Electronic Data Interchange (EDI)

What Is EDI?

EDI is a standardized method for electronically transmitting information between businesses or trading partners. Commonly used for purchase orders and invoices, EDI makes printing and mailing these documents a thing of the past, replacing time-consuming manual practices with a simple digital transfer.

What Does EDI Stand For?

EDI stands for “electronic data interchange.” This term highlights the efficient nature of this technology and its ability to make business processes much smoother while improving the performance of office administrators.

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How Does EDI Work?

Though the EDI definitions you’ve seen are likely fairly simple, there’s much more to the process than meets the eye.

EDI transmissions generally fall into two categories. The first is direct (point-to-point) connections, during which each trading partner’s computer connects directly to the other using a secure protocol. The second, referred to as a value-added network (VAN) connection, requires a third-party network to manage transmission.

Common EDI transmission protocols include:

Although there are others, these main protocols enable EDI core functions, such as:

Extensible Markup Language (XML) and JavaScript Object Notation (JSON) metalanguages have the potential to complement EDI well, allowing companies to handle more document formats and transmission options with ease.

What Is an EDI Payment?

EDI isn’t a form of payment. It’s a way of sending and receiving invoices and remittance documents that cuts out the manual transmission process and creates a standardized data format that two separate systems can understand.

This format allows computers to easily exchange messages and complete payment-related processes without the need for human interference.

Traditional Documents for Purchase Orders vs. EDI Integration

Using EDI software offers a significant advantage over manual methods. Here are some of the differences between the two processes and the improvements that come with making the switch:

Manual Document Exchange System
EDI Document Exchange System
The business creates and prints a purchase order (PO).
The business creates a purchase order (PO).
The business mails the PO to their supplier.
EDI software creates a digital PO (ePO) and sends it directly to the supplier.
An office administrator on the supply side receives the PO and manually enters the information.
The supplier’s system receives the ePO, updates the system, and generates a receipt.
The business checks in with the supplier about the PO receipt, and the supplier mails out a confirmation.
The EDI system sends a receipt back to the business for confirmation.

While the manual method could take a week or more, EDI systems promote efficiency by reducing the time needed for this process to less than an hour.

What Can EDI Be Used For?

There are many potential use cases for EDI, which means these systems can create value across the board in your business. Just a few of the ways they do so include:

EDI is much less tedious and time-consuming than any manual process, which helps drive productivity across the business.

EDI Integration

EDI integration is typically handled by an IT professional or service provider. It involves mapping EDI document data fields to those in a target application, such as your warehouse management, customer relationship management, or enterprise resource planning system. This eliminates redundant activities, as there’s no need to re-key mission-critical information, which in turn streamlines processes and ensures greater accuracy.

As you integrate EDI systems into your business, it’s vital that you first establish the documents, protocols, and endpoints you’ll use with your trading partners. Once you’ve done that, convert your data into a format that can be mapped to your back-end application.

Doing things this way results in a much smoother process as you share data between and among systems.

Benefits of EDI Technology

EDI automation can yield several positive effects and boost business agility. In fact, 50% of U.S. workers believe that automating specific job tasks gives them more time to work on other critical business projects. Some of the other benefits of EDI include:

Businesses large and small can reap these benefits when they choose to integrate EDI into their back-end processes.

EDI Standards for Formatting

Because computers must be able to understand each other, standardizing EDI formats is critical to the successful exchange of information without human intervention. Businesses might use one of several EDI standards, including:

Trading partners need to agree on a format before they begin exchanging documents. Once they do, they can use an EDI translator to help their internal applications “speak” the right language and enable seamless processing.

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