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What Is EDI? Meaning, Capability, and Example

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Group of business people meeting, discussing the meaning of EDIInvoice processing costs average between $1.00 and $21.00, although some invoices can cost as much as $40.00 when handled manually. For organizations that process thousands of invoices a month, the costs can add up quickly. Add to the invoice costs the expense of manually handling purchase orders, ship notices, or other B2B documents, and enterprises will find their profit margins shrink.

Reducing administrative costs is a primary reason companies implement electronic data interchange (EDI). EDI is a digitized process that allows participating businesses to exchange paper-based business documents such as purchase orders or invoices. As EDI usage increases, organizations will need to become EDI capable if they want to do business. Here, we’ll explore the meaning and capability of EDI. 

What Is the Meaning of EDI?

EDI is a standard electronic format that replaces paper-based documents. Instead of taking days to send invoices or purchase orders, EDI enables companies to exchange documents in minutes. Information is transmitted from one computer application to another, using interface standards that define where the data should be placed.

EDI also reduces errors that can occur with manual document processing. Accounts payable receives an invoice that must be entered into an accounting system. Errors may occur as the data is transferred from paper to the accounting software. Depending on the error, payment could be incorrect or delayed, adding to the cost of processing the invoice.

Invoices and purchase orders are not the only documents that use EDI. Since its first use in 1965, EDI standards have expanded to include requests for quotations or proposals and even loan applications. These documents make it easier for organizations to do business regardless of location.

How Does EDI Work?

Standards form the basis of all EDI messages. Standards exist for the communication protocols and the messages, but there are multiple organizations that issue EDI standards. Different industries adhere to different standards. For example, the American National Standards Institute and the Electronic Data Interchange Association form the ANSI X12 committee to create EDI standards. In 1981, the committee published standards for transportation, drug, food, warehouse, and banking industries. Not all industries followed the same standards.

EDI transmissions may be point-to-point or through a third party. Regardless of the mechanism, EDI protocols include:

  • Secure File Transfer Protocol (SFTP). A secure form of the file transfer protocol (FTP) that allows access to a shared location.
  • Applicability Statement 2 (AS2). An HTTPS-like protocol for the internet.
  • Simple Object Access Protocol (SOAP). An XML-based protocol for web services.

Other transmission protocols like message standards are also used.

For EDI to work, the sender and receiver must agree on the message and protocol standards. This can be challenging for organizations that exchange EDI messages with multiple parties, each using different standards. Envelope structures can be implemented to send multiple transactional messages in a single wrapper, complicating EDI exchanges.

EDI can be difficult to implement because of changing standards, government regulations, and required updates. It is a complex interface that reflects the complexities of international trade. Because there is no universal standard, many organizations outsource their EDI efforts to businesses that specialize in EDI messaging. 

What Does EDI Capability Mean?

Whether in-house or outsourced, businesses need to ensure that they are EDI capable. They need to have support for an array of document types, secure protocols, and message types. Companies should be capable of the following;

Mapping Software

EDI-capable organizations should have the ability to take data from one source and place it in the designated locations for transmission to another entity. An EDI example would be taking data such as names, addresses, part numbers, and quantities and mapping them to different locations in the message going to a trading partner. 

Envelope Capabilities

Envelopes enable EDI messages to be batched or wrapped into a group that is sent as a single message. EDI processing should include the capability to wrap and unwrap EDI envelopes. The unwrapping should include separating the information and delivering it to the appropriate endpoint.

Routing Mechanisms

After an envelope is unwrapped, the messages must be sent to the appropriate department or group for processing. Without a routing mechanism, organizations would have to develop a process that would do the routing for them. This added step not only delays delivery but provides an opportunity for increased errors.

EDI capability means having the resources to send and receive EDI messages, no matter the format. If your business is thinking of implementing EDI, contact us to speak with a consultant or schedule a consultation.

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