How does EDI work? What is the process? Why do people use it? What are the advantages/disadvantages?

Recently, someone posted these questions on Quora and thought I would post my response here as well.

EDI (electronic data interchange) is a standard data structure that allows companies with differing hardware and software systems to exchange information in a common  format.  EDI is used to communicate a variety of information and is typically used in a supply chain.  It is widely adopted in retail, healthcare, automotive and even by the U.S. Department of Defense.

In my experience, no one does EDI because they want to, they do EDI because a partner in a business relationship mandates it, however it does help save time and money when it comes to communicating business information documents.  Major retailers such as Wal-Mart, Target and Home Depot most commonly use EDI to communicate the following information: Orders to their suppliers (850), Invoices from their suppliers (810), Shipment notices from their suppliers (856). There are also a number of other documents that are used but these three are almost always required in a retail relationship.

There are many different EDI solutions in the marketplace so the process and tools you set up and use can differ but the high level processing steps are the same.

The process flow for you receiving an EDI document is the following:

1. Buyer exports a business document from their back-office system (let’s use a purchase order as the example)
2. The purchase order is converted from the back-office format into EDI using some type of data transformation/mapping software or tool
3. The EDI purchase order data is run through validation software that ensures it is structurally sound according to EDI the standards
4. The EDI data is transmitted to a VAN, or Value-Added-Network (see below) using some communication method (FTP, HTTP, HTTPS) that may be built into the validation software or may be another application
5. The VAN determines how to route the data and either hands it off to a different VAN used by the recipient or it is delivered to the VAN mailbox if the sender and receiver are using the same VAN service.  The data has now crossed the line and is the responsibility of the recipient and their VAN service.
6. The data remains in the recipients VAN mailbox until the recipient’s systems check for and processes the document.

What happens next depends on how you, the recipient have chosen to process your EDI.

6a. Web-Based Solution: If you are not exchanging large volumes of data, you may opt for a web-based EDI solution where you can log in to a web site and see a human-readable version of the EDI data. You log in to a web site to view your EDI data and manually process it as if you had received it via fax or email.  In other words, you need to re-key the data into your back-office system.

6b. Integrated Solution: To truly benefit from EDI, you need to integrate your EDI with your back-office systems which would allow the creation of orders directly into your accounting/ERP system.

If you are doing full integration, you can reverse the steps above starting with #4.  You would download the EDI data from the VAN, run it through your EDI validation software, convert the data from EDI to your back-office format and import it into your system.

Value-Added-Network (VAN): This is a service you can picture as an electronic post office that looks at the sender and recipient and routs EDI data to the proper ‘mailbox’.  You pay the VAN based on the volume of data you do, usually calculated by the kilo-character.  Note that some companies like Wal-Mart and Bed, Bath & Beyond do not use a VAN connection but a direct connection called AS2.  This prevents data transmission charges incurred by the VAN.

Advantages of EDI: faster supply chain due to increased speed of communication of key business documents ,  increased accuracy (especially if integrated), cost savings associated with reduced re-keying errors, fewer people needed to physically handle the documents.

Disadvantages of EDI: reputation for being complex and expensive to set up, VAN fees are variable and can be expensive, business processes may need to change (such as how accounting communicates with your EDI business partner).

Listen to Anthony Pralet, Project Manager from eBridge explain in simple terms how Electronic Data Integration works and the various stages within EDI Integration.

If you have any questions about EDI, please feel free to leave them in the comments section below.

Article by Mike Catalfamo

Mike Catalfamo has over 10 years' experience delivering integrated eCommerce and EDI solutions and is the Technical Sales Engineer at eBridge Software Inc. When not chasing around his toddler, a few of Mike's interests include playing music, photography, reading, practicing GTD and exploring ways to make the most of technology to integrate and automate information and systems.

General EDI