Electronic Data Interchange (EDI) is the exchange of structured electronic business documents between different business partners. EDI is not a specific technology but an interaction of electronic processes, exchange protocols, and business document standards with ultimately one central goal:
“Automated communication of information, in the form of business documents directly between two IT systems, without human intervention.”
This seamless and direct communication enables high process automation, as business information can be exchanged paperlessly and quickly between different systems. Direct means that no change of the information-carrying medium is necessary during the exchange (such as the manual typing of a paper bill). The data is transferred directly from one system to the other without anyone having to intervene manually.
What is being exchanged between systems in the context of electronic data interchange? Depending on the application, this can be electronic orders, delivery notes, and invoices, but also master data or sector- or industry-specific data such as transfers, delivery schedules, time lists, personal data, etc.
How Does EDI Work?
All of your company’s information is stored within your ERP system, such as details related to purchasing, inventory levels, invoicing and billing, shipping, and so on. EDI solutions like integrating with your Sage ERP system, accessing and using the information needed to create the documents you need to do business with other companies.
Your suppliers and clients have specific requirements for how they do business. Ship-to addresses, special pricing, and so on are determined when a deal is made and must be considered when transactions occur. This is the data that gets used by solutions to facilitate trading between businesses.
EDI uses the standard of data (ANSI or EDIFACT) to ensure requests from one party are compatible with the supplier’s information system so that the supplier can fulfill orders placed. It helps companies doing business with each other, particularly suppliers that can consistently meet the requirements and terms of their clients, like retailers and distributors.
This is all organized during software implementation when fields are mapped to each other so that the relevant data is used.
When a request is received, the data is converted to fit the recipient’s system, and crucial transaction information is used to generate all incoming and outgoing documents.
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Who Is EDI Aimed At?
Any company can use it to exchange business documents with its partners (suppliers, customers, banks, etc.), as long as its partners can interpret this data and integrate it into its information system in an automated manner.
How Does EDI Work?
All business documents can be digitized using EDI, such as order forms, purchase orders, mandates, invoices, payment documentation, shipping notices, customs documents, and inventory analysis.
However, these documents must follow a standard format so that computers can process this flow of information automatically. Several standards (XML and OCI for messages relating to purchase requests, orders and order confirmations, etc.) are available to ensure standardization, each of which comes in several versions. Before sending any documents, business partners must agree on the format (standard and version) they wish to use.
Once a format is decided upon, the process follows three main steps:
Prepare The Documents
First, the information required to create the document must be gathered and organized.
Translate The Documents Into The Correct Format
Next, the internal document must be converted into the defined format. You can purchase and use your translation software or a service provider.
Connect And Send The Documents
Your business documents are ready to go! There are multiple ways to send them to your business partner:
- Direct connection using a secure protocol, also known as Point-to-Point EDI
- Connection via an EDI network provider
How Does EDI Benefit Businesses?
Relying on manual processes to ensure conditions of a deal are met is a cumbersome and error-prone process. An EDI solution will replace many manual processes with automated transactions by setting up a communication network between systems in a supply chain.
The growth of software solutions is much like that of other business software systems like ERP. Once a luxury of large enterprises, it’s made its way into the hands of small and medium businesses. It differs, however, in that a significant trading partner, retailer, or distributor often imposes it as a requirement on members of its supply chain. So, the significant benefit of implementing the software is to trade with large companies requiring partners to have an EDI solution for transactions. On a smaller scale, the software also improves efficiency for a growing small and medium enterprise.
1. Time-Saving And Speed Improvements
Some of the benefits of EDI solutions are pretty straightforward. The speed at which information flows with systems is a clear example. With a solution, incoming orders are created automatically, not needing user input or taking up employee time.
There are no delays due to different time zones or getting a person familiar with the term on the phone. No faxes, or paper trails, leading to better cash flow, faster buy-sell cycle time, shorter lead times, and reduced inventories.
2. Accuracy And Elimination Of Manual Errors
An EDI solution improves the reliability of the information being exchanged between businesses. Companies see a reduction in errors by eliminating manual and duplicate data entry. With access to the data of these systems, the solutions serve as the medium in which the information travels and ensure that information accessed and received is accurate and that conditions for the transactions are met.
This improves relationships with trading partners, minimizing costly chargebacks, late deliveries, or incorrect product prices.
3. Security And Simplicity
Standardizing data within your systems will help your IT staff and employees know where to find it. The automatic generation of sales orders, invoices, shipment reports, and so on will simplify the work for sales and warehouse staff.
EDI solutions are set up to be only accessible to pre-defined authorized users, equipped with audit trails and archives to track use and ensure security. Electronic confirmations to confirm receipt of documents between parties brings transparency to business relationships.
Integrating it with your ERP system can bring other benefits, as different business processes can be mapped and automated. A company looking for EDI is a company that is on the right growth path and may find further benefits by investing in business software solutions.