Complete Guide to Understand Electronic Data Interchange (EDI)

Introduction

For eCommerce companies and logistics service providers, exchanging business documentation is an everyday reality. Electronic Data Interchange (EDI) is an instrumental communication technology for businesses. Though EDI has existed in some capacity since the late 1040s, its present avatar is best suited to enhance B2B communications.

Each stage in the supply chain requires a purchasing order, bill of lading, shipping label, invoices, or order acknowledgments. It is easy to lose valuable time and accuracy in the flurry of papers and raining words.  To reduce the burden on businesses, EDI is the most trustworthy resource. Let’s learn more about this versatile technology.

EDI: Harbinger of the Next-Generation of Business Communication

Electronic Data Exchange, better known as EDI, is a technology that helps businesses converse with each other digitally. It is a medium that facilitates the interchange of business documents between two computer systems over a secured network pathway. 

Today EDI has become the foremost communication source for handling documents like invoices and bills of lading between two or more businesses. But this wasn’t always the case. To completely understand and appreciate the value of EDI, let’s take a quick look at its founding history.

History of EDI

EDI was the brainchild of the U.S. Army Master Sergeant, Ed Guilbert. In the early 1960s, Mr. Guilbert developed an electronic messaging standard to exchange information about shipping and cargo. That marked the advent of EDI. 

It gained international renown after an American-Holland steamship sent shipping manifests via telex messaging, a system of electronically exchanging handwritten messages over teleprinters. This was the first time a shipping manifest was sent within two minutes of its transmission. 

Since then, EDI gained the popularity and trust of the logistics industry, with many landmark events quickly following in the subsequent decades.

One such is the founding of TDCC (Transportation Data Coordination Committee), which standardized the EDI formats for the transportation sector. It was later changed to Electronic Data Interchange Association.

Others were the development of VAN (Value Added Network) and the formulation of the HTTP protocol that allowed data transmission over the Internet. Since the early 1990s, EDI has gained the trust of many American enterprises, and history records that some 12000 companies in 1991 were already using EDI extensively. 

The Types of Document Formats Supported by EDIs

One of the prime characteristics of EDIs is that it eliminates the need for paper-based interaction, even sidelining the use of emails for business exchanges. But how does it do so? 

EDIs support documents into standard formats that are electronically transmitted to a computer system over the internet. You can think of these formats as a template of codes that computers can understand and process. EDI supports over 1000 business document standards geared towards specific business purposes. Here are a couple of examples:

• ANSI X12 format is used by 300,000 businesses in North America. For example, EDI 856 for advanced shipping notice and EDI 250 for purchase order shipments. 
• EDIFACT is a universal EDI standard governed by U.N. containing numerous subsets for transportation and commerce. For example, DELFOR (delivery forecast) and INVOIC- invoices. 
• HIPAA format that is specifically designed for the healthcare industry. 
• The ODETTE standard is primarily designed for the automotive industry of Europe and uses the OFTP and OPTP2 EDI codes.

The Different Types of EDI Systems:

The many different types of EDI are a testament to EDI’s versatility in exchanging structured information via points of contact and electronic systems. Here are some of the most commonly prevalent modes of EDI communication channels:

1) Point-to-Point EDI

This is a direct and secure communication channel between two individual businesses. This connection cannot be replicated or shared with other businesses by either of the parties involved. This EDI approach requires both companies to adopt the same EDI protocol. It also mandates that both parties use the same EDI package, like AS2 or FTPS, for eligible EDI transactions. 

2) EDI via VAN or a Network Service Provider

In this method, a business can initiate EDI-based communication with other parties over a value-added network (VAN) with an internet connection. The VAN network service provider will create a mailbox for the business owner. The mailbox then becomes a storehouse for businesses to send and receive documents. 

VAN-led EDI allows businesses to conduct rapid document sharing with EDI formats and is more cost-effective than point-to-point EDI. It also acts as a centralized system that allows businesses to keep real-time track of their documents' whereabouts. 

3) Web-based or Cloud-Based EDI

Overhauling the traditional EDI infrastructure, a web or cloud-based EDI facilitates B2B data interchange following the HTTP, FTPS, or AS2 protocols. In fact, AS2 is the most widely used EDI system in today’s digital environment owing to its secure encryption and affordability. 

Businesses can implement cloud EDI software (there are plenty of them in the market) for exchanging documents. The cloud EDI provider often offers an EDI translator, allowing companies to share  XML and flat files. 

4) Third-Party EDI

This approach is commonly referred to as EDI outsourcing. Here, businesses integrate with a third-party service provider and use their platform without setting up the infrastructure and incurring set-up costs. 

Third-party EDI solutions are in demand now mostly because companies prefer to integrate their EDI with existing software like ERPs and WMS. 

The Role of EDI in eCommerce and Logistics 

Here is a list of the main areas where EDIs play a role in eCommerce and logistics:

1) Central Technology in Vendor Compliance

Vendor compliance is one of the popular areas in logistics where EDI is extensively used. Take, for example, the numerous business documents that EDI technology supports, like purchase orders and invoices. In fact, major retail chains like Walmart, Target, and Costco mandate their vendors to communicate with EDI.

Take the case of Walmart. It even issues 4 EDI vendor compliance requirements. Walmart seeks that trading partners should have a set of  7 basic EDI documentation like 821 (claim), and 820 (remittance). It also seeks that vendors prove their EDI connectivity successfully within 6 weeks to qualify as Walmart’s trading partners.

2) Process Bill of Lading and Other Shipping Documents

EDIs have secured a permanent status in the freight and shipping industry because of their automated, simpler, and secure dissemination of information. EDIs are commonly used to process and convey bills of lading, freight handling lists, and cargo manifests.  

EDIs help formulate a seamless communication channel between port authorities and shipping lines. It makes it faster and easier to seek a stopover, layover, or mooring permit from competent authorities. Similarly, freight forwarders can submit their Simple Administrative Document for customs declaration using EDI’s CUSDEC format. 

3) Streamline Warehouse and Inventory Management 

EDI creates tokens of data that can create a seamless transition of business transactions. There are several EDI documents that have proved themselves useful for warehouse and inventory management. These include: 

• EDI 945 or warehouse shipping advice that allows 3PLs to quickly send shipment confirmation alongside details like the date, delivery method, and payment status to suppliers. 
• EDI 856, or advanced shipping notice, enables suppliers to inform 3PLs about the early arrival of a batch of cargo or merchandise.
• EDI 862, or shipping schedule, conveys information about any changes made to a shipment, such as an increase or decrease in order quantity.

4) Optimize TMS and ERP Communications 

Nowadays, many eCommerce and carrier companies are seeking to integrate EDI with TMS (Transport Management System) and ERP (Enterprise Resource Planning) software. In doing so, online businesses can advance their business communication with shipping companies. 

There are over 50 EDI standard documentation formats for enabling the transport of messages between businesses electronically. Take the examples of EDI 109 for vessel content details, EDI 212 for motor vehicle delivery trailer manifests, and EDI 859 for freight invoices. 

Similarly, if EDI is combined with ERPs, it can drastically reduce data entry errors and create a centralized database for storing business data. It also hastens order processing time and aids in offering better customer service.

5) Enforces Sustainability in Logistics 

It can be very well inferred that using EDIs helps businesses reduce their carbon footprint and introduce sustainability in their business practices. First of all, it eliminates the need to use paper, thereby aiding tree preservation. 

More than that, EDI reduces the chances of order errors. In doing so, it lowers the possibility of reorders and returns, thus saving transit time, fuel use, and carbon emissions of vehicles.

5 Benefits of Incorporating EDI Technology by Businesses

Now that we understand the role of EDI in the retail industry and logistics let’s take a closer look at how beneficial it is to businesses: 

1) Process documents at 2x speed

According to a B2B eCommerce Market Report of 2019, EDI accounted for an estimated 78.4% of all B2B sales conducted electronically. The prime reason was the speed at which EDI transmission happens in just a couple of minutes. This enables companies to speed up their business processes and increase business cycle efficiency by about 61%.

2) Reduce Operational Costs by 1/20 proportion 

One of the core features of EDI is reducing the use of paper-based transactions. This, in turn, reduces costs across various variables, including printing, storage, filing, posting, and retrieval costs. 

Since EDIs are machine translated, it also lowers the cost of manual order processing. Overall it enables businesses to save about 35% of their overall costs in running a business. 

3) Lower error percentage by 30%, ensuring order accuracy 

There are hardly any technical errors associated with EDIs. Since EDI formats are bound by strict protocols and adherence norms, there are fewer chances of errors cropping up. In fact, industry research suggests that EDI helps businesses decrease their errors and inconsistencies by 30%.

This helps online businesses secure trading contracts with big retailers like Home Depot and Walmart. Already 160,000 companies have switched from manual order processing to EDI transactions. 

4) Uplift 2x business efficiency 

The incorporation of EDIs in businesses has helped improve order-to-cash and procurement cycles. It also helps improve visibility in supply chain operations, fulfillment, and delivery times. 

EDI, moreover, assists in increasing business efficiency by enabling companies to meet the SLA contracts of trading partners. Along these lines, EDIs help businesses eliminate situations of service chargebacks and non-compliance fines.  

5) Strengthen transaction security by 90%

EDI transactions are conducted over secure and protected networks, mostly on VANs and web/cloud-based solutions. These solutions create a complete audit trail so that businesses are in the know-how of their transaction details. 

Most, if not all, of these services use encrypted codes to ensure data integrity and security. Apart from this, EDI service providers also introduce preventive measures against unauthorized personnel. These measures include authorization verification, digital signature, and cybersecurity steps.

What Does the Future of EDI Look Like?

In the past couple of years, there has been some speculation that EDI technology is past its prime years. But the truth is far from this. According to the prevailing market statistics, EDI is projected to reach 4.04 billion USD by 2029, showing a CAGR of 11.6% in the forecast period. It is estimated that 59%-80% of supply chain businesses have adopted EDI.

One of the hallmarks of EDI technology has been its adaptability to changing IT infrastructure and business needs. There are efforts underway to integrate EDI with API (Application Programming Interface). This would allow APIs to disseminate standardized documents amongst multiple business partners and EDI technology to reach more companies. 

Moreover, the changing expectations of B2B businesses as they venture into eCommerce can be managed with EDI. EDIs are scaled to offer ‘frictionless’ commerce relying on the powers of automation. 

Moreover, given the security ecosystems and convenience of document transmission with EDI, it has become a key player in B2G (business to government) e-procurement. 

In fact, the European Union created the Peppol ( Pan European Public Procurement Online) standard for this very purpose. This suggests that the future of EDI is expanding beyond the B2B realm. 

Conclusion 

EDI is a noteworthy business-to-business communication technology that allows the seamless transfer of critical business information. It has an extensive history of use in business and logistics since the initial years after World War II. 

EDI has proven itself to be a reliable, secure, and automated solution that reduces cost, errors, and slow speed in postal business communication. The future of EDI seeks to further its utility by blending with newer technologies like API. By integrating the functionalities of both to create a hybrid solution, businesses can take efficiency to the next level.

FAQs

1) What is EDI compliance?

EDI compliance is a process whereby a business establishes that it can safely and accurately exchange EDI transactions with its trading partners based on the requirements of its partners. 

2) What are some good EDI software?

Some good EDI software in the market includes IBM (for big retailers and eCommerce companies), Cleo (for integrations with multiple software), Truecommerce (for smooth inventory management and dropshipping), and SPS commerce (for customer service and operations management).