July 29th, 2020
Updated on May 22nd, 2023
EDI stands for Electronic Data Interchange. It’s defined as the computer to computer exchange of business documents in a standardized format. These business documents (purchase orders, invoices, advance ship notices, etc.) are called transaction sets. Organizations that exchange EDI transaction sets are called trading partners.
Electronic data interchange is necessary for most B2B transactions in today’s business environment. That's mainly because it has the potential to dramatically improve supply chain efficiency, as well as reduce costs and much more. The ability for trading to partners to exchange documents electronically means that they are EDI capable.
How Does EDI Work?
To begin our EDI 101 crash course, here's an analogy: Think of EDI as an electronic postal service.
Imagine that envelopes with important business documents are exchanged between a sender and a receiver. The only catch is that these envelopes have to be mailed with the receiver’s preferred stamp.
In other words, the envelopes must follow mutually defined standards. Otherwise, the document is not accepted and returned to the sender. To be capable of these exchanges, it is necessary to utilize EDI software. This software acts as the postal service that ensures the delivery.
EDI has been around for a long time. We can trace its origin back to the early 1960s when Edward A. Guilbert standardized the first pre-EDI messages. To do this, he expanded upon the manifests he had developed with U.S. Army officers during the 1948 Berlin airlift. It was initially introduced as a method to electronically exchange data between suppliers and military troops.
1975 – The first electronic data interchange standards were published by the Transportation Data Coordinating Committee. This committee was created in 1968, with Edward Guilbert as president, and majorly contributed to the first EDI standards.
1978 – The Transportation Data Coordinating Committee was renamed to the Electronic Data Interchange Association. It was then chartered by the American National Standards Institute as the ANSI X12 committee.
1981 – The first ANSI X12 standards were published. These standards included specific rules for the transportation, food, drug, warehouse, and banking industries.
1985 – The United Nations enlisted the help of ANSI X12. Together, they created a global standard, UN/EDIFACT (Electronic Data Interchange For Administration, Commerce, and Transport).
1990s – EDI became mandatory for many retailers in the healthcare industry. Because of this, there was a huge spike in its use. This introduced a whole new level of electronic data interchange, mainly related to security and encryption.
The first EDI VANs (Value Added Networks) were also introduced on the internet in the 90s. That's when the EDIINT/AS1/AS2 communication protocol began to be put into practice.
2000s - Rumors predicted that EDI would soon be dead with the rise of XML. At the same time, online ordering exploded. Online retailers began to mandate that all of their suppliers use EDI to exchange business documents.
Today, rumors of the 2000s are proven to be just that—rumors. It is definitely not dead. In fact, over 90% of retail enterprises worldwide require their partners to adopt EDI in order to do business with them. More and more small businesses are becoming EDI capable as well.
Trading partners that send documents electronically must follow the same standards to format their business critical data. Standards are the rules (structure, content, syntax) that define the language used to exchange data between trading partners. These standards ensure a commonly understood meaning across different systems.
Most trading partners use the following EDI standards:
ANSI X12 - American National Standards Institute X12
UN/EDIFACT - EDI for the Facilitation of Administration, Commerce, and Transport
Commonly used international standards are:
GS1 - Global Standards 1
Peppol - A set of open and interoperable technical specifications across purchase-to-pay (P2P) business processes
Why Use EDI Standards?
Standards take the guesswork out of understanding the content of a business document. Here are a few big reasons that standards have been adopted in B2B transactions:
- Different computer hardware around the world
- Different internal business systems (ERP’s, WMS’s, etc.)
- Different operating systems
- Different programming languages
- Different file structures
- Different character sets and languages
Once you have the standards covered, you need mapping. Mapping is crucial to ensure that data is translated into another format and integrated into your internal system. This could be anything from your ERP to your Warehouse Management System (WMS).
Some sort of communication method is required to transmit, or send, data between trading partners. The following are the main EDI communication options:
Value Added Network (VAN)
A value-added network (VAN) is a private, hosted service that provides a secure way to exchange electronic messages between companies. It’s basically a secured electronic postal service for trading partners.
Direct connections allow trading partners to transmit data directly between one another. This happens via secured protocols, which help determine how the data is delivered.
Direct connections offer full control over EDI operations. The downside is that this requires an investment in EDI software. Additionally, it requires a team of IT experts to manage the environment.
Commonly used protocols are:
- AS2, AS3, AS4, etc.
- FTP, sFTP, FTP/S, HTTPS
- IP over VPN
Web-based EDI is ideal for small companies with no technical staff and limited funds. It uses a portal that helps trading partners to transform documents into human-readable web pages. It is useful for companies that must quickly become EDI compliant. But to be clear, this method requires manual intervention.
Companies that don’t want to manage an on-premise environment may choose to outsource. This typically involves selecting a third-party provider to manage EDI implementation, trading partner onboarding, and daily maintenance and support.
Paper-based documents can be converted to true electronic documents with 100% accuracy. This eliminates the manual processing involved with traditional EDI. It also has the potential to automate all non-enabled partners.