Thousands of years ago, the invention of the wheel changed everything around us. From transportation to trade, the wheel shaped how the world looks now. The same thing is true for Electronic Data Interchange, or EDI, as it is commonly called.
The technology was first introduced in the 1960s when Ed Guilbert from the US Army had to drop 2.3 million tons of goods in West Berlin and wanted a system to keep track of these goods. It took another 20 years for the system he developed to take shape and evolve into standardized business documents and then into electronic messages as we know them today.
EDI continues to be a robust and irreplaceable technology that remains at the heart of most industries. When XML and AS2 were first introduced, it was thought that they would replace EDI since they were simpler and human-readable. Then came APIs, and the world again thought that APIs would replace EDI. However, that was not the case. Today, the global EDI market is expected to grow from $1.98 billion in 2023 to $4.52 billion in 2030. EDI continues to be vital for businesses, offering a reliable way for trading partners to exchange information quickly and efficiently.
What is EDI?
Electronic Data Interchange is the electronic exchange of business documents between a company and its trading partners using standardized formats.
In the past, business documents like purchase orders (PO) and invoices were typically paper-based. They lacked a standardized format, which meant that companies had to manually enter information into internal systems before processing. However, all of this changed with the introduction and adoption of digital documents.
Electronic Data Interchange converts business documents into standardized electronic formats, typically using specific standards such as ANSI X12 or UN/EDIFACT. These standards define the structure and content of the documents, allowing different computer systems and software to understand and process the information accurately.
While POs, invoices, and advance ship notices are the most exchanged documents via EDI, the range of supported documents is vast. Any type of business document can now be easily exchanged, including bill of lading, customs information, inventory reports, shipping status updates, and payment details.
How does the EDI Process Works?
To understand how the EDI process works, let’s consider an example in the retail industry, specifically focusing on the exchange of purchase orders, advance ship notices, and invoices between a retailer and a supplier:
- Agreement and Setup: A retailer and supplier establish an EDI relationship and agree to use the ANSI X12, a widely used standard in North America for digital transactions in various industries.
- Document Mapping: The retailer and supplier collaborate to map their internal systems to the ANSI X12 format for purchase orders and invoices. They identify the specific segments, elements, and data structures required by the standard and align them with their internal systems.
- Data Transformation: When the retailer generates a purchase order within its ordering system, the system automatically transforms the purchase order data into the EDI 850 (Purchase Order) ANSI X12 EDI format. Using the defined syntax and codes, it also organizes the information into segments, such as header, line items, and totals.
- Transmission: The retailer’s system transmits the ANSI X12 purchase order to the supplier via a secure communication method, such as an AS2 connection over the Internet. The document is encrypted and sent electronically, ensuring data security and integrity during transmission.
- Data Processing: Once the purchase order is validated, the supplier’s system processes the ANSI X12 document. It extracts relevant information, such as product codes, quantities, prices, and delivery details.
- Acknowledgment and Response: After processing the purchase order, the supplier’s system generates an EDI 855 Purchase Order Acknowledgment and sends it back to the retailer, confirming the receipt and acceptance of the purchase order.
- Invoicing: Upon shipment of the goods, the supplier’s system generates an ANSI X12 invoice, also known as an EDI 810 Invoice, based on the received purchase order. The invoice includes details such as the billed quantities, prices, payment terms, and relevant identifiers.
- Reconciliation and Payment: The retailer’s system receives the ANSI X12 invoice and performs reconciliation with the original purchase order. This process verifies the accuracy of the invoice and ensures consistency between the ordered and billed quantities. Once the reconciliation is completed, the retailer proceeds with the payment based on the agreed-upon terms.
Types of EDI
There are several types of EDI used in different contexts and industries. Businesses may adopt a single transaction type or a combination based on trading partner requirements, technical capabilities, security needs, and industry standards.
- Direct EDI: Also known as point-to-point EDI, it establishes a direct connection between the sender and receiver’s systems, allowing for the secure exchange of electronic documents without intermediaries. It requires both parties to have compatible systems and communication protocols.
- Value-Added Network (VAN): A Value-Added Network (VAN) is a third-party service provider that acts as an intermediary for EDI transactions. VANs receive EDI documents from one trading partner, validate and process them, and then deliver them to the intended recipient. VANs offer secure data transmission, translation, document tracking, and message routing services. They provide a reliable and standardized platform for EDI exchanges, especially when trading partners have different communication protocols or technical requirements.
- AS2 (Applicability Statement 2): AS2 is an Internet-based communication protocol that ensures the secure and reliable exchange of EDI documents over the internet using encryption and digital signatures. AS2 utilizes the HTTP or HTTPS protocol for communication, which is why it is the most used method for EDI transactions.
- AS4 (Applicability Statement 4): AS4 is an extension of AS2 and provides an enhanced messaging standard for EDI exchanges. It adds additional security features, support for web services, and increased interoperability between different systems. AS4 is commonly used in healthcare and government sectors.
- Web EDI: It enables EDI transactions through web-based portals or platforms. Trading partners access a web interface to exchange documents without the need for dedicated EDI software. Web EDI is often suitable for smaller businesses or organizations that have low transaction volumes or limited IT resources. It simplifies the onboarding process and reduces the technical requirements for participating in EDI.
- Mobile EDI: It allows users to perform EDI-related tasks using mobile devices such as smartphones or tablets. It provides the flexibility to access and manage EDI transactions on the go, facilitating quick decision-making and response to business processes.
Benefits of EDI
- Increased Efficiency: EDI solutions automate the exchange of business documents, eliminating manual processes such as paper-based document handling, data entry, and document rekeying. The automation reduces errors, streamlines operations, and speeds up transaction processing, allowing businesses to handle a larger volume of transactions efficiently.
- Cost Savings: Using an EDI software reduces costs associated with the manual handling and processing of paper documents. It eliminates expenses related to printing, paper, postage, and document storage. Additionally, it helps minimize errors and associated costs, such as data entry mistakes, invoice discrepancies, and processing delays.
- Enhanced Supply Chain Visibility and Collaboration: It provides increased visibility into supply chains and consequently helps businesses optimize inventory management, plan production, and coordinate logistics more effectively.
- Standardization and Compliance: The technology relies on standardized formats, such as ANSI X12 or UN/EDIFACT, which ensures consistency and interoperability between different systems and organizations. It helps businesses comply with industry-specific standards, regulations, and trading partner requirements.
- Improved Customer and Partner Relationships: It reduces errors and delays in order processing and improves response times. The speed, accuracy, and efficiency enabled by EDI contribute to better customer and partner relationships.
The Use of EDI Technology Across Industries
Retail
The retail industry utilizes EDI 850 for purchase orders and 855 for purchase order acknowledgments. The shipping stage entails a supplier sending an advance ship notice (856) to a retailer with crucial information about package contents, shipment timing, and more. Then, the invoicing process involves the supplier issuing an EDI invoice ( 810) to request payment for delivered products. The retailer responds with EDI remittance advice (820), confirming payment to the supplier. These stages ensure that every step of the supply chain is well-knit and facilitates efficient business operations.
Healthcare
Electronic Data Interchange plays a crucial role in the healthcare industry as it facilitates the secure and efficient exchange of information between healthcare providers, insurers, pharmacies, and other entities. It allows healthcare providers to submit claims electronically, leading to faster reimbursement and reduced claim rejection rates. Some of the commonly used standards in the healthcare industry include EDI 837, 835, 270/271, 278, etc.
Logistics
It has become imperative for the logistics industry to be EDI capable as it enables the automation of tasks like order processing, shipment tracking, and invoicing. It allows for real-time visibility into inventory levels, shipment statuses, and delivery schedules, enabling better planning and decision-making. Some of the commonly used EDI standards include 310, 110 etc.
Implementing EDI with Astera
Astera EDIConnect is an enterprise-grade solution that enables frictionless B2B data exchange across systems. The code-free, unified platform allows businesses to seamlessly cover the entire journey, including source extraction, translation, acknowledgment generation, verification, and sending data to its destination. The intuitive, drag-and-drop UI allows even non-technical business users to handle the customization of transactions, segments, elements, and validations with ease. It also:
- Offers a visual that enables users to build complex, hierarchical EDI transactions
- Supports a wide variety of standards, including ANSI X12, HIPAA, and EDIFACT
- Checks all files against the standard and custom validation rules defined for a trade partner
- Efficiently processes large volumes of files regardless of complexity
- Automates workflows using job scheduling capabilities
The Future of EDI
As technology continues to advance, it is evolving to meet the demands of a rapidly changing digital landscape. One key aspect of the future of EDI lies in its integration with emerging technologies such as artificial intelligence (AI), machine learning (ML), and blockchain. With AI and ML, EDI systems can become smarter and more automated, enabling intelligent data mapping, error detection, and predictive analytics.
Up till now, EDI has traditionally been associated with the exchange of business documents such as purchase orders, invoices, and shipping notices. Its scope is expanding to include other forms of data exchange, including integration with Internet of Things (IoT) devices.
By incorporating IoT data into EDI processes, businesses will be able to gain real-time visibility into their supply chains, monitor inventory levels, and optimize production and logistics operations.