The definitive guide to Electronic Data Interchange (EDI)

In many industries, Electronic Data Interchange (EDI) is increasingly becoming the preferred method of conducting business-to-business (B2B) document exchanges between business partners. EDI enables you to carry out B2B exchanges in an efficient, secure and cost-effective manner. If you’re just getting started with EDI, you can use this comprehensive guide as a jump-off point for all the things you need to learn and put in place to properly implement electronic data interchange with your business partners. 

What is EDI?

EDI refers to a standardized method of exchanging digitized business documents between two computer systems. Depending on the industry involved, these documents can include purchase orders, invoices, advance ship notices, patient claims and many others. Organizations that exchange documents through EDI are called trading partners. 

When you carry out EDI with a trading partner, your documents must adhere to a standard format. In addition, you and your trading partner must agree on a common communications channel. This standardization eliminates one of the biggest obstacles to B2B data exchanges — the use of disparate computer systems. 

When two organizations use different systems, they’re prone to interoperability issues. By standardizing document structure, data elements and the communications channel, EDI allows two organizations to exchange data regardless of the systems those documents are coming from and are headed to. 

EDI and business process automation

EDI technology and business process automation are a match made in heaven. EDI eliminates interoperability issues, thereby making it easier for you to set up automated B2B workflows with your trading partners. At the same, automation enables you to harness the full potential of EDI. If you just exchange standardized business documents through manual methods like email, your B2B workflows will still be prone to errors and delays. 

EDI has been around for decades. However, advancements in business process automation technology, like workload automation (WLA) and managed file transfer (MFT), are injecting new life into it. WLA and MFT solutions are making it substantially easier and more affordable for organizations to automate entire business processes. Because these two complement each other perfectly, EDI and business process automation normally go hand in hand. So, when we talk about EDI in succeeding sections, we always mean automated EDI.

Benefits of EDI

The following benefits are driving businesses to EDI adoption:

• Reduces errors and increases accuracy

• Boosts processing

• Increases productivity and efficiency

• Lowers costs

• Improves customer and employee satisfaction

• Strengthens business relationships

Reduces errors and increases accuracy

Manual processes in non-EDI environments are prone to data entry, calculation, duplication, omission and other types of human errors. These lead to inaccuracies or even material misstatements. By shifting to EDI processes, wherein human intervention is minimal or even completely absent, you can substantially reduce these errors. 

Boosts processing

Traditional, paper-based transactions can take days or weeks to complete. By comparison, EDI transactions are typically done in just a few minutes. Some EDI transactions even approach near real-time processing. 

Increases productivity and efficiency

By automating data exchanges, you can free up time for employees who would have been tasked to prepare the business documents and carry out those exchanges manually. Those employees can instead redirect their attention to more important tasks. 

Lowers costs

Compared to the total costs associated with storing, retrieving, transporting, organizing and managing voluminous paper documents, the costs associated with electronic documents are much cheaper. 

Improves customer and employee satisfaction

Faster transactions and streamlined business processes brought about by EDI enable you to deliver products and services on time. By bringing down annoying delays and waiting times, you can foster end-user and customer satisfaction. 

Strengthens business relationships

Consistently prompt deliveries are always beneficial to trading partners. They reduce inventory costs and stockouts, improve cash flow and demand forecasting, and boost your partners’ overall confidence and satisfaction in your organization. 

Use cases for EDI

Any organization that wishes to exchange business documents in an automated manner can use EDI. To help you gauge EDI’s applicability to your organization, here are some sample use cases. 

Supply chain

EDI is heavily used in automotive, apparel, food and beverage, oil and gas, pharmaceutical, manufacturing and other supply chain industries. Raw material suppliers, component suppliers, Original Equipment Manufacturers (OEMS), distributors, retailers and other supply chain participants use EDI to send and receive various business documents. 

Common supply chain EDI documents

• Purchase orders (POs)
• Order Acknowledgements
• Advanced Shipping Notices (ASNs)
• Bill of Lading (BOL)
• Request for Quotation (RFQ)

Healthcare

Healthcare organizations in developed countries are likewise heavy users of EDI. In fact, in the United States healthcare industry, EDI usage is mandatory. The Health Insurance Portability and Accountability Act (HIPAA) requires healthcare providers, health plans, healthcare clearinghouses and other covered entities to exchange certain types of information through EDI. 

Common healthcare EDI documents

• Healthcare claims
• Remittance advice
• Eligibility and benefit inquiry
• Referral certification and authorization

Financial services

Banks and other financial institutions leverage EDI to facilitate electronic transmissions of payments, payment information and other financial documents. These institutions also use EDI to exchange financial data with their clients, which may include businesses, academic institutions and government agencies, among others.

Common financial EDI documents

• Credit/debit adjustment
• Debit authorization
• Financial information reporting
• Secured interest filing

eCommerce

In the e-commerce industry, EDI plays a critical role in automating order processing, inventory management and logistics. It streamlines how e-commerce stores exchange business data with suppliers, warehouses, logistics providers and payment processors. 

Common e-commerce EDI documents

• Purchase order
• Invoice
• Shipping schedule
• Warehouse shipping order
• Product catalog

Travel and tourism

Hotels, resorts, airlines, cruise lines, travel agencies and other organizations operating in the travel and tourism industry use EDI to send and receive booking information, ticketing details, passenger manifests and other relevant data. 

Common travel and tourism EDI documents

• Hotel reservation request
• Customs manifest
• Travel itinerary
• Ticket purchase order

Key components of EDI

The following components must be in place before you can conduct EDI transactions with a trading partner. 

EDI standards and formats

In order for EDI to work, you and your trading partner must agree on a common EDI standard or format. To ensure full compatibility, you must also agree on the specific version of that standard. The standard specifies what constitutes a particular EDI document and how it must be formatted. For instance, it specifies the segments and data elements that must be present in a particular document like, say, purchase order.

Here are some of the most common EDI standards in use today and the industries or regions that use them:

EDI software

Automated EDI environments rely heavily on software applications that perform integration, translation/mapping and communication functions. These EDI solutions play a significant role in eliminating manual tasks and boosting the efficiency and accuracy of your B2B exchanges. 

EDI integration

Integration software connects your EDI system with your business applications like Enterprise Resource Planning (ERP), Customer Relationship Management (CRM), Supply Chain Management (SCM) and Warehouse Management System (WMS). These integrations are usually achieved through application programming interfaces (APIs), adapters/connectors, middleware or custom-built integration solutions. 

EDI translation and mapping

The documents generated by your business applications usually come in the form of XML, CSV or JSON files. You need to convert these files into EDI format before sending them to your trading partner. Conversely, EDI documents you receive from your trading partners must in turn be converted to XML, CSV, JSON or any suitable format that can be ingested by your business applications. EDI translation and mapping software can carry out these two types of conversions for you.

Here’s an example of a purchase order (PO) in XML format:

<PurchaseOrder>

  <OrderNumber>12345</OrderNumber>

  <OrderDate>2024-07-01</OrderDate>

  <Customer>

    <Name>John Doe</Name>

    <Address>123 Elm Street</Address>

  </Customer>

  <Items>

    <Item>

      <ProductID>98765</ProductID>

      <Quantity>10</Quantity>

      <Price>15.00</Price>

    </Item>

  </Items>

</PurchaseOrder>

Here’s that same purchase order after being translated into ANSI X12 850 format:

ISA*00*          *00*          *ZZ*SENDERID       *ZZ*RECEIVERID     *20240701*1200*U*00401*000000001*0*T*:~

GS*PO*SENDERID*RECEIVERID*20240701*1200*1*X*004010~

ST*850*0001~

BEG*00*NE*12345**20240701~

N1*ST*John Doe~

N3*123 Elm Street~

PO1*1*10*EA*15.00**BP*98765~

CTT*1~

SE*6*0001~

GE*1*1~

IEA*1*000000001~

EDI communications

Once your business documents have been converted into the appropriate EDI format, you would be ready to send them to your trading partner. EDI transmissions used to be carried out through intermediary EDI service providers known as Value-Added Networks (VANs). These days, however, many businesses have replaced VANs with EDI communications software like Managed File Transfer (MFT), which enables direct transmission of EDI documents to trading partners. 

Communication channel

In performing EDI communications, you have two main options. You can go through a third party or perform EDI transactions directly with your trading partner. 

EDI via Value-added Network (VAN)

A VAN is a third-party EDI service provider that acts as a middleman between you and your trading partners. It sends and receives EDI documents to and from your trading partners on your behalf. 

Direct EDI

Instead of going through a middleman, you can send EDI data directly to your trading partners through point-to-point solutions. These in-house, self-managed solutions, which usually come in the form of MFT software, transmit data through file transfer protocols like Applicability Statement 2 (AS2), Odette File Transfer Protocol (OFTP) or Secure File Transfer Protocol (SFTP).  

How EDI works

Let’s put together all those concepts we’ve learned so far and discuss how a typical EDI environment works. 

• EDI standard selection: Before any EDI activity can take place, trading partners first agree on an EDI standard and communications channel. For example, if you and your trading partner are US-based companies and already connected to the internet, you might adopt ANSI X12 as your EDI standard and AS2 as your communications channel. This step is crucial because it dictates how succeeding steps are carried out.
  
  

• EDI infrastructure deployment and setup: Based on the outcomes of Step 1, the parties involved then procure all necessary hardware, software and other requirements, and then build the appropriate EDI infrastructure. It’s at this stage where EDI integration takes place. Here, you would integrate your EDI system with your business apps. It’s also at this stage where you would set up a connection with your trading partner through the appropriate EDI network, whether it be a VAN or the internet.
  
  

• Document preparation: Once the EDI environment is operational, sending parties start preparing the business documents that need to be translated to EDI format. You’ll likely have to retrieve these documents from your ERP, CRM, SCM, WMS and so on. This can be done manually or through software.
  
  

• EDI translation: Once the business documents are ready, they’re converted into the EDI format the trading partners have agreed on. This is the part where you transform, say, your PO to EDI 850. Again, you can do this manually or through an EDI translation software. If you want to minimize errors and improve efficiency and accuracy, use the second option.
  
  

• EDI document transmission: EDI documents that are ready for sending are then transmitted through the agreed communications channel. If you’re going to send documents through direct EDI, choose a solution that is automated, secure and supports multiple file transfer protocols. The reason you’ll want a multi-protocol-capable tool is because different trading partners might prefer different protocols.
  
  
• EDI translation: Upon receiving the EDI documents transmitted by the sending trading partner, the receiving partner converts those documents to a format that their business applications support and then has them ingested into the appropriate applications. The diagram below illustrates steps 4 to 6. 

EDI implementation best practices

The moment you decide to adopt EDI, you’ll want to ensure the implementation process goes smoothly and efficiently. Here are some best practices that can help you achieve that:

• Work closely with trading partners: Collaborate with your trading partners in choosing protocols, document formats and communication methods for a seamless onboarding process. If possible, detail everything in a trading partner agreement (TPA). 

• Assess current IT environment: Review your current IT infrastructure, especially on-premises and cloud-based systems that you would have to integrate with your EDI environment. Identify any potential incompatibility issues and take them into account in choosing your EDI solution. 
• Adhere to standards: To minimize risk and ensure interoperability in your EDI engagements, align with industry standards and regulations. For instance, if you’re operating in the US healthcare industry, make sure you comply with the EDI provisions of the Health Insurance Portability and Accountability Act (HIPAA). You’ll also want to check if your EDI solutions are Drummond-certified, which means they have been rigorously tested for security and interoperability.  

Adopt EDI with JSCAPE MFT 

JSCAPE MFT by Redwood offers businesses secure, automated and compliant solutions that can be had through an on-premises MFT server or a cloud-based MFT-as-a-Service (MFTaaS) solution. Both solutions are equipped with no-code/low-code automation features, multi-protocol and integration capabilities and a host of security controls that make EDI implementations seamless, reliable and secure.

Start your EDI journey the right way. Schedule a quick JSCAPE MFT demo today.