Electronic data interchange, or EDI, is the system-to-system transfer of data, from one trading partner to another. The transfer is facilitated by standardized, electronic message formatting without the need for manual intervention.
In simple terms, EDI is the process of transferring business documents (purchase orders, invoices, and shipping documents) between companies. It’s used mostly by large organizations in many different industry sectors (retail, healthcare, financial services, manufacturing, and distribution) that typically receive a high volume of invoices (normally more than 30,000 per year).
How does EDI work?
All of the data is passed using one of various methods of data transfer, some common options are:
- Value Added Network (VAN): A private network provider for facilitating the transfer of files. The files are stored in an EDI Mailbox, a secure, single location where EDI messages are consolidated and accessed by users.
- Secure File Transfer Protocol (SFTP): An exchange method used to pass files from one system to another using a login.
- EDI-INT (internet integration): A way of transferring EDI files through the internet securely, based on a set of standards defined through applicability statements using AS1, AS2 or AS3. AS2 is the most common and defines the standards for sending files via a web browser (HTTP).
Who should use EDI?
When it comes to using EDI for the transfer of invoices, there are 3 key factors to consider:
1. The volume and frequency of invoices that you receive
If your company relies heavily on stock purchased from vendors, chances are the volume of the invoices and the frequency at which they’re received is substantial. If the volume of invoices is so high that it is difficult to manage and process manually without the need for to dedicate a lot of time and resources, then it may be time to consider EDI.
Consider also the ways in which vendors send invoices to your company: you may be receiving invoices in multiple different formats – email, paper, PDFs – and this will inevitably slow down processing times, delaying payment to vendors. EDI allows for the transfer of documents in a standard format, making processing quicker, and removing delays in issuing payment. If you are placing a large number of orders with vendors, you may also have the bargaining power to ask vendors to start sending invoices using EDI, which would ensure that the majority of invoices are captured the same way, allowing for even faster processing times.
2. The volume of vendors that you purchase from
Again, if the number of vendors that you’re buying from is substantial, it may be difficult to accurately process invoices quickly to meet the agreed payment terms. Like we mentioned above, not all of these vendors will be using the same method of getting documents to you, either, which drives up the time taken to process invoices and as a result, the cost.
On the other hand, if you have a small number of key vendors from which you purchase goods and services, the volume of invoices might not be as high nor the resources needed to process them, so it may not be financially worthwhile to invest in EDI.
3. The time and cost involved in processing an invoice
Ultimately, the aim of using EDI is to reduce the time and cost involved in processing documents received from your vendors. One of the major benefits of EDI is managing hundreds and thousands of documents that would otherwise need to be managed manually.
Fig. 1. Research by Paystream Advisors shows a link between the time, cost, and method of processing invoices
For routine tasks, EDI relieves organizations of labor-intensive, repetitive tasks that drain resources and time. Research and advisory firm, Paystream Advisors, finds a correlation between the time it takes to process an invoice, the average cost, and the method by which a company receives the invoice. Fig. 1. shows that when the number of days taken to process an invoice increases, there is a proportionate increase in related costs. It also shows that when invoices are received electronically (via EDI for example), invoices take significantly less amount of time to process (on average 40 days less) and companies stand to save on average $12.64 – or 84% – when compared to a predominantly manual way of invoice processing.
Calculate how much time and money you’re spending on your current manual, paper process. If the calculation justifies an investment in an EDI solution, then it should be strongly considered.