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What is EDI? Learn About the Benefits of EDI

What is EDI?

Within the B2B industry, there has been a long time standard for doing business with other organizations. A standard that remains today, and will for much longer into the future.

That standard is EDI. So, what does EDI stand for?

What is EDI? 

EDI stands for Electronic Data Interchange.

EDI Definition: "EDI is a method for electronically exchanging standardized business information between trading partners."

The EDI order process allows the computer-to-computer exchange of business documents from one company to another, thereby enabling automated, paperless communication. Businesses that communicate electronically are called EDI trading partners.

Think of EDI as a common electronic business language that allows trading partners to quickly and easily communicate with each other. 

What is the Difference Between a Paper-Based and an EDI-Based Business? 

Before EDI, businesses relied on moving paper-based documents, which would take far too long and did not provide the flexibility that an electronic exchange would. 

There are hundreds of specific EDI transaction codes that represent different business documents, but two documents that should be familiar to any business are purchase orders and invoices. 

In a traditional invoice exchange, a company will create an invoice using a computer system, print a copy of that invoice on paper, and then send that invoice via mail to their customer.

With both email and fax, that transmission might occur slightly faster, but the core of the process remains the same. 

Once the customer receives the invoice, there are often markups required and the customer must also enter the invoice contents into its own back-end computer system.

This traditional invoice cycle is essentially a manual transfer of information from a seller's back-end computer system to the customer's backend system: from one ERP to another ERP, or from one accounting solution to another accounting solution. 

By nature, EDI software replaces postal mail, fax, and email to directly connect business trading partner systems, eliminating the manual steps necessary for a traditional invoice transfer. 

The Function of EDI

So, how does EDI work?

In a traditional purchase order document exchange, the entire cycle could take anywhere from days to weeks.

Below you can see an example manual process showing the traditional document exchange for a purchase order:

  1. The buyer creates a purchase order

  2. The buyer prints the purchase order and then sends it to the supplier via the mail, fax, or email

  3. The supplier receives the purchase order and manually enters it into its own order management system (Netsuite, Salesforce, Quickbooks, SAP, etc.) 

  4. The supplier creates an invoice

  5. The supplier prints the invoice and then sends it to the buyer via mail, fax, or email.

  6. The buyer receives the invoice and manually enter the invoice contents into its own back-end systems

Oftentimes, there are far more steps than the ones outlined in the below diagram, including acknowledging the purchase order reception or requesting changes to an invoice. 

 

A manual - and cumbersome process

 

In contrast, EDI order processing can take far less time (hours, if not minutes). 

  1. The buyer chooses to purchase a good or product

  2. The buyer's EDI system automatically creates an EDI version of a purchase order and then sends the order directly to the supplier.

  3. The supplier's order management solution receives that purchase order and then automatically ingests and updates its own system. 

  4. The supplier's order management solution automatically creates an acknowledgment and an invoice and then transmits both documents to the buyer to confirm the reception of the purchase order and provide a receipt for the order. 

 

The EDI process

 

EDI Process

Here's how the exchange would play out using actual EDI transactions, with each transaction labeled in order: 

  1. You receive/accept an EDI 850 Purchase Order  

  2. You send an EDI 855 Purchase Order Acknowledgment to your buyer to confirm the successful reception of the EDI 850

  3. You send an EDI 856 Advanced Shipping Notice (ASN) to describe to your buyer the contents of each shipment and how items were packed

  4. You send an EDI 810 Invoice to your buyer

You can match the EDI documents listed above to the Cleo Integration Cloud EDI platform screenshots below:

 

First, an EDI 850 purchase order is received from a trading partner (Rick's Sporting Goods).

 

Cleo Integration Cloud - EDI 850 Purchase Order

 

Second, an EDI 855 Purchase Order Acknowledgment is sent to Rick's Sporting Goods to acknowledge the reception of the EDI 850 purchase order.

 

Cleo Integration Cloud - EDI 997 Acknowledgment

 

Third, an EDI 856 is sent to Rick's Sporting Goods, giving information on the contents of the shipment.

 

Cleo Integration Cloud - EDI 856 Advanced Shipping Notice

 

Fourth, an EDI 810 invoice is automatically generated and sent to Rick's Sporting Goods.

 

Cleo Integration Cloud - EDI 810 Invoice

 

6 Benefits of EDI

EDI allows companies utilize to save time, money, and make life a whole lot easier. For supply chain companies, in particular, the value of an efficient EDI provider can be the difference between business success and failure. 

  1. EDI creates cost savings: Through the use of an EDI service, companies can execute workflows that reduce costs. Previous paper expenses, ranging from printing, reproduction, storage, and postage, are gone. A streamlined documentation process helps companies comply with EDI service standards, which helps to avoid fines due to SLA violations, delays, and other performance gaps. According to Infoworld Magazine's survey of an enterprise company, the cost for processing a paper-based purchase order is almost $70, whereas the same transaction performed through EDI costs less than $1.1

  2. EDI enhances speed: EDI allows enterprises to cut processing time remarkably through automation, speeding up business cycles. Order-to-shipment cycles, in particular, can be cut by 50 percent to 60 percent. There is a tremendous difference in a transaction that is exchanged in minutes instead of days or weeks, as is common with many forms of manual transfer.

  3. EDI ensures order accuracy: Nobody wants to make errors, and that’s exactly what EDI helps organizations avoid. When employees are forced to manually enter data into enterprise resource planning (ERP) software or order systems, odds are that a mistake will happen eventually. EDI solutions are designed to automate that cumbersome process of moving EDI data into an ERP, eliminating human-caused errors. EDI mapping ensures lost orders, or incorrectly entered phone orders are left behind, saving employee time handling data disputes or finding errors. 

  4. EDI drives business efficiency: EDI is proven to be fast and accurate, which is why EDI integration is such a popular automation method for enterprises everywhere. No longer are companies expected to perform hands-on processing, so customer relationships are improved, errors happen less, and the delivery of goods and services are expedited.

  5. EDI establishes security: Companies can feel safe and secure when they have an EDI model in place. In fact, EDI-capable solutions are designed to ensure security and only allow strict access to authorized users, and are usually equipped with archive tracking and audit trail capabilities. Companies are also able to share data securely across many communication protocols and security standards, to ensure EDI compliance with mandates in global business.

  6. EDI elevates strategic decisions: The right EDI solution will allow businesses to onboard trading partners faster, quickly resolve errors, improve productivity, and provide real-time visibility into every single transaction. When configured correctly, EDI can create a seamless flow of data that allows companies to shift their focus from the processing of transactions to the ultimate goal of growing their business.

Here is a look at EDI by the numbers to further illustrate the benefits of the EDI supply chain

 

EDI by the Numbers

 

The Importance of EDI

How many languages does your business-speak? Perhaps a strange question, but if the entire business world could be given an official language, it would be that of EDI.

Without EDI, efficient communication between organizations wouldn’t exist. Instead, retailers, manufacturers, healthcare providers, governments, and multiple other industries would have to rely on manual and outdated procedures to facilitate business-to-business (B2B) communication.

 

How EDI Helps Every Industry

 

Think of EDI alternates like fax, email, and manual data re-entry.

Using these manual methods creates a jumble of unreliable, insecure, non-scaling, and non-programmatic systems for communicating business-to-business information – the most important data to the business at large. Furthermore, inconsistent messaging formats result in higher error rates and confusion among supply chains and logistics partners.

In other words, without EDI capabilities, business communication would be lost in translation.

And that’s why EDI is so important. The use of a standardized communication format creates an international language across every industry in the world. EDI has evolved over the decades to become the most globally recognized business communication standard, allowing enterprises to conduct business electronically across business networks and geographic borders. In this way, EDI has become the dominant language of business.

3 Reasons EDI Will Elevate Your B2B Workflows

EDI has always been a great technology, one that automates business processes and simplifies once-cumbersome data workflows to enable faster transactions. But there’s been a resurgence in EDI use cases as of late. The data movement and transformation technology driving EDI workflows have evolved to better enable the governance, visibility, and partner relationship management critical to doing business today.

Cloud EDI integration and application integration capabilities, for instance, arm enterprises with the tools to support emerging connectivity use cases that enable more flexible ways to interact with new customers. Additionally, modern EDI solutions can be deployed in a way – in the cloud, on-premise (or private cloud), or in a managed services model – that fits an organization’s current and future needs.

Here are three reasons why electronic data interchange implementations continue to benefit businesses across the supply chain:

  1. EDI has standards

EDI’s rigid standardization that technologists often complain about is also a huge reason for its staying power. It’s difficult to maintain and scale B2B data exchanges without standardization, and the absence of standards to dictate a universal format is why APIs haven’t been able to replace EDI in the B2B world. An API is infinitely customizable to meet the requirements of the business for which it was produced, so connecting is in the hands of the developer.

Taking the manual effort out of the data exchange processes means businesses can automate more of the work to be more efficient, eliminate the labor-intensive activities, and put precious IT resources on more important projects.

  1. EDI works

Companies may have spent a lot of time and resources getting EDI up and running over the years (the technology admittedly has evolved into a less massive undertaking), but the result was a communication solution that works. It’s still the most widely accepted communication tool out there, and the largest organizations in the world won’t do business with you unless you support EDI.

For these reasons, the market isn’t explicitly pushing for a technology change, but rather is clamoring for better ways to do EDI. These include supporting more advanced protocols to move EDI data, offering EDI-as-a-service products, and providing fully-managed EDI solutions that provide flexible licensing options and predictable costs.

  1. EDI integrates

EDI technology is not the standalone data beast it used to be. Its purpose was to move order and invoice information among external trading partners. More often, companies are seeking to integrate other applications into that flow and require consolidated integration for ERP, CRM, WMS, and other cloud and on-premise applications.

Modern integration solutions enable this holistic connectivity and business-wide visibility at greater speeds so they can achieve faster time to revenue. Vendors like Cleo have engineered exciting platforms that address EDI integration needs holistically, across the full range of application and process integration workflows within the modern enterprise. (Learn how Cleo can seamlessly integrate EDI documents into the most popular business applications and cloud services, such as Salesforce, Expensify, and PayPal.)

Below you can see a comprehensive diagram on how Cleo does EDI integration.

  1. Starting on the lefthandside, a traditional EDI order document set is automatically processed between trading partners.
  2. Next, those EDI documents are converted into the necessary internal format.
  3. Finally, the information that was previously contained in those EDI documents, now in the correct internal format, is pushed into the ERP systems on the right-hand side using an API connection.
EDI Integration the Cleo Way

 

To fully understand the importance of EDI, we have to go back in time to first understand its history. And it all started in 1948 in Berlin.

The History of EDI

 

Advent of EDI

The year 1948 was one of the most tumultuous times in the history of the United States. Ed Guilbert was an Army Master Seargent who had a problem.

How was he supposed to deliver supplies to U.S. troops in Western Berlin after it had been cut off from Western Germany?

The result was a marvel of logistics, the ‘Berlin Airlift’ which transported over 2.3 million tons of goods into West Berlin over the next year.

So how did Guilbert do it? He designed a standardized shipping manifest that organized the entire process and tracked what was contained in each shipment and which pilots were delivering the cargo.

The 1960s

Years later, in the 1960s, Guilbert took his idea to the next level by developing an electronic messaging format to send shipping information around cargo.

The transportation industry was the first to really take advantage of this new process and recognized the endless potential of EDI.

The Holland-American steamship line sent shipping manifests in 1965 across the Atlantic Ocean by using telex messages. This allowed the Holland-American line to send a full page of data within roughly two minutes.

EDI really gained steam in 1968 with the creation of the Transportation Data Coordination Committee (TDCC) which started to create electronic standards within the transportation industry.

Companies across other verticals began to adopt EDI as well and soon were able to pass documents electronically through radioteletype (RTTY), telex messages, and telephone.

The 1970s

The year 1973 saw the file transfer protocol (FTP) published to enable the file transfer between internet sites.

The FTP protocol was created as a standard in the RFC959 Declarative, outlining the different ports used, commands that FTP accepted, and values for the transfer parameters and modes allowed.

In 1975, the first national EDI specification was published, and Guilbert was a big contributor. The first VAN (value added network), Telenet, was also established in 1975 and was the first commercial packet-switching network to add more than just linking basic computer systems.

Two years later, in 1977, a group of grocery companies and partners drafted an EDI project, and in 1978, the TDCC becomes the Electronic Data Interchange Association (EDIA). Soon, the EDIA is chartered by the American National Standards Institute and becomes the ANSIX12 committee which is responsible for publishing EDI standards.

The 1980s

ANSIX12 published its standards for the first time in 1981 and include the transportation, food, drug, warehouse, and banking industries. Soon after, major companies in the automotive industry, including Ford and General Motors, as well as retailers such as Sears and Kmart mandate EDI for their suppliers.

The EDIFACT EDI standard was created by the UN in 1985 in order to aid with the global reach of technology. Interestingly enough, EDIFACT was adopted by the automotive industry, but other industries insisted on remaining with ANSIX12.

The 1990s and 2000s

By 1991, as many as 12,000 companies were regularly using EDI. The Uniform Code Council (UCC) began EDI over the Internet (EDIINT) so it could standardize communications of EDI reporting data over the Internet.

By 2001, the AS/2 communication standard is published by the UCC to enable encrypted transmission of data over the Internet with the HTTP protocol.

Walmart adopts the AS/2 standard in 2004 to communicate better with its suppliers, and other major retailers follow, although many remain on VAN communication.

EDI is Everywhere Today

Whether you purchase a jug of orange juice at the grocery store, order new shoes from Amazon, buy medicine at the drugstore, or sip that nice wine at your favorite restaurant, EDI plays a critical role in ensuring a dependable, repeatable experience.

Sure, it’d be possible for these things to happen in a non-standard way.

Each manufacturer, retailer, or other business could manually fax paper orders and invoices, or email shipping data and confirmation docs. It would just cost a lot of time, money, and simplicity to do so. EDI enables the standardization and automation required to expeditiously execute – and track – these processes.

Some of the biggest companies in the world – Walmart, Target, and Home Depot, to name a few – mandate sending EDI via AS2 and prioritize securely connecting with suppliers, vendors, and trading partners to keep doing billions of dollars in business every day.

While the process itself isn’t all that exciting, it’s cool to know that EDI drives much of the global economy and has a hand in much of the commerce we transact daily.

The Criticality of Modern EDI

In 2021, the importance of a modernized EDI solution has never been greater or more obvious. Modernizing your EDI software positions your company to take on new business and respond quickly to customer and trading partner requests.

The last thing you need is to disrupt your data flow and business processes because your environment isn’t up to date.

Cleo Integration Cloud elevates your EDI integration processes and streamlines your B2B communications. Cleo Integration Cloud helps automate your EDI solutions in order to connect, transform, and route your EDI and non-EDI transactions through your ecosystem without piling on the custom code.

Discover the benefits of using Cleo Integration Cloud for EDI integration by watching this short demo video:

 

 

Get Your EDI Success Kit

 

1Millman, Howard. "A Brief History of EDI." Info World, pp. 83

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