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What is EDI? A guide to electronic data interchange [2024]

Electronic data interchange (EDI) is a system that enables the electronic exchange of business documents between different computer systems, either company to company or company to client. It’s a quick and efficient method that reduces manual effort and human error commonly associated with paper-based methods.

Operational efficiency is a concern that businesses of all sizes share. Technology like EDI can help businesses improve their operations and automate communication. So, what is EDI? And what can it do?

Electronic data interchange, or EDI, is the standardized computer-to-computer exchange of information between two or more partner entities. It’s a method of digitally transferring data between companies and their customers, partners, and systems. EDI software is a tool that helps the computer carry out data transfers with other computers. The software prepares the data by translating it into the standard EDI format.

EDI is commonly used in manufacturing, retail, health care, finance, and logistics to transmit documents like invoices, purchase orders, and shipping notices. It’s also widely used to streamline HR and finance processes. For example, large retailers that source from manufacturers and suppliers find themselves in need of an EDI connection, seeing as they rely on its seamlessness and accuracy to maintain steady recurring product shipments to stock their shelves. With multiple suppliers and manufacturers in the equation, EDI automation can be the difference between profit and disaster.

Not only is EDI a lot faster than conventional communication methods like fax and mail, but it’s also much more secure since it involves very little to no human intervention. Without EDI, the average U.S. small retailer has only 63% inventory accuracy

Read on to explore the different types of EDI, how they work, and what they can do for your business.

Illustration depicting the EDI transaction cycle.

How does EDI work?

Transmitting data like a purchase order or an invoice through EDI is a well-defined and fully automated process. Here’s how it works: 

1.Document creation and translation: When a company creates a purchase order, an invoice, or any other type of document, it’s first translated or converted into a standardized EDI format through an EDI solution or translation software. 

2. EDI transmission: Once translated, the document is transmitted through one of two primary methods:

    • Value-added networks (VANs): These third-party service providers simplify and facilitate the exchange of EDI documents. They act as hubs companies use to transmit, receive, and manage their EDI transactions reliably and securely. 
    • Direct connections (or point to point): This refers to a one-to-one connection between two parties exchanging data.

3. Document receipt and translation: Once received, the EDI document is translated back into a format that the recipient system can easily process, essentially reversing the translation that occurred during the initial transmission. For example, if your company receives a purchase order, your EDI software will translate it into a format that your inventory management software (IMS) can understand and process.

4. Integration and processing: The recipient’s system then integrates and processes the document. For example, a supplier receives a shipping order, which then gets integrated into their inventory system and processed to prepare data for a response. 

5. Acknowledgment and response: At this stage, an acknowledgment is sent back to the business or vendor, indicating that the document has been received.

Companies generally have extensive databases and ERP systems or IMS systems that are constantly updated. Communication through EDI sometimes only requires specific data from a few selected fields, which depends on the nature of the communication and who the partner is. There are different ways to manage these transactions:

  • Manual input: Companies can manually pick up the necessary information, convert it into standardized documents, and share it with trading partners. However, this is prone to human error and security lapses and is extremely time-consuming.
  • Automation software: Companies can use EDI software to automate this data exchange by simply attaching itself to existing Inventory Management or ERP software and creating standardized documents by taking the data from your database. Using pre-built templates, you will never have to spend your time and resources on such a repetitive task.

Illustration outlining the benefits of EDI.

Benefits of EDI

Adopting an EDI solution improves operational efficiency, especially when communicating with clients and partner businesses. Here’s how EDI can benefit your business: 

  • Increased speed: EDI can accelerate your business cycle by enabling order data to flow through your accounting and IMS/ERP systems without human input. It also boosts order processing, invoicing, picking, packing, and shipping processes. With EDI, you can reduce the order-to-cash cycle time and improve partner transactions and relationships.
  • Boosting business efficiency: Organizations can provide significantly faster delivery of goods and services. If the paper-related tasks get automated, your employees can focus on higher-priority work.
  • Lower operating costs: EDI reduces operational expenditure by lowering administrative, maintenance, and resource costs. Companies can cut down other costs by moving to a more efficient EDI solution.
  • Improved business strategy: When you enable real-time visibility in all your transaction statuses, you’ll be able to make quick decisions and enhance the responsiveness to fulfill customer and market demands. EDI replaces paper-related work with electronic mediums, saving money and decreasing CO2 emissions.
  • Process integration: The exchange of electronic documents between the sender and receiver sets up a smooth communication flow, simplifying the commercial relationship with your partner and permitting all operations based on familiar and shared management models.
  • Advanced service for the end user: EDI offers the best end user service, as you will receive a notification of your receipt before the goods are delivered. It will also 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 to improve the security of document exchange. It records transactions, which is why it’s used by businesses and governments to avoid fraud and evasion. EDI offers excellent security with the best anti-fraud techniques.
  • Removes the use of paper: Going paperless saves time and the cost required to manage paperwork. 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, freeing your employees to put extra hours into something productive.
  • Better transaction tracking: With the help of EDI, organizations can track their documents in real-time and ensure secure delivery. This process helps your organization to stay up-to-date with all the shipping information and avoid any kind of delay or damage to your shipments.
  • Team optimization: EDI technology encourages and supports organizations in dealing with many operations despite having less staff. By reducing manual tasks and automating inventory management, your team stands to make headway in other areas of the business.

Types of EDI

Employee using a laptop for an EDI transaction.

The difference between types of EDI comes down to the communication methods used, the message formats, and how businesses implement them. More importantly, it depends on the company’s needs and industry. 

Some businesses prefer point-to-point EDI to maintain direct communication with their partners for more control and cost-effectiveness. Other businesses may need a VAN third-party service to access translation services, secure channels, and additional EDI management features ––  especially businesses leveraging multi-channel inventory management.

Here are the seven types of EDI and what makes them unique: 

1. Use of connectors directly

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

2. 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.

3. Hybrid EDI infrastructure

For large organizations that 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 EDI connectors, and the rest of the transactions are managed through an EDI network provider. This helps maintain agility while optimizing costs.

4. 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 ranging from mapping to reporting. This is a good choice for significantly large businesses in e-commerce that do not want to get involved in the technicalities of developing and maintaining the infrastructure.

5. Indirect EDI

Indirect EDI typically involves a third-party intermediary like VANs to facilitate electronic data exchange. This solution covers services needed to manage, transmit, and translate EDI documents, meaning the EDI network, its security, and operation are all covered and managed by the third-party intermediary. 

These providers offer enhanced services, increased compatibility, and multi-party connectivity. While it may give you some peace of mind in terms of managing and monitoring the system, it usually comes at the cost of subscription and usage fees.

6. Web EDI

Simpler web-based access, cloud-based infrastructure, and ease of implementation mean that web EDI provides the standard EDI functionality with the added benefit of superior accessibility. 

Web EDI may lack the resources for a complex EDI system, making it more suitable for small to medium-sized businesses performing electronic transactions with larger partners.

7. Mobile EDI

Mobile EDI has unique accessibility benefits, making it easier to conduct transactions from anywhere, with flexibility and accessibility beyond traditional office settings. User-friendly interfaces, real-time data exchanges, and improved efficiency are some benefits of mobile EDI.

EDI transactions

Illustration outlining commonly used EDI transactions.

An EDI transaction is when a document or data is communicated from one party to another through the network. The most common functions of EDI transactions are handling requests for purchase orders and invoices, sending out acknowledgment messages, tracking information, and providing payment information to the partners.

You’ll notice that each transaction comes with a code (EDI 850, EDI 855, EDI 820, etc.). These codes are identifiers that make the type of transaction clear. For example, an EDI 850 refers to purchase orders — receiving one will automatically trigger an EDI 855 response as a purchase order acknowledgment.

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


EDI 850: Purchase order

An EDI 850 transaction is an electronic purchase order. When a company puts forward an order to buy goods or services, an EDI 850 is used to convey all purchase details such as the type of goods/services, the quantity, the timeline, and the payment terms. Additionally, some purchase orders may contain specific information related to shipping the products and the shipping carrier’s information.

EDI 855: Purchase order acknowledgment (POA)

While an EDI 850 is sent to convey a purchase order, an EDI 855 is the response that’s sent to acknowledge its receipt. It’s an acknowledgment of receipt of the purchase order and serves as a provisional confirmation for the partner before issuing an invoice.

EDI 810: Invoice

The EDI 810 transaction is an electronic invoice containing all the information that a traditional paper-based invoice. it’s 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

An EDI 997 is a functional acknowledgment that’s frequently used to acknowledge receipt of documents, to validate their integrity, or to report errors or exceptions in the transmission process.

EDI 856: Advance ship notice (ASN)

Also known as the EDI Advance Shipping Notice (ASN), the EDI 856 transaction carries details about the shipment, including contents, quantities, carrier information, expected delivery dates, and more. They enable recipients to prepare for incoming goods.

EDI 940: Warehouse shipping order

The EDI 940 transaction is known as a Warehouse Shipping Order and contains detailed information about the products being shipped from the warehouse. It authorizes the warehouse management system to ship them to either the trading partner or the retail customer. An EDI 940 acts as the final greenlight that the warehouse requires before it can ship the order to its destination.

EDI standardized formats

The use of standardized data formats is crucial for maintaining the structure, syntax, and semantics of the information shared across multiple partners. These formats provide a common language for the data exchange.

  • Interoperability: ANSI ASC X12, EDIFACT (Electronic Data Interchange for Administration, Commerce, and Transport), and other formats ensure that different companies’ systems can understand and interpret any documents they share.
  • Efficiency and accuracy: With standardized data formats, the need for manual reformatting is eliminated, reducing data entry errors or translation issues between systems. With this rise in efficiency and accuracy, data processing takes less time, and businesses benefit from automated information exchange that streamlines their operations.

EDI integration

For EDI to be most efficient, it’s important to aim for seamless integration with existing systems like Inventory Management Software, enterprise resource planning (ERP) software and customer relationship management (CRM), HR, and finance tools.

When EDI systems collaborate seamlessly with HR tools, for example, it ensures that changes in employee information, such as new hires, terminations, or modifications to personal or payroll data, are accurately reflected in EDI documents like employee benefit enrollment forms or payroll-related transactions.

Integrating EDI with finance systems enables accurate processing of invoices, purchase orders, payment information, and other financial documents exchanged between trading partners. It automates the transfer of financial data from EDI documents into accounting or finance software, reducing manual data entry errors and enhancing overall financial management.

The future of EDI

Despite its rich history dating back to the 1960s, EDI is still a developing technology. As more EDI software work to further refine business communication and transaction processes, EDI continues to change in several ways.

Cloud-based solutions are part of this change. The shift toward cloud-based EDI offers a measure of scalability, flexibility, and accessibility, allowing businesses to manage transactions securely from anywhere. These platforms provide cost-effective options for SMBs to access advanced capabilities without significant investments.

For example, QuickBooks provides cloud-based inventory management software that seamlessly integrates with EDI, allowing SMBs to manage inventory, sales orders, and fulfillment processes in a centralized system, improving efficiency and accuracy in managing stock levels and order fulfillment.

The rise of AI and machine learning is another avenue of change, as its integration into EDI systems enhances automation and predictive analytics. These technologies help optimize supply chain processes by analyzing large datasets, predicting demand patterns, improving forecasting accuracy, and automating routine tasks like document routing or data validation.

Illustration listing vetting questions for EDI solutions.

For example, Walmart pioneered EDI adoption in the retail industry, improving supply chain efficiency by utilizing the technology to manage inventory, orders, and payments with their suppliers.


How to choose the right EDI solution

EDI solutions can prove to be one of the best tools for any growing organization as it enables quick digital transformation. Implementing a proper EDI platform can facilitate internal and external communications, data pooling, and software integration.

But how do we find the best EDI provider for our business? 

To figure out which type of EDI works best for you, it’s important to consider costs, scalability, and ease of use. 

  • Costs: Evaluate the cost of goods and ownership, including software, hardware, implementation, and regular maintenance.
  • Scalability: Make sure your choice of EDI can scale alongside your business and can handle increased transaction volumes.
  • Ease of use: Always opt for user-friendly systems that don’t require comprehensive knowledge or extensive technical expertise.

Before choosing your EDI solution, it’s important to analyze your business needs and evaluate existing systems to determine the most compatible one. This helps identify EDI requirements and pave the way for the implementation strategy.

From there, it’s a matter of choosing the EDI standards and protocols that work best for your industry and partners. That’s when you integrate and test your EDI software to make sure your data exchange works seamlessly for you and your partners.

Choosing the right EDI provider is an important decision that hinges on a few key considerations:

  • Experience and expertise: Look for providers with a track record in your industry and expertise in implementing EDI solutions.
  • Compatibility: Ensure the provider supports the required EDI standards and integrates well with your existing systems.
  • Support and services: Assess the level of customer support, maintenance, and additional services the EDI provider offers.

1. Consider EDI support

Evaluate support for various document types and various EDI standards. This should be a top priority because as your business grows, you’ll have to deal with a lot of vendors and supply chain participants.

You’ll need to exchange different document types, including shipping reports, warehousing documents, and shipping labels. Your EDI provider should be able to support all common EDI standards  apart from the industry-specific EDI standards, including ANSI, AS2, and EDIFACT.

2. Understand the type of EDI solution offered

Not every vendor specializes in all types of EDI platforms. Depending on the one you selected, it’s important 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. That’s why it’s important to find trustworthy EDI providers that meet your needs head-on.

3. Prioritize 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 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.

4. Look for 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’s also important that you 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 good.

5. Opt for 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 they are 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 VAN solution, the scope of service should be discussed and documented extensively to avoid any conflicts in the future.

Level up with built-in EDI

Choosing the right type of EDI will depend on what works best for your business and your partners. That’s why Cin7 Omni Inventory Management Software includes a built-in EDI feature, providing a comprehensive solution that streamlines operations through workflow automation, ensuring seamless communication with trading partners.

Its full-service offering eliminates the need for internal IT resources or third-party providers, simplifying the EDI process and reducing complexities. By leveraging Cin7’s integrated EDI capabilities, businesses can experience faster time to value, benefiting from efficient data exchange, standardized processes, and improved collaboration.

While the answer to the question “What is EDI?” may be complicated, Cin7’s all-encompassing solution makes it simple, empowering businesses to thrive in today’s competitive landscape.

Ready to streamline operations? Explore Cin 7’s built-in EDI software today.


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:

What are examples of EDI?

Purchase orders, invoices, shipping notices, and inventory documents are all examples of the electronic data transmitted and received through EDI systems. They are standardized business documents that are automatically transmitted and translated between a business and its partners.

What’s the difference between API and EDI?

API (application programming interface) and EDI are both technologies used to exchange data between different systems, but they have different purposes. API facilitates real-time interaction and data exchange between applications and services, while EDI focuses on the standardized exchange of business documents between partners.

What are EDI tools?

EDI tools are software solutions with dedicated EDI functionalities like ERP systems, cloud-based EDI platforms, and specialized applications for specific industries and document types. These tools enable businesses to efficiently conduct electronic transactions and automate document exchange processes.