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What is Electronic Data Interchange (EDI)

What is Digital Knowledge Interchange (EDI)?

As a concept, EDI (Electronic Data Interchange) isn’t a new one. In fact, it can be traced all the way back to the Berlin Airlift in 1948. Put simply, EDI systems automate and simplify the process of exchanging key business documents – such as invoices, purchase orders and shipping notices – principally with partners, suppliers and customers. EDI documents deliver a formal structure for the delivery of information to allow the data to be exchanged effectively.

So what is EDI? The most accurate EDI definition is the computer-to-computer exchange of business documents in a standard EDI document format between business partners. By moving from a paper-based exchange of business documents to EDI documents, businesses enjoy major benefits such as reduced cost, increased processing speed, reduced errors and improved relationships with business partners. EDI transactions are processed much faster and with less human intervention. In addition, the best EDI software and services can integrate into back-end systems such as ERP and accounting platforms to enable the end-to-end processing of key business documents.

Since its widespread adoption in business in the 1980s, EDI has become a core part of the IT infrastructure for businesses across a wide range of industry sectors. It continues to grow today. In the healthcare industry alone, the most recent estimates suggest the EDI market will be worth $5.9 billion by 2025 – an annual growth rate of 9.4%.

One of the reasons for the continued prominence of EDI technology is its ability to span business documents from several key business processes. For example, EDI payments and EDI invoices, rather than the paper variety, allow companies to process order information faster and more accurately. And, it’s within EDI payments and EDI invoicing that the technology developed to include EDI shipping documents for instance, and help give insight into global shipping transactions, warehouses and distribution centers.

In addition, EDI goes beyond the exchange of structured data to allow organizations to benefit from EDI transactions across their supply chain. EDI technology also allows for secure file sharing – including Managed File Transfer – that can help departments such as engineering to exchange large CAD or Product Lifecycle Management (PLM) files.

What are the benefits of EDI?

Electronic Data Interchange software and services hold many benefits for those organizations that get it right. The best EDI solutions can generate dramatic increases in performance while delivering improved accuracy in the transfer of business-critical information. Automated processes, optimized for full effect, directly from computer to computer, can perform much more quickly than manual processes – and with a measurably higher degree of accuracy.

With paper documents replaced by EDI transactions, electronic logs built into the processes facilitate easy and quick EDI tracking and audit handling activity. This enhanced transparency of data helps businesses increase their ability to measure performance and instigate improvements throughout their supply chain. Benefits include:

  • Cost reduction
    Expenses associated with paper, printing, reproduction, storage, filing, postage and document retrieval are all reduced or eliminated when you switch to EDI transactions, lowering your transaction costs by at least 35%. A major electronics manufacturer calculates the cost of processing an order manually at $38 compared to just $1.35 for an EDI order.
  • Time saved
    The transfer and processing of EDI documents can take seconds or minutes instead of days, gaining time for executives to focus on more pressing tasks. Estimates suggest that EDI can speed up your business cycles by 61%.
  • Enhanced accuracy
    EDI invoices can be issued and processed with no need to transcribe the invoice when it’s received, resulting in a significant reduction in the potential for data entry error. Research shows a 30-40% reduction in transactions with errors—eliminating errors from illegible handwriting, lost faxes/mail and mistyping. Similarly, EDI payments that are transferred from the buyer’s computer through a secure network to the vendor’s computer do not need human contact throughout the process of the transaction.
  • Security
    Relying on electronic transmission, the EDI document doesn’t have to be passed through any insecure channels, such as post or third-party delivery services. It will be passed directly to its desired recipient promptly and securely. These secure file sharing capabilities build trust and cooperation across your trading partner community.
  • Improved efficiency
    The buyer gets rapid confirmation that their EDI payment documents have been received, further helping to speed up the ongoing process. Quick processing of accurate EDI documents leads to less re-working of orders, fewer stock outs and fewer cancelled orders. In addition, shortening the order processing and delivery times mean that organizations can reduce their inventory levels.
  • The complexity of EDI solutions
    The best EDI tools can lead directly to reduced cycle times, reduced overheads, enhanced accuracy and improved efficiency. In an era of digital transformation, EDI solutions have been a forerunner of using digital technologies to dramatically improve the performance of paper-based business processes. So why is EDI not part of every business? The short answer is that EDI can be complex. Any Electronic Data Interchange definition has to make note of the number of EDI standards and communication protocols there are. Common EDI standards include EDIFACT and ANSI X.12 but there are wide variety of flavors within a standard. For example, by the late 1990s, there were 100 different standards for X12 alone. In addition, many different industries developed their own flavour of EDI to suit their specific needs – such as ODETTE in automotive, RosettaNet in High tech and Tradacoms in retail.

What types of EDI communication models are there?

All EDI systems vary, as does each organization’s individual requirements, but it’s worth taking the time to determine the best EDI communications model for your business that will help you deliver an effective EDI program.

  • Direct Connect
    Connecting directly with each business partner works well if your community size remains small and if everyone agrees on a single connectivity protocol. Your organization is responsible for all mapping, translation, technical support and reporting.
  • On-premises B2B software
    In an on-premises deployment, EDI software applications are stored securely at your offices and behind your firewall. You have complete control over all aspects of your EDI system including security, access and data integrity. However, your IT staff will require the skills and expertise to maintain and manged the system.
  • Value-Added Network (VAN)
    The EDI Network provider facilitates the exchange of electronic documents via its “document mailbox” service which all parties connect to. This approach relieves all community members of the responsibility for supporting all communications issues, ensures data security and non-repudiation. Furthermore, the “value added” capabilities in the best VAN providers, can and should include increased visibility, enhanced alerting and custom analytics to help optimize your business processes and enable you to make better business decisions.
  • Managed Services
    A B2B managed services provider receives your business documents directly from your ERP system (SAP, Oracle, etc.) and assumes responsibility for all the mapping, translation, technical support, data center operations and ultimately, for delivery and reporting.

Working with an EDI provider

Over the years, there have been a number of types of EDI solutions that have developed. These include web-based portal and online forms that let small businesses exchange key business documents with their large customers. However, the cost and complexity of EDI for larger organizations mean that more and more companies are looking to work with EDI providers. An EDI provider can take care of all the technical aspects of EDI – including EDI mapping and compliance – meaning the organization can quickly benefit from EDI transactions without the need for specialist EDI skills and resources internally.

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