Electronic Data Interchange (EDI)

Electronic Data Interchange (EDI) is the electronic interchange of business information using a standardized format; a process which allows one company to send information to another company electronically rather than with paper. Business entities conducting business electronically are called trading partners. 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.[1]

How EDI Works[2]
There are 3 steps to sending EDI documents – Prepare the documents, Translate the documents into EDI format, Transmit the EDI documents to your partner. (see figure below)

  • Step 1: Prepare the documents to be sent: The first step is to collect and organize the data. For example, instead of printing a purchase order, your system creates an electronic file with the necessary information to build an EDI document. The sources of data and the methods available to generate the electronic documents can include:
    • Human data entry via screens
    • Exporting PC-based data from spreadsheets or databases
    • Reformatted electronic reports into data files
    • Enhancing existing applications to automatically create output files that are ready for translation into an EDI standard
    • Purchasing application software that has built-in interfaces for EDI files
  • Step 2: Translate the documents into EDI format: The next step is to feed your electronic data through translator software to convert your internal data format into the EDI standard format using the appropriate segments and data elements. You can purchase EDI translation software that you manage and maintain on your premises. This requires specialized mapping expertise in order to define how your internal data is to be mapped (i.e. correlated) to the EDI data. Translation software is available to suit just about any computing environment and budget, from large systems that handle thousands of transactions daily to PC-based software that need only process a few hundred transactions per week. Alternatively, you can use the translation services of an EDI service provider. In that case, you send your data to the provider, who handles translation to and from the EDI format on your behalf.
  • Step 3: Connect and Transmit your EDI documents to your business partner: Once your business documents are translated to the appropriate EDI format they are ready to be transmitted to your business partner. You must decide how you will connect to each of your partners to perform that transmission. There are several ways, the most common of which include to
    • connect directly using AS2 or another secure internet protocol
    • connect to an EDI Network provider (also referred to as a VAN provider) using your preferred communications protocol and rely on the network provider to connect to your business partners using whatever communications protocol your partners prefer, or
    • a combination of both, depending on the particular partner and the volume of transactions you expect to exchange.

Electronic Data Interchange (EDI)
source: OpenText/GXS

Necessary EDI components[3]
A complete system for exchanging electronic transactions consists of four elements.

  • Web-based EDI tool that translates your accounting information into the EDI format
  • EDI mapping syncs your accounting system to your customer’s system
  • Transaction network sends and receives transactions
  • Ongoing EDI support and maintenance services

What you need to be EDI compliant[4]
EDI compliance involves either buying or outsourcing the following components:

  • Software for communications
  • VAN service for EDI transmission
  • Mailboxing of EDI transactions
  • Mapping and translation software
  • Installing upgrades to software as needed
  • Mapping labor
  • Testing with EDI trading partners
  • Upgrades for new versions required by trading partners

EDI VAN, FTP, or AS/2 Internet communications will be required by various partners. A server or PC, communication devices and peripherals will be needed as well as secured office space, monitored security, backups and redundant power. Additional software will be needed if integration of the EDI transactions with back office systems is desired. Personnel must be trained in how to use the software and communication devices. Maps will then need to be developed, tested and maintained.

Electronic Data Interchange (EDI) and the Internet[5]
Part of the confusion revolving around EDI refers to its difference with the Internet. The Internet is obviously the epitome of electronic data transfer. So what’s the difference between the Internet and EDI?

  • The main difference between EDI and simply sending email with EDI information, is the set of rigorous standards involved with following the EDI format. These standards were put in place to ensure that companies who use EDI as their method of information transfer were being diligent about security, and conforming to the proper procedures of the protocol.
  • The other difference, is that EDI is for the most part handled by computer systems; human intervention is usually only required when there are errors to address. In this way, it needs to follow a seamless data transfer process by which the data set being sent to the receiving machine is accepted and confirmed with no down-time.

Over time, EDI and the web began to live harmoniously. In fact, those businesses that have used EDI as their data transfer methodology have leveraged the Internet to send their EDI documents, instead of what some thought would happen: the Internet replacing EDI. If anything , the Internet has simply facilitated the transfer of EDI documents. The nature of EDI is to follow a rigid security and data management protocol, while at the same time being flexible, in order to pertain to multiple business models. Many companies choose to outsource their EDI because of the level of complexity involved with the format.

EDI Terms[6]

  • ANSI: (American National Standards Institute). A voluntarily committee that coordinates standards. Its subcommittee, the ANSI Accredited Standards Committee (ANSI ASC), recommends the X12 EDI standard.
  • ANSI X12: (American National Standards Institute X12). EDI standard supported by American National Standards Institute. The ANSI Accredited Standards Committee (ANSI ASC) recommends a standard referred to as ANSI X12 or simply X12.
  • Application Acknowledgment: A transaction set transmitted by the receiver of an EDI transmission to the sender as a t-set-specific response. It is sensitive to the type of transaction set or message received and reports according to the standards for the application. Application acknowledgments include Financial Return Notice (827), Purchase Order Acknowledgment (855), and Response to a Load Tender (990).
  • AS2: (Internet Applicability Statement 2). Specifies how to transport data and the means to connect, deliver, validate, and reply to data in a secure and reliable manner.
  • ASN: An EDI transaction used for communicating the specifics of a shipment in advance of delivery. The transaction set can be used to list the contents of a shipment of goods as well as additional information relating to the shipment, such as order information, product description, physical characteristics, type of packaging, marking, carrier information, and configuration of goods within the transportation equipment.

Benefits of EDI[7]
While many companies leverage EDI to comply with trading partner requirements, few take advantage of EDI to drive operational excellence. Limiting EDI use to fundamental transactions, such as purchase orders and invoices, leaves money on the table and misses an opportunity to strengthen customer service and overall competitiveness.Companies achieve the greatest operational excellence gains by expanding EDI across a broad spectrum of transactions and integrating it with a warehouse management system to create visibility through the [[[Supply]]-Chain-Management|supply chain].

  • Enhanced visibility. EDI can enable a sharper understanding of your supply chain to reduce inventory carrying costs. You can stock only what you need.
  • Reduced labor costs. Companies using EDI for advanced shipping notices (ASNs) can save up to 40 percent of labor costs associated with inbound processing.
  • Minimized freight costs. Using EDI in concert with a transportation management system can minimize transport expenses while maintaining high service levels through load consolidation and mode selection.
  • Improved customer service. Customers, suppliers, and regulators benefit from the seamless flow of critical business information among partners.

Barriers to EDI Implementation[8]
There are a few barriers to adopting electronic data interchange.

  • One of the most significant barriers is the accompanying business process change. Existing [Business-Process|business processes] built around paper handling may not be suited for EDI and would require changes to accommodate automated processing of business documents. For example, a business may receive the bulk of their goods by 1 or 2 day shipping and all of their invoices by mail. The existing process may therefore assume that goods are typically received before the invoice. With EDI, the invoice will typically be sent when the goods ship and will therefore require a process that handles large numbers of invoices whose corresponding goods have not yet been received.
  • Another significant barrier is the cost in time and money in the initial set-up. The preliminary expenses and time that arise from the implementation, customization and training can be costly. It is important to select the correct level of integration to match the business requirement. For a business with relatively few transactions with EDI-based partners, it may make sense for businesses to implement inexpensive "rip and read" solutions, where the EDI format is printed out in human-readable form and people, rather than computers, respond to the transaction. Another alternative is outsourced EDI solutions provided by EDI "Service Bureaus". For other businesses, the implementation of an integrated EDI solution may be necessary as increases in trading volumes brought on by EDI force them to re-implement their order processing business processes.
  • The key hindrance to a successful implementation of EDI is the perception many businesses have of the nature of EDI. Many view EDI from the technical perspective that EDI is a data format; it would be more accurate to take the business view that EDI is a system for exchanging business documents with external entities, and integrating the data from those documents into the company's internal systems. Successful implementations of EDI take into account the effect externally generated information will have on their internal systems and validate the business information received. For example, allowing a supplier to update a retailer's Accounts Payable system without appropriate checks and balances would put the company at significant risk. Businesses new to the implementation of EDI must understand the underlying business process and apply proper judgment.


  1. What is Electronic Data Interchange (EDI)? Union Pacific
  2. EDI Basics - How Does EDI Work? OpenText/GXS
  3. The Components of EDI truecommerce
  4. What do you need to be EDI Compliant? CovalentWorks
  5. The Difference between the Internet and EDI Commport
  6. Common EDI Terms |1edisource
  7. 4 Benefits od Electronic Data Interchange (EDI) Laney Duke
  8. The Barriers to EDI Implementation Wikipedia

Further Reading