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What is Electronic Data Interchange? EDI Defined

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What is Electronic Data Interchange? EDI Defined

Electronic data interchange replaces paper-based transaction and manual data entry while also eliminating human errors. Implementing the right EDI system for your company can result in significant time and cost savings, heightened productivity, and strengthened relationships with trading partners. Learn why EDI serves as the foundation of digital trade, and explore why leading businesses opt for Comarch’s cutting-edge solutions.

What is EDI?

EDI stands for electronic data interchange. It is the use of an IT solution for the automatic transmission and reception of primarily commercial documents in a digital and structured format. This process of document exchange between business partners' systems is automatic. EDI is typically used between trading partners or business entities involved in various commercial transactions. 

The significance of why EDI is important cannot be overstated. Whether you opt to outsource EDI or manage it in-house, EDI optimizes business transactions by facilitating the dynamic sharing of reliable business information necessary for the supply chain. Furthermore, there are multiple advantages to utilizing EDI.

Functions of Electronic Data Interchange

The EDI software facilitating document exchange between business partners’ systems performs tasks such as checking, validating, and enriching structured documents (purchase orders, delivery notes, invoices, etc.).

Moreover, an EDI solution expedites digitization by enabling companies to eliminate paper documentation, offering a more cost-effective, rapid, and error-resistant alternative to traditional methods like email or paper-based communication.

In this computer-to-computer exchange, digital data replaces paper documents, automating tasks that were previously manual. EDI streamlines various incoming and outgoing document types, with invoices being the most commonly interchanged file type. In fact, e-invoicing is becoming a legal requirement in many countries (see here for more details). Yet, the real power of EDI comes with the standardization of the information communicated in business documents, regardless of file type.

EDI can integrate a customer’s internal systems with partners’ corresponding systems (such as ERP, WMS, TMS, CRM, etc.) via suitable communication protocols including AS2, FTP/VPN, sFTP, Web Service, and others.

How does EDI work?

EDI optimizes the workflow in exchanging documents between business partners by translating the document from the sender’s format to the one required by a particular business partner, and vice versa.

In the traditional process, invoices were generated using a computer, printed, and sent to the customer. Upon receipt, the trading partner manually entered the invoice into their computer system for further processing. EDI software simplifies this exchange, eliminating manual labor associated with data transfer.

EDI Workflow - How does EDI work

Within an EDI system, various processes occur before a document reaches its intended recipient. These include collecting the data, decoding, disassembling, error handling, validating, mapping, authorization, routing, preassembling, and assembling.

The entire process can be divided into three straightforward steps:

1. Document preparation

Initially, data is collected and organized, for instance, by creating a file containing the necessary information to construct an EDI document within the EDI system. To generate electronic documents, data can be input manually, exported from databases, or automatically generated.

A complete EDI document is a file containing segmented and formatted data elements in accordance with specific EDI standards.

Some popular electronic document types exchanged via EDI include:

  • Orders (ORDERS)
  • Invoices (INVOIC, VDA 4906, VDA 4938, ANSI X12 820, INVFIL)
  • Dispatch advices (DESADV, VDA 4913, VDA 4987, ANSI X12 856, DELHDR)
  • Receiving advices (RECADV, VS30, VDA 4989, ANSI X12 846 )
  • Order responses (ORDRSP)
  • Inventory reports (INVRPT, VS35 and VS36, VDA4990, ANSI X12 846)

2. Translating sales reports (SLSRPT, ANSI X12 852) into EDI format

Next, data is translated into the EDI standard format using specialized software. EDI service providers typically offer this functionality, as it requires expertise in mapping to define the correlation between internal data and EDI data. EDI mapping involves translating data from primary files such as SAP IDOC or CSV into EDI formats like EDIFACT. Standardized formats, such as FLATFILE, XML, CSV, and JSON, are used for EDI files to ensure compatibility between computers.

3. Transmission

Once documents are translated into the appropriate format, they are transmitted to the connected EDI-capable business partner. To ensure secure online data transfer, documents are encrypted, and various connection standards are utilized.

What is EDI-capable?

An EDI-capable company can seamlessly transmit business documents between trading partners using EDI software. Smooth exchange is guaranteed through compatibility with the EDI format between trading partners.

Upon receipt, the recipient's EDI software performs the reverse process: translating the data into the required format and sharing it with ERP or other systems.

What are EDI transactions?

EDI transactions are standardized electronic business documents used for data exchange. They operate independently of the communication methods employed by companies or the EDI software. These transactions must contain a minimum amount of information to comply with strict formatting regulations.

Each transaction is assigned an EDI transaction code, which aids in process automation. Additionally, these EDI transaction codes can be categorized by document type, such as finance, manufacturing, retail, transportation, and logistics.

Among the most common EDI transaction types and their corresponding codes are:

  • EDI 810: Invoice
  • EDI 820: Payment Order/Remittance Advice
  • EDI 850: Purchase Order
  • EDI 855: Purchase Order Acknowledgement
  • EDI 940: Warehouse Shipping Order
  • EDI 997: Functional Acknowledgement

Benefits of EDI

  • Cost reduction
    By automating processes, EDI minimizes labor costs related to data entry, document handling, and error correction. It also slashes expenses associated with paper, printing, postage, and physical document storage. Additionally, EDI helps avert costly errors and delays, reducing the need for rework and enhancing overall operational efficiency.
  • Error reduction
    Manual data entry is susceptible to errors such as typos, transcription mistakes, and data entry errors. EDI mitigates these errors by automating data exchange processes, ensuring precise and consistent information across systems. This results in fewer discrepancies, fewer disputes, and enhanced data integrity.
  • Enhanced data integrity
    Input document data once into the company's internal IT system, and seamlessly transmit it to the recipient's system with a single click, preventing alteration by multiple individuals and ensuring information integrity.
  • Utilization of turnaround wizards
    Modern systems provide turnaround wizards, simplifying invoice creation from existing orders. With pre-set data saved within the system, errors such as incorrect addresses or VAT numbers are eliminated, as the system automatically populates fields using the stored master data of the business partner.
  • Automated document validation rules
    Document transmission includes automatic validation checks, ensuring accuracy in net and gross amounts with every transaction.
  • Expedited invoice payment
    EDI enables real-time document exchange, facilitating quicker transaction processing and reducing cycle times, thereby shortening order-to-cash and procure-to-pay cycles, and improving cash flow.
  • Accelerated logistics processes
    EDI streamlines document exchange, reducing processing times and expediting logistics operations.
  • Reduced risk of supply chain disruption
    With EDI, communication with suppliers and partners is automated and efficient, minimizing the likelihood of disruptions and delays.
  • Enhanced visibility of document exchange processes
    EDI provides a centralized platform for managing document exchanges, offering better oversight and control over various processes.
  • Improved relationship with business partners
    Quick exchange of data and funds can enhance relationships with business partners, especially when the EDI system automatically enriches documents with additional data that partners require.
  • Increased transaction security
    EDI systems employ encryption and authentication protocols, ensuring secure transmission of sensitive data and reducing the risk of unauthorized access or tampering.
  • Environmentally friendly processes
    By eliminating paper-based transactions, EDI reduces paper consumption and associated CO2 emissions, contributing to environmental sustainability.
  • ESG
    Thanks to data collection for ESG reporting and dashboards, EDI eliminates the need for paper-based transactions. By streamlining communication and document exchange electronically, EDI reduces the need for physical transportation and associated emissions, thus contributing to lower carbon footprints.
  • Supply Chain Optimization
    Improved visibility helps identify inefficiencies, reduce waste, and optimize inventory levels, contributing to more sustainable supply chain practices.

Benefits of EDI

EDI vs. API

Technologies such as application programming interfaces (APIs) present an alternative to EDI in supply chain communication. Unlike traditional EDI systems, APIs enable real-time data exchange and offer seamless integration with backend business systems through web service APIs.

However, API integration may not always be suitable for ensuring compliance with regulations, especially concerning the handling of sensitive financial information.

When weighing the options between API and EDI, it's important to consider a hybrid approach that combines the advantages of both solutions. API is often utilized as a communication channel, allowing the exchange of EDI messages between systems.

Different types of EDI integration

EDI integration refers to the connection between an EDI system and other internal or external systems, enabling automated exchange of business documents within your organization or with your trading partners.

The process of EDI integration involves aligning the data fields within EDI documents with their counterparts in the intended system or application, such as an enterprise resource planning (ERP) system, warehouse management system (WMS), or supply chain management (SCM) system.

Types of EDI integration

Direct EDI integration (point-to-point)

Direct EDI integration establishes a direct connection between two business partners. This approach involves individually establishing connections with each partner, offering businesses greater control. It is primarily favored by larger customers and suppliers engaged in frequent transactions.

Indirect EDI integration

Indirect EDI integration entails communication between your ERP system and your business partner via an intermediary, such as an EDI provider or a value-added network. These VANs serve as intermediaries, facilitating the translation of EDI messages among different protocols, ERPs, and partners.

Hybrid EDI integration

Hybrid EDI integration combines elements of direct and indirect integration methods, catering to companies seeking specific benefits from each approach. Effective utilization of hybrid EDI integration requires businesses to demonstrate flexibility and expertise throughout the integration process, along with access to appropriate tools and resources.

EDI integration can be a complex process, involving various alternative methods and communication protocols. The choice of EDI integration method depends on factors such as company size, industry, and operational requirements.

To delve deeper into EDI integration, explore our comprehensive guide, entitled “What is EDI Integration?”, which provides insights into maintaining competitiveness in the market.

 

Different methods of EDI connection

1. EDI via VAN network (direct EDI alternative)

Most EDI transactions presently occur through VAN/EDI networks, shielding users from the challenges associated with a direct connection.

The attractiveness of EDI networks stems from the array of value-added services provided by the EDI network service provider. These typically encompass:

  • Back-office integration
  • Management information
  • Community and partner facilitation
  • EDI outsourcing

2. EDI via AS2/AS3/AS4

AS (applicability statements) are standards for secure data transfer through the Internet. They explicitly outline the process of establishing a connection, performing data validation and transmission, and providing confirmation of receipt. Consequently, messages are encrypted and their origin is verified by a digital signature. Confirmation of successful transmission is provided through a message disposition notification (MDN) – a proof of receipt.

Utilizing AS2 and other transmission protocols for electronic data interchange combines the functionality of traditional EDI with the widespread accessibility of the Internet. Presently, it ranks among the top choices for secure and dependable data transport, particularly for EDI data exchange.

Numerous organizations choose to engage an EDI network provider for AS2 connectivity, ensuring a constant capability to receive EDI transmissions.

Other transmission protocols:

  • FTP: The file transfer protocol is utilized to transmit data via TCP/IP. It enables the downloading and uploading of data to and from an FTP server. FTP is particularly suitable for transferring large volumes of data, as it supports simultaneous transfers of multiple data items. In case of connection interruptions during a transfer, the process can be restarted from the point of interruption. However, FTP data transfer lacks encryption, making it susceptible to interception by third parties. Consequently, FTP is rarely used in EDI.
  • SFTP: The SSH file transfer protocol facilitates data interchange between a client and a server, transmitting data via TCP/IP. SFTP ensures encryption at both the actual data and access data levels, making it the most secure method for transmitting files and directories to a host.
  • OFTP: The ODETTE file transfer protocol is widely used in the European automotive industry. OFTP2 supports point-to-point connections or VANs. Additionally, this protocol can handle requests, exchange files, and encrypt and sign message data, rendering it secure and highly recommended.

3. Web EDI integration

Web EDI utilizes a standard web browser for conducting EDI transactions, typically through a web-based platform. Organizations employ various online forms to exchange information with their trading partners. This approach makes electronic data interchange accessible and cost-effective for small and medium-sized businesses.

The process of web EDI involves translating paper-based documents into web forms. These forms include fields where users input relevant information. Once filled out, the data is automatically converted into an EDI message and transmitted via secure Internet protocols.

4. Mobile EDI

Traditionally, users accessed EDI through private networks such as VANs or the Internet to send and receive documents. The adoption of mobile EDI has been limited, partly due to security concerns associated with mobile devices in an EDI environment, and largely due to technological constraints of mobile devices.

The emergence of tablet computers has expanded the capabilities of mobile computing devices. Companies are now developing apps to mobilize their supply chains. Direct exchange (DEX) enables delivery personnel to use a mobile device to scan barcodes and generate electronic invoices. Particularly in the retail sector, DEX has gained traction for facilitating the flow of products and information throughout the supply chain.

 

EDI standards

EDI communication standards define the structure of EDI documents, outlining the specific order and locations of necessary business data. Each EDI transaction document is divided into multiple parts:

  • Element: The smallest component in an EDI standard, containing data such as cost, item number, or recipient’s city.
  • Segment: A group of elements, representing entities like the beginning of a purchase order, the company, or street address.
  • Transaction set: Once all segments are assembled in a predetermined format, they form a transaction set, constituting a complete EDI message.

Various types of EDI standards exist. Some were developed for specific industries or jurisdictions, and others are universal across sectors and regions. These standards serve as definitive guidelines governing the creation and interpretation of specific business transactions. Whether dealing with purchase orders, shipping notices, invoices, or any other exchanged document, adherence to the standards set by the respective EDI language is imperative. These standards dictate the format for presenting information, specify the essential data required in each message or document, and outline the methodology for labeling various message fields.

 

Some prevalent EDI standards include:

ANSI ASC X12

Established in 1979 by the Accredited Standards Committee (ASC) of the American National Standards Institute (ANSI), X12 aims to develop cohesive standards for electronic business transaction interchange across various sectors.

With over 320 updated transaction standards, ANSI ASC X12 is one of the most comprehensive EDI messaging standards, exhibiting widespread usage across industries and diverse applications. Furthermore, X12 serves as a foundation for subsequent EDI standards.

UN/EDIFACT

The Electronic Data Interchange for Administration, Commerce, and Transport emerged as a standard developed by the United Nations in the 1980s, spearheaded by the Working Party 4 group.

This multi-country, multi-industry EDI language gained prominence in Europe, particularly within the retail sector, which was its initial adopter. Nonetheless, its application has diversified over time, extending to sectors such as Healthcare, Construction, Logistics and Transportation

TRADACOMS

Introduced in 1982, TRADACOMS served as an early EDI standard primarily used in the United Kingdom, particularly in the retail sector. Since then, it has been overseen and expanded upon by GS1 UK. However, development of TRADACOMS ceased in 1995, paving the way for the adoption of EDIFACT EANCOM subsets.

ODETTE

The Organization for Data Exchange by Tele-Transmission in Europe was initially conceived as a project by experts from European vehicle manufacturers seeking to leverage advancements in information and communications technology. Previous initiatives undertaken by various national committees highlighted the importance of collaboration in creating a pan-European EDI standard, leading to the establishment of ODETTE.

Different types of EDI implementations

Deployment options and operating models

As more companies embrace the benefits of EDI, they can choose from various implementation options: keeping EDI in-house, outsourcing it, or utilizing other solutions.

4 Types of EDI implementations

In-house EDI

Managing a company’s EDI in-house requires setting up and maintaining an electronic data interchange system, handling data translation, and providing constant support, such as for purchased EDI software. The cost of this solution includes licensing fees, infrastructure and technical resources.

Pros
  • Complete control over document interchange processes.
  • Faster adaptation to changes due to internal management.
  • Clear visibility into system performance for strategic decision-making.
  • Opportunities for internal optimization and improvement.
Cons
  • Increased responsibilities and workload for employees.
  • Higher costs associated with hiring and training additional staff.
  • Sole responsibility for success, with limited external support.
  • Dependency on internal expertise, potentially limiting adaptability and innovation.

EDI outsourcing

Outsourced EDI means that your organization doesn’t need to purchase additional EDI software – electronic data interchange is a service provided by a third-party vendor.

Pros
  • Access to specialized EDI experts for efficient management of electronic document interchange.
  • Allows companies to focus on core responsibilities while professionals handle EDI tasks.
  • Professional management and support minimize the occurrence of issues.
  • Enables business expansion and fosters better partner and customer relationships.
  • Cost and time savings by avoiding the expense of hiring and training new employees.
Cons
  • Loss of control over the company's EDI system, limiting the ability to fix errors or add new trading partners independently.
  • Dependency on external vendors' schedules for completing tasks, potentially leading to delays.
  • Reduced visibility into system performance, relying on reports from the EDI provider for insights.

Managed EDI

In managed EDI services (also referred to as EDI as a service), the EDI provider develops and maintains a cloud-based EDI solution but still requires internal staff’s help in daily operations.

Pros
  • Professional solution development, ensuring reliability and performance.
  • Internal staff involvement means retained control and insight into the EDI processes.
  • Customization to suit specific business needs and workflows.
Cons
  • Dependency on internal staff, potentially increasing workload and responsibilities.
  • Potential for miscommunication and delays between the internal staff and the EDI provider.
  • Managed EDI may come with additional costs due to the need for ongoing collaboration and support.

Integration platform as a service (IPaaS)

While outsourced EDI focuses specifically on managing EDI processes through a third-party service provider, iPaaS offers a broader integration solution that encompasses EDI along with other integration needs within an organization, often with more self-service capabilities.

Pros
  • Support for real-time data integration, essential for applications requiring immediate updates.
  • Tools for monitoring performance, resolving issues, and ensuring data security and compliance.
  • Reduced need for custom integrations and extensive IT infrastructure, potentially leading to cost savings.
Cons
  • The need for technical expertise during implementation, potentially leading to challenges for organizations lacking in in-house IT resources.
  • Reliance on the uptime of the iPaaS vendor’s infrastructure and services.

Which industries use EDI?

  • EDI in healthcare: Organizations can exchange medical claims, patient records, prescriptions, and insurance information between healthcare providers, insurers, pharmacies, and regulatory agencies while securing all the data.
  • EDI in manufacturing: Supply chain processes can be streamlined, thanks to automated order processing, invoicing, and inventory management between manufacturers, suppliers, distributors, and retailers.
  • EDI in logistics: The seamless data exchange can automate freight booking, shipment tracking, and customs documentation to improve the efficiency of transportation and logistics operations, including managing carriers, warehouses, and freight forwarders.
  • EDI in finance: To improve financial transactions, reduce manual errors, and enhance cash flow management, EDI in the banking industry automates invoice processing, payments, and financial reporting between financial institutions, businesses, and trading partners.
  • EDI in retail: EDI systems optimize order management, inventory replenishment, and sales reporting processes by electronically exchanging purchase orders, invoices, and shipping notices between retailers, suppliers, and distributors.
  • EDI in e-commerce: Adopted solutions can enable seamless integration of online sales platforms with back-office systems for order fulfillment, inventory management, and customer service, ensuring real-time data synchronization and enhanced customer experience.
  • EDI in supply chain: EDI facilitates seamless communication and data exchange to optimize inventory levels, reduce lead times, and enhance overall supply chain visibility and efficiency.

Key indicators that you need an EDI upgrade

Deciding whether it’s time to switch EDI provider or upgrade an EDI system involves analyzing current processes and defining limitations of your EDI software. Here are some signs that may indicate it’s time for a change:

It’s important to be vigilant for performance issues and opportunities for cost optimization in your company. Additionally, consulting with IT professionals or EDI experts can provide recommendations suitable for your organization.

 

How to choose the right EDI software

For many years, electronic data interchange has been a cornerstone of communication in industries such as retail and manufacturing. By facilitating rapid and efficient data exchange among business entities, EDI aids companies in saving both time and costs. However, as these corporations evolve and scale, they often encounter limitations with their existing EDI systems, realizing the necessity for solutions better aligned with the demands of a dynamic business landscape.

To find the right EDI provider, conducting in-depth analysis of your company's current data exchange processes is necessary. This enables you to define the needs and limitations of your current solution, as well as identify additional features that could enhance data exchange in the future.

What other criteria should you consider to find the best EDI provider for your business?

  • Cloud-based EDI solution
  • Global presence
  • Compliance with legal requirements for data exchange
  • Seamless integration with your infrastructure
  • Experience
  • Support during EDI migration and maintenance
  • Technical flexibility and security

With a multitude of EDI solution providers on the market, selecting the right one for your organization can be challenging. Make an informed decision by diving into the key factors to consider in our article. Choose the best EDI provider that will meet your company’s needs and ensure seamless integration and efficiency.

The future of EDI

Electronic data interchange solutions have long been instrumental in facilitating information flow between businesses. Despite the uncertainty surrounding its future, with some experts touting Internet services and API interfaces as potentially cheaper, faster, and more flexible alternatives, it's unlikely that these solutions will completely replace EDI systems. Instead, they are expected to complement and enhance them.

APIs enable direct communication between applications, while web services offer similar functionality over the internet. Cloud-based integration platforms such as iPaaS leverage both technologies and are increasingly prevalent in supply chain management. However, APIs and Internet services still have limitations, including a lack of standards, incompatibility with older systems and operations, and issues integrating with supply chain processes.

The future of EDI hinges on its adaptability to individual business needs. Selecting a provider that takes a holistic approach, focusing on macro results rather than specific protocols, is crucial for preparing your business for the future.

How Comarch can help

Deciding between in-house vs. outsourced EDI and selecting the right EDI provider is crucial for the success of your business. As electronic data exchange continues to flourish with no signs of slowing down, it's imperative to future-proof your operations with Comarch.

Comarch EDI (Electronic Data Interchange) is a cloud-based B2B2G platform, which enables the automation of business processes through fast and secure data exchange, connecting partners in the supply chain worldwide, regardless of the business sector.

In an accessible, modern and comprehensive way, it enables business communication, allows the full management of supply chain, purchasing and sales processes, increases the efficiency of cooperation by synchronizing data with partners, and manages full data flow and control. It offers a range of solutions for everyone, from support for automatic processes of document transmission processes and full integration, through web service solutions and APIs, and a web portal that does not require any integration.

Comarch EDI is a cloud-based platform that upholds the highest security standards for your data exchange processes. With a global reach and decades of experience, we deliver state-of-the-art technology that facilitates automation across various business operations.

Comarch offers flexible solutions tailored to companies of any size. Our Comarch WEB-EDI ensures reliable data exchange even with the smallest trading partners, while the EDI Integration Platform seamlessly integrates with your organization's internal systems such as WMS and ERP, as well as external partners.

Secure your data exchange processes with confidence using Comarch EDI.

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