Electronic Data Interchange (EDI)

What is Electronic Data Interchange (EDI)?

Electronic data interchange (EDI) is the exchange of documents between different companies while following a specific format. EDI replaces paper-based documents with electronic documents that can be read and interpreted by computer applications.

EDI replaces the standard paper-based communication method for sending documents like purchase orders or invoices, automating the entire process and helping organizations save on the costs of manual processing. 

During an EDI transaction, information is moved automatically through a computer application from one organization and received by the other application, where the information is automatically decoded and read. 

The format and order of information is determined as per EDI standards, making it easy for information to be read quickly.  This standardized flow of information is what leads to a fully paperless exchange of information. 

Benefits of Using Electronic Data Interchange

There are a number of benefits of using electronic data interchange for modern businesses. Here are a few:

Significant Cost Reductions 

One of the biggest advantages of using EDI is that it helps companies reduce their costs in processing important documents. Instead of sending paper-based invoices or purchase orders, companies can simply use a computer application to send information remotely. 

Faster Processing

Electronic data interchange offers considerably faster processing speeds. Information is automatically captured from standardized documents, allowing for faster document processing. Companies that have to deal with a large number of invoices or purchase orders can ensure nothing is missed with EDI.

Reduced Risks of Human Error

EDI also reduces the risk of human errors considerably. There’s no risk of error when information is being copied, unlike when dealing with paper-based documents. The information is read automatically and EDI documents are automatically picked up by a relevant application on the receiver’s computer. 

Improvement in Business Relationships

When invoices are processed faster, it helps companies not only build better relationships with their business partners, but it also improves their goodwill. It allows vendors to trust them and makes it easy for the company to avoid supply issues.

How Electronic Data Interchange Works

The concept of EDI is actually quite simple: all documents must be converted into specific EDI formats.. 

Companies often specify which EDI format they use, and trading partners are required to comply with those. Transaction documents can be run through EDI software to convert them into different formats. 

EDI messaging standards are defined by different organizations, and the most common standards include:

The Use of Secure Data Transfer Protocols

EDI data transfer is generally carried out through secure data transfer protocols. A common example is SFTP, or Secure File Transfer Protocol. Others include Simple Object Access Protocol (SOAP) and Applicability Statement 2 (AS2). 

There are different data elements that are included in an EDI document, including:

Certain data segments can even include different components to give them greater meaning, such as amounts, addresses, and more.  Most businesses generally optimize their systems to handle a large number of EDI documents, which makes it easy for them to work with different partners. 

Transmission of EDI Documents

There are two common methods used for transmitting EDI documents, involving the use of an intermediary or directly. 

Direct EDI

This method involves vendors and trading partners connecting directly with each other to transmit and exchange EDI documents. This means companies don’t have to worry about using intermediaries, which ensures security and allows for seamless document transmission.

Value-Added Networks (VAN)

Value-added networks are like exchanges, where EDI transactions are received, read, and routed to specific recipients. VANs also offer additional services, such as offering audit information or even providing support. 

SoftCo & EDI

SoftCo’s Procure-to-Pay solution uses EDI to make it easy for companies to streamline their finance processes, ranging from invoice automation to posting payments. It’s capable of handling documents in multiple currencies, languages, and offers greater visibility and control over the procurement process.