February 9th, 2022
What Is EDI?
EDI, or electronic data interchange, is a simple way of exchanging B2B documents in a completely electronic form.
EDI eliminates paper and enables automated data exchange between business partners. EDI documents contain the same information as their paper counterpart—for example, an electronic invoice would have all the same elements (date, item, item number, cost, etc.) as a paper invoice, but there’s no need for anyone to spend time sifting through dozens of invoices a day to find what they need—EDI documents automate that process for you by creating standardized electronic messages (business documents) between business partners and making those documents available in a single location, most likely an Enterprise Resource Planning (ERP) system.
EDI is time saving, cost effective, and helps to eliminate mistakes that can be made during manual processing.
How is EDI Formatted?
All EDI messages conform to certain rules. These rules vary by syntax, codes, message designs, and identification values, all determined by the standard that’s being used (more on standards below). Syntax rules, for example, determine the order of element arrangement within a message, while codes are used to show common information such as dates or country codes.
Before we continue, it’s important to note that EDI isn’t a standard in and of itself. It’s more a general term used to describe data that is exchanged in a standardized format.
While the vast majority are based on XML format, quite a few standards exist for EDI (hundreds, actually), many of which we’ve written about in more detail in other blogs, like this one: Intro to EDI Standards & Subsets. These standards exist because every company has different needs when it comes to document exchange depending on their country and/or industry. For example, North America uses ANSI X12, while most of Europe uses the international UN/EDIFACT standard.
Most EDI standards are made up of three components: elements, segments, and transaction sets. These are also defined by the standard that they follow.
Elements: The individual items of information that make up the segments. For example, an element could be as simple as a number that represents quantity in a purchase order.
Segments: A combination of the individual elements that provides information about the nature of the document.
Transaction Sets: A combination of segments that determine the complete message.
Here’s an example: ANSI X12 (American National Standards Institute X12) was developed in 1981 and is a comprehensive EDI standard that establishes rules for consistent electronic document exchange. ANSI X12 is used in a variety of ways; each industry (transportation, retail, banking) has its own subset (set of rules/syntax structure). One of the most prevalent sub standards is HIPAA due to the national standards for sharing personal healthcare information, but regardless of subset, each message is represented as a transaction set, a common one being EDI 810 (AKA, an invoice).
Feeling a little overwhelmed? This glossary may help.
What Is EDI Capable?
Now that we’ve covered the basics, it’s a good time to address some common industry jargon that you’re sure to hear at some point or another if you’re dealing with electronic document exchange: EDI capable and non-EDI.
Being EDI capable simply means that you are able to send and receive business documents electronically while aligning with specific standards. It also means that you can connect to global trading partners easily and over a secure network. Quite the opposite, a non-EDI trading partner is one that lacks these capabilities. This most often indicates that the trading partner has not (yet) implemented the technology required to create and send electronic documents.
Speaking of technology, that brings us to a critical component of all electronic exchanges between business partners: EDI mapping. This is the process in which the data that you provide is translated into a format that can be understood by the receiving system (that of your business partner). The data you provide may have been generated by your ERP, but depending on the technology you use, your initial data could also be something like a PDF invoice. So, for example, if you’re a supplier and have to send an invoice to one of your customers and you create your invoices in an ERP system, your EDI technology will automatically transform the format your ERP has generated (e.g., ANSI X12) into the format required by your customer (e.g., IDoc).
If you’re interested in learning more about EDI mapping, we’ve written extensively on the topic here: EDI Mapping 101: Direct vs. Canonical Data Model.
Once the data has been converted into the appropriate format by means of the EDI technology, it then has to be sent in the correct way. That’s where communication protocols come into play—also known as communication or transmission methods. In any case, it refers to the delivery method. You can think of the transmission method as the postal service that delivers your letter, for example, FedEx. But FedEx isn’t your only option for mailing a letter—the same goes for sending documents via EDI, a common delivery method being AS2.
Business partners agree on a transmission method in their initial trade agreement—along with the required EDI format—so the rules for sending electronic documents are always clear. 9.9 times out of 10, it’s the buyer that sets these rules.
When you adopt EDI into your business, you’re setting up a secure workflow between you and your trading partners to ensure seamless electronic document exchange. This requires integration, which can be executed in house but is more often than not outsourced to a third-party SaaS provider like TIE Kinetix. As long as you’ve determined the standards (data formats) and protocols (delivery methods) with your trading partners, it’s easy to get started.