Electronic Data Interchange (EDI)

EDI (Electronic Data Interchange) is the transfer of data from one computer system to another by standardized message formatting, without the need for human intervention. EDI permits multiple companies -- possibly in different countries -- to exchange documents electronically. Data can be exchanged through serial links and peer-to-peer networks, though most exchanges currently rely on the Internet for connectivity.

An EDI message contains a string of data elements, each of which represents a singular fact, such as a price, product model number, and so forth, separated by delimiter. The entire string is called a data segment. One or more data segments framed by a header and trailer form a transaction set, which is the EDI unit of transmission (equivalent to a message). A transaction set often consists of what would usually be contained in a typical business document or form.

When sending an EDI document, both parties or trading partners must adhere to the same set of rules. These standards define where and how the information from the document will be found. Translation software processes the information differently for sent and received messages and performs a complete audit of each step to ensure information is sent or received in EDI format. When the translator on the receiving computer reads a document, it knows where to find the buyer's company name, order number, purchase items and price, for example. This information is then sent to the receiver's order entry system without necessitating manual order entry.

EDI applies to documents such as purchase orders, invoices, shipping notices and commission sales reports, as well as other important or classified information. For example, an insurance company can verify that an applicant has a driver's license through an EDI exchange.

EDI is primarily used by large companies to have a uniform processing system, enabling efficiency. Cost, speed, accuracy and efficiency are the major benefits of EDI. The system is expensive to implement and usually requires help from a consultant that specializes in the field.

EDI competes with XML, which relies on tags to organize data. It can also compete with application programming interfaces -- code that allows two software programs to communicate. While similar to EDI, API lacks a standard for users, making it hard for different businesses to share information via APIs.   

Using EDI systems eliminates the need -- and therefore cost -- to print, file, store, post and retrieve paper documents. The goal is to get rid of paper and have everyone working with the same invoice so that information is processed and read easily.

Some users, such as doctors transmitting healthcare information, may find EDI more burdensome than paper, but the standardization and electronic conversion pays dividends in the long run.

Automating paper-based tasks improves data quality, and transactions are exchanged within seconds or minutes instead of days or weeks. EDI frees up staff time to work on more important tasks. Business-critical data is sent on time and tracked in real time by automating the transfer of data among applications across a supply chain.

Different EDI standards address the needs of specific industries or regions or other specifications. ANSI ASC X12 (X12) is routinely used in the U.S., and EDIFACT (Electronic Data Interchange for Administration, Commerce and Transport) is used outside of the U.S.  Also, numerous other standards relate to specific industries, such as VDA for the German automotive industry.

The Data Interchange Standards Association (DISA), a company that develops and proliferates the standards for interchanging electronic business across multiple industries, supports ASC X12. X12. Three times a year, X12 members work together across various industry verticals such as finance and healthcare to develop new versions of the standard.

EDI systems

Different types of EDI are implemented to suit the business's needs, capabilities and budget -- assisting multiple consistent business partners, supporting partners around the globe or in other situations. Methods include Direct EDI (point-to-point); EDI via VAN or EDI network services provider; EDI via E S2; EDI via FTP/VPN, SFTP or FTPS; Web and Mobile EDI; and EDI outsourcing.

Direct EDI: With Direct EDI, one connection is created between two business partners. Larger businesses might choose this method if they have numerous transactions with the same partner per day.

EDI via VAN (value-added network), EDI Network Services Provider: This model protects businesses from the complications that come from supporting the many communication protocols that are required when dealing with multiple business partners. It is a secure network where documents are transmitted between business partners.

EDI via Applicability Statement version 2 (AS2): This communications protocol securely exchanges data over the Internet. Two computers (a client and a server) connect in a point-to-point mode through the Internet. AS2 is sent securely in an envelope that uses digital certificates and encryption.

EDI via FTP/VPN, SFTPS, FTPS: file transfer protocol (FTP) over Virtual Private Network (VPN), Secure File Transfer Protocol (SFTP) or File Transfer Protocol Secure (FTPS) exchange documents through the Internet, connecting business partners directly.  These protocols encode data during transmission from one business to the other, to protect sensitive information. Data are decrypted upon arrival.

Web EDI: EDI is directed via Internet browser, duplicating paper-based documents into Web forms that contain fields where users enter information. It is then automatically converted into an EDI message and sent via secure Internet protocols.

Mobile EDI: This method enables the transmission of documents through mobile devices.

Managed Services: Managed services systems outsource the EDI document control to a third-party provider.

Business needs and processes determine which EDI system to implement. Before moving to EDI in your organization, establish a managerial structure. Members of the team should have EDI and executive experience. Next, set priorities for adoption and then analyze which areas of the business will benefit most from EDI. Select an EDI network provider that focuses on your business necessities. Then, assimilate EDI and data into the business.

To outline how the data in the EDI transaction correlates to the data in the internal system, create a map that will determine where each incoming field goes and if the data needs to be reformatted. Test the system before implementing it live.

This was last updated in October 2014

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