What is EDI (Electronic Data Interchange)?
What EDI is, how it works and how it's used — everything you need to know about Electronic Data Interchange, including the advantages and disadvantages
EDI, which stands for Electronic Data Interchange, can be defined as the exchange of information between computers in a standardized format either within an organization or between two business partners. EDI is a fast, reliable, and accurate system for exchanging business documents with external entities that do business together.
Companies have long been trying to find solutions around the intrinsic problems associated with paper-dependent commercial transactions. From delays to inaccuracies and labor costs, paper transactions simply aren't adaptable and fast enough for the digital age. Modern consumers and business partners demand things to be done instantly and securely.
This is where electronic data interchange, or EDI, comes into play.
EDI, in some form, has been around in the United States since the mid-1980s. Although it's not a novel concept, many businesses and IT professionals today lack a basic understanding of what EDI is and, more importantly, how it can benefit their organization.
EDI solutions are employed in a wide variety of industries, including manufacturing, retail, finance, healthcare, and more. Continue reading to learn more about EDI, along with the pros and cons of implementing EDI at your company.
EDI Mechanics & Standards
How does EDI work, exactly?
Simply put, electronic data interchange uses a defined set of standards for transmitting business information that allows data to be interpreted correctly and instantly, regardless of the platforms being used on the different computers that transmit and receive the data.
EDI messages involve actual transactions, not simple exchanges of text like an email. "Transaction sets" are what we in the business refer to as EDI messages. Each "set" consists of a string of data elements that each represents one fact (for example: price, quantity, product number, etc.).
Each company uses specific formats based on accepted standards in their EDI documents. These standards allow flexibility so companies can tailor them to suit their particular business needs. The most common EDI standard in North America is referred to as ANSI ASC X12 or the EDI x12 which was developed by the Data Interchange Standards Association.
Other major sets of global EDI standards include:
- UN/EDIFACT - recommended by the UN and the only international standard predominantly outside of North America
- GS1 EDI - developed the GS1 and predominantly used in global supply chain
- TRADACOMS - developed by the Article Number Association (now known as GS1 UK) and is predominantly applied in the UK retail industry
- ODETTE - mostly used within the European automotive industry
- VDA - predominately used within the German automotive industry
- HL7 - a semantic interoperability standard commonly used for healthcare data
- Edig@s (EDIGAS) - a standard pertaining to commerce, transport, and gas storage
To give you some idea of how the EDI process works, consider a purchasing manager who is preparing an order for their store in their purchasing system. After doing this, the order can be translated into an EDI document or an EDI 850 (purchase order). Other common EDI documents include advance ship notices (EDI 856) and invoices (EDI 810).
Once the document is properly formatted, it is transmitted to the supplier through the Internet (HTTP protocol) or a Value Added Network (VAN). The supplier receives the EDI document and processes the order.
Individually, we interact with EDI applications all the time. Electronic funds transfer (EFT) between different financial institutions such as direct deposit of paychecks, debit of individual bank accounts through purchases, and ATM withdrawals are good examples.
For another example, consider a car dealership. The financing department plays an important part of the car buying process, with over a third of all car buyers needing to be financed. The standard process for most dealerships today is to request a credit report about a potential buyer from a credit bureau via an EDI connection. The dealership's system electronically sends, receives, and analyzes the credit report, telling a finance expert exactly what rate they can approve for the customer. Often this happens in a matter of hours or minutes, and is provided with little human involvement.
Without EDI, this process might take days or weeks.
EDI implementation has many advantages, many of which may seem obvious.
- Cost. Electronic exchange of information is much cheaper than traditional paper documents. In fact, one study has shown that a purchase order using paper can cost $70 or more to process. The same order costs less than a $1 to process using EDI.
- Reliability. Electronic processing also reduces human errors, which can extend the time of processing an order and cost you money.
- Speed. Digital documents can also be processed much faster. For instance, paper orders can take up to 10 days from start to finish, while EDI can take as little as one day.
- Automation. By automating the ordering process, EDI can greatly minimize the manual human power required, saving a business time and money.
One drawback to implementing EDI is that it costs some money and requires expert EDI consultants or an IT professional to make it work. But these costs are typically offset by increased organization efficiency.
Leverage EDI to Make Your Business Run Better
Are you ready to join the nearly 200,000 other businesses who have been successful at implementing EDI at their companies? Hiring an EDI consultant means putting an end to your paper documents once and for all.
EDI consultants at Innovative Architects can assist you in this solid business investment. See how our EDI experts have helped enterprises like BlueCross, BlueShield of North Carolina and others revolutionize their operations by integrating EDI into their systems.