What is Electronic Data Interchange (EDI)? The purpose of this article is to provide a layperson's understanding of the electronic data interchange process. An overview of EDI benefits and drawbacks is included.

The electronic data interchange process is the computer-to-computer exchange of business documents between companies. EDI replaces the faxing and mailing of paper documents.

EDI documents use specific computer record formats that are based on widely accepted standards. However, each company will use the flexibility allowed by the standards in a unique way that fits their business needs.

EDI is used in a variety of industries. Over 160,000 companies have made the switch to EDI to improve their efficiencies. Many of these companies require all of their partners to also use EDI.

The EDI process provides many benefits. Computer-to-computer exchange of information is much less expensive than handling paper documents. Studies have shown that manually processing a paper-based order can cost $70 or more while processing an EDI order costs less than one dollar.

• Much less labor time is required
• Fewer errors occur because computer systems process the documents rather than processing by hand
• Business transactions flow faster.

Faster transactions support reduction in inventory levels, better use of warehouse space, fewer out-of-stock occurrences and lower freight costs through fewer emergency expedites.

Paper purchase orders can take up to 10 days from the time the buyer prepares the order to when the supplier ships it. EDI orders can take as little as one day.

One drawback to EDI is that companies must ensure that they have the resources in place to make an EDI program work; however, the need for buying and hiring these resources or outsourcing them may be offset by the increased efficiency that EDI provides.

Here is an example of how the electronic data interchange process works. A buyer prepares an order in his or her purchasing system and has it approved.

Next, the EDI order is translated into an EDI document format called an 850 purchase order.

The EDI 850 purchase order is then securely transmitted to the supplier either via the internet or through a VAN (Value Added Network).

If the purchase order is sent using a VAN, then the buyer’s VAN interconnects with the supplier’s VAN. The VANs make sure that EDI transactions are sent securely and reliably. The supplier’s VAN ensures that the supplier receives the order.

The supplier’s computer system then processes the order. In the case of CovalentWorks’ clients, we provide VAN transportation and our servers provide all of the software and hardware required to process EDI documents. Only internet access and email are needed.

Data security and control are maintained throughout the transmission process using passwords, user identification and encryption. Both the buyer’s and the supplier’s EDI applications edit and check the documents for accuracy.

Each trading partner has unique EDI requirements. These will include the specific kinds of EDI documents to be processed, such as the 850 purchase order used in the example above, 856 advance ship notices and 810 invoices.

Almost any business document that one company wants to exchange with another company can be sent via EDI. However each EDI document must be exchanged with the partner in exactly the format they specify.

Many partners will have an EDI implementation guide or kit that explains their specific requirements. Maps are required to translate the EDI documents from the trading partner’s format into the format that is useable by the receiving party.

Meeting all of an EDI trading partner's EDI requirements is called being EDI compliant.

EDI compliance involves either buying or outsourcing the following components:

EDI VAN, FTP, or AS/2 Internet communications will be required by various partners. A server or PC, communication devices and peripherals will be needed as well as secured office space, monitored security, backups and redundant power.

Additional software will be needed if integration of the EDI transactions with back office systems is desired. Personnel must be trained in how to use the software and communication devices. Maps will then need to be developed, tested and maintained.

CovalentWorks specialty is outsourcing all of the above components of EDI for small and mid-sized companies. All you need is internet access and email.

We take care of everything - all of the software, EDI VAN transmission, hardware, communications and labor. Get a free quote instantly

Go to the Frequently Asked Questions page for answers to questions about EDI topics. Executive, Sales, Accounting, and Technology questions are addressed.

CovalentWorks white papers have more in-depth explanations of EDI topics. Go to the White Papers page to download white papers.

Go to the Glossary page for explanations of over 100 of the most common terms and acronyms you may encounter as you implement EDI processes.