Electronic data interchange (EDI) is a standardized method of exchanging business information between companies, enabling them to share documents like purchase orders and invoices digitally instead of relying on paper-based processes.
By using EDI, companies may automate and optimize data interchange, greatly cutting down on the time and mistakes that come with manual processing. Because it offers a quicker and more effective means to handle transactions, this technology has become essential to many different businesses.
This post will explain the operation of EDI, its advantages, and its differences from more recent API-based interfaces. You’ll learn exactly how EDI can improve your company’s operations by the time it’s through.
What Is EDI?
Electronic data interchange, or EDI, is a technology that enables companies to exchange data in standardized formats electronically. EDI reduces errors and boosts productivity by automating and optimizing the interchange of business documents such as shipment notices, invoices, and purchase orders. This eliminates the need for human processes.
In the past, important documents were shared by corporations using paper-based communication channels like mail and fax. EDI converts these labor-intensive manual procedures into automated workflows by converting documents into a format that is widely accepted and facilitates smooth system communication. EDI makes it possible for businesses to exchange enormous volumes of data accurately and efficiently. It’s essential to supply chain management, logistics, and other industries where speed and accuracy are crucial. This technology is critical for businesses seeking to increase collaboration, save costs, and ensure data integrity throughout their whole operations.
How Does EDI Work?
At a high level, EDI involves sending business documents from one organization’s computer system to another. A person isn’t part of it and doesn’t have to transfer the data manually from the document to the correct place. For EDI to work effectively, trading partners must agree on how to exchange and use the information.
EDI can be used to automate certain workflows. For example, a buyer generates a purchase order that’s sent to their supplier using EDI. The supplier receives the purchase order and automatically creates and sends an invoice to the buyer, while also notifying fulfillment about the new order. Once the order has been processed, shipping information can be automatically sent to the buyer.
EDI Message Routing Software
Message routing software in an EDI structure ensures that the data packets or documents are accurately directed to the correct destination within the trading partner’s system. It manages the flow of EDI messages, ensuring that each document reaches its intended recipient without manual intervention, maintaining the integrity and security of the data during transmission.
EDI Batch Enveloping and De-Enveloping
Batch enveloping in EDI involves grouping multiple documents together into a single package, or “envelope,” before transmission. This process allows for efficient handling of large volumes of data. De-enveloping, on the other hand, is the process of extracting individual documents from the envelope once they reach the recipient’s system. This is crucial for processing the documents correctly, ensuring that all data is accounted for and routed to the appropriate internal systems.
EDI Message Standards
EDI message standards describe the format, location, and order of each piece of data in a document. This is a crucial part of EDI because it’s what allows the computer systems from two different organizations to communicate and process data.
There are several EDI standards that are in use today. North America uses the American National Standards Institute (ANSI) X-12, or ASC X12, standards, while the Electronic Data Interchange for Administration, Commerce, and Transport (UN/EDIFACT) EDI protocol is an international EDI standard created by the United Nations that enables multi-country data exchange. There are also industry-specific standards, like HIPAA.
An EDI translator converts your data into the correct EDI format so that it can be sent to your trading partner. Both businesses must be using the same format in order for EDI to work.
EDI Transmission
EDI transmissions generally follow two basic types: value-added networks (VAN) and direct EDI (or point-to-point EDI).
A value-added network is when a third-party network provider manages the transmission of data, while direct EDI or point-to-point EDI is when trading partners connect their computers or systems to each other directly over the internet via secure protocols.
Direct EDI or point-to-point EDI can use several internet transmission protocols, including Secure File Transfer Protocol (SFTP) or File Transfer Protocol (FTP), Applicability Statement 2 (AS2), HTTPS protocol, Simple Object Access Protocol (SOAP), mobile EDI, and more.
EDI Use Cases
Although EDI started as a simple way to replace paper documents, it’s now typically used to connect on-premise applications, ERP systems, accounting software, e-commerce software, and more to automate business-to-business workflows.
EDI software is a popular choice for businesses that deal with supply chains or logistics; as a result, organizations in industries like retail, manufacturing, automotive, and utilities often turn to EDI. Let’s take a closer look at how specific departments and industries can use EDI:
- Supply Chain Management: Better order accuracy, prompt delivery, and a better supply chain becomes possible through EDI’s real-time visibility into inventories.
- Healthcare: Between healthcare providers and insurers, EDI securely transmits patient data, insurance verification, and billing information while guaranteeing HIPAA compliance.
- Retail: EDI streamlines order processing and supply chain visibility by automating purchase orders, inventory tracking, and data exchange across e-commerce partners.
- Logistics: EDI improves the visibility of the supply chain. And allows for quicker order processing and giving clients real-time shipping status updates.
- Accounting: By automating data transfers and invoices between financial systems, EDI streamlines vital procedures like procure-to-pay and order-to-cash.
Benefits of EDI
Organizations all have their own way of doing things and unique internal systems. EDI is a way to ensure that they can still exchange business documents and work together more easily.
Below are a few other benefits worth highlighting.
1. Provide Better Data Accuracy
EDI lets you avoid manual processes—like data entry—that can lead to errors, which improves your overall data quality. EDI message standards also include mandatory data so you can ensure that the most important information is always included in your documents.
2. Elevate the Customer and Partner Experience
EDI helps streamline business processes. Data doesn’t have to be added to business documents manually and then sent to your trading partners by email or fax. EDI allows for this exchange of business documents to happen automatically, making you more responsive to customers and business partners.
3. Improve Your Order-to-Cash Process
EDI helps you process and fulfill orders more quickly by allowing purchase orders and automatically sending the invoices from the supplier’s systems into the buyer’s systems. This results in invoices being recorded sooner and payments being sent and received on time. It also keeps financial systems up to date so you can close your books faster.
4. Keep Transactions Secure
Since the data sent using EDI can be sensitive or private, security standards must be in place. Security is a major component of EDI protocols and EDI solutions only allow access by authorized users.
Related: What are the benefits of software integration?
What Is EDI Mapping Software?
A tool that assists companies in converting data between various formats to adhere to the particular standards needed for EDI transactions is EDI mapping software. Before the delivery to trading partners, this software makes sure that data from internal systems—such as accounting or ERP software—is converted into the appropriate EDI format. Additionally, it transforms incoming EDI messages into a format that the systems of the recipient organization can simply process.
Why Do Organizations Consider Outsourcing EDI Solutions?
In order to lower the complexity and expense of handling EDI procedures internally, organizations frequently think about outsourcing EDI solutions. Expertise, scalability, and the capacity to manage diverse EDI standards and trading partner requirements are all provided by EDI outsourcing companies. Through outsourcing, companies may concentrate on their core competencies while guaranteeing quick and secure handling of their EDI transactions, frequently with improved adherence to industry standards.
EDI vs. APIs for Integration
EDI helps you integrate your systems with external business partners. But what about your internal systems? Businesses are using a growing number of applications across departments to get work done—the average enterprise has nearly 300 different SaaS apps in use—and those applications often do not connect to each other.
APIs offer a modern approach to connectivity and can work as an alternative to EDI. They help you integrate with both internal and external computer systems, databases, and applications.
Even though EDI is much faster than manual processes, EDI data is stored before it’s transferred, so it can still take a few hours to transfer data. APIs, on the other hand, enable the transfer of data in near real-time.
Therefore, depending on your business needs and goals, an alternative integration solution to EDI might be necessary.
For cloud applications, the best way to automate is through integration-led automation based on APIs and on-premise agents for databases. EDI can still play a key role in certain processes. But, it might not be enough as your business transforms and scales.
Workato, the leader in integration-led automation, provides an API management platform that allows your organization to manage the full life cycle of APIs for both internal teams and external partners. It also enables you to implement workflow automation that works across connected apps, teams, and data.
To learn more about Workato, you can schedule a demo with one of our automation experts.
Managing and Implementing EDI
Managing and implementing EDI involves various technical, regulatory, and operational considerations. Below are key aspects to consider when working with EDI systems.
What kind of network equipment is needed to manage EDI internally?
Businesses require strong network hardware, such as firewalls, secure servers, and dependable internet connections, in order to handle EDI internally. Data conversion and transfer also require the use of specialist EDI translators and mapping tools.
What makes EDI difficult for some enterprises to implement?
Enterprises may find it difficult to use EDI because it requires specialist knowledge, complicated set-up procedures, and exact alignment with the systems and standards of trading partners. Barriers may also include high startup expenditures and continuous upkeep.
How do government regulations affect EDI implementation?
Government rules, which force companies to abide by industry-specific requirements or data protection legislation like GDPR and HIPAA, have a substantial impact on EDI deployment. Organizations must keep up to speed on pertinent regulations because non-compliance might result in penalties.
In what scenario should a business adjust its EDI system?
When entering new markets, integrating with new trading partners, or when their current systems are no longer able to meet security or performance standards, businesses should think about making changes to their EDI systems. Frequent reviews contribute to the system’s continued compliance and efficiency.
What actions are needed if an industry’s required EDI data protection regulations and standards are updated?
Businesses need to promptly update their EDI software and processes in order to comply with any revisions made to the mandatory EDI data protection rules by an industry. This could entail changing access controls, retraining employees on compliance procedures, and putting new encryption standards into place.
What happens when your trading partners decide to change their EDI standards?
To maintain compatibility, firms need to update their systems whenever their trading partners modify their EDI standards. To comply with the new standards, this can entail renegotiating agreements, testing new formats, and adjusting EDI mapping.
Conclusion
EDI continues to be an essential tool for contemporary companies. It facilitates the smooth transfer of data and business documents throughout sectors. EDI helps businesses increase productivity, lower errors, and adhere to industry standards by automating tasks like order management, invoicing, and supply chain coordination.
The benefits of EDI in terms of speed, accuracy, and cost savings are significant. However, its implementation and management can be difficult, particularly given the requirement for specialized knowledge and adherence to constantly changing standards. With ever-increasing flexibility and integration choices, EDI is becoming an ever more essential component of modern corporate processes as technology develops.
