What is Electronic Data Interchange (EDI)?

Electronic data interchange (EDI) has been around for decades and it is still an important cornerstone of global trade. As EDI is also spelled out in Youredi's name - and it's a solution iPaaS can tackle better than any other tool - we wanted to write a series of blogs, starting out with the definition of electronic data interchange. 

In other blogs of the series, we will cover different topics related to electronic data interchange, such as:

- The most common challenges of electronic data interchange

- The role of electronic data interchange in supply chain management

- Electronic data interchange integrations with iPaaS

- How to tackle electronic data interchange supply chain management challenges?

- 25 great electronic data interchange service providers 

- EDI transactions

- Electronic data interchange in manufacturing, automotive, and warehousing

With this series of blogs, we want to provide you with a better understanding and more insights about electronic data interchange, why it is important, or how you can deal even with more difficult formats, such as EDIFACT or IMP that weren't meant to be easily processed by humans.

By the end of the series, you will know more about electronic data interchange and how you can utilize it today with more flexibility. Once you've read all these posts, we guarantee that you will be able to reassess your electronic data interchange efforts and consider whether using an integration platform would be a good idea. 

Also, we recommend you to read our two-part "Modern EDI" blog post, which outlines in detail the challenges in the current EDI world, as well as some potential paths to overcome those challenges.

Electronic Data Interchange (EDI)

Electronic data interchange enables enterprises to exchange business-critical information (e.g., purchase orders, invoices, booking requests, custom status information, etc.) with their ecosystem of trading partners electronically. Shortly, electronic data interchange is a set of protocols that empower businesses to communicate with each other. Under EDI we mean the transmission, message flow, document format, and the software that interprets the documents.

The electronic data interchange message normally includes the same information as the paper one; however, switching to electronic processes has significantly improved the way trading partners can do business with each other.

To open up the concept a bit more, electronic data interchange is a rather high-level concept that can also be explained as a synonym for business-to-business integration. Basically, all information exchange that happens between businesses automatically can be considered as an EDI transaction.

Note that although exchanging information in email happens electronically, however, this is a manual process. The point of electronic data interchange has been the automation of messaging processes across trading partners.

EDI in Supply Chain Management

Predominantly, supply chain management is heavily relying on EDI. Electronic data interchange has been widely used in different industries, such as ocean logistics, air cargo, transportation logistics, finance and insurance companies, warehousing, manufacturing, retail, high-tech services, and healthcare providers.

According to available data, 85% of supply chain management companies are using EDI today. This also proves that all the “EDI is dead” articles are exaggerating. As the electronic data interchange between companies is actually growing, therefore electronic data interchange most probably won’t disappear anytime soon. However, changes in formats and implementation are happening.

The Importance of Electronic Data Interchange

Electronic data interchange is widely used as it is well-established for business-to-business communication with a number of different standards.

Some electronic data interchange formats are not the ideal form of communication anymore as they are rigid, but there are solutions that can help to handle them better, and new formats are emerging and taking the place of the old ones.

This already leads us to our next topic: electronic data interchange has quite a few challenges that we will be discussing in another post in more depth to give you a better understanding of why improvements are necessary for electronic data interchange. In this post, we are briefly explaining some of these challenges.

Electronic Data Interchange Challenges

We have written a full article on this topic. Nevertheless, it's good to have these challenges here too and discuss them shortly.

Complex B2B Networks

Long gone the days when an enterprise only had a couple of trading partners. Today, a company may have hundreds of stakeholders they need to connect with and exchange information electronically. The connections have to be deployed as fast as possible for seamless sharing of the information.

Increasing Electronic Data Interchange Volumes

As the connections are growing, though does the data volumes. To tackle this challenge, firms need to be able to scale their electronic data interchange solutions as their demand is increasing.

Electronic Data Interchange Costs are Increasing

The increase in electronic data interchange volumes typically results in emerging costs too. It's important to ensure that even though the volumes would suddenly change, that wouldn't have a reverse effect on the costs - instead, unit costs should go down.

Data Quality Concerns 

Errors and missing fields in electronic data interchange messages can slow down your operations. Handling the messages manually is slow, therefore, expensive. Automating the validation of the messages can help to speed up your operations. 

Timeliness of the Data

Having information available in real-time is crucial for operational efficiency and customer experience. Therefore, a real-time EDI solution is a must for companies. 

Variety of Data Formats

The fact that an enterprise is communicating with a variety of stakeholders means that they will also need to deal with a variety of data standards and formats. To overcome this, a solution should be able to translate the message format while routing the message to the right system.

Security Concerns

A security breach can have fatal consequences. Communication with the whole ecosystem should be secure whether especially if it is happening through the cloud.

Electronic Data Interchange Formats

EDI comes in many different formats, such as EDIFACT or X.12, but even old air cargo format, Cargo-IMP is EDI, as well as others, such as XML and JSON, or in-house proprietary formats (if they are meant for automated electronic communication among organizations).

EDI Standards

Companies use different EDI standards for communication. There is a variety of standards available, we are now taking a look at those.

UN/EDIFACT

We have already written about UN/EDIFACT in a longer post. You can find that here. EDIFACT has been developed in Europe together with the United Nations and with help from the American National Standard Institute (ANSI). EDIFACT is still widely used today across industries. Below are two subsets that are in use.

EANCOM

The EANCOM subset includes the European Article Number (EAN) that is a system of product codes that enables retailers to identify products throughout Europe/the world. It was originally developed for retailers but this has become the most used EDIFACT subset. This standard helps to facilitate international trade and simplifies the way products can be ordered.

ODETTE

ODETTE has been developed for the automotive industry in Europe by the Organisation for Data Exchange by Tele Transmission in Europe (ODETTE). This is still the standard that car manufacturers use for electronic data interchange. We have written a blog on this topic separately if your industry is automotive, it’s worth a look. You can find here the full list of ODETTE Supply Chain Management standards.

ANSI X12

ANSI X12 is the U.S. version of EDIFACT. It was developed in 1979 by the American National Standards Institute (ANSI) to simplify electronic messaging between trading partners. Today, other countries worldwide have adopted to using X12 EDI standards. Together with EDIFACT, X12 is probably the most important standards used for electronic data interchange.

Other standards:

HIPAA

The Health Insurance Portability and Accountability Act was legislated by the U.S. Congress. They have established national standards for electronic data interchange in the healthcare sector within the U.S. the HIPAA EDI is based on ANSI X12.

RosettaNet

The RosettaNet standard is based on XML and it is widely used in consumer electronics, manufacturers, telecommunications, and logistics companies to accelerate supply chain management processes.

SWIFT

To enable financial electronic data interchange across banks and financial institutes, the Society of Worldwide Interbank Financial Telecommunications (SWIFT) has developed a messaging network to standardize the exchange of financial data.

Tradacoms

The Tradacoms standard is mainly used by UK retailers, although it has been mainly replaced by EANCOM.

Communication Protocols for Electronic Data Interchange

Whether you are connecting to your trading partners directly or through an EDI Valu-Added Network (VAN), or you use a cloud-based iPaaS for facilitating EDI, you will face different communication protocols used by your stakeholders.

If you are connecting directly with all your trading partners, you will have to have software for all these protocols, so you would be able to connect with them and exchange files. If you are using, for example, an iPaaS for exchanging EDI messages, you won’t need to worry about it. While you may use an SFTP protocol, some of your partners may prefer AS2 or FTPS. Your iPaaS vendor will take care of the connections and make sense of the different protocols.

When companies decide which communication protocol to use, they must consider which one supports data security, non-repudiation, message management, ease of setup and use, and interoperability the most.

SFTP/FTPS

Both protocols are secure for B2B communications, but there are differences between how these provide security and encryption. Both are encrypting the information during the transition process. Nevertheless, these protocols do not provide non-repudiation or message management. These protocols are still commonly used for electronic data interchange and the lack of non-repudiation or message management is not an issue when someone is using an iPaaS for business-to-business communications as iPaaS will take care of those during the transmission.

FTP (File Transfer Protocol)/VPN (Virtual Private Network)

FTP is still commonly used today, especially for internal file exchange. FTP on its own is not suitable for B2B communications, as it is not secure enough. In case companies decide to use FTP for B2B information exchange, they use VPN software as well to add the required security for external communication.

In this case, VPN is complicating the story. There are so many different versions of VPN that it may be too difficult to implement. It is also not the right communication protocol for non-repudiation, message management, and interoperability required.

AS2 (Applicability Statement 2)

While other communication protocols have some limitations, AS2 has been developed to overcome those. It complies with all the requirements mentioned above: high-level security, non-repudiation, message management, and interoperability. 
Through AS2, messages are sent as soon as they are ready (therefore, it’s great for real-time communication), but on the negative side, the business partner must be able to ready to receive them. Normally, it would require a server that is running 24/7 (plus support for troubleshooting), but with an iPaaS, these problems are solved. Without using an iPaaS, utilizing the AS2 protocol is challenging, as it is a highly sophisticated protocol requiring highly skilled personnel to take care of it.

How does electronic data interchange work?

A workflow of an EDI transaction

1. Generate information

You have information in your ERP systems or databases, and the information includes specific fields that need to be included in your EDI message. This information can be a purchase order, an invoice, a booking request, a bill of lading or a status message.

When you have all the information, the next step is to generate the EDI message.

2. Translate the information into EDI status message

Once all the information is available, you need to generate the EDI status message. This typically happens by using an EDI translator software that understands the information and converts the data into the appropriate EDI message. The electronic data interchange software is normally on-premise and maintained by your IT personnel.

3. Forward the EDI status message to your partner

Once the EDI message has been generated, you need to forward it to your partner through an established and secure connection – connection is often provided by secure protocols, such as AS2, FTP, SFTP, etc.

The system of your partner needs to be able to understand the EDI message that you forwarded - this is often a challenge that we will discuss in more detail in our next blog of the series.

The Advantages of Electronic Data Interchange

Electronic data interchange has been around for decades (it’s been in use since the 1950s), and when it was initially introduced, it had the power to transform industries that used it.

Adapting to electronic data interchange has helped companies to eliminate paper processes which resulted in significant cost savings, not only because of the cost of paper but also because they needed less labor to handle and manage information.

They could process information a lot faster and with greater accuracy regarding the quality of the data, so this resulted in better relationships with their partners, it speeded up the business cycle and reduced order-to-cash-cycle.

As the process of transferring information across partners became electronic and more automated, the information could reach all stakeholders faster, resulting in more transparency.

If you've found this article resourceful, continue reading the rest of our EDI-related blogs here.

Also, learn what EDI transactions we support: