What is EDI?

EDI stands for Electronic Data Interchange. Because EDI is not dependant on technology, it has existed in various forms since the 1960s. Technological advances, such as the global emergence of the Internet however, have certainly been to the benefit of EDI. This means there are a number of ways an organization can go about EDI implementation, allowing for each organization's particular business goals to dictate the preferred method of EDI integration.

EDI, in its most basic sense, however, is the simple exchange of standard business documents between two computers at two companies. Beyond this basic definition, it is worth noting that the business documents being exchanged are electronic and follow a standardized format. An EDI system then, eliminates the need for handling paper documents, fosters greater accuracy, greater speed, and costs savings for organizations that use EDI.

EDI in Detail

In the current information age, your organization may already be considering the move to an EDI system. Perhaps it has been suggested to your organization by customers or suppliers. Perhaps your organization functions in an industry wherein EDI integration will give you a decisive advantage among your competitors. Whatever the reason, being new to EDI can seem a little overwhelming. Rest assured, however, that most confusion usually stems from the capabilities EDI offers for so many different business applications. The basic functioning of an EDI system is easy to grasp. When you understand it, you can begin seeing immediate instances within your own organization where the benefits are immediately evident.

Right now, let's take some time to look at EDI in more detail from a purely functional standpoint.

Traditional Document Exchange

Since EDI deals specifically with exchanging documents, we should be clear on just what constitutes a document. In business, a document has been traditionally identified as a paper-based communication between two companies. Some common examples of a document include:

• Purchase Orders
• Invoices
• Shipping Notices
• Export / Import Notices
• Carrier to carrier waybills
• Funds transfer
• Design specifications
• Health insurance claims

EDI replaces these traditional paper- or electronic-based documents with electronically coded messages. Through EDI, then, one computer creates the electronically coded document and sends it. The receiving computer accepts the message and interprets it - all without any human intervention. As such, it might be helpful to understand EDI as a basic data processing concept for document exchange; however, it is a concept that functions independently from established communication protocols or transmission media.

At this juncture, it might be beneficial to take a more focused look at an example of an EDI system in action and note the key differentiations between paper-based transaction and EDI.

Exchanging a Purchase Order Without EDI

A common process for e-commerce EDI to be implemented is in exchanging a purchase order (PO). A look at the traditional approach to PO processing looks a little like this:

• A buyer reviews data from an inventory or planning system
• The buyer then manually enters relevant data into the purchasing system to create the PO
• The buyer then finds the special form the PO needs to be printed on and waits for it to print
• When the PO is finally printed, the buyer mails it to the vendor, accruing the cost of postage, which rises regularly
• The buyers waits a few days for mail delivery, then begins the task of calling the vendor to determine if the PO has been processed or even received
• The vendor receives the PO, then manually posts it to their order entry system

Between the internal handling time and the time the PO has spent in the mail, the simple process of exchanging a PO can take three-to-five days, assuming there are no errors in handling at either the buyer or vendor's end, and that mail delivery was timely. Now multiply that time by the number of POs even a small business handles to see just how much time is really being lost.


Exchanging a Purchase Order With EDI

Now let's take a look at the same process. This time, however, we will be following the PO exchange when handled by an EDI system:

• A buyer reviews the data and creates the PO
• The EDI software generates an electronic version of the PO and automatically sends it to the vendor in mere minutes
  
• The vendor's order entry system receives the PO and immediately updates the system automatically

A traditional, paper-based process that lasted as long as five (business) days, when done without errors, has been completed by an EDI system within minutes.

EDI Benefits at a Glance

The benefits gained from the implementation of an EDI system are difficult to ignore. For more information on the benefits of EDI implementation including improved speed and accuracy of transactions, reduced costs (e.g., paper, customized forms, ink, postage, labor), and improved daily communications through faster information sharing, please visit the Benefits of EDI section.

EDI Implementation

If you are starting to see how an EDI system can benefit your organization, and would like to learn how to begin the EDI implementation process, please select the "Implementing EDI" button from the menu above.