A Beginner’s Guide to Electronic Data Interchange (EDI)
Learn all the basics about EDI in a quick 3 minute read.
If you're new to the world of Electronic Data Interchange (EDI), you're probably wondering what it is, how it works, and why so many businesses rely on it to manage their supply chains, orders, and data transfers. This FAQ-style guide will cover the essential concepts of EDI, giving you a solid understanding of the basics and how it can benefit your business.
What is EDI?
EDI (Electronic Data Interchange) is the process of electronically exchanging business documents, such as purchase orders, invoices, and shipping notices, between companies using standardized formats. It replaces traditional paper-based transactions, allowing companies to communicate faster and with fewer errors.
Why is EDI important for businesses?
EDI is critical for businesses because it automates the exchange of key business documents. This automation results in:
Faster transactions: Documents are transmitted almost instantly compared to the delays of mailing or faxing.
Cost savings: Reduces the costs associated with printing, mailing, and manual data entry.
Fewer errors: Minimizes human error by automating data entry and processing.
Improved business relationships: Faster communication and fewer mistakes lead to better partnerships with suppliers and customers.
What types of businesses use EDI?
EDI is widely used across many industries, including:
Retail and eCommerce: To streamline order fulfillment and inventory management.
Manufacturing: For managing supply chain logistics, raw materials, and product distribution.
Healthcare: For sharing claims, payments, and patient information between providers and insurers.
Logistics and Transportation: For managing shipments, invoices, and carrier contracts.
Automotive: To handle large-scale supplier and distributor relationships.
How does EDI work?
EDI works by exchanging standardized electronic documents between two or more businesses (trading partners). The general flow of an EDI process includes:
Creating an EDI document: A business system (e.g., ERP) creates a document such as a purchase order (EDI 850).
Translating the document: The document is converted into a standardized EDI format, such as ANSI X12 or EDIFACT.
Transmitting the document: The EDI document is sent through a communication network (like a VAN or direct point-to-point connection).
Receiving and processing: The receiving party’s EDI system translates the document back into a readable format and processes it in their internal systems.
What is an EDI document?
An EDI document is an electronic version of a traditional paper document used in business transactions. Each EDI document type has a standardized format to ensure consistency and readability across different systems. Here are some of the most common EDI documents:
EDI 850 – Purchase Order: Sent from a buyer to a seller to initiate an order.
EDI 855 – Purchase Order Acknowledgment: Confirms the receipt of the purchase order.
EDI 810 – Invoice: Sent from the seller to the buyer to request payment.
EDI 856 – Advance Shipping Notice (ASN): Alerts the buyer that goods have been shipped.
EDI 940 – Warehouse Shipping Order: Sent to a warehouse or 3PL provider to initiate the shipping of goods.
What are the common EDI standards?
EDI documents are formatted using specific standards, which ensure that the data is structured and readable by all trading partners. The two most common EDI standards are:
ANSI X12: Primarily used in North America and covers many industries such as retail, transportation, and healthcare.
EDIFACT: Used internationally, especially in Europe and Asia, for various industries including logistics and manufacturing.
Other specialized standards exist for certain sectors, like HL7 in healthcare or VDA in the automotive industry.
What is an EDI VAN?
A Value-Added Network (VAN) is a private network used by businesses to exchange EDI documents. VANs offer secure and reliable transmission of documents, providing features like data encryption, error checking, and storage. Some businesses prefer to use VANs over direct connections because of the added security and convenience.
What is the difference between direct EDI and using a VAN?
With direct EDI, trading partners connect directly over the internet or a dedicated communication line, usually through protocols like AS2 (Applicability Statement 2). This method is typically more cost-effective than using a VAN but requires more IT resources to maintain.
Using a VAN involves a third-party service provider that handles the secure transmission of EDI documents. VANs offer convenience and security features, but they come at a higher cost compared to direct EDI.
What is EDI mapping?
EDI mapping is the process of translating data from your internal system’s format into the standardized EDI format required by your trading partners (and vice versa). For example, the fields in a purchase order from your ERP may need to be mapped to match the fields in an EDI 850 document.
EDI mapping can be complex, especially when dealing with multiple trading partners, each requiring slightly different document structures. Many EDI platforms have built-in tools to help automate the mapping process.
What is an EDI integration?
An EDI integration connects your internal business systems, such as your ERP (Enterprise Resource Planning), WMS(Warehouse Management System), or CRM (Customer Relationship Management), to your EDI platform. This integration allows EDI documents to flow seamlessly between systems without manual intervention.
For example, once a customer submits a purchase order, your ERP can automatically generate and send an EDI 850 to the supplier without requiring manual input.
What is an EDI compliance check?
EDI compliance refers to ensuring that your EDI documents meet the formatting and data requirements set by your trading partners. Compliance checks ensure that the documents adhere to the correct standards (like ANSI X12) and contain all necessary data fields, preventing errors or rejections.
Many companies and EDI platforms perform compliance checks before documents are sent, ensuring smooth transactions and avoiding delays.
What are the benefits of using EDI for eCommerce?
For eCommerce businesses, EDI offers several key benefits:
Faster order fulfillment: Orders are processed and fulfilled more quickly with automated data exchange.
Inventory accuracy: EDI helps synchronize inventory levels in real time, reducing stockouts and overselling.
Improved customer experience: Faster order processing, shipment tracking, and timely invoicing result in better customer satisfaction.
Cost savings: Automating manual processes reduces operational costs, labor, and errors associated with paper-based transactions.
How do I get started with EDI?
To start using EDI, follow these steps:
Choose an EDI solution: Decide between an in-house EDI solution or using a third-party EDI provider. Platforms like MagicPass offer easy integration and real-time monitoring for seamless EDI transactions.
Identify your trading partners: Determine which partners you will exchange EDI documents with and what standards they require.
Map your documents: Set up your internal systems to translate data into the appropriate EDI formats (e.g., ANSI X12).
Test the integration: Conduct thorough testing with your trading partners to ensure the EDI documents are transmitted and processed correctly.
Conclusion
EDI is a powerful tool for automating business transactions, improving efficiency, and reducing errors. By understanding the basics of how EDI works and following best practices, you can implement an EDI system that helps streamline your business processes, improve customer satisfaction, and grow your eCommerce operations.
Whether you're just getting started or looking to upgrade your current system, platforms like MagicPass provide the tools you need to manage, monitor, and optimize your EDI integrations.