Electronic Data Interchange – Meaning, Types, and Applications

Electronic data interchange (EDI) is the straight conversation of business-related documents between two computers based on a fixed standard with data counterparts of common documents such as purchase orders, request support, invoices, etc.

Businesses can use various EDI codes to facilitate B2B processes and transactions.

What Is Electronic Data Interchange (EDI)?

Electronic data interchange (EDI) is the direct conversation of business-related documents between two computers. It is based on a fixed standard with electronic counterparts of common documents such as purchase orders, request support, invoices, etc.

In EDI transactions, information flows straight from one organization’s computer application to another’s computer program. The transaction entails the following:

Data elements

These are distinct information such as firm name, product code, quantity, and price. Each EDI standard comprises a specification for each data element inside every transaction set, which determines the data type (numeric, alphanumeric, date, time), minimum and maximum permissible length, and any related ‘core values’ (e.g., currency exchange code component for prices).

Segments

It refers to logically related data components such as order number, volume, units, or price linked with a product inside a purchase order. A segment is always preceded by a segment ID, which indicates the type of material or information components comprising the element.

Envelopes

It encapsulates transaction sets for transmission. Each transaction set is included in a separate message envelope, whereas a cluster of transaction sets (such as a group of bills) is enclosed in a group envelope.

How was EDI developed?

In the 1960s, Army Master Sergeant Ed Gilbert devised a sort of electrical connection between shipping supply lines in the US Army so that rations could be delivered to troops in Berlin. Gilbert would take another 20 years to convert this paper-based approach toward standardizing commercial papers into an electronic mode of communication, which would eventually become EDI.

In 1968, the Transportation Data Coordination Committee (TDCC) was established in the US, initiating the development of electronic standards for the transportation sector. Since then, EDI has become a core technology in numerous industries, including automotive, manufacturing, healthcare, and retail.

How does electronic data interchange work?

Electronic data exchange operates in just minutes, utilizing a software application or an external managed service to instantly transmit business documents in EDI standard format from computer to computer between trade partners.

The buyer determines the purchase and generates the purchase order but does not print it.

EDI software generates an electronic purchase order and automatically communicates it to the supplier.

The supplier’s order entry system promptly updates the database upon receipt of the purchase order.

The supplier’s system generates and dispatches an acknowledgment to confirm receipt.

Data transformation:

Data transformation capabilities take fields such as naming conventions, location, currency value, parts metrics, and quantities and map them from business application formats into standardized documents and vice versa.

Batch support:

These capabilities support large EDI message batches, enabling senders and receivers to wrap and unwrap transactions. The transactions can then be grouped from or split into several divisions or areas of a trading associate’s bus.

Why is EDI Important?

EDI transactions are vital to B2B processes and remain the preferred way for businesses of all sizes to transfer documents and conduct transactions.

Conventional commerce partnerships depend on manual, time-consuming processes.

EDI deployment is, therefore, critical for continued profitability and expansion for businesses of all sizes. EDI technology provides five essential business benefits.

Conserve time and save money by automating a process that was previously completed manually using physical documents.

Increase efficiency and output by sharing and processing more business documents in less time and with greater precision.

Minimize mistakes via strict standardization, ensuring data is appropriately structured before entering business processes and applications.

Connect electronic documents to various IT systems to assist data gathering, transparency, and analysis, facilitating traceability and reporting.

Types of EDI

EDI can happen in various ways depending on the business use case and the parties exchanging the information (usually financial data and related documents).

1. Direct EDI

Direct EDI, often called point-to-point EDI, creates a single link between two business partners. In this methodology, users connect with every business partner individually. It offers control to business associates and is utilize most frequently between big customers and suppliers who conduct multiple daily transactions.

2. Value-added Network (VAN)-enabled EDI

An option to the direct EDI framework is the EDI network service provider, also known as a value-added network (VAN), which was in operation even before the Internet arrived.

Many businesses prefer this network approach because it shields them from the ongoing challenges of maintaining the diverse communication protocols demanded by various business partners. VANs are private networks on which partners exchange electronic business documents. The VAN provider manages the network while providing businesses with mailboxes, enabling them to send and receive EDI documents.

3. Applicability Statement 2 (AS2)-enabled EDI

AS2 is a network communications protocol that securely transmits data over the Internet. It consists of two computers — a client and a server — communicating point-to-point via the Internet. AS2 generates an ‘envelope’ for EDI data, enabling it to be transmit securely over the Internet employing digital certificates or encryption. This EDI type is easily accessible to all.

4. 4. Web EDI

Web EDI refers to completing an EDI transaction using a web browser. It mimics paper-based documents in a web form. Information-entry areas will be part of the form. After all pertinent information has been supplied, the paper is instantly transformed into an EDI message and sent using secure internet protocols such as file transfer protocol secure (FTPS), Hypertext Transport Protocol Secure (HTTPS), or AS2.

5. Mobile EDI (emerging)

Traditionally, users have accessed EDI through a network, such as a VAN or the Internet, to send and get EDI-related business documents. The adoption of mobile EDI applications has been constrained, in part, due to security concerns and limitations in screen quality or device size. Yet, a burgeoning sector is building EDI applications for mobile download. Oracle’s JD Edwards EnterpriseOne, for example, offers mobile EDI applications.

Applications of Electronic Data Interchange

1. Greater agility in manufacturing

EDI facilitates the efficient management of materials necessary to create a product. The manufacturer’s inventory is continuously updated through EDI, and the supplier is advised of material shortages. The supplier also reacts via EDI, and the stock is updated as soon as the cargo is deliver. EDI supports maximum retail price (MRP) compliance and just-in-time production by improving supply and delivery.

2. Better demand-to-supply mapping in retail

EDI offers a structured method for maintaining and replenishing retail inventory. Stock is continually update at the point-of-sale (POS) terminal, and data is sent via EDI into the supply chain management (SCM) module. The EDI software also monitors all logistics and refreshes the original stock.

3. Digital process enablement in financial services

Through electronic systems, EDI simplifies payment collection, processing, and expenditure. It enables the automatic transfer of funds between the checking accounts of business associates.

4. Increased automation of business processes

EDI renders human intervention redundant and makes process automation the present-day reality. The advantages of automation include operations that operate nonstop and document-relevant information that needs to be enter just once into the distribution channel. This allows businesses to avoid duplicating tasks within the process flowchart.

5. Seamless vendor interactions in the high-tech industry

Supply-chain systems of technology companies are mostly quite complicate. Particularly common in the high-tech sector are outsource design and prototype functions. The ability of EDI to rapidly share documents with minimum human interaction in such a dynamic, complex environment significantly contributes to streamlining processes.

Conclusion

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