What is EDI?

Electronic Data Interchange (EDI) is the computer-to-computer exchange

of business documents in astandard electronic format between business
partners.

By moving from a paper-based exchange of business document to one that is electronic, businesses
enjoy major benefits such as reduced cost, increased processing speed, reduced errors and improved
relationships with business partners. Learn more about the benefits of EDI here. »

Each term in the definition is significant:

 Computer-to-computer– EDI replaces postal mail, fax and email. While email is also an electronic
approach, the documents exchanged via email must still be handled by people rather than computers.
Having people involved slows down the processing of the documents and also introduces errors. Instead,
EDI documents can flow straight through to the appropriate application on the receiver’s computer (e.g.
the Order Management System) and processing can begin immediately.

A typical manual process looks like this, with lots of paper and people involvement:

The EDI process looks like this – no paper, no people involved:

 Business documents – These are any of the documents that are typically exchanged between
businesses. The most common documents exchanged via EDI are purchase orders, invoices and
Advance Ship Notices. But there are many, many others such as bill of lading, customs documents,
inventory documents, shipping status documents.
 Standard format– Because EDI documents must be processed by computers rather than humans, a
standard format must be used so that the computer will be able to read and understand the documents. A
standard format describes when each piece of information is and in what from (e.g. integer, decimal,
 mmddyy). Without a standard format, each company would send documents using its company-specific
format and, much as an English-speaking person probably doesn’t understand Japanese, the receiver’s
computer system doesn’t understand the company-specific format of the sender’s format.There are
several EDI standards in use today, including ANSI, EDIFACT, TRADACOMS and XML. And, for each
standard there are many different versions, e.g. ANSI 5010 or EDIFACT version D12, Release A. When
two businesses decide to exchange EDI documents, they must agree on the specific EDI standard and
version. Businesses typically use an EDI translator – either as in-house software or via an EDI service
provider – to translate the EDI format so the data can be used by their internal applications and thus
enable straight through processing of documents.
 Business partners – The exchange of EDI documents is typically between two different companies,
referred to as business partners or trading partners. For example, Company A may buy goods from
Company B. Company A sends orders to Company B. Company A and Company B are business
partners.

Benefits of EDI

According to research from GS1 UK, the grocery sector saves £650
million every year from its use of EDI. The research also suggests that the
grocery sector could save a further £200 million each year from the automation of
one single business document – the Advance Ship Notice. From a financial
perspective alone, there are impressive benefits from implementing EDI with your
trading partners and each additional document that you implement can increase
that savings. But cost savings is far from the only benefit of using EDI.
But let’s start with cost savings anyway:

 Research has consistently shown that EDI costs only one third of its paper-based equivalent.
 One report put the cost at 70 times less. A major American company reported a reduction in its order
processing costs from $38/order to $1.35/order with EDI.
 The EU has reported that by taking 10 minutes less to process electronic invoices it saves 120 euro per
invoice every year.
 GS1 UK found that UK grocers saved £14 on every electronic order.

The major benefits of EDI are often stated as speed and accuracy:

 Transactions that used to take 5 days by paper can be completed in under an hour. An American
automotive corporation reduced a key cycle time by 97% – a 30-day process was reduced to 24 hours.
And a major retailer reduced order cycle time by 75% from 24 days to 6 days.
 Research has shown that with paper-based processes often as much as 5% of the data on an invoice is
inaccurate.
 More accurate data means that the entire supply chain is more efficient. Some estimates suggest that
EDI can result in 30% faster delivery time to customers.
 However, the increase in business efficiency is also a major factor:

 Automating paper-based tasks frees staff to concentrate on higher-value tasks. It provides them with the
tools to be more productive. Research reports as much as a 50% savings on human resources from the
use of EDI.
 The prompt processing of accurate business documents leads to less re-working of orders, fewer stock
outs and fewer cancelled orders.
 Buyers can take full advantage of better payment terms and discounts.
 Sellers benefit from improved cash flow and reduced order-to-cash cycles.
 Shortening the order processing and delivery times means that organisations can reduce their inventory
levels – research suggests by an average of 10%, a major benefit when you consider that inventory often
accounts for 90% of product costs.

In many cases, the greatest benefits come at the strategic business level:

 Enables real-time visibility into transaction status. This, in turn, enables faster decision-making and
improved responsiveness to changing customer and market demands, and allows businesses to adopt a
demand-driven business model rather than a supply-driven one.
 Shortens the lead times for product enhancements and new product delivery.
 Streamlines your ability to enter new territories and markets. EDI provides a common business language
that facilitates business partner onboarding anywhere in the world.
 Promotes corporate social responsibility and sustainability by replacing paper-based processes with
electronic alternatives. This will both save you money and reduce your CO2 emissions.

Cost of EDI
Calculating the cost of EDI implementations is very important in order to ensure
that it will deliver real financial and business benefits to your company. But first
you must decide the approach you are going to take with EDI: In-house or
working with a third party EDI provider (sometimes referred to as a value-added
network, or VAN).
In-house

A few very large organisations have created their own EDI networks. This has the advantages of internal
management, control and security but it is not something to be undertaken lightly. If you are going to build
your own EDI system, at a minimum, you’ll need to invest in:

 EDI software
 Communications software
 EDI transmission methods
 Mapping and translation software
 EDI and mapping specialists
 Ongoing upgrades, support and maintenance
 That investment will get you to the start point. You’ll have an internal EDI system. It is likely that you’ll
have to assist each of your trading partners to implement the system at their end, maybe even build it for
them. You will need to do this with each trading partner that you want to do EDI with and it will be an
ongoing requirement as your trading community evolves, grows and changes.

Little surprise then that most organisations have chosen instead to work with some form of third-party
provider who can supply the EDI infrastructure without their having to make that initial investment. This
can be particularly important for small- and medium-size businesses that simply do not have the people
or cannot find the money for this level of investment within their company.

EDI Provider/VAN

As you’d expect, there are different pricing models available from third-party providers that you will need
to review. Although your final choice will, of course, consider price, you should also consider key business
factors such as:

 The number of your partners who are enabled on the providers’ networks already
 Whether the provider covers the range of geographies you require
 The levels of support and training they are able to provide to support you and your trading community
 The range of options that they can provide to enable you and all of your trading community to do EDI

The provider’s charge, to a large degree, is usually based on the volume of data you transmit over the
network. This is often measured in the number of kilo-characters (KCs) contained within your EDI
document. Based on this, providers offer a variety of subscription models that you can select from, such
as:

 Pay-as-you-go
 Monthly
 Annual subscription

Often these models operate within price bands based on anticipated volumes of KCs or documents. You
should also be aware of hidden charges such as minimum record lengths. Some providers specify a
record length of 128 to 512 characters. The result is that if you were to send 10 documents of 10
characters you would be charged for up to 5120 characters for sending only 100. If you have a large
volume of small transactions this can add a substantial amount to your monthly charge.

It is important that you understand the volume and nature of your business transactions before selecting a
provider. That way you can select the pricing model that best meets your business needs. And, look
carefully at the small print of any provider that claims to offer a “free” EDI VAN service, as it is unlikely to
be the case.

Types of EDI
Electronic data interchange (EDI) is the structured transmission of data between
organisations by electronic means. There are many types of EDI and approaches
to enabling EDI across a trading community. Whether looking at EDI for the first
time or expanding an existing EDI infrastructure to support business partners
across the globe, there is a method of utilising EDI that will suit your business
 needs, technical capabilities and budget. Many larger companies adopt hybrid
EDI solutions to connect with their business partners, dependent on size and
frequency of their transactions.

Below is an outline of the different methods available:

 Point-to-point

Brought to prominence by Walmart, point-to-point EDI establishes a single connection between two
trading partners. In this approach, you connect with each business partner individually. It offers control
and security for the business partners and is most commonly used between larger customers and
suppliers with a lot of transactions.

 EDI via VAN

Value Added Networks (VANs) are private networks where electronic business documents are
exchanged between partners. The VAN provider manages the network and provides companies with
mailboxes where they can send and receive EDI documents.

 EDI via AS2

AS2 is an Internet communications protocol. It allows data to be transmitted securely and reliably over the
Internet. EDI via AS2 delivers the functionality of EDI but with the cost-effectiveness and ubiquity of
access of the Internet.

 Web EDI

Unlike EDI via AS2, Web EDI conducts EDI using a standard Internet browser. Organisations use
different online forms to exchange information with business partners. Web EDI makes EDI easy and
affordable for small- and medium-sized organisations and companies that have only occasional need to
utilise such a service.

 Mobile EDI

Users have commonly accessed EDI either by a private network such as Value Added Network or the
Internet in order to send and receive EDI-related business documents. Mobile EDI has had limited
adoption, in part due to security concerns with mobile devices across an EDI infrastructure, but mainly
due to the mobile devices themselves.The quality and size of the screen of most devices has been
relatively poor until recently. There is a growing industry for developing software applications or ‘apps’ for
downloading onto mobile devices and it will be only be a matter of time before you will be able to
download supply chain and EDI related apps from private or corporate app stores.

 EDI Outsourcing

EDI Outsourcing (also referred to as Managed Services) is a fast-growing option that enables companies
to use external resources to manage their EDI environment on a day-to-day basis. This is in part driven
by companies wanting to integrate to back office business systems such as Enterprise Resource
Planning (ERP) platforms. Many companies do not have the internal resources to undertake this type of
work so they outsource it instead.
Implementing EDI

Implementing EDI across your organisation and network of trading

partners can be complex. Taking a systematic approach will help you deliver an
effective EDI programme. Below is a structured 10- step implementation
process for successful EDI implementation:
Step 1: Develop the organisational structure

Your first action is to ensure that you have access to the correct skills. Develop EDI coordinators and
teams that will drive the programme through your organisation.

Step 2: Undertake a strategic review

The business areas that benefit most from EDI deployment vary by organisation. A strategic review
identifies where EDI has greatest potential in your business.

Step 3: Conduct in-depth analysis

An accurate analysis of costs and projected payback when implementing EDI is essential.

Step 4: Develop a business-focused EDI solution

Selecting the correct EDI solution for your business requires an in-depth understanding of both the
technical and business issues – for you and your trading partners.

Step 5: Select the correct EDI network provider (VAN)

Most organisations find using an EDI provider makes the best business and financial sense. Selecting the
correct provider for your business is imperative.

Step 6: Integrate EDI with the business

How an EDI system is designed and developed depends on the amount of custom work required and the
amount of internal systems with which it needs to share data.

Step 7: Integrate data across the business

Most applications impose their own data structures. The data from internal and external systems need to
be analysed in order to ensure they translate into your EDI system.

Step 8: Undertake data mapping

To ensure the smooth flow of information between internal applications and trading partners, documents
need to be mapped to allow effective data transmission.
Step 9: Establish a pilot project

Before your EDI system goes live within your entire trading community, it is important to select a small
number of partners to test the system in ‘near live’ conditions.

Step 10: Roll out EDI to trading partners

The last action is to implement EDI across your trading partners. This should be achieved in a staged
manner that reflects your current business priorities.

EDI by Industry
EDI is used across many different industry sectors. It is applied to address many
different business processes and industry challenges. Over the last forty years
numerous industry specific document and communication standards have
evolved, industry specific associations and work groups have been established
and many private networks have been set up to meet the individual demands of
different industry sectors.
The Automotive Industry

Just-in-Time and Lean manufacturing have been at the heart of the Automotive industry for some years.
In addition a growing OEM industry in developing parts of the world has led to increasingly global
manufacturing process. EDI is key to Automotive companies achieving these business objectives.

The Financial Services Industry

The Financial Services industry relies on its ability to process accounts payable and receivable, as well as
managing investments and loans on behalf of its customers both retail and wholesale. For years many of
these processes were manual and paper intensive. EDI is changing all that.

The High Tech Industry

The high tech value chain has become very complex with many high tech companies relying on external
partners to help design and manufacture their products. Time to market can define the success of a High
Tech company. EDI ensure the industry’s processes are as efficient as possible.

The Retail Industry

One of the first sectors to fully embrace EDI technology, the Retail industry is still at the forefront of Using
EDI to drive competitive advantage. For an early adopter, it has proved surprisingly cautious to the advent
of new technologies, preferring to build upon the EDI infrastructures already in place.