What Is EDI (Electronic Data Interchange)?

By The SupplyPike Team, Retail Rockstars

Last Updated March 8, 2024

4 min read

The international supply chain continues to grow in complexity with the aid of technology. Electronic Data Interchange (EDI) allows for much-needed automation and standardization to happen instantaneously.

EDI is the direct computer-to-computer exchange of standard formatted business transactions between one or more business partners, known as trading partners. It allows for the exchange of business documentation to happen in a structured, machine-processable format.

EDI facilitates the exchange of electronic documents (such as purchase orders, advance shipment notices, and invoices) without human intervention or human-readable (paper or electronic) documents.

Benefits of EDI:

It eliminates manual re-keying of data.
Cuts order processing costs.
Increases data accuracy.
Improves cycle time.
Makes just-in-time deliveries possible.

"Automating the supply chain so that everything could be closely tracked and monitored was hard enough when it was all in one country. Now that manufacturing has shifted to different continents--often more than one for the same company--with people speaking different languages, (and) using different measurement standards--, managing the supply chain has moved from difficult to incredibly complex." -- Forbes Business

How Does EDI Work?

Standard business documents, previously sent through the mail in paper form, can now be transmitted instantly using secure internet protocols and EDI software, bypassing the need for manual data entry. This "paperless trading" is made possible through EDI's standard electronic format, which differs significantly from free-format digital copies or emails, often requiring data re-entry.

Not only does EDI surpass paper documentation, but it also surpasses other electronic forms as well, such as digital copies of email. Both of these transmission types are in the free format (not standard format) and, therefore, generally require re-keying of data into a computer system.

The Importance of EDI Standardization

The standardization of EDI liberates it from differences in computer or communications equipment among trading partners. Similar to digital copies or electronic mail. EDI is able to bridge the previous information gap that existed between companies with different computer systems.

EDI includes the direct transmission of data between organizations (both sending and receiving) using an intermediary such as a value added communication network.

EDI Transmission Typically Involves the Following Process:

The sender uses internal computer files to assemble the data needed for the transaction.
This data file then becomes input to a software module that generates the transaction into the EDI standard format.
The resulting data file is then transmitted to the receiver.
At the receiving end, this data file is input to a software module that translates the data from an EDI format into a file. The file can be entered into the receiver's computer application systems.

Key Types of EDI Documents:

Purchase Orders (POs) (EDI 850): These documents initiate the buying process by detailing the products or services requested by the buyer, including quantities and specifications.
Invoices (EDI 810): Invoices are critical for the billing process, providing a detailed account of the products or services delivered, their costs, and payment terms. EDI invoices ensure that billing information is processed quickly and accurately, facilitating faster payment cycles.
Advance Shipment Notices (ASNs) (EDI 856): ASNs offer detailed information about pending deliveries, including the types of products being shipped, quantities, and expected delivery times. This document helps receivers prepare for incoming shipments, optimizing inventory management and reducing receiving errors.
Functional Acknowledgments (FAs) (EDI 997): FAs confirm the receipt of an EDI transaction. They play a crucial role in ensuring that documents have been successfully transmitted and received, providing a verifiable trail of communication.
Payment Orders/Remittance Advice (EDI 820): These documents streamline the payment process by detailing the payments to be made or received, linking financial transactions directly to their corresponding delivery of goods or services.

Through electronic commerce, business information can be communicated through standard electronic messages to your trading partners. With your accurate electronic messages on their computers and your barcodes printed on your products and shipments, your trading partners are able to directly connect your products and shipments to information about them as they travel through the supply chain.