What Is EDI: Meaning, How It Works and Benefits

EDI software minimizes the risks that come with manual data processing by standardizing information. This ensures greater accuracy and reliability, saving you from spending time on corrections or rework.

EDI systems streamline communication, making it faster and more accurate than using physical documents. This efficiency reduces costs by eliminating the need for printing, mailing, or storing paper records. Plus, real-time information exchange helps maintain trust and smooth collaboration with your business partners.

By automating your processes, EDI cuts out delays from manual tasks like mailing. What used to take hours or even days can now happen almost instantly, making your operations quicker and more accurate.

EDI comes with robust security features, such as user permissions, authentication, and file encryption. This ensures that only authorized users can access sensitive data, making it a much safer option compared to paper-based methods.

This is when two computers talk to each other directly using secure methods without needing any go-betweens. It’s one of the safest ways to share information because there’s no middleperson. But, as you add more trading partners, things can get complicated. Each partner might use a different way to connect, making setup and management more expensive and tricky.

Here, a third-party service steps in to help different systems communicate, kind of like a digital post office. Businesses send their information to the VAN, which delivers it to the right partner. This makes handling connections with many partners easier because you don’t have to set up separate links for each one. However, there’s a cost for each document sent, usually between $0.03 and $0.20, which can add up over time.

This type of EDI lets businesses manage their transactions using a web browser. It’s like using an online email service, but instead of sending messages, you’re sending orders or invoices. It’s simple and cost-effective, especially for smaller companies, because you don’t need to install special software or be tech-savvy to use it. However, it might not be as efficient for companies dealing with a high volume of transactions.

An API (Application Programming Interface) acts like a bridge between software, allowing real-time communication. This setup is ideal for businesses needing fast, continuous data exchange, like tracking shipments or updating inventory levels. Orderful specializes in API-based EDI, offering a flexible and efficient solution, though it may require more advanced technology and resources to set up than other methods.

EDI documents use transactional codes, which are standardized formats that organize information so the recipient's system can interpret it correctly. This standardization specifies details about the data, like whether it’s a decimal number, an integer, or a date, and how it should be arranged.

Here are some common EDI standards:

1. ANSI X12: The go-to standard in North America
2. EDIFACT: The main standard outside North America
3. TRADACOMS: Primarily used in the United Kingdom

Translation software takes your data and converts it into a standardized format so it can be sent to your trading partner. Think of it like a language translator for computers: Your system “speaks” one language, and your partner’s system might speak another. The translation software ensures everyone is “speaking” the same language. When your partner gets the data, their own translation software changes it into a format their system can understand and work with. This whole process keeps communication smooth, accurate, and efficient between different businesses.

Think of EDI connections and communication protocols as two key parts that make electronic communication between businesses possible. An EDI connection is how two companies link their systems so they can “talk” to each other, while a communication protocol is like the language they use to make sure their messages are sent, received, and understood correctly.

For data to be exchanged smoothly and securely, both the connection and the protocol need to work together. If your company and a partner aren’t using the same protocol, you might need a middleman called a value-added network (VAN) to help translate and connect your systems.

Common communication protocols include:

• Applicability Statement 2 (AS2): AS2 became popular after Walmart began requiring its partners to use it in the early 2000s. It allows companies to share unlimited files securely, making it great for businesses that need to send a lot of data back and forth.
• File Transfer Protocol (FTP)/Secure FTP (SFTP): SFTP is used for secure and cost-effective data transfer. It doesn’t offer unlimited sharing like AS2, but it’s still reliable and can handle huge amounts of data (up to nine petabytes!). The “secure” part of SFTP adds extra protection by encrypting the information being shared.
• VANs: As mentioned earlier, a VAN is like a translator between companies using different protocols. It helps make sure messages get to the right place and are understood, even if the companies don’t “speak” the same data language. Again, while it’s helpful for connecting more partners, it does come with extra costs per transaction.

EDI mapping is a way of organizing information by matching data fields from your internal system to the correct fields in the EDI standard. This alignment ensures that details like names, addresses, or order info are properly arranged so both parties can accurately process and interpret the data, keeping everything clear and consistent.

An EDI envelope acts like a digital wrapper that securely holds EDI files. It includes details about the sender and receiver, making sure the documents get to the right place without any mix-ups. Additionally, it organizes the data so that it remains intact and easy for the recipient's system to process.

Setting up EDI integrations means creating a direct communication link between different computer systems. This link allows data to move smoothly from the EDI system to your company’s internal tools, like CRM (Customer Relationship Management), ERP (Enterprise Resource Planning), and WMS (Warehouse Management Systems).

This message contains the details of an order that a buyer sends to you. It’s used for one-time or recurring purchases and even for adjusting or canceling orders. Key parts of an EDI 850 include:

• Order date
• PO Number
• Requested delivery and shipping date
• Buyer and vendor details like name, blling information, and contacts
• Item quantity and measurement unit
• Item identifiers like stock-keeping units
• Unit and total order prices
• Shipping terms, such as preferred carrier and method
• Payment terms
• Charges and allowances

This document outlines charges and payment terms for the buyer. Unlike other types of invoices like EDI 210, 880, or 894 — which are used for specific purposes — EDI 810 is used for various order types. Key elements include:

• Invoice date and number
• Remittance, seller, and buyer identification details
• Order information, such as item amounts and prices
• Allowances, discounts, and extra charges
• Accepted payment methods and terms
• Total amount due
• Tax detail, if applicable

Also known as advance shipping notices (ASNs), these messages notify the receiving party about an upcoming shipment. ASNs are crucial for EDI logistics, helping buyers stay informed about their deliveries. Important components of an ASN include:

• Shipment date and number
• Expected delivery date
• UCC128/GS1 numbers
• Shipping addresses (from and to) and other relevant details
• Item quantities and descriptions
• Purchase order number
• Shipment and item tracking details, such as tracking, lot, and serial numbers
• Packaging information, such as what items are in which carton

EDI payments are organized into different stages that involve specific documents. Here’s how it typically works:

1. Your customer’s system sends a purchase order (like EDI 850 or EDI 871) to your system.
2. Your system receives the order and sends back EDI 855 to confirm receipt.
3. Finally, your system issues an invoice (EDI 810) to the customer’s system for payment.