How Does EDI Work? Exploring Its Mechanisms and Benefits

Tori Katz
May 24, 2024

Electronic data interchange(EDI) is the implementation of computer-to-computer document exchange between business partners. It is the most efficient way of undergoing B2B communications. 

There are several reasons why a director of engineering would choose EDI implementation and integration for their busy startup firm. 

Exchanging an EDI document eliminates the chances of human error, saves time and money, and streamlines communications and transactions between all supply chain members. EDI also provides safer transactions and secure data storage. 

So how does EDI work, exactly? It's not as simple as sending electronic documents to partners. To successfully use EDI, a company must ensure they have the proper means of sending electronic data. 

It's always a wise idea to understand how B2B communications work. And while the inner workings of EDI may seem complex, your EDI software solutions will take care of that for you. Today we're going to break down: 

  • EDI Implementation
  • Types of EDI Software
  • EDI Integration

EDI Implementation 

Installing an EDI system means first recognizing why you want one in the first place. You want to improve your business system and eliminate menial tasks like faxing, mailing, file storing and shredding, and even emailing. 

Selecting the right EDI software is the most important part of EDI implementation. It should generate electronic data, of course, but it also needs to make the most financial sense for your company and trading partners. 

You can use an in-house EDI program for data interchange or outsource an EDI software and service provider. The latter may be the easiest route for a busy engineering startup, as the outsourced EDI solution eliminates a lot of the responsibility on your end. It will handle factors like translation software, customer support, mapping, operating systems, etc. 

Types of EDI 

Using a Company Firewall

While this method of EDI can work for some businesses, it is not recommended for a director of engineering to manage growth and headcount. 

This method is for companies who want to manage their own EDI environment. The company is responsible for implementing and maintaining the software. The company will also have to hire IT employees and upgrade whenever necessary. 

Direct EDI

Also known as point-to-point electronic data interchange, this is the most efficient and common method of exchanging information between companies. It uses a secure line between business partners. 

Using direct EDI means purchasing the right EDI software that agrees with all trading partners. Large, established corporations with several business partners use direct EDI. Still, booming engineering startups can also use it, especially since there will be consistent purchasing of large machinery. 

EDI Implementation flowchart
Did you know ?

EDI Integration

Electronic data interchange will allow all of your team members access to critical members of the supply chain. 

Thus, the EDI software must integrate with various partners and suppliers, like warehouse partners, customers, financial partners, and stakeholders. When everyone decides on an EDI integration, the EDI workflow is established. 

There are two important factors to EDI integration

  • Establishing EDI documents and protocols that exchange information between trading partners. 
  • Taking EDI data and converting it into a format that's compatible with your own enterprise resource planning (ERP) system. An ERP system is the software a company uses to manage accounting, risk management, supply chain operations, and more. 

To better understand EDI integration, specifically direct EDI, you can envision two companies and a chain. At either end of the chain would be each company's ERP system. When you head towards the center of the chain, you'll find that each company will have an internal format that stems from the ERP. Then in the center will be one EDI standard format that helps both companies communicate. 

The EDI standard format is responsible for translating each company's internal data into a language they both comprehend. 

Let's now explain how this works in action using the simplest terms. EDI technology can seem complex, but the end goal is always to streamline the day-to-day actions of a company. 

Using your engineering startup as an example, let's start with a simple purchase order of a piece of machinery. With EDI integration, the first step would be to export the proper document from the ERP system. 

The EDI conversion software then takes the document from the ERP system and transforms it into an EDI document that both you and the supplier understand. You can now connect to the supplier, receive real-time updates and communication, and skip document fees. 

What is ERP?

ERP, or Enterprise Resource Planning, is asoftware system that integrates and managescore business processes such asfinance, HR, supply chain, manufacturing, andCRM. It provides a centralizedplatform for data flow and communication acrossdepartments, enabling efficientdecision-making and resource allocation. ERPstreamlines operations byautomating tasks, improving process visibility, andenforcing standardizedpractices. It offers benefits like real-time insights,improved efficiency, andcompliance with regulatory requirements. However,implementing ERP can becomplex and requires careful planning and investment.Overall, ERP serves as avital tool for businesses to optimize theiroperations, enhance collaboration,and stay competitive in today's fast-pacedenvironment.

What is the difference between ERP and SAP?

ERP (Enterprise Resource Planning) is a broadcategory of software systems designed to integrate and manage various businessprocesses within an organization. SAP (Systems, Applications, and Products inData Processing) is a specific ERP software developed by the company SAP SE.While ERP refers to the concept and class of software solutions, SAP is aleading provider of ERP software.

The key difference lies in specificity: ERP isa general term encompassing various vendors and solutions, while SAP is aspecific brand offering a comprehensive ERP system. SAP ERP provides modulesfor finance, HR, supply chain, manufacturing, CRM, and more, with extensivecustomization options. Other ERP systems, such as Oracle ERP, MicrosoftDynamics, or Infor ERP, offer similar functionalities but may differ infeatures, implementation processes, and target markets.

Discover the leading Top ERP eCommerce software solutions that can transform your business operations.

Understand the key differences between SAP and other ERP systems to make an informed decision for your technology stack.

Final Summary

Knowing the intricacies of an EDI system can help make the lives of engineering directors of growing startups easier. You want to focus on your job and don't have the time to expend your energy on manual data interchanges, paper documentation, and other menial work. That's why an EDI software solution is your best bet for not only peace of mind but for heightening the client experience. 

Your goal is to take your company to the next level, which is what streamlining purchasing orders and other B2B communications are all about. 

Check out more at ControlHub! 

Tori Katz
Content specialist
Tori has a deep expertise in procurement and digital transformation technologies within the hardware industry. Author of extensive guides on strategic procurement practices and technology implementations. Focuses on improving operational efficiency and strategic growth through content.

Table of Contents