What is EDI?
Electronic Data Interchange (EDI) is a structured way for businesses to send and receive documents electronically. It was created in the 70's as a replacement for paper documents. EDI is like a schema to cover all possible business transactions across most industries, but it existed before the Internet was invented. Today, most every large company uses it including Amazon, Walmart, and FedEx.
Prior to EDI, businesses used to exchange paper transactions and record those transactions into a hand-written book called a ledger, but modern businesses use one or many software applications, called business systems, to facilitate operations. There are many types of business systems, ranging from generic software suites like Oracle, SAP, and NetSuite to vertical-specific products that serve some particular industry, like purpose-built systems for healthcare, agriculture, or education.
When broken down to its simplest definition, EDI can be thought of as "getting data from one business system into another".
Some examples of the types of documents that can be sent via EDI are a Purchase Order (want to buy), Invoice (pay me), Ship Notice (items shipped), and over 300 other transaction types. Some of the more common examples of EDI usage are:
- Receiving purchase orders from a customer
- Sending e-commerce orders to a fulfillment warehouse
- Requesting pickup of a shipment by a trucking provider
- Sending benefits enrollments to an insurance provider
- Requesting the status of a healthcare claim
- Communicating patient health information
- Receive invoices and initiate payments
- Communicate information between trading partners and financial institutions
- Manage reconciliation disputes
- Communication between upstream and downstream suppliers
- Inventory transparency across suppliers
- Verification of trading partner purchase orders
A few technical standards have been created since the introduction of EDI including X12 in North America and EDIFACT which is prevalent throughout Europe. Standards bodies make changes over time and version releases with names like “Release 004010”. These standards do not exist to solve all of the problems of B2B transactions. Instead they exist to allow a trading partner to understand each of its trading partner's internal syntax and vocabulary.
Standards such as X12 and EDIFACT provide highly structured, opinionated alternatives intended to reduce the surface area of knowledge required to successfully integrate with trading partners. All documents conforming to a given standard follow that standard’s syntax, allowing an adoptee of the standard to work with just one syntax for all trading partners who have also adopted that syntax.
EDI can be transmitted between trading partners using various protocols but the most common ways to connect are:
Direct EDI: peer-to-peer
In this scenario, trading partners communicate directly with one another over a secure connection. Complexity can increase depending on how many partners you will communicate with, since each partner will require a separate connection. Direct connection can operate over various protocols with the most common being Applicability Statement 2 (AS2) and Secure File Transfer Protocol (SFTP)
A value-added-network service operates as an intermediary between trading partners. VANs attempt to reduce the complexity involved in establishing direct connections with partners facilitating communication between two partners. Typically they support a range of formats including AS2, SFTP, and other data formats.