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The ultimate guide to EDI (Electronic Data Interchange)

The ultimate guide to EDI (Electronic Data Interchange)

What is EDI?

EDI: Definition and Meaning

Electronic Data Interchange or EDI is defined as the standardized computer-to-computer /exchange of information between two or more partner entities.

With the help of EDI, partners can share crucial information with each other with greater efficiency by mitigating human error. Not only is it a lot faster than the conventional communication methods like the post, but it is also much more secure since it involves very little to no human intervention.

Entities that are involved in such an exchange of information through EDI are known as EDI trading partners.

What are EDI payments?

EDI is often used to interchange payment information between the partners via a computer-to-computer connection. Payments done via such a transfer of information are known as Financial EDI or EDI payments.

EDI transactions today comprise more than 85% of all electronic business transactions around the world. It is a proven method of transferring funds securely online.

What is EDI software?

EDI software is a tool that helps the computer carry out the data transfer with other computers via EDI. The software prepares the data by translating it into the standard EDI format.

EDI software contains built-in templates that are used to create a unified format before transferring it to another computer. Individuals can simply fill in the details in the predetermined fields and the software will automatically generate data in the standard format.

Many companies use EDI software to replace any other modes of communication like fax, email, etc. which may be prone to discrepancies and human error.

How does EDI package work?

Companies today have tons of data stored in their servers, which keeps getting updated every minute. This data is generally stored in a centralized ERP system and is accessible across the organization fully or in part.

However, while communicating with its partners, only the data from a few selected fields is required. This depends on the nature of the communication as well as who the partner is.

One way to do so is to manually pick up the necessary information, convert it into standardized documents, and share it with the trading partners. However, this is prone to many human errors, security lapses and is extremely time-consuming.

An EDI software automates this data exchange by simply attaching itself to your existing ERP systems and creating standardized documents by taking the data from your database. You can create different templates as per the nature of the requirements, and once you implement them, you will never have to spend your time and resources on such a repetitive task.

EDI allows you to create templates to suit your and your partners’ preferences and provides a great way of customizing how you share crucial information with your partners.

E.g., If you’re a shipping company and have to regularly share shipping information with your clients about their cargo, you can create different formats for the same with the help of an EDI tool.

For starters, you can create an onboarding template, where they get a detailed document welcoming them to your company and walking them through how the entire process will go. You can create another document for providing them regular updates on where their shipment is and other important details.

The EDI tool will then send out these documents automatically by taking the information from your ERP system and will save you a great deal of time and energy which you can spend on other non-repetitive tasks.

Top Benefits of EDI

People have been using EDI (Electronic Data Interchange) since the 1960s. Understanding EDI is essential, and this can be explained as the virtual exchange of data in electronic format among the trading partners.

In general, the exchange of documents such as purchase orders, payments, shipping notices, invoices, and other documents is regularly done between the supplier and the buyer. Using EDI for exchanging this data will ultimately avoid manual paperwork, enhance overall operational efficiency, and help in improving the virtual exchange process with the new trading partners. EDI opts to lower the costs while improving accuracy and speed, thereby increasing business efficiency.

Some of the top benefits of EDI

Increased speed

EDI has the full capability to accelerate your business cycle up to 60%. It helps make speedy transactions within a few minutes instead of waiting for the conventional posts that take days and weeks to arrive.

With the integrated electronic data interchange, order data will flow in and out of your accounting and ERP systems without human intrusion. It will boost order processing, invoicing, picking, packing and shipping processes, and other various supply chain functions. With EDI, you will reduce order-to-cash cycle time by more than 20% to improve partner transactions and relationships.

Boosting business efficiency

By minimizing human errors, organizations can leverage the increased efficiency aspects. Electronic data interchange will enhance any organization’s customer and trading partner relationship by providing them with fast delivery of goods and services. If the paper-related tasks get automated, your employees will focus on high-priority work and more critical functions that are more productive for your company.

Low operating costs

EDI helps in lessening down your operational expenditure by around 30%. It will tremendously reduce your administrative, maintenance, and resource costs. With the help of EDI software, you can cut down other costs like Matson Logistics that reduces the ASN fines by around 12% by moving to a more efficient EDI solution.

Improved business strategy

When you enable real-time visibility in all your transaction status, it will help you make quick decisions and enhance the responsiveness to fulfill customer and market demands. EDI helps in offering a common business language that will support your business partners’ onboarding all around the globe. It will replace the paper-related work with electronic mediums for getting faster responses. In the end, it will save money and decrease CO2 emissions.

Process integration among trading partners

In the trading partnership, the exchange of electronic documents is arranged between the sender and receiver. It helps set up a smooth communication flow that has some kind of standard processes and working models. It will simplify the commercial relationship with your partner and permit all operations based on familiar and shared management models.

Advanced service to end-user

EDI offers the best end-user service as you will receive the notification of your receipt before the goods are delivered. It will help you to plan your resources and their needs for unloading. Also, it will assist you in adjusting the production and delivery plans that will ultimately enhance the services obtained by your customers.

Enhanced security

Electronic data interchange makes use of encryption systems for improving the security of document exchange. It records transactions, which is why it is used by businesses and governments to avoid fraud and evasion. EDI offers excellent security with the best techniques that keep your business always safe from any kind of fraud.

It completely removes the use of paper

Going paperless is the goal of every organization these days. It is the best advantage that helps any organization save their hours and cost required to manage the paper-work. With electronic commerce solutions, you can remove these time-consuming and tedious paperwork tasks and perform instant information exchange using the internet, computer, and emails. Also, it will help your employees by providing extra hours to spend on something productive that will be beneficial to your organization rather than managing complex paper-work activities.

Better transaction tracking

The best electronic document interchange system helps in tracing and tracking different locations of your orders. With the help of EDI, organizations can see their orders and documents in the exact position and ensure secure delivery. This process helps your organization to stay up-to-date with all the shipping information. All this information can avoid any kind of delay or damage to your shipments.

Team optimization

EDI technology encourages and supports organizations to deal with many operations despite having less staff. Now, the team members can make their involvement in some other functions for adding massive value to the business. Every individual from the team can add their potential and ideas for taking the business to new heights.

EDI Implementation

EDI implementation is a multi-phased process, and one needs to get started with it in the early days of their organization to benefit maximum from it. EDI is an acronym for Electronic Data Interchange, and as the name indicates, it is used to circulate documents within an organization quickly and securely.

However, its use is not limited to exchanging files inside your business exclusively. You can also use it to share data with the external stakeholders of your organization and third parties with an adequate level of data security and gated access. Let us understand EDI software implementation and how you can simplify the process for your vendor proactively.

Firstly, you need to conduct an in-depth strategic review of the number of people, region(s), hierarchy levels, business documents, transactions to be made, and their complexities. This will enable you to understand what type of solution you require to cater to your needs currently and estimate the scalability. Next, you should identify the parts of your organization that are ready for EDI implementation.

Also, these insights help determine the most cost-effective implementation cycle for your organization. Here, you also need to consider the existing infrastructure and your staff’s skillset as you plan to do away with email-based document sharing. Missing on any of these aspects can result in EDI implementation challenges that will stretch the implementation cycle and require you to perform additional contingency planning as well.

Your EDI software implementation vendor plays a vital role in analyzing and confirming these details as they pair up with your staff members. It is necessary that you fully cooperate with their team in order to get a fully optimized solution. This is fundamental to conducting an effective cost benefits analysis (CBA) and avoiding EDI implementation issues:

The following aspects play an important role in the decision-making process:

  • The nature of complexities and shortfalls of existing systems
  • The degree of customization and standardization for the business documents
  • The timeline that will be allocated for the implementation life cycle
  • Finances and special demands that might impact the infrastructure
  • References to the solutions studied earlier

Upon successful implementation of an EDI solution, you will be able to:

  • Reduce the manual exchange of business documents over naive systems like emails
  • Reduce the correspondence and redundancy in capturing, maintaining, and scrutinizing business data
  • Improve the security of your business documents and implement authorization-based access to all your business data
  • Enhances the communication between your internal and external stakeholders
  • Reduce the cost induced on business document sharing and communication that also includes the HR costs

Types Of EDI Implementation

In this section, we will go through the different approaches that you can employ for your organization:

Use Of Connectors Directly

This method was used in the early days of EDI technology, and it relies on building connectors for all data transactions under a unified protocol. But, this approach is applicable only when you have a limited number of users and a single connectivity protocol. As you grow, it turns obsolete.

EDI Network Provider

This is a slightly improved solution in terms of architecture as you can outsource the mapping of document sharing, their translation in different formats, and the reporting to an external vendor who will also be responsible for technical support. They provide you with a document mailbox and are useful when your business exceeds the handling capacity of the direct connection model.

Hybrid EDI Infrastructure

For organizations that are significantly large and have a high volume of document sharing, the hybrid model is ideal. Under this approach, the high volume, high-frequency transactions are transferred to direct connectors, and the rest of the transactions are managed through an EDI network provider. This helps maintain agility while optimizing costs.

Fully Managed EDI Services

The entire workload associated with document interchange is looked after by your managed services vendor in this case. They fetch the data directly from your ERP system and execute all tasks henceforth ranging from mapping to reporting. This is a good choice for significantly large businesses like eCommerce that do not want to get involved in the technicalities of developing and maintaining the infrastructure.

Depending on your business needs and plans, you may go ahead with a suitable value-added network (VAN) provider. Keep the above points in mind, along with the VAN provider’s expertise in serving your industry. Also, discuss the requirements of any custom developments.

We hope this article helps you understand EDI implementation adequately.

EDI Transactions

The communication between computers connected via the EDI network happens through various predefined structures known as EDI transactions. These transactions have a fixed format as per their functions.

Since these transactions come in a pre-defined format, they help with the standardization of data across the network and ease communication. It also makes the entire communication process independent of any other software or technology used by any partners.

EDI transactions’ most common functions are handling requests for purchase orders and invoices, sending out acknowledgment messages, tracking information, and providing payment information to the partners.

There are several types of EDI transactions, and each one serves specific purposes. Some of the most commonly used EDI transactions examples are:

EDI 850 - Purchase Order

EDI 850 transaction is an electronic purchase order, used by companies to communicate to the recipient organization that they would like to buy their goods or services that are mentioned in the document.

It consists of all the essential information about the order, such as the type of goods/services, the quantity, the timeline, and the payment terms. Additionally, some purchase orders may even contain specific information related to shipping the products and the shipping carrier’s information.

EDI 855: Purchase Order Acknowledgement (POA)

As the name suggests, the Purchase Order Acknowledgement transaction is sent to a trading partner once the EDI 850 Purchase Order sent by them is received. It is an acknowledgment of receipt of the purchase order and serves as a provisional confirmation for the partner before sending the invoice.

EDI 810 - Invoice

The EDI 810 transaction is an electronic invoice containing all the information that a traditional paper-based invoice. It is shared with the partner once the EDI 850 Purchase Order has been received.

EDI 820 - Payment Order / Order Remittance Advice

EDI 820 transaction is also referred to as a Payment Order and is used to communicate the financial details such as the total amount to be paid to a trading partner and the due date of payment.

The EDI 820 is generally issued once the invoice has been received.

EDI 997 - Functional Acknowledgment

A functional acknowledgement is a type of transaction that is frequently used as an acknowledgement of receipts of other EDI transactions.

EDI 856: Advance Ship Notice (ASN)

Also known as the EDI Advance Shipping Notice (ASN), the EDI 856 transaction carries the information related to the contents of the cargo. These transactions are very frequent among the trading partners, especially in the fields of manufacturing and retail.

EDI 940 - Warehouse Shipping Order

EDI 940 transaction is known as a Warehouse Shipping Order and is used to communicate with the warehouses. It contains detailed information of the products that are to be shipped from the warehouse and authorizes the warehouse to ship them to either the trading partner or the retail customer.

It is the final greenlight that the warehouse requires before it can ship the order to its destination.

EDI Trends: The Future of EDI for 2021

The EDI market, i.e., Electronic Data Interchange, is going to double in the coming years. EDI has always been the heart of businesses for all organizations. Its scope is going to escalate in the year 2021 as well.

The market report of EDI gives in-depth knowledge on the present size of the market, its competitive landscape, and development patterns. It is better to deep dive into the futuristic aspects of Electronic Data Interchange that will be happening in 2021.

“The Electronic Data Interchange (EDI) market revenue was 739 Million USD in 2019, and will reach 1403 Million USD in 2025, with a CAGR of 11.26% during 2020-2025.”

You must know these interesting facts about EDI

  • The communication in EDI happens in between the computers and not the people
  • The transactions of EDI comply to a universal and the standardized format
  • Electronic data interchange is not utilized by customers for buying products
  • Trading partners make use of electronic data interchange for making B2B transactions
  • The use of EDI in enterprises has been made since the 1960s
  • The US government has been also making use of EDI since 1994
  • Electronic data interchange is a strategic marketing tool
  • EDI is a vital marketing tool

Let’s take a look at future EDI trends of 2021

Participating in digital transformation drives

It has been observed that the Covid-19 pandemic is responsible for boosting the digital transformation drives. Companies worldwide are trying to engage and trade with their partner ecosystems and automate more and more processes.

The spread of the Covid-19 disease globally has taught companies how to stay connected to a cloud-based EDI network. It will allow easy and fast connection and trading with suppliers and customers from all over the world. Also, it provides some integral and value-added tools for enhancing visibility and automating processes to boost business growth.

Huge role to play in e-commerce

Electronic data interchange is going to play a massive role in the e-commerce sector. “In 2019 EDI accounted for 78.4%—$7.00 trillion—of all B2B electronic sales.” As we are moving towards 2021, B2B sales are expected to continue getting conducted online.

The involvement of EDI and e-commerce will become more and more interconnected being two sales channels. EDI helps in the buying and invoicing process and also in the overall production and supply chain. The best EDI software holds the full capability to offer data and insight to all the crucial processes.

A rise in small business

EDI will take a huge rise in small and medium-sized businesses (SMBs) and become the leading driver for leveraging the market. Many companies are thinking of growth in today’s digitized world and searching for a simple path to becoming digital for the first time.

Small and medium-sized businesses are working on strict budgets, and also they are trading digitally with big customers. All such companies lacking in infrastructure or in-house skills should take immediate steps to connect with prominent retailers and use effective EDI services. Different types of EDI and their approaches help EDI to run across a whole trading community.

How To Choose The Right EDI Provider For Your Business

EDI (Electronic Document Interchange) solutions can prove to be one of the best tools for any growing organization as it enables quick digital transformation. It is extremely necessary that you implement a proper EDI platform to facilitate internal and external communications, data pooling, and software integration.

This includes legacy, cloud, and hybrid systems used by every stakeholder directly associated with your business. But how do we find the best EDI provider for our business? Let us have a look at the factors that you need to keep in mind when selecting an EDI service provider.

EDI Support

It is necessary for you to evaluate the support for various document types and various EDI standards. This should be a top priority because as your business grows, you will have to deal with a lot of vendors and supply chain participants.

It will require you to exchange many document types, including shipping reports, warehousing documents, and shipping labels. Your EDI provider should therefore support all common EDI standards ANSI, AS2, and EDIFACT apart from the industry-specific EDI standards.

Type Of EDI Solution Offered

It is not necessary that every vendor specializes in all types of EDI platforms. Depending on the one you selected, it is necessary to evaluate the vendor’s expertise and experience in delivering the type of platform you need.

The EDI platforms are broadly classified into cloud, mobile-based, web-based, networking, and full-fledged B2B EDI solutions. The choice also depends on the existing IT infrastructure, underlying technical expertise, and the complexity of your organizational structure. Thus, it is necessary that you find trustworthy EDI providers that meet your needs head-on.

Integration Support

The second aspect that you need to put on high priority is the level of integration support offered. Your EDI provider should support tightly coupled solutions that enable a seamless flow of data and insights across software packages like warehouse, shipping, order processing, product lifecycle management, and inventory management systems.

The degree of automation achieved through integration should be analyzed. You will need to communicate extensively with each EDI solution vendor’s technical team to understand the push and pulls of their specific platform.

Flexibility And Scalability

Your EDI solution provider must cater to your existing business needs as well as evolving requirements. Cloud-based EDI solutions seem to be a good fit as they provide virtually unlimited scalability and flexibility.

It is also important that you can find developers and quality assurance engineers who can keep the system running. Ensuring that your EDI provider scores high on these points determines whether you benefit from EDI implementation or if it does more harm than it does good.

EDI Mapping And Translation

Whenever we discuss EDI solutions, mapping and translation are invariably considered important. Your vendor should provide you with exhaustive mapping and translation capabilities as it is fundamental to interoperability. The mapping and translation tools should support a wide range of document types and encoding-decoding formats to minimize the complexities in integrations and subsequent maintenance.

If you are opting for a value-added network (VAN) solution, the scope of service should be discussed and documented extensively to avoid any conflicts in the future.

EDI Vs. API In Supply Chain

The success of modern-day supply chain management is largely dependent on how efficiently businesses exchange information and insights. This covers all aspects of the supply chain between demand and fulfillment but sharing business data outside your organization requires you to be in complete control as well as safeguard your interests. The basic step in this direction is sharing order process details, inventory management reports, warehousing inputs, pipeline inventory, and shipping.

Generally, two types of solutions facilitate data sharing and pooling across organizations: EDI and API. Let us understand the difference between the two and which one is the ideal choice for supply chain management:

EDI Vs. API: The Basics

EDI is an acronym for Electronic Data Interchange, while API stands for Application Programming Interface, and both of them are focused on facilitating data flow between applications and users in the same/different organizations. EDI is an older solution that uses mapping and translation tools for interoperability.

It is an asynchronous data transfer technology that uses a file-based, batch transfer model. The standardization levels for EDIs are matured and accepted almost universally. However, these standards are also customized to meet industry-specific requirements.

APIs are a modern solution based on the Service Oriented Architecture (SOA) approach. They facilitate synchronous data transfer (real-time) between various web applications through a series of predefined stateless operations.

It allows the web applications to access each other’s data and resources to process requests in a uniform and standardized manner. As opposed to EDI, which focuses solely on data exchange, APIs help businesses monetize their data.

So which one is more suitable for supply chain management? Let’s find that out.

API Vs. EDI For Supply Chain: Which One Is Better

The short answer to this question is that we need both of these technologies to operate efficiently. Their application depends on case to case basis, and both of them can be used in combination with each other.

EDI solutions provide better security and reliability, which makes them highly preferred by businesses. Also, due to being the older platform out of the two, the support and resources are available for every industry and region.

On the other hand, many user cases demand real-time synchronous data exchange like in the case of making an online platform. In the cases where a third party is involved, and the data transaction needs to be completed instantly/within a given period, APIs are undoubtedly the preferred solution.

They are also popular for cloud-based integrations. Despite the lack of support, their acceptance is growing rapidly to the extent that we are witnessing a shift towards an API-first economy.

EDI has three different versions for each of its standards. Both receiver and sender need to use the same version of the exchange standard. They are also not compatible with responsiveness or real-time visibility/access, which can cause backlashes in many situations.

On the flip side, one remains dependent on the API catalog provided by the developer in case they land into any trouble. EDI requires maintenance, but it is also a cost-effective option when the same type of data is to be shared across the same type of applications. On the other hand, APIs are an ideal choice for the free flow of data and computing access across different software tool verticals.

Since supply chain-oriented businesses need high security, reliable file sharing in considerable volumes while stacking different types of software solutions, they need to use both EDI and API solutions.

Building a centralized architecture that enables using both of them as required will prove to be the most holistic approach for supply chain management, especially ecommerce businesses.

It will support both high-volume and time sensitive file transfer requests simultaneously to make sure that your operations continue seamlessly.