What is EDI (Electronic Data Interchange)? | SAP (2024)

The origins of electronic data interchange (EDI) can be traced all the way back to the development of electronic messaging systems in the late 1960s. One of the first implementations was in the automotive industry, where it was used to streamline the procurement process between manufacturers and suppliers. However, it wasn’t until the standardization of EDI formats in the 1980s and the rise of the Internet in the 1990s that EDI became much more accessible and widespread. In its heyday, EDI was credited with reducing errors, speeding up transactions, and increasing business productivity. It was revolutionary in its time.

Despite its age, EDI is still used by some organizations today, particularly large companies that invested in the technology long ago. Now, much more modern supply chain collaboration systems exist – offering capabilities that eclipse EDI – but most of these systems still provide the option to transact with EDI if trading partners have not yet moved beyond the older technology.

What is electronic data interchange?

EDI is the electronic exchange of business documents between trading partners. Instead of using traditional methods such as paper, fax, and e-mail, EDI allows for the secure, automated exchange of vital information – such as purchase orders (PO) and invoices – between businesses. In an EDI system, data is formatted according to predefined standards agreed upon by trading partners, enabling interoperability between different systems, and eliminating the need for manual data entry.

There are three primary ways EDI can be deployed:

• Direct EDI (point-to-point). Computers in an organization connect directly with computers in the trading partner organization. Direct EDI is still widely used, despite high maintenance costs. However, when a company’s business involves many trading partners, direct communication can become overly complex, with connections running in too many directions. For this reason, point-to-point EDI is the least scalable of options.
• Value-added network (VAN). Data transmission is managed by a third-party network, which routes communications to information recipients using a mailbox approach.
• Web-based EDI, also known as Internet EDI. Companies access a web portal or platform – often provided by a third-party service provider. This makes EDI transmission accessible to organizations without EDI infrastructure.

To enable machines to exchange information, data must be structured in a format that both the sending machine and the receiving one can understand. Standardized formats and communication protocols are key.

There are several steps in the EDI process:

1. Document creation. The sender creates a document to be shared – a purchase order, invoice, shipping notice, or another document.
2. Translation. Before it can be transmitted electronically, the document must be translated into a standardized EDI format. This translation is typically handled by EDI software.
3. Transmission. The translated document can now be transmitted to the trading partner. Various communication methods can be used for transmission, including EDI file transfer protocol (FTP) and web-based methods.
4. Data receipt. At this step, the receiving organization’s EDI system receives the document, and it’s the recipient’s responsibility to check for completeness as well as compliance with agreed-upon EDI standards.
5. Translation – receiver side. The EDI document is now ready to be translated to a format the recipient can read, so it can be processed by the organization’s internal systems.
6. Processing. Now, the data from the translated document can be automatically processed, thanks to integration into the recipient’s ERP and other systems. This integration reduces the need for manual data entry and improves accuracy.
7. Confirmation. In many cases, EDI messages are sent back to the sender to advise that the document was received and processed. EDI systems also often include archiving features to store past transactions, which is important for record-keeping and compliance purposes.

The advantages of electronic transmission over paper, fax, and e-mail processes were numerous and compelling:

• Greater efficiency – replacing slow and cumbersome manual processes with faster electronic workflows
• Fewer errors – minimizing the risk of errors due to data entry mistakes, illegible handwriting, or miscommunication
• Improved data accuracy – with predefined standards, verification processes, and data consistency
• Faster transaction processing and integration – resulting in greater responsiveness to customer demands and faster decisions
• Cost savings – reducing costs related to document production, mailing, and storage as well as significant staffing costs related to time-consuming manual processes
• Compliance – helping organizations comply with industry regulations by adhering to standards
• Environmental benefits – radically decreasing the use of paper and preserving trees

Historically, EDI was used in a wide variety of business transactions, supporting buyer and seller relationships by providing both parties with the details they needed – when they needed them.

Examples of EDI transactions include:

• PO transmission and confirmation – specifying quantities, pricing, delivery dates, and payment terms
• Advanced shipping notices (ASN) – providing information including contents, packaging details, carrier details, and expected delivery dates
• Payment remittance advice – communicating payment information from a buyer to a supplier
• Product catalogs – including pricing and availability details
• Transportation and shipping status – real-time information about the location of shipments

EDI standards have evolved over time and vary by industry. They also differ by region, with different standards bodies providing support for the development, maintenance, and distribution of standards. The American National Standards Institute (ANSI) oversees standards and conformity assessments in the U.S. In Europe, there are three bodies – CEN, CENELC and ETSI – that are responsible for developing and defining standards at a European level. There are also industry-specific associations, such as RosettaNet, responsible for developing standards in electronics and semiconductor manufacturing industries.

These standards are critical for interoperability, consistency, efficiency, and compliance. Some common examples include:

• ANSI X12 – widely adopted in the U.S. for a broad range of industries, including manufacturing, healthcare, retail, finance, and transportation
• UN/EDIFACT – the international EDI standard recognized by the United Nations and commonly used in Europe and other regions
• EANCOM – a standard developed by G1 for use in the retail and consumer goods sectors
• HL7 – used in the healthcare industry for the electronic exchange of medical and patient information
• SWIFT – financial industry standard for safer and standardized communication among financial institutions
• Tradacoms – primarily used in the United Kingdom in the retail sector

Instead of EDI, leading enterprises today engage in supply chain collaboration. Supply chain collaboration is the process of extending internal systems and processes to an ecosystem of trading partners. On the supply side, this ecosystem typically includes direct materials suppliers across multiple tiers, contract manufacturers, co-packers, shippers, carriers, and third-party logistics providers. Businesses can collaborate on order processes, including PO transmission, order confirmations, advance ship notices, goods receipt notices, and invoices, as well as forecast, inventory, and even quality processes, which are areas that EDI does not address.

Supply chain collaboration offers three important benefits over EDI:

1. More trading partners can participate. Due to cost and resource constraints, EDI implementations typically stall after only some trading partners have been onboarded. This means smaller suppliers are either left behind or relegated to manual means of exchanging documents with their customers. Supply chain collaboration, on the other hand, offers multiple trading partner integration methods: B2B integration; use of tools such as Microsoft Excel, as forecast commits and related information can be created in Excel templates and uploaded; and web-based portals.
2. Business rules “open the envelope” and improve processes. EDI processes have often been compared to that of a post office. An EDI VAN receives the “letter”, such as a business document, but doesn’t open it to look at the contents. If the contents are problematic – for example, a purchase order that is impossible to fulfill, or a forecast that cannot be committed – the letter gets passed on anyway. This missed step can cause major delays – and result in supply chain delays and lost revenue.

   Rather than providing post office-type functionality, supply chain collaboration technologies can analyze documents sent to and from suppliers and determine business process compliance – not just payload, format, and protocol compliance. For example, if a supplier can commit to only 90% of a forecast, some enterprises may find this acceptable, while others want to be alerted to a process compliance problem. A supply chain business network can identify the process compliance and offer in-network intelligence that understands when to alert the buyer and when to send the forecast commit along. Furthermore, artificial intelligence can be applied to invoices to add important missing data, such as general ledger data.

3. Multitiered collaboration is feasible. EDI was developed at a time when most enterprises were vertically integrated and simply needed to buy key components from suppliers. Enterprises and their supply chains have changed considerably with the introduction of contract manufacturers, contract packagers, tollers, and others, who offer considerable manufacturing flexibility – but who impact visibility and control over the supply chain. For example – visibility into availability of upstream components such as semiconductors, active pharmaceutical ingredients, and other important supplies that are “once removed” may be compromised with the addition of these enterprises. Business networks offer collaboration across these multitiered supply chains, which older EDI technologies cannot model or address.

The benefits of supply chain collaboration and orchestration are substantial. They include all the benefits of EDI and more, such as:

• Greater assurance of supply, which leads to higher customer satisfaction, more upside revenues, and fewer stockout penalties
• Reduced excess buffer stock and increased inventory turns
• Faster and more compliant confirmation of quality of raw materials, manufactured components, final products, and more
• Fewer invoice exceptions and disputes

Trading partners, including contract manufacturing organizations, suppliers, n-tier suppliers, co-packers, tollers, and others, also benefit from:

• Better visibility into customer demand
• Increased customer satisfaction for a higher share of wallet
• Reduced IT costs from creating one harmonized point of connection with customers

With this type of supply chain collaboration and multitiered orchestration, there are benefits for both buyers and suppliers. Even smaller organizations supplying goods win, as they become part of the network of large, influential companies. EDI doesn’t typically allow these smaller companies to participate.

Explore SAP Business Network Supply Chain Collaboration