What is EDI (Electronic Data Interchange)?

Aaron Keeports
Content Marketing Manager

The growing majority of businesses (60-86%) involved in the EDI order process are continuing to utilize EDI transactions. For those wondering exactly what EDI is, let's cover the topic completely.

What is EDI?
How EDI Works
Benefits of EDI
Challenges of EDI Solutions
What Does EDI Implementation Require?
End-to-end connection using EDI Integration
The Future of EDI in Smart Supply Chains
Harness the Power of EDI with Cleo Integration Cloud

What is EDI?

EDI, or Electronic Data Interchange, is the computer-to-computer exchange of business information in a standardized format between EDI trading partners in the form of electronic documents. EDI automates the exchange of business documents like invoices, purchase orders, and shipping forms between organizations. Instead of relying on manual data entry from paper-based or emailed documents, cloud EDI enables digital systems to seamlessly share and process information, reducing errors and improving efficiency across business networks.

Now, wherever EDI data is used, that EDI data needs to be integrated. EDI integration is the process that makes EDI data compatible with a business's internal systems, like an ERP, order management system or inventory management software.

How EDI Works

EDI Documents

Unique EDI codes are used to specify certain EDI documents, which corresponds to specific EDI transactions. For example, a purchase order might be identified by the code EDI 850, while an invoice could be identified by an EDI 810.

Unlike traditional paper documents or even PDFs though, EDI documents adhere to specific formatting and communication standards to ensure smooth and error-free exchange between different computer systems.

There are a vast number of EDI documents that are sent from one business to another. The types of documents sent depend on the industry, EDI process, EDI standard, and more. Some of the most common EDI documents include purchase orders (EDI 850), invoices (EDI 810), advanced ship notices (EDI 856), and functional acknowledgements (EDI 997).

EDI Order Processing between buyer and supplier's system

EDI Standards

EDI document standards play a crucial role in electronic data interchange (EDI). Simply put, these standards, also known as EDI file formats, define the structure and content of business documents like purchase orders, invoices, and order confirmations. Once formatted correctly, these documents are transmitted to trading partners or service providers using established EDI communication protocols.

Think of EDI like sending a package internationally. The EDI standard is like the standardized customs forms that ensure the package contents are clearly defined.

EDI standards are sets of rules and formats that define how business documents should be structured for electronic transmission between trading partners. For example, standards specify if the delivery date should be listed as an integer, decimal, or mm/dd/yyyy. If companies didn’t specify which standard to use, companies and their trading partners would be speaking ‘different languages’ and their internal systems would not be able to understand the data in the EDI documents they receive.

So with everyone "speaking the same language," (i.e. using the same standard) data quality and interpretability are maintained across different systems. Common standards include:

X12: commonly used in North America, particularly in industries such as retail, manufacturing, healthcare, finance, and transportation.
EDIFACT: an international standard used primarily in Europe and other parts of the world outside of North America in industries such as transportation, logistics, retail, and international trade
TRADACOMES: a UK-specific standard commonly used in the United Kingdom in industries such as retail, supply chain management, and manufacturing
HIPAA: sets standards for the electronic exchange of healthcare information in the United States

EDI Protocols

If EDI standards are the customs forms that outline a package's details, EDI protocols are like the chosen shipping method (plane, boat, train) that dictates how the package is delivered.

EDI protocols define the technical specifications for how data is transmitted between businesses. They determine how the data is packaged, secured, and delivered electronically. EDI data is typically transmitted using secure protocols like SOAP, SFTP, and AS2, which act as secure communication channels to protect your sensitive business information.

Building Richer Communication

EDI software has the capability to merge multiple pieces of data within an EDI document. For instance, it can blend elements like "ITEMQUANTITY" and "ITEMDESCRIPTION" into "ORDERLINE," offering a more detailed depiction of items and their quantities within an order. These combinations create more comprehensive and succinct EDI documents.

Transmission Methods

EDI transmission has two main methods:

Using a third-party service (EDI VAN): Like a secure mailbox that routes EDI documents between partners. More secure but can be expensive.
Connecting directly (point-to-point): Partners connect directly over the Internet with secure protocols (like AS2) for a cheaper option.

For example, suppliers send EDI purchase orders directly to retailers' systems (like Walmart, Target, etc.) via point-to-point connections or through a VAN. Additionally, VANs act as intermediaries, facilitating communication between suppliers and multiple retailers. For example, a clothing manufacturer may use a VAN to transmit product catalogs, inventory updates, and shipping notices to various retail partners, ensuring timely delivery and replenishment of merchandise.

EDI Message Standards

Standards like ODETTE, TRADACOMS, GS1, Peppol, and ASC X12 define EDI message formats, ensuring consistency and interoperability.

Take Procter & Gamble (P&G) for example, which implements EDI standards such as GS1. P&G exchanges standardized EDI messages with retailers like Costco or Kroger to coordinate product orders, shipments, and invoices. By adhering to GS1 standards, P&G ensures that product information, such as UPC codes and pricing, is consistently formatted and easily understood by its trading partners, enabling efficient inventory management and order fulfillment processes.

Internet Protocols:

Many trading partners, including automotive manufacturers like Toyota or General Motors, require their suppliers to use secure internet protocols for EDI communication. Suppliers may employ protocols like Secure File Transfer Protocol (SFTP), Applicability Statement 2 (AS2), and Simple Object Access Protocol (SOAP) to transmit production forecasts, shipment schedules, and quality assurance reports securely over the Internet. By using these protocols, suppliers encrypt sensitive data, establish secure connections, and ensure the integrity of transmitted information, thus mitigating the risk of data breaches and ensuring compliance with industry regulations.

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Benefits of EDI

The reason EDI is so popular and continues to be adopted by businesses across a wide variety of industries is the multitude of benefits it provides. These benefits include:

Enhanced Trading Partner Connectivity

EDI is pivotal for businesses seeking to establish and maintain connections with larger trading partners. For instance, major retailers such as Walmart, Amazon, and Target mandate the use of EDI for seamless integration and standardized data exchange with their suppliers and vendors. Without EDI compliance, businesses risk exclusion from lucrative partnerships and opportunities. By adopting EDI, companies not only meet the stringent requirements of these industry giants but also demonstrate a commitment to efficient and compliant business practices. This not only strengthens existing partnerships but also opens doors to new business opportunities, facilitating expansion into new markets and driving growth within the industry.

Improved Customer Experience

EDI automation plays a crucial role in enhancing the overall customer experience by enabling businesses to streamline their operations and deliver faster, more accurate service. By automating order processing, invoicing, and other transactional activities, companies can fulfill customer orders more efficiently, leading to shorter lead times and improved order accuracy. Additionally, the reduction in errors and processing delays associated with manual methods enhances customer satisfaction and loyalty. With EDI automation, businesses can provide a seamless and reliable purchasing experience, fostering stronger relationships with their customers and ultimately driving repeat business and positive word-of-mouth referrals.

Time and Cost Savings

One of the primary benefits of EDI is the significant time and cost savings it offers. By automating paper-based transactions, EDI eliminates the need for manual processing, which not only saves time and effort but also reduces the processing delays often associated with traditional methods. This streamlined approach accelerates transaction cycles, allowing businesses to operate more efficiently and effectively allocate resources elsewhere.

Error Reduction

Another key advantage of EDI is its ability to minimize errors in document processing. Automated data exchange greatly reduces the reliance on manual data entry, which inherently carries a risk of human error. With EDI, data is transmitted electronically in a standardized format, reducing the likelihood of transcription errors and ensuring higher accuracy rates. This reduction in errors leads to improved data quality and operational efficiency, ultimately enhancing overall business performance.

Enhanced Security

EDI offers superior data security compared to paper-based methods through the implementation of robust authentication and encryption mechanisms. These security measures help control access to sensitive information and safeguard data during transmission and storage. By ensuring data integrity and confidentiality, EDI provides businesses with peace of mind knowing that their critical information is protected from unauthorized access, interception, or tampering.

Improved Connectivity

With the rise of cloud-native file transfer services, EDI has become even more accessible and efficient in facilitating data exchange among business partners. These services enable quick and seamless sharing of data sets over secure networks, enhancing connectivity within B2B ecosystems. By leveraging cloud-based solutions, businesses can easily integrate EDI into their existing systems and collaborate with partners regardless of geographic location or technological infrastructure. This improved connectivity fosters stronger relationships with suppliers, customers, and other stakeholders, driving collaboration and innovation across the supply chain.

Common Challenges of EDI Solutions

1. High Initial EDI Costs

Implementing an EDI solution requires a significant initial investment, as businesses must purchase hardware, software, and systems that meet industry regulations. Additionally, companies may need to pay for third-party EDI network services if they choose to use external providers. A crucial yet often overlooked expense is the training required for staff to understand EDI processes, standards, and software. Ongoing training to keep staff up to date with EDI best practices and evolving standards also adds to the total cost, requiring businesses to establish accessible and effective training resources.

2. Complex EDI Document Mapping

A major challenge in EDI implementation is the complexity of mapping the EDI format to existing business documents. Companies that use multiple systems may find this process particularly challenging, as they must ensure that data flows accurately across all systems. The mapping process requires extensive testing to ensure accuracy, and without the necessary expertise, it can become time-consuming and prone to errors. For businesses with limited technical resources, this task can be even more complex, potentially delaying the integration of EDI solutions.

3. Difficulty Scaling EDI Systems

Once an EDI system is operational, businesses often face difficulties when trying to scale it across all their logistics partners and vendors. One of the main hurdles is the varying levels of EDI readiness across different trading partners. For instance, purchase orders may have different business rules, data elements, and document fields depending on the specific requirements of each partner. As companies scale their EDI operations, they must adapt to these differences and ensure that their system can handle diverse formats and standards, which can complicate the expansion process.

4. Ongoing EDI System Monitoring

To maintain the effectiveness of an EDI solution, continuous monitoring is essential. Inaccurate, incomplete, or inconsistent data can disrupt the flow of business transactions, so it is vital to regularly check the integrity of data and ensure compliance with evolving industry standards. This ongoing oversight involves monitoring the EDI system’s performance, conducting audits, and assessing security protocols. Without allocating sufficient resources for these activities, businesses risk data quality issues, security breaches, and noncompliance with regulatory requirements, all of which can lead to costly disruptions.

What Does EDI Implementation Require?

The key steps for implementing EDI include:

1. Building the Infrastructure:

Think of this as setting up the foundation for your EDI system. You'll need the right software tools to manage various aspects of EDI communication:

Mapping Software: EDI mapping software translates your internal data formats (like names and addresses) into the standardized EDI format your trading partners’ systems understand.
Enveloping and De-enveloping Software: This software "wraps" your EDI documents for secure transmission and then "unwraps" them upon arrival at the recipient.
Routing Software: This ensures your EDI messages reach the correct destination and are compatible with the receiving system.

There are two main ways to handle data transmission:

Value Added Networks (VANs): These act as secure intermediaries, managing the transfer of your EDI documents for a fee.
Internal Management: If you choose to manage EDI in-house with point-to-point connections, you'll need the necessary hardware infrastructure, such as servers and network equipment.

2. Connecting with Trading Partners:

Now that your technical base is solidified, it's time to establish connections with your trading partners. Since you'll be sharing documents with external parties electronically, secure and standardized communication is vital.

Standardization: Different industries and regions often use specific EDI formats. Configure your system to match the standards used by your trading partners, ensuring smooth data exchange. This could involve formats like X12 or EDIFACT.
Secure Connections: Set up secure pathways for data transmission using methods like protocols, VPNs, or firewalls.

3. Staying Compliant:

The world of EDI revolves around standards and regulations. Here's what you need to keep in mind:

Industry Compliant: Your EDI system must comply with the data protection rules and standards mandated by your industry. Be prepared to update your system as these standards evolve.

Trading Partner Compliant: If your trading partners change their EDI standards, you must be flexible and adapt your system to comply with these changes to maintain seamless communication. Otherwise, you may lose their business.

End-to-end connection using EDI Integration

The right EDI solution should be able to seamlessly integrate with your existing internal software, as well as with a vast network of current and future trading partners.

Internal Systems

EDI can connect to a variety of internal solutions within your organization, such as an ERP, WMS, TMS, visibility platform, and more. These integrations can create better communication and greater efficiency by automatically exchanging data between the internal solutions and your EDI solution. This data can be used to automatically update inventory levels in real time, generate and send shipping updates, pay bills, provide trading partners with tracking updates, and more.

Expanding Your EDI Network

Growth often involves connecting with more partners – retailers, online marketplaces, logistics providers, manufacturers, and more. Many businesses, especially larger organizations (e.g. Amazon, UPS, and Procter & Gamble), require their trading partners to be EDI-capable because the technology provides efficiency, accuracy, cost savings, and scalability—all of which are vital for success at the enterprise level.

Trading partners commonly have strict and unique requirements for their business, so it’s important to find a solution that can support a wide range of protocols and standards, as well as one that updates their offerings to keep pace with evolving requirements. Non-compliance can lead to steep fees and negative vendor scorecards which impact future business opportunities.

Cleo has a large trading partner network with thousands of the most popular trading partners your business might need or want to connect to. Cleo’s trading partner network includes:

Online Marketplaces: Amazon, Wayfair, and eBay
Retailers: Target, Walmart, Lowes, and Home Depot
Wholesalers: Costco and BJ’s Wholesale Club
eCommerce Platforms: Shopify and WooCommerce
Grocers: Kroger, Albertsons, and Publix
Convenience Stores: Walgreens, CVS, and 7/11

The benefits of Cleo’s trading partner network include:

Pre-configured Connections: Pre-built connections that are ready to use, eliminating the need for custom mapping and setup for each partner
Reduced Errors: Automate manual configuration and mapping to minimize human errors and provide your team with more bandwidth
Faster Time to Value: Connect with new partners quickly so you can start communicating and conducting business sooner
Effortless Expansion: Easily expand your EDI ecosystem by leveraging our existing network connections to onboard new partners without significant effort
Compliance Management: Remain compliant with evolving industry regulations and trading partner requirements, with automatic updates

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The Future of EDI in Smart Supply Chains

Imagine a damaged shipment is delivered. This triggers a chargeback via an EDI 214 message (Transportation Carrier Shipment Status). The unusable materials lead to disputes between the involved parties. This scenario highlights the limitations of traditional EDI.

However, the future of EDI holds new levels of possibility for supply chains that can bring added clarity to a situation like this. Here's a glimpse into what this future may hold:

Real-Time Visibility with IoT: Embedded sensors in packaging that can routinely communicate with EDI systems via EDI 214 messages. This real-time data regarding a package’s condition will provide unprecedented visibility throughout the supply chain.
Dispute Resolution with Blockchain: Blockchain technology that creates a shared, tamper-proof record of shipment information. This "single source of truth" will streamline dispute resolution and potentially eliminate chargeback conflicts.
AI-Powered Automation: AI that monitors shipment data and identifies potential issues. This AI could:
- Detect non-compliance with shipping regulations
- Assess whether a reshipment is needed
- Evaluate the optimal source for replacements
- Trigger a reshipment and automate returns

The future of EDI is about going beyond basic transactions. It's about enriching EDI with these budding technologies to further optimize supply chains, so businesses can decrease disputes, increase efficiencies, improve customer satisfaction, and resolve issues quicker.

Integration with Emerging Technologies: EDI will play a pivotal role in future supply chains, integrating with IoT sensors, blockchain, and AI technologies to enhance visibility, traceability, and automation in document exchange and supply chain operations.

How Cleo can support your EDI requirements

Electronic Data Interchange (EDI) represents a critical advancement in modern business communications, offering significant benefits over manual processing in terms of efficiency, accuracy, security, and connectivity. As organizations continue to adopt EDI solutions and integrate them with emerging technologies, the future of EDI promises even greater advancements in streamlining business processes and driving supply chain resiliency.

With Cleo Integration Cloud as your EDI solution, your business will have access to:

Any-to-any integration (ERP, TMS, WMS, CRM, visibility platforms like Project44, etc.)
End-to-end business process automation for O2C, P2P, and L2I
Pre-configured EDI templates and maps to speed trading partner onboarding
Complete EDI transaction visibility
Real-time alerts for proactive error management
The choice of self-service, managed services, or a blended approach
User-friendly interface with customizable dashboards for each user

…and so much more.

If you have questions about what was covered in this blog or Cleo's products and services, contact us at [email protected], +1.815.282.7695. Additionally, explore some of our educational resources through our content hub.