What is Electronic Data Interchange (EDI)

In the business world, Electronic Data Interchange (EDI) is an upgraded system in the form of software by which one company can electronically share and send business documents to another company. These business documents include invoices, contracts, purchase vouchers, records, and many more.

EDI function completely takes place in computers between partner companies like trading partners, suppliers, and customers. It means if you're preparing any documents in your computer's EDI system, they will be sent to another computer's EDI system of your client, customer, partner, or stakeholder.

EDI is a modern way to speed up the transaction and communication process between two companies. It also reduces paper wastage and cost, which isn't possible in traditional despatch.

The Function of EDI: How Does it Work?

Electronic data interchange, at its core, works in multiple phases. Here, we'll describe three phases, including the process involved in each.

Phase 1: Preparing Data

The primary phase of EDI involves organizing data, including necessary documents, information, and bills, and entering the computer system. Let's find out the process below:

Data entry by the employee(s) via screens
Exporting data from spreadsheets or database
Preparing reformatted electronic reports
Creating output files for translation into EDI standard files

Phase 2: Document Translation into EDI Format

The second phase will involve translating the output files into EDI standard documents. The process goes like this:

Purchasing EDI software to learn and maintain within an organization
Mapping the official internal data to correlate it with the EDI format
Translating the data using an integrated EDI translator into a suitable format that’s acceptable by the company’s accounting and ERP (Enterprise Resource Planning) system

Phase 3: Transmitting Documents to Partner

The company needs to connect to the business partner as the documents are ready to be sent. You must decide which secure internet protocol to use to connect and transmit data to your partner so no data breach occurs.

There are several ways to send confidential EDI standard data or documents to your business partners, including:

Connecting to an EDI network provider or VAN provider
Using AS2 (Applicability Statement 2) internet protocol
Use both protocols in combination if you need to send a large volume of transaction files.

Nonetheless, there’s a scope for your partner to advise you on selecting the right protocol to get the job done in the most secure way possible.

Business Documents and Records in EDI

Companies may want to send certain documents and records away to their stakeholders immediately. Here, electronic data exchange comes in handy.

EDI is an intelligent way to communicate the below documents and records:

Proposal for Contract Pricing
Purchase Order
Invoice
Inventory documents
Advance Shipment documents
Customs documents
Bill of Lading
Credit/debit Adjustment
Commission Sales Report
Tax Information Exchange
Payment Cancellation
Debit Authorization

EDI Versus Paper-Based Document Transmission

Thousands of businesses still use the typical paper-based document transmission method. Many are still reluctant to use internet-based data transmission for fear of theft.

However, you'll find supporters of both systems. So, let's compare these two systems below for a better view of them:

1. Paper-based

Usually, the paper-based transaction or document exchange takes place between two trading partners as below:

An official from the buyer’s organization will check the inventory system to create a Purchase Order (PO).
The person will prepare an electronic PO based on the inventory requirements on the company’s system, print it, and send it away to the vendor through a courier.
It may take a week or more before the vendor receives the PO and places the order into their sales order system.
The vendor will print the necessary documents and an invoice to ship the order to the buyer's address.
On the other hand, the buyer will receive the documents and invoice and place them into the accounts payable system.

Usually, the overall process takes more than a week or two, lengthening the transaction completion more than desired by any parties.

Due to this, documents or invoices may sometimes need to be found or go missing, delayed payment, and so on.

2. Electronic Data Interchange

In an EDI system, the order placement and transaction occur like below:

A company with an EDI incorporated within its system enjoys an automated PO creation which is based on the inventory updates and sent away to the vendor's EDI system in no time.
Usually, a critical-level inventory system generates an automatic EDI formatted PO to keep up with the product requirements.
The vendor’s EDI system receives the PO while disposing of it in two ways; by sending a notification to the shipping department to ship products and transmitting an invoice to the buyer’s accounts payable system.

Here, the officials involved in the process at both buyer and vendor premises will take care of the rest of the manual processes to complete the transaction as neatly as possible.

However, it's obvious how fast and reliable an electronic data interchange can be to pace up an ongoing business between two partners.

Future Endeavors of EDI

The future functions and feats of electronic data interchange are auspicious. A few of those are mentioned below:

Blockchain data interchange has become the modern electronic data interchange that can generate encrypted, auditable, and cost-efficient transferable business messages like Purchase Order, Advance Ship Notice, Sales Order, Invoice, etc.
EDI will work with IoT (Internet of Things), where an IoT sensor will be chipped into the packaging of the goods, so the EDI system of the buyer can trace and monitor the product’s real-time condition and location.
A correlation between the AI tech and EDI will enable the detection of any noncompliant or relevant events in the shipment process and notify both the buyer and vendor parties.