A Complete Overview of Electronic Data Interchange (EDI)
Over the years, there has been a very primitive way of doing business in the B2B industry, and now’s the time to break this cycle. Which cycle, you ask? The cycle where you purchase a new product for your business, fill out the required details, take a printout, and mail it to the supplier. Then, after a few days, the supplier receives your purchase order, processes it, fills out an invoice, takes a printout, and later faxes it to you. This way you were able to pay it after manually adding the invoice information to your accounting system. These paper-based processes were the only options for businesses in the early days. Electronic Data Interchange (EDI) ‘s commencement has become a rich alternative to exchanging information in documents like purchase orders and invoices, also prevailing across industries today.
In this article, we will talk about what EDI is and how it enables the exchange of business data, the various benefits of EDI, and how it differs from API-based integration.
What is Electronic Data Interchange (EDI), and How Does it Work?
EDI, or electronic data interchange, is a way to digitally exchange business information through standardized, electronically formatted documents between business partners. It is a standard electronic business language that replaces business processes and allows trading partners to quickly and easily communicate with each other. The EDI order process allows the computer-to-computer exchange of business documents from one company to another, enabling automated, paperless communication.
At a high level, EDI or Electronic Data Interchange involves sending business documents from one organization’s computer system to another. A person is not engaged, and there is no need to transfer the data manually from the paper to the proper place. Moreover, for EDI to work, trading partners must agree on how the information will be exchanged and used. The technology is used to specifically automate workflows; for instance, a buyer generates a purchase order sent to their supplier using EDI. Once the order is received, it automatically creates and sends an invoice to the buyer and notifies completion about the new order. The shipment information is automatically sent to the buyer once the order has been processed.
The Components That Allow EDI to Work:
EDI Message Standards
EDI message standards are a crucial part of EDI, as it describes each document piece’s format, location, and order, allowing the two organizations’ computer systems to communicate and process data. In today’s tech-savvy world, there are several EDI standards used. In North America, they use the American National Standards Institute (ANSI) X-12, or ASC X12, standards. At the same time, the Electronic Data Interchange for Administration, Commerce, and Transport (UN/EDIFACT) EDI protocol is an international EDI standard created by the United Nations that enables multi-country data exchange. There are also industry-specific standards, like HIPAA. An EDI translator converts your data into the correct format to send to your trading partner. Both businesses must use the same form for EDI to work.
EDI Transmissions Generally Follow Two Basic Types:
- Value-added networks (VAN)
- Direct EDI or point-to-point EDI
A value-added network is when a third-party network provider manages data transmission. Direct EDI or point-to-point EDI is when trading partners connect their computers or systems directly over the internet via secure protocols. This type of EDI can use several internet transmission protocols, including Secure File Transfer Protocol (SFTP) or File Transfer Protocol (FTP), Applicability Statement 2 (AS2), HTTPS protocol, Simple Object Access Protocol (SOAP), mobile EDI, and more.
The Importance of EDI Technology in Diverse Industry
Although the technology started as a no-frills way to replace paper documents, it is now generally used to connect on-premise applications, ERP systems, accounting software, e-commerce software, and more to automate business workflows. When dealing with supply chains or logistics sectors, EDI software becomes the vital choice for businesses as it helps the industries get systematized. This is why most industries, such as retail, manufacturing, automotive, and utilities, often turn to EDI.
EDI is often used in healthcare surroundings as it helps in ensuring HIPAA compliance and security when a hospital or another healthcare provider sends information to an insurance company. The technology also allows collecting patient data, verifying insurance coverage, and billing a patient or insurance company for services.
In the logistics sector, EDI improves partner management and gives visibility into the supply chain, enabling businesses to have faster and more efficient order processing while helping them avoid late shipments or missing items in an order. Carriers can provide shipment status notifications through EDI to inform customers of their shipment’s progress.
Supply Chain Management
By giving real-time visibility and updates on inventories, EDI helps businesses manage their stocks and supply chains, allowing them to supply customers with the in-time products requirement, enhance order accuracy, and provide customers with updates on their orders. The supply chain team can use the technology with their warehouse management systems for shipping and warehousing documents, such as customs documents, inventory lists, shipping statuses, and advanced shipment notices.
Under the retail sector, EDI manages purchase orders, tracks inventory, supplies advance ship notices, and automates the data management services between e-commerce business partners. Since the industry involves managing many suppliers and a high volume of orders and inventory, technology has traditionally played a pivotal role in providing these businesses with more visibility and improved order processing times.
Benefits of EDI
Most organizations have their style of working and doing things with unique internal systems. EDI is a way to ensure that they can still exchange business documents and work together more efficiently.
Provide Adequate Data Accuracy
EDI avoids manual processes like data entry, which can lead to errors and improve your overall data quality. EDI message standards also include mandatory data, ensuring that the essential information is always included in your documents.
Elevate The Customer and Partner Experience
EDI helps streamline business processes, as it avoids the manual process of entering data and emailing or faxing the content to your trading partners. Instead allows this exchange of business documents to happen automatically, making you more responsive to customers and business partners.
Enhance Your Order-to-cash Process
The business automation process done by EDI technology smoothens the process. It fulfills orders faster by allowing purchase orders and invoices to be sent automatically from the supplier’s systems into the buyer’s systems. As a result, invoices are recorded sooner, and payments are sent and received on time. It also keeps financial systems up to date so you can close your books faster.
Have a Secure Transactions Process
Since the data sent using EDI can be sensitive or private, security standards must be in place. Security is a significant component of EDI protocols, and EDI solutions only allow access by authorized users.
Therefore, an alternative integration solution to EDI might be necessary, depending on your business needs and goals. For cloud applications, the best way is through integration-led cloud automation based on APIs and on-premise agents for databases. EDI can still play a key role in specific processes, but more is needed as your business transforms and scales.