What is EDI? The Basics of Electronic Data Interchange Explained

What is electronic data interchange (EDI)?

EDI stands for electronic data interchange, the automated process of exchanging business documents, such as purchase orders (PO) and invoices, between a company and its trading partners. EDI standards, like ANSI X12 and EDIFACT, ensure that these documents follow a consistent structure, streamlining communication and accelerating transactions.

Organizations exchange several types of documents with their trading partners daily. The term trading partners, or business partners, refers to organizations (e.g., you and your suppliers, vendors, distributors, etc.) involved in the exchange of business documents on a regular basis. Traditional methods of conducting these transactions involve sending and receiving these documents via email and manually rekeying data into systems. Not only is this process error-prone, but it also involves documents with varying formats and structures that make data processing needlessly time-consuming.

Electronic data interchange (EDI) automates the exchange of these documents by enabling you to transmit standardized digital documents from one system to another without any manual intervention. The structured format is of critical importance—digital systems and computers use it to understand these documents and communicate with each other.

While POs, invoices, and advance shipping notices (ASN) are the most frequently exchanged documents, the range of supported documents is vast. You can exchange virtually any type of business document easily, including bills of lading, customs information, inventory reports, shipping status updates, and payment details.

A brief history of electronic data interchange

EDI technology was first introduced as a system to keep track of goods in transit. It took several years for the system to take shape and evolve into standardized business documents and then into electronic messages as we know them today.

When XML and AS2 were first introduced, many believed they would replace EDI due to their simplicity and human readability. Later, APIs emerged, sparking similar predictions that they would take over EDI. However, the communication standard is still going strong—it remains a highly reliable and standardized method for B2B communication and exchanging business data, especially in industries where compliance, security, and established infrastructure are critical.

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What are the different EDI standards?

Organizations operating in different industries and regions resort to the relevant EDI standards. These include:

• ANSI ASC X12
• UN/EDIFACT
• HIPAA
• EANCOM
• VICS
• ODETTE
• Tradacoms
• VDA
• RosettaNet
• SWIFT

Learn more about EDI standards in detail.

Types of EDI

We find several types of EDI used in different contexts and industries. Businesses may adopt a single transaction type, or a combination based on their trading partner requirements, technical capabilities, security needs, and industry standards.

1.     Direct EDI

Also known as point-to-point EDI, it establishes a direct connection between the sender and receiver’s systems, allowing for the secure exchange of electronic documents without intermediaries. Direct EDI requires both parties to have compatible systems and communication protocols.

2.     Value-Added Network (VAN)

A Value-Added Network (VAN) is a third-party service provider that acts as an intermediary for EDI transactions and offers secure data transmission, translation, document tracking, and message routing services. VANs receive EDI documents from one trading partner in batches, validate and process them, and then deliver them to the intended recipient.

3.     EDI using AS2 (Applicability Statement 2)

AS2 is an internet-based communication protocol that enables the secure exchange of EDI documents over the internet using encryption and digital signatures. AS2 utilizes the HTTP or HTTPS protocol for communication, which is why it is the most used method for EDI transactions.

4.     EDI using AS4 (Applicability Statement 4)

AS4 is an extension of AS2 and provides an enhanced messaging standard for EDI file exchange. It adds additional security features, for example, support for web services and increased interoperability between different systems. EDI via AS4 is commonly used in healthcare and government sectors.

5.     EDI using FTP/SFTP/FTPS

You can also use various file transfer protocols for electronic data interchange. FTP (file transfer protocol) is the most basic protocol to transmit EDI files over a network. Since FTP is not inherently secure, organizations use SFTP (uses SSH) to encrypt data during transit. FTPS is the second alternative to FTP that uses SSL/TLS to encrypt data.

6.     Web EDI

As the name suggests, web EDI enables transactions through web-based portals or platforms. Trading partners access a web interface to exchange documents without the need for dedicated EDI software. Web EDI is often suitable for smaller businesses or organizations that have low transaction volumes or limited IT resources.

7.     Mobile EDI

With mobile EDI, users can perform certain EDI-related tasks using mobile devices such as smartphones or tablets. It provides the flexibility to access and manage EDI transactions on the go, facilitating quick decision-making and response to business processes.

How does EDI work?

EDI works as a two-way communication process between you and your partners. In a typical EDI setup, document transmission and reception involve a point-to-point connection between two systems, although value-added networks (VAN) are also frequently used. The choice of transmission method largely depends on your organization’s specific requirements. You would be better off with a point-to-point connection if you have high transaction volumes and established relationships with your trading partners. VANs serve better when your transaction volumes fluctuate frequently, and you have a diverse range of trading partners.

EDI software or system is the most basic tool you need to create, translate, and transmit documents electronically. Beyond integrating with your systems and converting formats, EDI software can perform error-checking, data validation, and help you comply with various standards.

To understand how the EDI process works, let’s consider an example in the retail industry between a provider (supplier) and a payer (retailer):

1. Agreement and Setup: A retailer and supplier establish an EDI relationship and agree to use the ANSI X12, a widely used standard in North America to conduct digital transactions in various industries.
2. Document Mapping: The retailer and supplier collaborate to map their internal systems to the ANSI X12 format for purchase orders (PO) and invoices. They identify the specific segments, elements, and data structures and align them with their internal systems.
3. Data Transformation: When the retailer generates a PO within its ordering system, the EDI system automatically transforms the PO document into the EDI 850 (Purchase Order) ANSI X12 EDI format. Using the defined syntax and codes, it also organizes the information into segments, such as header, line items, and totals.
4. Transmission: The retailer’s system transmits the EDI 850 to the supplier via a secure communication protocol, such as SOAP, AS2 (HTTPS), or SFTP. These protocols are critical to preserve data integrity during transmission.
5. Data Processing: Upon receiving the EDI file, the supplier’s system validates it extracts relevant information, such as product codes, quantities, prices, and delivery details.
6. Acknowledgment and Response: The supplier generates an EDI 855 (Purchase Order Acknowledgment) response, and sends it back to the retailer, confirming the receipt and acceptance of the PO.
7. Invoicing: The supplier’s system also generates an invoice and sends it as EDI 810 (Invoice).
8. Reconciliation and Payment: The retailer’s system reconciles the invoice with the original PO before proceeding with the payment. Once the payment is made, the retailer transmits EDI 820 (remittance advice) as payment confirmation.

The benefits of electronic data interchange

EDI offers several advantages to organizations and their trading partners:

Better security

With user authentication and data encryption, you can control and manage user access more effectively than with the traditional paper-based approach. With this in mind, modern EDI software is designed to offer multiple ways to secure business documents from unauthorized access.

Increased efficiency

EDI software automates the exchange of business documents, eliminating manual paper-based document handling, data entry, and document rekeying. Its no-code UI leads to fewer errors, streamlined operations and faster transaction processing.

With EDI’s paperless approach businesses also reduce costs associated with the manual handling and processing of their paper documents. Specifically, it eliminates expenses related to printing, postage, and document storage, allowing businesses to handle a larger volume of transactions efficiently.

Enhanced visibility

It provides increased visibility into supply chains and helps businesses optimize inventory management, plan production, and coordinate logistics more effectively.

Standardization and compliance

EDI document standards ensure consistency and interoperability between different systems and organizations. They also help businesses comply with industry-specific standards and regulations, as well as trading partner requirements.

Improved partner relationships

The speed, accuracy, and efficiency enabled by EDI software contribute to better customer and partner relationships.

The use of EDI across industries

Retail

The retail industry utilizes EDI extensively for B2B data exchange, notably EDI 850 for PO and 855 for purchase order acknowledgments. The shipping stage entails a supplier sending an advance ship notice (856) to a retailer with crucial information about package contents, shipment timing, and more. Then, the invoicing process involves the supplier issuing an EDI invoice (810) to request payment for delivered products. The retailer responds with EDI 820 (remittance advice), confirming payment to the supplier. These stages ensure that every step of the supply chain is well-knit and facilitates efficient business operations.

Healthcare

In healthcare, EDI facilitates the secure and efficient exchange of information between healthcare providers, insurers, pharmacies, and other entities. It allows healthcare providers to submit claims electronically, leading to faster reimbursement and reduced claim rejection rates. Some of the most commonly used transaction sets in the healthcare industry include EDI 837, EDI 835, EDI 270/271, and EDI 278.

Logistics

It has become imperative for any organization in the logistics industry to be EDI capable as it enables the automation of tasks like order processing, shipment tracking, and invoicing. EDI allows for real-time visibility into inventory levels, shipment statuses, and delivery schedules, enabling better planning and decision-making. EDI documents widely used in the logistics industry include EDI 310, EDI 110, etc.

The future of electronic data interchange

The advancements in technology and the growing need for seamless and reliable B2B data exchange will be the primary drivers of pushing EDI to the next level, i.e., making it more intelligent, secure, and adaptable to modern business needs.

Particularly, the cost and complexity of transitioning entire ecosystems away from EDI, along with its proven track record, will keep it relevant for years to come. Many businesses have found ways to complement EDI software with newer technologies, such as APIs and cloud-based integration platforms, rather than fully replace it.

With artificial intelligence (AI) and machine learning (ML) integrated into EDI software and systems, organizations will be able to leverage novel features and techniques, such as intelligent data mapping. Adding blockchain to the equation would result in EDI data being tamper-proof and easy to audit. Similarly, integrating Internet of Things (IoT) devices with EDI systems will enable businesses to be swift in their operations with added visibility into data from their supply chains.

As a result, the global EDI market is expected to grow from $1.98 billion in 2023 to $4.52 billion in 2030.

Implementing EDI with Astera

Astera offers an enterprise-grade EDI solution that enables frictionless B2B data exchange across systems. Its no-code, unified platform allows businesses to seamlessly cover the entire data journey, including source extraction, translation, acknowledgment generation, verification, and sending data to its destination. The intuitive, drag-and-drop UI allows even non-technical business users to handle the customization of transactions, segments, elements, and validations with ease. With Astera, you can:

• build complex, hierarchical EDI transactions
• exchange documents formatted in ANSI X12, HIPAA (HL7), and EDIFACT
• efficiently processes large volumes of files regardless of complexity
• automate workflows using job scheduling capabilities

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