What is EDI?
EDI stands for Electronic Data Interchange. EDI is not a new technology; in fact, it has been around since the late 1960s. Although it has benefited enormously from advances in technology such as the emergence of the Internet, EDI is not technology-dependent. This means there are a number of ways an organization can go about EDI implementation, allowing each organization’s particular business goals to dictate the preferred method of EDI integration.
EDI in its most basic sense 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.
In the current information age, your organization may already be considering the move to an EDI system. Perhaps customers or suppliers have suggested an EDI system to your organization. Perhaps your organization functions in an industry where 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 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 will begin to see instances within your own organization where the benefits are immediately evident.
Let’s take some time to look at EDI in more detail from a purely functional standpoint.
Since EDI deals specifically with exchanging documents, we should be clear on just what constitutes a document. In business, a document has been traditionally defined 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, 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.
Take a more focused look at an example of an EDI system in action and note the key differences between paper-based and EDI transactions.
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 manually enters relevant data into the purchasing system to create the PO
- The PO is printed on special paper
- The buyer mails the PO to the vendor, incurring 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 confirm the PO was received, and whether it has been processed
- The vendor receives the PO, then manually posts it to the 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 between three and five days. This assumes there are no errors in handling at either the buyer’s 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 being lost.
Exchanging a Purchase Order with EDI
Now let’s take a look at the same process again. This time 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 communications through faster information sharing, please visit the Benefits of EDI section.
EDI Implementation
To learn how to begin the EDI implementation process, please visit the Implementing EDI section of EDI Basics.