Electronic Data Interchange (EDI) explained – Exchanging business documents

Posted on 10th Jul 2019

Year ago, when faxing was new, organizations had fax cover sheets – an introductory page that pretty much had standard information – usually date, sender, receiver, fax number, and the number of pages attached. There was no standardized format because everything was a hard paper copy.

Today, documents can be sent electronically, from one computer to another. Most of us do this when we send attachments to emails or photos that we want to share. But EDI takes all of this one step further.

EDI is a document exchange between businesses and other organizations that occurs from one computer to another, without any human handling or intervention. The big benefits of this system are several – lower cost, greater processing speed, error reduction – and result in overall better relationships between businesses.

Defining the terms

Computer-to-Computer: Edi documents move from one computer to another in a specialized language that both computers understand. The receiving computer can automatically “read” the document and act upon it. So, if one computer should send a purchase order to another computer, the receiving computer can automatically generate an invoice for that order and send it back – hands-free.

Business Documents: there are some pretty common documents that are exchanged among businesses – purchase orders, invoices, shipping orders/notifications, inventory, customs documents, payments, etc. In some instances, EDI is now being used for health records transfers too.

Standard Format: Obviously, for one computer to “read” what another computer has sent, there needs to be a standardized format. That format describes each piece of information in “computer terms” and what format is being used. And there are several. Typically, a business will use software that acts as an EDI translator or, in other instances, use the service of an EDI provider. Two businesses that decide to trans documents this way must agree on which standard format they will use.

Partners: this term refers to any two businesses that have agreed upon a standard format to use for document transfer.

Elements, segments, and envelopes

Remember when you were in school? You may have stressed over writing assignments. “I have to write my paper and use a style format that I don’t know.” You had to look up that format and follow the standardized guidelines that were already set for that style. Now, however, students have it easier. There are software programs that will automatically generate citations in any formatting style.

And so it is with EDI. There are standardized formats that, once agreed upon by two businesses, will generate documents in that language. These documents will follow “rules” that define exactly where all elements of a document will be placed and in what format. This allows the receiving computer to “read” the document correctly and respond according to the same “rules.”

Elements are the specific items in a document – a PO number, price, etc. And each of these elements is introduced by a type of code that identifies it.

Elements are organized into segments. A segment may be the company address or the PO number and date on the top section of a PO or an invoice, for example. Another segment may be the body of an invoice that describes the items purchased and the unit cost, and the bottom segment may include the order summary with a total.

Envelopes are obviously not what we normally consider to be containers for letters or documents. In this case, envelopes are the codes that indicate the beginning and end of segments of documents.

How EDI documents are prepared and transmitted

The information for a document is first collected and entered into the system.

The software then translates that information into the EDI format. For this step, businesses have two options. They can buy EDI translation software that is kept in-house, and I will require an in-house expert to map the data, manage, and maintain it. And translation software comes in varieties to accommodate large enterprises with heavy use to smaller businesses who may not need to transmit as much.

The other option businesses have is to use an EDI service provider. If this is the option, data is sent to the provider who then translates it.

Transmission of documents occurs by connecting to a secure internet protocol, connecting to an EDI Network provider who then sends it based on the Internet protocol the business partners have established.

Benefits of EDI transmission

Cost and efficiency are obviously the big benefits of using EDI.

1. Cost

There are any number of expenses associated with traditional documents, as companies conduct business with one another – paper, printing, and staff costs – even if those documents are generated through computer systems and then emailed or faxed to another company.

There are also the costs of correcting the human error, when changes must be made, when orders/invoices are lost, when phone orders are misunderstood, etc. EDI eliminates all of these indirect costs of doing business.

2. Accuracy and speed

Transmissions can be completed in minutes. Further, the quality of the data – eliminating poor handwriting and poor print quality – is clear. As well, there are no lost faxes or emails landing in a spam folder or incorrectly addressed.

3. Business efficiency

Overall, transmissions can be tracked in real-time, there will be improved cash flow, and ordering and delivery times are shortened. This can impact everything from inventory management to transparency to response rates. And the benefits for establishing and maintaining a more global presence are certainly enhanced.

Challenges of EDI

With all of these benefits, it may be difficult to understand that there are challenges inherent in this efficient and cost-effective method of supply chain management. But there are, especially for businesses that grow. Here are some that will have to be addressed.

1. Scaling the EDI program Itself

Adding customers (partners) means that there may be different EDI protocols, with unique requirements, software, and “rules.” Accommodating these differences will mean multiple EDI protocols may have to be used. One solution is to outsource EDI to an outside provider.

2. The issue of bad data

EDI does not eliminate errors of pricing, duplicate orders, or other data. These are still human-related issues. To reduce these issues, businesses will need to set up some type of “exception management tool” that will provide alerts when data appears to be bad. This will allow human review before a document is transmitted or acted upon when received.

3. Speed

Many businesses set up their EDI systems to process transmissions every 24 hours While this is certainly better than traditional speeds, it is not ideal. There is an increased demand from customers for immediate response. And the solution lies in having the real-time flow of documents, with alerts built into the software or a regular schedule of pulling these throughout the day.

4. Transparency

Both partners in an EDI protocol need to have full transparency in the process. There are new EDI transaction sets that can support such things as the availability of inventory, shipments, etc. Adding blockchain technology in the future may also assist with the transparency issue.

5. Being proactive

While EDI is an amazing solution, there are still many businesses that have not adopted this solution. Businesses that understand the value of this technology will have to be assertive and proactive in convincing their partners to adopt EDI for transaction transmissions.