What is EDI? An overview of electronic data interchange

EDI guide

Imagine you’re a buyer and need to purchase a new product for your business. 

You fill out a purchase order with the necessary information, print it out, and then mail it to the supplier. A few days later, the supplier receives your purchase order, processes it, fills out an invoice, prints it out, and then faxes it to you. You then need to manually add the invoice information into your accounting system so it can be paid. 

These slow, inefficient, paper-based processes used to be the only option for businesses. EDI has since emerged as an alternative solution to exchange information in documents like purchase orders and invoices, and it’s prevalent across industries today. 

We’ll cover the basics of how EDI enables the exchange of business data, including how data is formatted and the ways business documents can be sent; we’ll also break down the various benefits EDI provides and how it differs from API-based integrations.

What is EDI?

EDI, or electronic data interchange, is a way to exchange business information electronically using a standard format. EDI replaces business processes that would typically happen using mail, fax, and e-mail. 

How does EDI work?

At a high level, it involves sending business documents from one organization’s computer system to another. A person isn’t involved and (therefore) doesn’t have to transfer the data manually from the document to the correct place. Moreover, for EDI to work, trading partners (the businesses you share information with) have to agree on how information will be exchanged and used. 

EDI can be used to automate certain workflows. Here’s just one example:

A buyer generates a purchase order that’s then sent to their supplier using EDI. The supplier receives the purchase order and automatically creates and sends an invoice to the buyer and notifies fulfillment about the new order. Once the order has been processed, shipping information can be automatically sent to the buyer. 

Let’s take a closer look at the individual components that allow EDI to work.

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 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 

EDI helps businesses manage their inventories and supply chains by giving them real-time visibility and updates on their inventories. This allows them to supply customers with the products they need on time, improve order accuracy, and provide customers with updates on their orders. 

Supply chain teams can use EDI along with their warehouse management systems for shipping and warehousing documents, such as customs documents, inventory lists, shipping statuses, advanced shipment notices, and more. 

Related: Why supply chain operations need automation

Healthcare

EDI is often used in healthcare settings because it can help ensure HIPAA compliance and security when—for example—a hospital or another healthcare provider sends information to an insurance company. Other examples of using EDI in healthcare include collecting patient information, verifying insurance coverage, and billing a patient or insurance company for services.

Retail

EDI is used in retail to manage purchase orders, track inventory, supply advance ship notices, and automate the data flow between e-commerce business partners. Since the industry involves managing many suppliers and a high volume of orders and inventory, EDI has traditionally played a pivotal role in providing these businesses with more visibility and improved order processing times. 

Logistics

In logistics, EDI improves partner management and gives visibility into the supply chain. It also enables businesses to have faster and more efficient order processing while helping them avoid late shipments or missing items in an order. Carriers can provide shipment status notifications through EDI to keep customers informed of their shipment’s progress. 

Accounting

Finance and accounting teams can use EDI to ensure that invoices are both sent and received without errors and much faster than what’s possible with paper-based processes. At a broader level, EDI can help these teams automate data exchanges across partner ERPs and other financial systems, as well as streamline important business processes like order-to-cash and procure-to-pay.

Benefits of EDI

Organizations 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.

Here 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 invoices to be sent automatically 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?

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 are often not connected to each other. 

APIs offer a modern approach to connectivity and can be used as an alternative to EDI, helping 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 lifecycle of APIs for both internal teams and external partners. It also enables you to implement workflow automations that work across connected apps, teams, and data.

To learn more about Workato, you can schedule a demo with one of our automation experts.