What is EDI?

Electronic Data Interchange (EDI) – Definition

Business to business (B2B) transactions were always based on the interchange of corporate and business documents on paper. Things have completely changed thanks to advances in technology and more specifically, specialized corporate software, which allowed corporations to significantly benefit from their adoption.

Digitalization and modernization of corporations resulted (for the latest ones) in dramatic reduction of their operating cost, increase in procedure completion speed, minimization of any errors and finally, achievement of improved relationships with their partners and third companies.

The need for digital interconnection of business companies and the automation of all of the information interchange procedures was covered with the advance of the Electronic Data Interchange (EDI) technology.

With the maturity and spread of this technology, we could also give a brief and simplified definition of EDI: concerned with the automation of the procedure for digital document interchange that relates to all of the required actions of the supply chain (from the recording of the order to payment receipts) from machine to machine, without any human intervention. Thus, the need for paper documents and direct or indirect communication between humans from different stages of the chain, which leads to waste of time, human resources and infrastructure is completely eliminated.

Initially used by military services for the improvement and quickening of supply procedures, EDI technology was quickly recognized as the future of communications between corporations in the digital age.

Having understood the benefits that it would have in supply chain procedures, industries and corporations started developing early models of EDI functionality. This lead to the creation and predominance of multiple standards and formats, even in the same economic field.

The continuous needs for extending and creating bridges between implemented EDI systems made it clear that the transformation of EDI required the establishment of specific technical standards, such that two parts do not need to make special adaptations or use the same software, and generally the procedures do not depend on the channel through which the data interchange is conducted, neither on the information systems that participate in the procedure of sending, receiving, processing, etc.

National and international entities took part in these actions – from the American National Standards Institute (ANSI) in the USA and the Organization for Data Exchange by Tele Transmission in Europe for the EU, as well as the United Nations (UN) – thus making clear the intention of corporations for electronic bridging and the necessity of modern EDI infrastructures for international business.

In 1996, the National Institute of Standards and Technology (NIST) of the USA defined Electronic Data Interchange as the “interchange of strictly formatted messages which represent business documents between computers”. It should be made clear that under EDI, there is no human intervention and the communication of the two parts that comprise the interchange and processing of the messages is done exclusively between computers.


  • Without human intervention

EDI between two computing systems completely replaces the post office, the phone, fax, and email. While email also comprises an electronic approach for the interchange of data, the documents that are interchanged through email must be transmitted by humans, and not by computers.

The participation of humans in the process slows down the processing of documents and also introduces errors. In contrast, EDI documents can be transferred directly to the recipient’s computer (for example, the purchases management system) via the proper channel of communication and the corresponding format, and the processing can start immediately. Using the traditional method, the corresponding procedure requires consumption of resources, infrastructure and of course, human resources.

  • Business documents

A common automation procedure via EDI is related to the interchange of documents from the initial to the last stages of the supply chain: Order entry, order confirmation, dispatch notification, dispatch slips, sales invoices, payment receipts. If we also add operational documents (such as waybills, customs documents, inventory documents, payment orders, etc.), which are likely to accompany an order, the enormous value of EDI in the operation of businesses becomes easily understood.

The term EDI includes the whole procedure of electronic interchange of data between two entities, including its transmission, its message flow, its document format and the software used for the interpretation for the data.

Since EDI documents must be submitted for processing by computers and not by humans, and also by different implementations between them, a standardized format must be used, so that the computer can “read” and understand the data that contain the digital documents regardless of software, network, operating systems, terminals involved in the whole process, etc.

Thus, a standardized format of an EDI document describes what exactly constitutes each information in a structured way, and in which format.

Without a standardized and widely accepted format, each company would send documents using their own internal format resulting in the software of the recipient not being able to understand the sender’s document.

Therefore, EDI documents which contain the strict format of electronic documents have been designed so that they are independent of the communication technologies and the software used, while the transmission of EDI data can be conducted using any pre-agreed methodology, such as modem, FTP, email, HTTP, AS2, etc.

The permeation of the internet in modern businesses resulted in the emergence of many new standards. In 2002, The Internet Engineering Task Force (IETF) published the RFC 3335 standard, providing a standardized and secure method of transmitting EDI data via email.

In 2005, a working team of IETF endorsed RFC4130, creating the EDIINT (Electronic Data Interchange – Internet Integration), while IETF has published a similar RFC standard for transmissions via FTP. Additionally, EDI via web services (e.g., AS4) has been standardized as well by the standards organization OASIS. While many have ported the communication via EDI to these newer channels, many of the older ones still remain active.

For each of the previous standards there are multiple different versions. It is important to mention that when two businesses decide to interchange EDI documents, they must agree in regards to the specific EDI standard which they would use for the interchange of data, as well as the communication channel through which that will be possible.

As a company is expected to require different EDI implementations with their business partners or to choose specific standards and communication channels for its internal procedures, it is common to conduct Electronic Data Interchange with each of its clients/suppliers via an EDI service provider. The provider is responsible for the conversion of the format that the service user uses to the one that the recipient wants, and to pass the documents to each via their preferred channel, relieving them from the technical requirements and difficulties required for the integration of the desired machine to machine interconnections.

The EDI standard provides for mandatory and optional information for a specific document and provides rules for its structure. Nonetheless, two EDI documents can follow the same standard and contain different sums of information. For example, a food company can mention the expiration date of the product while a clothing manufacturer can choose to send information about the size and colour.

For this reason, and as previously mentioned, each financial field had its own EDI standards and today, EDI technology is based on standards that were either non-integrated and dominated their fields, or were defined by responsible organizations and trade, technology and standards committees.

Some of the most important EDI standards used in the international market are mentioned below:

  • UN / EDIFACT: The only international standard that the UN suggests, and is mainly used outside North America.
  • ANSI ASC X12 (X12): The most prevalent EDI standard in North America.
  • GS1 EDI: A combination of standards that is used in the global supply chain.
  • TRADACOMS: Developed by ANA (Article Number Association, now known as GS1 UK) and used in the retail industry of the United Kingdom.
  • ODETTE: Used in the European automobile industry.
  • VDA: Used in the European automobile industry, mainly in Germany.
  • A standard used for healthcare data.
  • EDIGAS: Used in the business sector and in the transport of gas (via duct or containers).

Many of these standards appeared for the first time in the beginnings of the 1980s, while as previously mentioned, the advent of the internet had as a result the creation of new, or the modification of existing standards. Besides the many standards, an EDI task becomes even more complicated, as each standard has different versions, a multitude of different codes/fields for each sector, etc.

As an example, the X12 organization has a full list of EDI standards and it contains all of the important business documents, including purchase orders and invoices.

Note that the X12 organization develops and maintains the EDI standards and XML schemas that assist business procedures worldwide, on behalf of the American National Standards Institute.

X12 members include specialists from the technology field and experts in business procedures in the fields of healthcare, insurance, transport, financial, government organizations, the supply chain and many other industries. With more than 320 interchange standards available for use, the X12 standards can be used for conducting almost any kind of business activity throughout the whole world.

Business partners are free to use any method for the transmission of their business documents. Moreover, they can either interact directly, or via an intermediary (third party EDI service provider company).

  • Peer-to-peer: Business partners can directly connect with each other.

For example, a car maker can maintain a specific place in their web where they request their suppliers to enter into (via VPN or another technology). However, if a supplier works with multiple manufacturers, it might be necessary to connect to multiple webs, clouds or even use different software for each. The prevalence of the internet, as was expected, brought forth a reduction of peer-to-peer connections.

  • Value-Added Networks: Before the age of the internet, VAN (Value-Added Networks) were created to face the limitations in the adoption of EDI. VAN works as a regional post office. It conducts transactions, checks the “from” and “to” information and routes the transaction to the end recipient.

VAN networks can provide a series of added services, e.g., the retransmission of documents, the providing of control information by third parties who act as a bridge for various transmission methods and the management of telecommunications support. Due to these and other services provided by VAN networks, companies usually utilize a VAN even if both business partners use protocols based on the internet.

  • Internet: As more organizations obtained access to the internet, most – if not all – modern EDI standards depend on it. Initially, it occurred through ad hoc agreements. For example, access to the FTP of a company can only be allowed from specific IP addresses to a specific folder of a specific computer. Nonetheless, IETF has published multiple guidelines which describe the ways of using the typical internet protocols for EDI transactions.

Finally, it is worth noting that since 2002, Walmart has promoted the AS2 protocol.

Due to the significant presence of the company in the global supply chain, AS2 has become a commonly adopted approach to EDI transactions.

The interchange of electronic company documents improves the speed of the transaction and transparency, while reducing the amount of money and lost work hours which is spent in traditional procedures of the supply chain. Taking only the financial dimension into account, the benefits of the implementation of EDI are impressive. However, the reduction in cost is not the only benefit obtained from using EDI.

Let us, then, investigate the benefits of EDI more analytically:

Financial benefits

The expenses associated with paper, printing, reproduction, storage, archiving, sending and retrieval of documents are reduced or eliminated after switching to document interchanges via EDI. It has been calculated that the net cost of interchanges  can be reduced by at least 35%, counting only the savings in consumables!

By viewing the whole picture of the management of an order, a large electronic device manufacturing company has calculated the cost of processing an order in the traditional way to be $38, in contrast to just $1.35 for an order processed using EDI.

Errors from mistakes due to unreadable faxes, lost orders or erroneously received telephone orders are completely eliminated, thus saving the staff of a company precious time that would be used for handling these disputes.


Speed and precision

EDI can speed up key activities of a business, proven by at least 60%. The interchanges occur in minutes in contrast with days or even weeks of the time it took to manage disputes, approvals and lost documents.

The quality of the data is improved, achieving a reduction of mistakes by at least 30-40%, eliminating errors from unreadable handwritten papers, lost faxes/mail and mistakes in entry.

The use of EDI can reduce the cycle time from the placement of an order to a settlement/payment of the documents, improving transactions, cash flow and the relationships of business partners.


Increase in business performance

The automation of tasks which in the past were based on paper allows the staff of the business to focus on higher value tasks, giving it the tools to be more productive.

The quick processing and movement of business papers results in the guarantee of smooth operation between the responsible departments of the chain and a smooth flow of goods in the warehouse, either on the supplier side, who avoids being out of stock due to the correct handling of orders, or on the client side, who knows when they will receive the goods and in what quantities, thus helping in reducing the number of cancelled orders.

The automation of the interchange of data between computing systems in a supply chain can guarantee that the critical data of a business is delivered on time and can be monitored in real time. Sellers benefit from improved cash flow and reduced order cycles.

The reduction in processing time and delivery time of orders means that companies reduce the inventory that remains unmoved in their warehouses. The goods are replenished and the stock is constantly under control.


The largest benefits of EDI in a strategic business level

EDI allows viewing the status of each transaction in real time.

That, in turn, allows for faster decision making and improved response to the continuously changing needs of clients and purchases, and allows companies to adopt a business model which is based on demand and not only on supply.

It shortens the delivery times of the products and fosters trust between business partners, which is now based on automation of their cooperation.

It improves the possibility of companies to enter new markets, as EDI provides a common business language that makes it easier for the company to conduct business anywhere in the world.

Finally, EDI promotes corporate social responsibility and improves the energy footprint, as well as reducing CO2 emissions.

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