Electronic Data Interchange (EDI): An Introduction


Starting a robotics startup is exciting and promising. You get to work on world-changing technologies and indulge in your favorite activity; designing world-class gadgets!

However, running a hardware business requires more than engineering and designing. You'll need to procure raw materials to help run the business and meet customer demands.

However, procurement can be a long tiresome process. It will require you to spend hours filling out forms, following up on deliveries, and ensuring everything is in order. These manual tasks will easily distract you from your main goal.

Finding a way to automate procurement is essential. After all, you are an engineer and not a procurement expert.

In this article, we discuss Electronic Data Interchange and how it helps you automate business processes. We shall cover:

  1. What is EDI?
  2. Computer-to-Computer Data Exchange
  3. How EDI compares to Manual Processes
  4. What are the Benefits of EDI?
  5. How Does EDI work?
  6. How to Implement EDI

What is Electronic Data Interchange(EDI)?

Electronic Data Interchange or EDI is a technology businesses use to share essential business documents electronically with trading partners. The technology automates business communication to speed up the process by cutting communication time and eliminating manual errors.

A trading or business partner is any enterprise that does business with your company. For example, if you buy goods from company Z, you become trading partners.

EDI was created in the 1960s and has been adopted by various companies from various industries. If a company produces sales, ships, and purchases any goods or services, EDI is ideal. It will help in automating procurement and supply chain processes.

The major industries that rely on EDI include:

  • Transport and logistics
  • Insurance
  • Manufacturing
  • Retail
  • Healthcare
  • Automotive

Computer-Computer Data Exchange

Electronic Data Interchange is the specific exchange of standard electronic business documents between computers using a standardized and secure connection. It means that applications on these computers receive and send documents automatically without human intervention.

For example, if you send a purchase order(PO) to your vendor, their computer will read the contents and send you an acknowledgment that it has received it and an invoice in response to the PO. It doesn't have to wait for a human being to send the receipt note.

While emails use an electric format, they are handled by human beings, meaning they are not EDI.

Types of EDI Documents

You can use EDI to send thousands of different business documents. Here are the common EDI documents used by businesses:

  • EDI 850: Purchase orders
  • EDI 214: Shipping statuses
  • EDI 810: Invoice 
  • EDI 820: payment confirmations
  • EDI 855: Purchase Order Acknowledgment.
  • EDI 820: Payment Order/Remittance Advice.
  • EDI 997: Functional Acknowledgment.
  • EDI 940: Warehouse Shipping Order.

EDI Standard Formats

EDI requires you and your partners to settle on a standard EDI format for your EDI transactions. The standards help the computers process the documents and describe each piece of data and format. The data identified include the type of document, the sender, the date common, and needed actions.

The EDI standards are like a language; if both computers don't use the same language, they will not understand each other.

Various EDI standards are in use today and vary depending on the region, use cages, and industries. Additionally, each comes in different versions making it essential for you and your trading partners to use a similar standard and version. 

Failure to use similar standards will lead to the computers not understanding the contents of the documents.

Here are the common EDI standards:

  • ANSI X12- Used in the United States
  • UN/EDIFACT- Used around the globe
  • HIPAA- Used in specific industries

How Does EDI Compare to Manual Processes?

Manual processes are long and require human intervention and the use of paper. So, let's compare manual vs. EDI transactions. 

The following occurs when using a manual procurement process.

  • You'll check your inventory numbers and identify the need to make replenishments or receive a request from a department to purchase certain items
  • You'll then key in the information detailing what you want into the purchasing system to create a purchase order. You'll then print and mail it to your vendor or send it through email.
  • Your supplier will receive your PO through mail or email and enters the information into their sales system. Remember that mail takes some days to arrive.
  • The supplier will send the items and create an invoice and shipment form that they print and send by mail
  • Once you receive the invoice, you enter it into your finance system

When you are using an EDI solution, the following happens:

  • Your EDI- powered procurement system continuously tracks your inventory and automatically creates an EDI-formatted PO when the levels are critical. It will then automatically send the PO to the supplier's computer
  • The vendor's EDI-Equipped sales order system immediately receives the document and alerts the warehouse staff to make the shipment ready
  • Once the shipment is ready, the shipping system creates an Advanced Ship Notice(ASN) and sends it to you. The supplier's ERP system then generates an EDDI invoice that is immediately sent to you
  • Your EDI system will receive the invoice and send it to accounts payable for payment

From the two processes above, it is clear that manual procurement procedures take longer(Days to weeks) than EDI procurement procedures which take a few hours. Additionally, EDI eliminates human intervention, which eliminates the possibility of errors.

What are the Benefits of EDI?

Here are the benefits you'll enjoy using EDI for your procurement process.

Faster Business Cycles

EDI transactions are faster than manual processes. Your EDI system will generate your documents automatically and send them to the supplier immediately. The supplier's EDI-backed system also receives the documents and facilitates immediate action. As a result, critical information is exchanged faster, shortening the order processing and delivery time.

Improved Productivity

EDI automates the purchasing process meaning that you and your employees free up your time and energy to concentrate on other business aspects, such as creating the best machines in the world.

Reduced Operational Costs

Adoption of EDI eliminates the need for paper, ink, filing and storage, and postage. This helps you to save the money meant for transactions. Additionally, the fact that orders are met promptly could help you keep lesser stock on-premise, which also cuts inventory storage costs. You may also enjoy payment discounts if you make multiple transactions in a year.

Improved Supplier Relationships

Using EDI makes the order and payment fulfillment process faster and quick. You'll get your goods fast, and the supplier keeps a healthy cash flow. As a result, both parties are happy with the business. Additionally, automation eliminates errors that, in turn, eradicate frustrations during disputes.

Improved Decision Making

EDI allows you to track the transaction status and provides acknowledgments to help you confirm document receipt and the supplier handling the required actions. This tracking enables you to make informed decisions regarding your business processes.

Easier Scalability

Manual processes are a huge hindrance to a business that wants to expand into newer territories. The problem could lie in language differences and time to complete a process. With EDI, you can venture into new regions thanks to the common global business language it uses.

Improved Sustainability

EDI relies on the electric transfer of documents, meaning it eliminates the need for tree-based paper. Additionally, it eliminates the need for mailing documents. Mailing promotes emissions from transportation. The increased operational efficiency also translates to less energy waste.

How Does EDI Work?

EDI works in three steps: preparing, translating, and transmitting EDI documents to the business partner.

Let's have a closer look.

Step 1 : Prepare the Documents to be sent

To begin the EDI process, collect and organize your data. Then, your EDI system will compile the necessary information and build an electronic file instead of printing one. The different ways and methods that your EDI systems get this critical information to create electronic documents include:

  • Manual data entry by humans through screens
  • Exporting PC-based data from spreadsheets or databases
  • Purchasing application software that has built-in interfaces for EDI files
  • Reformatted electronic reports into data files
  • Enhancing existing applications to automatically create output files that are ready for translation into an EDI standard

Step 2: Translate the documents into EDI format

After compiling your electronic data, you need to enter it into a translator software that converts it into an EDI standard format using the appropriate segments and data elements.

You'll need to buy an EDI translation software that you'll manage and maintain. In addition, it will require specialized mapping expertise governing how internal data is correlated to the EDI data. You can find various translators for various needs: handling thousands of transactions or a few transactions.

If maintaining an EDI translator seems like a hassle, you can procure an EDI service provider to handle the translation to and from the EDI format.

Step 3: Connect and Send the EDI documents to your business partners

Once your documents are translated into the appropriate EDI format, it is time to share them with your trading partners. You'll have to choose how you connect to each partner for a successful transfer of EDI documents. 

The common ways to connect to partners include:

  1. Using AS2 or other secure internet protocols
  2. Using an EDI Network Provide or VAN provider- you use your preferred communications protocol and let the VAN provider transmit the results to your partners using the partner's preferred communication protocol.
  3. Using a combination of both based on the specific partner and the number of transactions you expect to complete.  

How to Implement EDI in your Business

EDI technology is governed by EDI compliance that requires you to set up EDI infrastructure and align it with your partner's.

Here are the must-haves for a successful implementation of EDI.

  • An EDI software for communication
  • Internet communications, depending on the trading partners
  • In-house hardware like servers, devices, and peripherals
  • Secured workspace with monitored security data backups and redundant power so that the system can run reliably
  • Integration software to help integrate EDI transactions with other business systems
  • Maps for each EDI document type

EDI only works when they are integrated with your partner's systems. Settle on EDI protocols that fit both you and your partners. You'll choose and implement exchanges for the correct documents or transactions.

EDI implementation requires you and your vendor to determine a few issues before your IT team gets to work.


Running an engineering startup is no easy task. As such, you'll want to automate some business processes so that you can concentrate on building mind-blowing machines.

EDI technology is critical to the automation of business processes. It will help you speed up procurement, eliminate errors, reduce transaction costs, improve partner relationships, and promote sustainability.

You'll need to communicate with your trading partners to decide on a few issues and remain EDI compliant but once agreed, the technology is beneficial.

Table of Contents