in reduced time, and with greater accuracy.
  2. It offers time and cost savings by automation processes that were previously handled manually using hard copies.
  3. Traceability and reporting improve because the electronic documents produced in EDI can be integrated with various IT systems. This enhances data collection, visibility and analysis.
  4. EDI reduces errors through rigid standardisation. This helps ensure the correct formatting or data and information before it enters business applications or processes.
  5. Customer experiences are improved via the efficient execution or transactions and reliable products and service delivery.

Large organisations can particularly benefit from EDI. It enables standards that you can implement across trading partners to consistently achieve benefits. For smaller organisations, EDI offers improved integration with larger firms whose big budgets and strong influence can be beneficial to growth.

What does the future hold for EDI?

Future supply chains may have EDI at their core for document exchange that uses innovations like the Internet of Things, blockchain and artificial intelligence. There are many exciting possibilities for integrating these technologies into EDI to improve the efficiency of supply chains, so this is definitely something to watch for the near future.

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