Electronic Data Interchange (EDI)
Electronic Data Interchange (EDI) is the electronic interchange of business information using a standardized format; a process which allows one company to send information to another company electronically rather than with paper. Business entities conducting business electronically are called trading partners.
Many business documents can be exchanged using EDI, but the two most common are purchase orders and invoices. At a minimum, EDI replaces the mail preparation and handling associated with traditional business communication. However, the real power of EDI is that it standardizes the information communicated in business documents, which makes possible a “paperless” exchange.
The traditional invoice illustrates what this can mean. Most companies create invoices using a computer system, print a paper copy of the invoice and mail it to the customer. Upon receipt, the customer frequently marks up the invoice and enters it into its own computer system. The entire process is nothing more than the transfer of information from the seller’s computer to the customer’s computer. EDI makes it possible to minimize or even eliminate the manual steps involved in this transfer.
EDI replaces postal mail, fax and email. While email is also an electronic approach, the documents exchanged via email must still be handled by people rather than computers. Having people involved slows down the processing of the documents and also introduces errors. Instead, EDI documents can flow straight through to the appropriate application on the receiver’s computer (e.g., the Order Management System) and processing can begin immediately. A typical manual process looks like this, with lots of paper and people involvement:
- Business documents
These are any of the documents that are typically exchanged between businesses. The most common documents exchanged via EDI are purchase orders, invoices and advance ship notices. But there are many, many others such as bill of lading, customs documents, inventory documents, shipping status documents and payment documents.
- Standard format
Because EDI documents must be processed by computers rather than humans, a standard format must be used so that the computer will be able to read and understand the documents. A standard format describes what each piece of information is and in what format (e.g., integer, decimal, mmddyy). Without a standard format, each company would send documents using its company-specific format and, much as an English-speaking person probably doesn’t understand Japanese, the receiver’s computer system doesn’t understand the company-specific format of the sender’s format.
- There are several EDI standards in use today, including ANSI, EDIFACT, TRADACOMS and ebXML. And, for each standard there are many different versions, e.g., ANSI 5010 or EDIFACT version D12, Release A. When two businesses decide to exchange EDI documents, they must agree on the specific EDI standard and version.
- Businesses typically use an EDI translator either as in-house software or via an EDI service provider to translate the EDI format so the data can be used by their internal applications and thus enable straight through processing of documents.
- Business partners
The exchange of EDI documents is typically between two different companies, referred to as business partners or trading partners. For example, Company A may buy goods from Company B. Company A sends orders to Company B. Company A and Company B are business partners