EDI, which stands for electronic data interchange, is the intercompany communication of business documents in a standard format. The simple definition of EDI is that it is a standard electronic format that replaces paper-based documents such as purchase orders or invoices.
Organizations can save time and reduce errors by automating paper-based transactions.
In EDI transactions, information moves directly from a computer application in one organization to a computer application in another. EDI standards define the location and order of information in a document format. Sharing data is now faster and easier with this automated capability, compared to using paper documents or other traditional methods that can take hours, days or even weeks.
Today, industries use EDI integration to share a range of document types, from purchase orders to invoices to requests for quotations to loan applications and more. In most instances, these organizations are trading partners that exchange goods and services frequently as part of their supply chains and business-to-business (B2B) networks.
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EDI message standards define all EDI transactions. It is vital to have proper governance processes for data quality. When information is missing or in the wrong place, the EDI document might not be processed correctly.
Standards are the basis of EDI conversations.¹ Several organizations define the EDI message standards, including ODETTE, TRADACOMS, GS1, Peppol and the Accredited Standard Committee X12 (ASC X12).
In general, EDI transmission has 2 basic types:
- Point-to-point or direct connections: Two computers or systems connect with no intermediary over the internet, generally with secure protocols.
- Value-added network (VAN): A third-party network manages data transmission, generally with a mailboxing paradigm.
EDI internet transmission protocols include Secure File Transfer Protocol (SFTP), Applicability Statement 2 or AS2, an HTTPS-based protocol, Simple Object Access Protocol (SOAP) and others. EDI data elements include items such as sender ID and receiver ID. Data segments combine two or more related elements to give them greater meaning. For example, FNAME and LNAME can combine to form CUSTOMERNAME. Envelopes structure different types of data and carry the sender and receiver address information. EDI document flow or message flow describes the movement of EDI messages to various inbound and outbound addresses and departments to execute a business process or transaction.²
Metalanguages such as Extensible Markup Language (XML) or JavaScript Object Notation (JSON) complement EDI rather than replace it. Companies must be ready to handle an ever-increasing number of document formats and transmission options. One global manufacturer routinely exchanges about 55 different document types with nearly 2,000 partners.
“As many as 20% of our B2B transactions were producing an error before we began using IBM® Supply Chain Business Network. We have fewer errors now, for example, we used to have issues with transfer orders because a client would submit a wrong code, which was painful for our client service team. It happens probably 80% less now because all of that used to be done manually.” Read what other EDI managers tell IDC about how they drive strategic value with IBM Sterling Supply Chain Business Network.
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EDI transactions are essential to B2B processes and continue to be the preferred means to exchange documents and transactions between businesses both small and large.
EDI technology delivers five key business benefits through automation and B2B integration:
- EDI technology saves time and money through the automation of a process that was previously manually run with paper documents.
- EDI solutions improve efficiency and productivity because more business documents are shared and processed in less time with greater accuracy.
- EDI data transfer reduces errors through rigid standardization, which helps to ensure that information and data are correctly formatted before they enter business processes or applications.
- Integration of EDI improves traceability and reporting by allowing electronic documents to be incorporated with various IT systems, facilitating data collection, visibility and analysis.
- Efficient EDI automation enables reliable product and service delivery for a positive customer experience.
For large organizations, EDI enables standards to be instituted across trading partners to achieve benefits consistently. For smaller organizations, adherence to EDI offers greater integration with larger firms that have large budgets and strong influence.
See the impact of automating paper-based transactions to EDI
For some enterprises, EDI can be difficult to implement. One reason is the need to keep pace with shifting government regulations, standards and updates. It is also inherently complex, as it needs to accommodate the complexities of global business needs. For example, each trading partner in a B2B network can present individual requirements. Many organizations outsource EDI solutions due to unique formatting criteria.
Whether in-house or outsourced, there are some basic conditions, capabilities and resources that are needed to implement EDI effectively. In addition to factors such as agreement on document types, secure transmission methods and necessary hardware and software, an effective EDI implementation should consider:
Translation or mapping software
This type of transformation software takes fields such as names, addresses, currency amounts, part numbers and quantities, and maps them from business application formats into standardized documents and vice versa.
Batch enveloping or de-enveloping capabilities
These capabilities support large EDI message batches by 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 business.
Message routing mechanisms
After a message is de-enveloped, routing mechanisms are required to sort the messages for different groups and deliver them to the appropriate targets. Message transformation may also be required to get the message into the correct format for its destination.
Trading partner agreements (TPA)
TPA clarifies terms and conditions, establishes standards for business documents and defines communications and business protocols between trading partners.
See what other essential elements make up a modern B2B architecture
Consider this scenario: a chargeback related to a damaged shipment is triggered using an EDI 214 document, which is a Transportation Carrier Shipment Status Message. The material in the shipment is unusable or unsaleable. Disputes will most likely arise based on the chargeback.
In future supply chains, EDI will be the core document exchange capability to support innovations such as the Internet of Things (IoT), blockchain and artificial intelligence (AI)³. Future EDI will use:
- IoT sensors that are incorporated into a shipment’s packaging and tied to periodic EDI 214 messages to improve package condition visibility in near real time.
- Blockchain technology underpinning EDI information flows for shipments to offer a shared version of the truth that can quickly resolve and even avoid chargeback disputes.
- An AI agent that monitors all relevant events and information that are connected to a shipment and can identify a noncompliant event. AI agents can also determine whether a reshipment is necessary, analyze the most efficient source of replacement, initiate a new shipment and accept an authorized return.
Read the POV: What is the future of EDI?
Streamline B2B transactions through seamless and secured any-to-any frictionless connectivity, built to scale with embedded AI to detect anomalies before disruptions occur.
Consolidate all your complex B2B and EDI integration and processing on a single, security-rich gateway built on hybrid-cloud technology.
Reduce the time and resources that are needed to onboard new partners while managing and maintaining existing partners at the same time.
Automate complex transformation and validation of data between different structured and unstructured formats and industry standards at enterprise scale without coding.
Convert paper, fax, and phone-based transactions to EDI format to automate supply chain transactions with non-EDI partners and reduce errors and save time.
Transform nonstructured documents such as faxes, emails and PDFs into an efficient EDI format with conversion services.
The world as we know it runs and depends on EDI, but that world is changing, and with it the future of EDI. Discover how you can modernize your B2B network.
Saint-Gobain saved 92% per line order and can now receive documents 24 hours a day, every day of the week by using EDI rather than manual processes.
Many enterprises continue to receive orders, tenders or invoices in the form of faxes, emails or PDFs. See the impact of doing business with smaller associates who are not fully automated.
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Citation
1 "Electronic data interchanges, (link resides outside ibm.com)" Wikipedia
2 "EDI and B2B basics, (link resides outside ibm.com)" Sriniedibasics, 20 Aug 2011
3 "The future of EDI: An IBM point-of-view (PDF, 490 KB)" IBM Watson Supply Chain, Oct 2018