Definition
Electronic Data Interchange (EDI) is the computer-to-computer exchange of business documents in a standardized electronic format between organizations, replacing paper-based documents like purchase orders, invoices, and shipping notices with automated digital transmissions. EDI enables seamless communication between different companies' systems using agreed-upon standards like ANSI X12 or EDIFACT, dramatically reducing manual data entry, processing time, and errors in supply chain transactions.
Understanding Electronic Data Interchange
EDI revolutionized business-to-business communication by establishing standardized formats that allow disparate computer systems to exchange data automatically without human intervention. Before EDI, companies manually prepared paper documents, mailed or faxed them to trading partners, and manually entered received data into their own systems—a process plagued by errors, delays, and high costs. EDI standards define specific formats for common business documents ensuring different organizations' systems can interpret exchanged data correctly, even when using completely different internal software platforms.
The mechanics of EDI involve translation software that converts data from a company's internal format into standardized EDI format for transmission, then converts received EDI documents back into the recipient's internal format. For example, when a retailer's inventory system generates a purchase order, EDI software automatically formats it according to ANSI X12 850 standard and transmits it electronically to the supplier's system via secure protocols like AS2 or Value-Added Networks (VANs). The supplier's EDI system automatically imports and processes the order without any manual data entry, immediately sending back an 855 purchase order acknowledgment confirming receipt and acceptance.
Major retailers and manufacturers require EDI capability from their suppliers, making it a prerequisite for doing business in many industries. Large companies like Walmart, Amazon, Target, and automotive manufacturers mandate that suppliers exchange documents electronically to maintain supply chain velocity and accuracy. This requirement has driven widespread EDI adoption across supply chains, as smaller suppliers must implement EDI to maintain relationships with major customers.
Core EDI Capabilities and Standards
- Standardized Document Formats: Common transaction sets include 850 (Purchase Order), 810 (Invoice), 856 (Advance Ship Notice), 855 (PO Acknowledgment), and 820 (Payment Remittance)
- Automated Data Exchange: Eliminates manual data entry between trading partner systems, reducing processing time from days to minutes and errors to near-zero levels
- System Integration: Connects directly with ERP, WMS, TMS, and accounting systems enabling seamless data flow throughout supply chain operations
- Trading Partner Networks: Uses Value-Added Networks (VANs) or direct AS2 connections providing secure, reliable transmission with delivery confirmation and audit trails
- Real-Time Transaction Visibility: Provides immediate confirmation of document transmission, processing status, and exception handling throughout transaction lifecycle
EDI in Practice
A mid-sized consumer goods manufacturer supplies products to major retail chains requiring EDI for all transactions. Previously, the manufacturer received purchase orders via email or fax, manually entered data into their ERP system, printed picking lists for the warehouse, then created invoices and mailed them to customers—a process taking 24-48 hours and frequently introducing errors. After implementing EDI integration with their ERP, the entire process becomes automated. When Target submits an EDI 850 purchase order, it flows directly into the manufacturer's ERP, automatically creating sales orders and picking lists. The warehouse ships products and scans cartons, triggering automatic generation of EDI 856 advance ship notices sent to Target before trucks even arrive. Upon delivery, the system automatically generates and transmits EDI 810 invoices with perfect accuracy matching Target's received quantities. Order-to-invoice cycle time drops from 48 hours to 2 hours, invoice accuracy improves to 99.8 percent, and the manufacturer eliminates three full-time positions previously dedicated to manual order entry and invoice creation.
Related Concepts
- API (Application Programming Interface): Modern alternative to EDI using real-time web services for system integration, more flexible but requiring technical development
- Value-Added Network (VAN): Third-party service providing secure EDI transmission, translation, and mailbox services between trading partners
- ANSI X12: North American EDI standard defining document formats for industries including retail, healthcare, transportation, and finance
- AS2 Protocol: Internet-based secure file transfer protocol commonly used for direct EDI transmission between trading partners without VANs
- B2B Integration: Broader category of technologies enabling automated business-to-business transactions, including EDI, APIs, and integration platforms
