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What is EDI

What is EDI: Electronic Data Interchange?

EDI, or Electronic Data Interchange, is a technology that helps trading partners and organizations get more done, speed up logistics timelines and eliminate manual errors by automating business-to-business (B2B) communications. EDI helps many organizations that produce, ship, purchase and sell goods or provide care, from retailers and manufacturers to logistics firms, airlines, healthcare providers, insurers and more.

Many business documents can be exchanged using EDI, but the two most common are purchase orders and invoices. At a minimum, EDI replaces the mail preparation and handling associated with traditional business communication. However, the real power of EDI is that it standardizes the information communicated in business documents, which makes possible a “paperless” exchange.

Though it’s been in use since the 1960s, EDI is finding new use today, enabling supply chain automation, digital transformation and even as a key part of workflow and business process automation. In this rundown, we give you a solid understanding of EDI and quickly introduce you to all the basics of EDI.

1. What is EDI?

Electronic Data Interchange (EDI) is the automated, computer-to-computer exchange of standard electronic business documents between business partners over a secure, standardized connection.

Let’s break down this EDI definition, piece by piece, to give you a full sense of what EDI is and means.

1.1 Computer-to-Computer

  • EDI replaces manual B2B communications, such as postal mail, fax and email.
  • Documents flow directly from the sender’s computer application (e.g. a logistics system) to the receiver’s computer application (e.g., an order management system).

Traditional Manual Process

Automated EDI Process

1.2 Business Documents

  • 1000s of standard business transaction documents can be sent automatically using EDI.
  • Some common examples include: purchase orders, invoices, shipping statuses, customs information, inventory documents and payment confirmations.

1.3 Standard EDI Format

  • EDI documents are processed by computers and use standard, computer-friendly formats.
  • Standards describe each piece of data and its format (e.g., type of document, parties involved, actions to take, mmddyy).
  • Standards eliminate company-to-company variations, allowing each business partner’s computer system to speak a common language.
  • There are a variety of EDI standards for various industries, regions and use cases – each with different versions, so EDI partners must use the same standard and version
  • Popular standards include: ANSI X12 in the U.S., UN/EDIFACT globally and industry-specific standards, such as HIPAA

1.4 Business Partners

  • The exchange of EDI documents is typically between two different organizations, referred to as business partners or trading partners.
  • Example: Company A may buy goods from Company B. Company A sends Purchase Orders to Company B, which sends Invoices and Shipment Notices to Company A.

1.5 Secure, Standardized Connection

  • EDI uses a range of secure protocols to facilitate the secure exchange of EDI documents.
  • Partners must use the same, agreed-upon protocol to exchange EDI files or work with an intermediary who can facilitate exchanges if the partners use different protocols.
  • Some protocols require more EDI technology infrastructure than others, but EDI software, such as ArcESB, now facilitates exchanges with minimal investment.
  • The protocols range from long-established technologies, such as FTP, to web-based EDI via AS2, API-based systems, such as AS4, and other options, such as mobile EDI.

1.6 Automation

  • EDI messages can be sent automatically using pre-configured workflows.
  • Businesses typically use EDI translators – either as software or via an EDI service provider – to translate EDI documents for use in internal applications, enabling automated processing.
  • Processes can be extended to work with data integration and workflows within an organization.
  • Example: once a company receives an EDI Purchase Order, the logistics system generates a task for warehouse staff to move goods from inventory to shipping.
EDI Facilitates Business Process Automation

1.7 EDI vs. Traditional Paper or Email Communications

To illustrate the meaning of EDI, or electronic data interchange, let’s compare how a typical purchasing transaction would go between two trading partners using traditional paper or email communications vs. using EDI.

Traditional methods:

  • The buyer either receives a notification in his system to place an order, or, after querying the inventory, determines he needs to place an order.
  • The buyer enters data onto the screen of a purchasing system to create the PO, prints and mails it or emails it to the vendor.
  • The vendor receives the PO, either days later or via email (along with a long list of other communications) and manually enters it into the sales order system.
  • The vendor prints an invoice and encloses it with the shipment and/or sends it separately by mail or email.
  • The buyer manually enters the invoice into the accounts payable system.

In this example, a paper system can add a week of back-and-forth shipping time to the process. Both email and paper are susceptible to manual data entry errors, lengthening order time.

EDI process:

  • The buyer’s procurement system, which uses EDI, auto-generates and sends an EDI-formatted PO when inventory reaches a pre-specified level.
  • In minutes the vendor’s sales order system, using EDI software, receives the EDI PO.
  • The supplier’s system automatically notifies their shipping department to send goods.
  • Once the goods are packed and ready to ship, the shipping system generates an Advanced Ship Notices (ASN) to send to the buyer’s receiving department
  • The vendor’s ERP system then generates an EDI invoice to transmit to the buyer’s accounts payable system

The entire EDI process can be completed in an hour.

1.8 Traditional & EDI

The process improvements that EDI offers are significant and can be dramatic. For example, consider the difference between the traditional paper purchase order and its electronic counterpart:

A Traditional Document Exchange of a Purchase OrderAn EDI Document Exchange of a Purchase Order
This process normally takes between three and five days.This process normally occurs overnight and can take less than an hour.
Buyer makes a buying decision, creates the purchase order and prints it.Buyer mails the purchase order to the supplier.Supplier receives the purchase order and enters it into the order entry system.Buyer calls supplier to determine if purchase order has been received, or supplier mails buyer an acknowledgment of the order.Buyer makes a buying decision, creates the purchase order but does not print it.EDI software creates an electronic version of the purchase order and transmits it automatically to the supplier.Supplier’s order entry system receives the purchase order and updates the system immediately on receipt.Supplier’s order entry system creates an acknowledgment an transmits it back to confirm receipt.

1.9 The Function of EDI

So, how does EDI work?

In a traditional purchase order document exchange, the entire cycle could take anywhere from days to weeks.

Below you can see an example manual process showing the traditional document exchange for a purchase order:

  1. The buyer creates a purchase order
  2. The buyer prints the purchase order and then sends it to the supplier via the mail, fax, or email
  3. The supplier receives the purchase order and manually enters it into its own order management system (Netsuite, Salesforce, Quickbooks, SAP, etc.) 
  4. The supplier creates an invoice
  5. The supplier prints the invoice and then sends it to the buyer via mail, fax, or email.
  6. The buyer receives the invoice and manually enter the invoice contents into its own back-end systems

Oftentimes, there are far more steps than the ones outlined in the below diagram, including acknowledging the purchase order reception or requesting changes to an invoice. 

1.10 EDI systems

Different types of EDI are implemented to suit the business’s needs, capabilities and budget — assisting multiple consistent business partners, supporting partners around the globe or in other situations. Methods include Direct EDI (point-to-point); EDI via VAN or EDI network services provider; EDI via E S2; EDI via FTP/VPN, SFTP or FTPS; Web and Mobile EDI; and EDI outsourcing.

Direct EDI: With Direct EDI, one connection is created between two business partners. Larger businesses might choose this method if they have numerous transactions with the same partner per day.

EDI via VAN (value-added network), EDI Network Services Provider: This model protects businesses from the complications that come from supporting the many communication protocols that are required when dealing with multiple business partners. It is a secure network where documents are transmitted between business partners.

EDI via Applicability Statement version 2 (AS2): This communications protocol securely exchanges data over the Internet. Two computers (a client and a server) connect in a point-to-point mode through the Internet. AS2 is sent securely in an envelope that uses digital certificates and encryption.

EDI via FTP/VPN, SFTPS, FTPS: file transfer protocol (FTP) over Virtual Private Network (VPN), Secure File Transfer Protocol (SFTP) or File Transfer Protocol Secure (FTPS) exchange documents through the Internet, connecting business partners directly.  These protocols encode data during transmission from one business to the other, to protect sensitive information. Data are decrypted upon arrival.

Web EDI: EDI is directed via Internet browser, duplicating paper-based documents into Web forms that contain fields where users enter information. It is then automatically converted into an EDI message and sent via secure Internet protocols.

Mobile EDI: This method enables the transmission of documents through mobile devices.

Managed Services: Managed services systems outsource the EDI document control to a third-party provider.

2. EDI document types

Various types of EDI document definitions exists for almost all types of business and domains, and these are usually called transaction sets. Different EDI standards would define similar documents or transaction sets to describe the same information. For example the X12 810 and EDIFACT INVOIC describe an invoice. The most recent X12 version 8010 defines 321 document types with 3-digit numbers. Here are a few examples.

2.1 EDI Transaction Set Definitions

The EDI standards used such as X12 or EDIFACT, defines the structure of the documents. The structure can depend on the version of the standard used. The X12 standard uses version numbers such as 4010, 5010 or 8010 etc, while EDIFACT versions are of the form D93A or D96A etc. The image below shows a page from a typical X12 document or transaction definition. The example is for an X12 810 transaction set, and this ‘overview’ page defines the overall structure of the document as a collection of ‘segments’.

The transaction set defines the document as starting with the segment ‘ISA’, and that segment being ‘Mandatory’ and occurring at most ‘1’ times at that position defined. This is followed by a ‘GS’ segment, also mandatory and occurring only once. Next an ‘ST’ and ‘BIG’ segment are defined in sequence, followed by an optional segment ‘REF’, which can occur at most 12 times at that position. So at a high level, one can form a mental picture of the EDI document structure defined, to be of the following form


This is exactly what’s conveyed by the definition. Although we’ve used a line break in the example above to separate each segment, EDI usually does not use line breaks and instead uses a pre-defined ASCII character as the segment separator.

2.2 Loops in EDI

A Loop in EDI refers to a repeatable sub-collection of related segments. Consider the loop ‘N1’ in the above definition. Here the loop can repeat upto 200 times and each loop occurrence shall consist of the segments defined as that loop. In the example ‘N1’ loop, only a single segment ‘N1’ occurs once for each loop iteration. However, loops can be complex hierarchies and can contain other loops, such as the ‘IT1’ loop which contains two sub loops ‘PID’ and ‘SAC’.

2.3 Segment and Element Separators

EDI files typically does not contain line breaks. Instead, each segment will be separated by a special character chosen as the ‘Segment separator’. The segment separator can be chosen by each partner, and commonly used characters include the tilde ~, pipe |, and the caret ^. Each segment contains one or more ‘elements’, with each such element separated by another chosen character, the element separator. The most commonly used element separator is the asterisk * or the pipe |.

2.4 EDI Header and Trailer

Each EDI message will start with a Header and end with a Trailer. In the case of ASCII X12, the header is defined by the ISA and GS segment combination, and the trailer is defined by the GE and IEA segment combination. The ISA and GS headers will include details about the sender, recipient, date, versions, and the unique control numbers. The trailer will contain the corresponding control number, and include the number of segments between the header and trailer elements, so that any malformed document can be identified.

2.5 Segment and Element definition

The sample below is a page from a sample EDI definition, describing the ‘BIG’ segmment, which is the beginning segment of an Invoice. Each element identified with its position allows references such as BIG01, BIG02 etc to refer to such data items. Each element is defined with a name, mandatory / optional flag, data type and minimum and maximum length. For example we see that BIG01 is a mandatory Date value of exactly 8 characters in length, while BIG02 is an alphanumeric string between 1 to 22 characters in length, and mandatory.

Usually large organizations override the standard EDI definition versions, and might want to state that a segment or element defined as optional as per the version of the specification used, is marked as mandatory by the client. This is the meaning of the last column ‘usage’, which exists to override such definitions.

2.6 Sample EDI X12 810 Invoice

Below listing shows a sample Invoice, in the X12 810 transaction set. Note that the line breaks have been inserted only for clarity. Notice the ISA/IEA header and trailer, and the GS/GE header and trailer. The ISA13 and the matching IEA02 are the Interchange Control numbers. IEA01 specifies the number of included functional groups (i.e. GS/GE pairs) which in this case is one. Similarly, the GS06 and GE02 specify the Group Control number, and GE01 states the number of included Transaction Sets, which in this case is one. The ST/SE pairs contain the Transaction information with ST02 and SE02 specifying the Transaction Control number, and SE01 specifying the number of segments within the transaction, which in this case is 19, including the ST and SE segments.

ISA*00*          *00*          *ZZ*ADRTPROD       *08*925485US00     *210701*1017*;*00501*100100547*0*P*>~
N3*94-1420 MOANIANI ST~
N1*BT*WALMART INC.*UL*0078742090955~
N3*12-345 BAKER ST~

3. Industries that Use EDI X12 Standards

Implementing EDI may look overwhelming due to the massive schema of ANSI X12 standards that includes hundreds of nodes and elements and rigid message structure. However, exchanging documents electronically in a standard format has proven to be a driver of operational excellence.

According to a study conducted by Forrester Consulting, electronic processing of invoices costs $3.50 per invoice, while manually-processed invoices cost $30 per invoice on average. The savings are not just limited to processing costs. Instead, EDI payments also enable faster communication with trade partners, which in turn improves business relationships. Considering the benefits, EDI information ordering is a natural solution for any business that wants to reduce the administrative burden associated with information transmission, improve business relationships, and achieve greater accuracy and efficiency in order fulfillment.

Today, a multitude of industries use EDI in countries around the world. Whether in the healthcare sector, retail, or the automotive industry, EDI is transforming the way businesses communicate and yield value.

The industries that commonly use EDI X12 standards include:

3.1 EDI Solutions for Retailers

Keeping a retail business running smoothly is a complex process. The high volume of invoices and orders not only makes the paper-based exchange of documents time-consuming but also error-prone. Therefore, retail businesses require a full-service EDI solution that can parse incoming EDI data and construct EDI transaction sets to be sent out to suppliers. This, in turn, enables the quick turnaround of purchase orders and ensures the accurate and efficient exchange of information between retailers and suppliers.

3.2 EDI Solutions for Banking and Finance

Banks, stock brokerages, consumer-finance companies, and other financial institutions provide a wide array of services and products to their clients. One of the major factors that impact the bottom-line of a financial institution is its ability to manage complex information flows such as handling receivables and payables, processing benefits eligibility claims, and transmitting merchant settlement files. Many of these processes remain very paper-intensive, with a lot of opportunities to truncate paper checks and move towards EDI automation.

In addition to being a lower-cost alternative to the traditional paper-based approach, EDI automation helps financial institutions manage the complexities associated with working across international boundaries, including differences in accounting practices and regulations.

3.3 EDI Solutions for Supply Chain

Accelerated globalization, larger product offerings, and shorter lead times have all compelled businesses to look for solutions that can reduce the large volumes of paperwork associated with managing a supply chain while enhancing the speed of information flow between trade partners.

EDI has emerged as a solution that facilitates more frequent and automatic transfers of information required for a high degree of coordination within the supply chain. As a result, an EDI-enabled supply chain is more effective than a manual supply chain in terms of shorter order cycles, greater product availability, and lower transaction costs.

3.4 EDI Solutions for Healthcare and Insurance

Administrative costs are a part of doing business. But in healthcare, it’s a proven fact that the costs of benefit verification, authorization, claims and billing, and other business transactions remain too high. While some of these costs are inescapable, the exchange of healthcare information can be automated to save time and money for healthcare providers.

EDI ordering system offers lucrative administrative benefits that healthcare providers and payers cannot ignore. It facilitates a rapid yet secure exchange of data between healthcare partners while ensuring data quality and addressing compliance issues.

3.5 EDI Solutions for Automotive

In the globalized just-in-time (JIT) environment of the automotive industry, delivery of the parts required to manufacture a vehicle must be quick and frequent to minimize disruptions to the production process. To ensure this, manufacturers should be able to onboard suppliers as quickly as possible and exchange information with them in a quick and reliable manner.

EDI file formats allow auto manufacturers and suppliers to exchange information in a faster, error-free manner, thereby providing them up-to-the-minute information about production and deliveries. This, in turn, streamlines the production process and improves operational efficiency.

3.6 EDI Solutions for Transportation

A fulfillment and transportation company relies on data from multiple entities to move goods through the supply chain. Using a manual approach that requires a dispatcher to manually key information into the dispatch and billing information not only is time-consuming, it can also result in costly data entry mistakes.

EDI payments system enables trucking and transportation companies to eliminate the need for manual entry of information and ensure seamless communication flow between all parties with electronic transmission of standardized documents. The real-time data exchange offers companies better visibility of the fleet and leads to better resource utilization and planning.

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