Electronic Data Interchange (EDI)

What is electronic data interchange (EDI)?

Electronic data interchange (EDI) is the exchange of purchase orders, invoices, shipping notices, and other business-related documents between companies. EDI allows businesses to automate their supply chain processes and increase efficiency by reducing paper-based communication.

EDI standards define electronic document structure and format, guaranteeing both parties can understand and process the data. To facilitate data exchange between two or more computers, many users turn to EDI software.

Types of EDI

Several types of electronic data interchange are used in different industries and applications. The choice of EDI type depends on the needs of the business, the industry, and the trading partners involved. 

• Direct EDI involves connecting two trading partners without using a third-party network. Direct EDI requires both parties to have the necessary hardware and software to establish a secure connection.
• Value-Added Network (VAN) EDI uses a third-party network provider to facilitate the EDI document exchange between partners. The VAN provider is an intermediary that makes sure data is transmitted securely and reliably.
• Internet EDI uses the internet as a communication medium to exchange EDI documents between trading partners. Internet EDI uses standard internet protocols, such as file transfer protocol (FTP), to securely move data.
• Applicability Statement 2 (AS2) EDI is a popular type of internet-based EDI that uses the AS2 protocol to securely exchange documents over the internet.
• Mobile EDI allows users to access EDI systems and data from mobile devices such as smartphones and tablets. It’s useful for businesses with a mobile workforce or those that require real-time access to data.

How does electronic data interchange work?

Electronic data interchange allows two or more trading partners to exchange business documents in a standardized, electronic format. Partners follow these basic steps to complete an EDI transaction.

• Setup. The trading partners agree on the specific documents they’re going to exchange and the EDI format they plan on using. They also establish a communication protocol and security measures for data transmission.
• Document preparation. The sender creates the electronic document in the specified EDI format using their internal systems or software. The document is then translated into an EDI message using EDI software.
• Message transmission. The sender sends the message to the receiver using a secure communication protocol such as AS2 or FTP. The recipient's EDI software receives and interprets the message.
• Message translation. The recipient’s EDI software translates the message into a readable format that can be imported into their internal systems or software.
• Document processing. The recipient processes the EDI document using their internal systems or software. This includes updating inventory, generating invoices, or initiating shipments.
• Acknowledgment. The recipient sends an acknowledgment message back to the sender to confirm the EDI message’s arrival. It makes sure both parties have received and understood the message.

Benefits of electronic data interchange

EDI transactions are a primary method for exchanging documents between small and large firms. Through automation and business-to-business (B2B) integration, EDI technology offers several essential business advantages.

• Saves time and money. Automating manual, paper-based processes with EDI technology leads to fewer costs.
• Improves accuracy. Businesses can process more documents with high precision quickly, increasing efficiency and productivity.
• Reduces error. Due to strict standardization, EDI data transfer avoids errors by ensuring information is correctly prepared before entering corporate processes or applications.
• Enhances traceability. As electronic documents can be integrated with various IT systems to support data collection, visibility, and analysis, EDI integration enhances traceability and reporting.
• Fosters positive customer experiences. Through effective transaction execution and prompting, dependable products, and proper service delivery, EDI automation supports favorable client relationships.
• Provides consistent benefits. EDI enables large organizations to establish standards among trading partners. Adherence to EDI enables smaller organizations to integrate with larger businesses with significantly greater financial resources.

Best practices for electronic data interchange

Following these recommended practices guarantees that an EDI system runs smoothly and efficiently, improving supply chain operations while lowering costs and errors. 

• Use standardized formats for EDI documents to encourage consistency and compatibility between trading partners.
• Test and validate all EDI transactions before going live so everything works correctly.
• Maintain accurate data in internal systems to avoid errors and discrepancies in EDI transactions.
• Monitor and track EDI transactions to make sure they’re processed correctly and promptly.
• Use secure communication protocols such as AS2 or FTP to protect sensitive data during transmission.
• Establish clear procedures to reduce the possibility of conflicts and determine explicit protocols for handling EDI exceptions, errors, and disputes.
• Create a backup plan in case the EDI system fails, or communication issues arise.
• Educate staff members involved in EDI transactions on system usage and recommended practices.
• Stay updated to keep the system compatible with trading partners. Continuously improve and understand the most recent EDI standards and technologies.

Electronic data interchange vs. applicant programming interface

It’s common to confuse electronic data interchange with application programming interface, but the two are different. 

Electronic data interchange is the most widely-used communication technique for efficiently transferring information from system to system. EDI provides firms with a quick and secure means of transferring data to other organizations instead of using paper. It uses standardized electronic formats to make it simple for computers to process the data, considerably decreasing or even eliminating the need for manual labor.

An application programming interface, or API, is a collection of standards and programming guidelines for using web-based software applications that enable platform-to-platform communication. An API acts as an interface between software programs to facilitate successful e-communication, much like a user interface facilitates communication between people and computers. 

Learn more about APIs and how they improve application development.