What is EDI and How It Works?
EDI or Electronic Data Interchange is a communication technology of exchanging business documents like invoices, purchase orders, sales orders and advanced shipping notices, in a standard electronic format, as an alternative for traditional paper-based communication. This is a computer-to-computer communication mechanism where you don’t need to rely on people as in regular Fax, Postal services or Email services. Electronic Data Interchange proves its worth by increasing efficiency, improving accuracy and lowering costs in the business world.
Which Industries suit EDIRetailManufacturingPharmaceuticalHealthcareAutomotiveEnergyFinancial ServicesLogistics
Since EDI file exchange is computer-to-computer, those documents should be written in a machine-readable format. So EDI documents should be generated according to a standard format agreed by each party involved in communication. EDIFACT, ANSI ASC X12, TRADACOMS, HL7, GS1 EDI and ebXML are some of the popular standards in use.
So before starting the transactions, all the business units in the communication thread should agree upon the same standard and the same version of the standard.EDI Translators/EDI translation software
The requirement of an EDI translator arises when the organizations need to convert either human-readable enterprise-specific documents into above standard EDI formats or convert EDI documents into enterprise-specific documents. Companies can purchase a translator from a service provider, or – if the inhouse technical team is capable – they can develop their own.
If the EDI translator is integrated with the company’s internal systems, the conversion process will be rather efficient, without manual data feeding. EDI translator will extract the required data and automatically convert EDI documents into a data structure that is compatible with the enterprise, and then route them to company systems without human intervention.EDI Transmission Methods
There are different EDI transmission methods to develop a communication bridge among business entities. According to the business requirements, technical skills, budget, number of transactions, payload size, etc, there are many EDI transmission methods available for B2B trading. Direct EDI, Indirect EDI/Value-Added Network (VAN)/Network Services Providers, Hybrid EDI (Direct EDI + Indirect EDI), EDI via AS2, and Web EDI are some of the popular EDI transmission methods used among business partners across the globe.EDI Transmission Protocol
There are many standard protocols to transmit EDI documents and some of them are:HTTP/HTTPSAS1AS2AS3AS4FTP, SFTP and FTPSSCPOFTP
When companies are going for an EDI solution, both trading parties (sender and receiver) must agree upon the same protocol and use a compatible transmission software for communication.EDI Transmission Software
An EDI transmission software facilitates the communication bridge between trading partners. Once the partners agree with a particular EDI standard format and a transmission protocol, they have to find software which provides communication using that protocol. Then companies will add each other as their trading partners in each of their transmission software and do the necessary configurations. There is open-source software like Mendelson and OpenAS2, JSCAPE and Axway, in the market. Some of these may support more than one protocol for transmission. There is also some software which provides both translation and transmission together, where users can directly integrate their document exchange interface with their internal systems.
Let’s say an Automotive Manufacturing company needs to buy some vehicle spare parts from a vendor. To do that, the manufacturing company procurement system generates a Purchase Order (PO) as a CSV file. The EDI translator software will extract the order details like the item, quantities, and agreed prices, and convert that retrieved data into an EDI document, and send it to the vendor via an EDI transmission software.
When the document reaches the vendor’s EDI transmission software, it will transfer the EDI document to the translator. The translator will retrieve order details and convert the document to a format which the vendor’s sales order system can read. Then the retrieved data will be fed to the vendor’s sales order system without any manual data entry. Sales order system will generate an invoice and transfer the document to the buyer following the same procedure.
BenefitsEfficiency is one of the main advantages of Electronic Data Interchange. In Electronic Data Interchange, sending and receiving business documents can be done within a few seconds, where it takes days and weeks if the documents are exchanged via postal services. This will surely reduce the costly delays of transactions, saving both time and money.
Computers process EDI documents without human interactions. This improves the accuracy of the exchanged data by minimizing data entry errors in manual keying and typographic errors in handwritten documents. Therefore, the time and cost of reprocessing erroneous documents will be eliminated.
Unlike in traditional postal services, there’s no need to inspect and follow up each stage of a B2B transaction. If the delivery is successful, the message sending party will get a receipt of acknowledgement within a few seconds. Even if there’s something wrong in a transaction and the documents get rejected, there’s always the ability to correct and retransmit them without any delay.
Automating paper-based tasks eliminates the labor-intensive processes and improves the productivity of the labor force. Therefore, the staff can use the excess time to concentrate on critical tasks which need more attention.
Electronic data exchanges eliminate redundant tasks and avoid generating duplicate documents.
EDI reduces the cost of printing and postage of paper documents and the cost associated with the long transaction process.Electronic Data Interchange enhances the security of transactions by sharing data over secure protocols like AS2, SFTP, etc.
It improves traceability by providing real-time status reports. By integrating EDI software with companies’ internal systems, users can easily collect business data and analytics.
EDI is like a common language where companies all around the world link together. This helps both large and small companies to expand their marketplace.
It is an environment-friendly replacement for tons of paper-based documents exchanged in large scale companies daily. This helps corporates to pay off their social responsibilities and maintain positive goodwill.LimitationsWhen going for Electronic Data Interchange, the migration process might be quite expensive for smaller companies. The initial setup is way more time-consuming.
Companies may have to rearrange hardware resources and redeploy software to be compatible with the new system. Network security considerations might be quite complicated since transactions happen electronically. But companies can eliminate these problems to a great extent by using cloud-based EDI solutions.There are too many EDI standards. So, it’s hard to cooperate with multiple partners with different standards. If one partner’s EDI document format is not supported by the other party, those messages will be rejected by the receiving EDI translator.Since this migration affects the whole business process and the organization structure of the company, aligning and re-educating staff to the new automated system is quite challenging. A resistance to change might also arise among employees.Conclusion
EDI allows transacting business documents electronically across trading partners, increasing the efficiency of transactions and productivity of staff, improving the accuracy of data and reducing the unnecessary costs associated with paper invoices. There are different EDI transmission methods and standards which support communication in a variety of industries. The strategic business level shows the highest benefits of EDI based operations. Hence, companies should focus on the big picture when moving to Electronic Data Interchange.