Explainer: What is EDI?

EDI (electronic data interchange) is one of the core technologies—along with barcode labeling and scanning—that is used to enable supply chains. EDI and barcoding date back to the 1960s and 1970s, and it is remarkable to think that these tried-and-true technologies are not only still in use today but that supply chains are so very reliant upon them.

Since data can be electronically exchanged between two computer systems using distinctively formatted CSV (comma-separated value) or TXT (text) files, EDI is different in that there are data standards. Just like there are different types (“symbologies”) of barcodes for different purposes—the barcode standards maintained globally by GS1—there are different EDI standards for different uses, such as industries or geographies.

Related: The Perfect Order: Introduction

In the United States, the familiar EDI standard used is maintained by the X12 organization under charter from the American National Standards Institute. In other areas of the world, UN/EDIFACT is the common EDI standard. Another EDI standard is ebXML. The ONIX standard is used in the publishing industry to exchange book information.

In X12-EDI, each transaction is given a unique three-digit number. The purchase order in X12-EDI is transaction number 850. Regardless of the industry—retail, grocery, furniture, pharmaceuticals, electronics—you get the idea, if one company wants to buy something from another company and issues a purchase order, the buying company will send an X12-EDI850 to the selling company if using X12-EDI. (Grocery also has its own special grocery purchase order, the X12-EDI875. Some grocers use the X12-EDI850, others use the X12-EDI875.)

EDI helps by allowing commerce to be conducted electronically and uniformly between business partners, also known as trading partners. Common business documents, such as purchase orders, shipping notices, and invoices, that were once exchanged via postal mail, fax machine, and email attachment (whether a data file of any format or a PDF) are now transferred in a standardized electronic file format that can be imported into and exported out from a business computer system, most typically the enterprise resource planning (ERP) system.

The mapping process associates like-data fields between the EDI and the ERP system. For example, the purchase order data field (“data element”) in the specific X12-EDI850 data record (“data segment”) needs to be associated with (“mapped to”) the purchase order field in the buying company’s ERP system when they generate the X12-EDI850. The conversion of the ERP file format to the EDI file format, or visa-versa, is called translation and is handled by an EDI translator, a unique software application designed for such a purpose.

In-between the buying party and the selling party is typically a third-party EDI service provider, sometimes known as a VAN (value-added network). Providing electronic mailboxes for everyone in the trading partner relationship, (consider that the buying party probably has a lot of vendors that they are conducting business with), third-party EDI providers usually offer a variety of different services.

Think of the EDI service provider like a version of a postal service: The EDI service provider has all these mailboxes on its network, and connects to networks with other mailboxes. At the beginning of each EDI file there contains the from and to—the sender and receiver—information needed to route the EDI file containing one or more documents (transactions) from the sender’s mailbox to the receiver’s mailbox. As part of this routing process, the EDI service provider can also offer to translate the document from ERP-to-EDI or EDI-to-ERP. The postal service doesn’t open our letters and read and transcribe our mail, but the principle is the same.

EDI software can be installed on-premises and used for data mapping/translation and communication. Now, it is more common for companies to use these services in the cloud without having onsite software. Translation mapping can be handled either by you, the client company, or can be outsourced to the EDI service provider; it just depends on which software, software module, or cloud service is purchased, and what the technical level of comfort is in your company.

Is EDI a good return on your investment? Consider these facts:

1. You’re saving money with less paper and printer ink costs.
2. It’s more secure: no more lost orders or invoices in the mail, email, or fax.
3. No more manual data entry. Inbound EDI transactions (like purchase orders) are imported directly into the ERP system (becoming sales orders), outbound EDI transactions (like ship notices and invoices) are generated from shipments and invoices from the ERP system and sent directly to your customers.
4. Improved data accuracy. With the reduction of data entry, the reduction of mistakes made during data entry go hand-in-hand.
5. Increased operational efficiency. Transactions flow faster without manual intervention, meaning that the business works quicker. Without data entry, staff has more time for more meaningful work. This also enhances job satisfaction. EDI sent and received transactions are confirmed by design, so no more guesswork.
6. You’re in the supply chain game. If you want to engage as a seller/vendor in certain industries, you need to be EDI-enabled. (But whether you integrate EDI to your ERP system, or start with webforms and manual data entry, EDI capability is still likely a supply chain compliance requirement.)

The monthly cost of EDI is easy to justify especially if the integration between EDI and your ERP system is established. Generally speaking, the greatest cost to a company is labor, and EDI-ERP integration, along with good data management, really reduces the vast majority of unnecessary data entry and the redundancy of correcting entry mistakes, making your people more productive.

Monthly EDI costs will probably be a combination of the cost of your electronic mailbox plus either a per-transaction fee or a cost per kilobyte (a fee for every 1000 characters sent or received) or some bundled pricing.

EDI isn’t really a choice anymore, it’s a requirement. It’s not really about “if,” it’s only about “when,” and the “when” is likely right at the beginning of your relationship with a retailer or your major customer accounts, because EDI is probably a supply chain vendor compliance requirement, just like barcode labeling.

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