EDI 101: What is EDI?
Many business owners are unfamiliar with the world of Electronic Data Interchange (EDI) until first informed that they will be required to trade EDI by a major customer or trading partner. In fact, for a number of business owners this may be the first time they’ve ever heard of the technology. In our ongoing EDI 101 series we examine the basics of EDI in order to help business owners, IT managers and marketing teams get a handle on this important and prominent type of ecommerce.
What is EDI? Electronic Data Interchange (EDI) is the process of transmitting business documents electronically utilizing a standardized data format. Even more simply, EDI is a structured exchange of business data between two different computer systems. It is meant to replace the use of faxing or mailing in the transmission of business document such as purchase orders, invoices and ship notices.
Who uses it? EDI is used by countless businesses, government agencies and healthcare centers around the world. In the United States EDI is probably best known for its role in the retail sector. Most major retailers have leveraged EDI for use in their supply chain operations and now mandate some level of EDI compliance from their supplier base. The Health Insurance Portability and Accountability Act of 1996 (better known as HIPAA) also established EDI as a major technology in the healthcare industry, where it is used to transmit patient and subscriber information between healthcare providers and insurance companies. EDI is the most prominent method of ecommerce in business to business relationships.
Why do I need to use it? Trading business data via EDI is less expensive and also less time consuming than traditional paper documents. EDI allows document processing to be automated, saving both time and money. There are less errors caused by the rekeying of data and the gains in efficiency allow individual suppliers to be paid faster than if they were sending paper invoices.
By requiring their suppliers to be EDI compliant, companies ensure that all documents they receive arrive with a standard data layout. This allows companies to process each document in the same manner, saving time and removing complexity. Many trading partners will be willing to fax purchase orders to a new supplier for a time, but as a supplier’s volume grows the trading partner may begin to implement fees for each document sent by a means other than EDI. EDI is no longer an option for companies aiming to be competitive in today's market.
What is required to do EDI? In order to be considered EDI compliant a company must be able to send and receive data in the EDI format required by their trading partner. Business data produced by one party’s internal systems is translated into the correct EDI format by a process known as mapping. Generally speaking, a business needs four components in order to trade EDI:
- EDI mapping software to translate their data to the correct format as well as to read the data they receive.
- A data communications component to allow for the secure exchange of business data electronically
- An electronic connection to their trading partners.
When combined, these tools provide the infrastructure needed to successfully maintain a production EDI environment. Of course, many small and midsize businesses lack the in-house resources needed to maintain an EDI system on their own. These companies often find the expertise of an EDI service provider, such as DataTrans, an invaluable asset in maintaining compliance with their trading partner’s requirements.
Next week we’ll take a look at the most commonly used EDI documents and examine EDI naming conventions.