How Does EDI Work?


There is a lot of conversation around EDI and how it is transforming B2B e-commerce. However, managers who are adopting new technology to keep up with their rapidly expanding business may be in the dark, or only know a few details about EDI. How EDI works remains a mystery.

By the end of this article, you will know everything you need to get started. 

We will cover:

  • What is EDI?
  • What Are the EDI Standards?
  • Types of EDI
  • How Does EDI Work?

What is EDI?

EDI (Electronic Data Interchange) is a low-cost, business data-transfer, automation technology that allows buyers and suppliers to send and receive electronic documents in standardized formats, from computer to computer without human intervention. EDI can be used in any business process involving data transfer, but it is mostly used in supply chain communication.

Examples of EDI documents include purchase orders, invoices, customs documents, shipping notices, inventory documents, payment documents, and bills of lading. EDI is an integral part of an effective supply chain and is often put under eProcurement technology's umbrella.

EDI was used for the first time in the late 1940s for U.S. military logistics. In the 1970s, large corporations began to employ it for data transmission activities. EDI transactions would later gain greater popularity in the 1980s and continue their upward trajectory to business-place prominence.

Since then, new data-transfer technologies have evolved. For example, a more recent EDI alternative, API, is projected to eventually replace EDI transactions in business processes. However, many EDI-related innovations, such as collaborative supplier portals, keep EDI fresh and relevant. EDI has also become such a mainstay in the B2B scene that replacing it will not be easy.

EDI software is utilized in B2B e-commerce, healthcare, and other areas where data transfer must be safe and seamless. But it has several different formats that are often the cause of compatibility problems. So, when planning EDI integration, you need to know which standard you are working with.

What Are the EDI Standards?

EDI standards are rules that define the different types of EDI. They tell the user the location and order of information in a document format. For two partners to exchange data, their EDI standards must be compatible. If not, then a collaborative supplier portal can be used.

The different types of EDI standards include:


ANSI ASC X12 is the official body for the development and maintenance of EDI standards in the United States. It is the most widespread standard in North America and the U.S.


HIPAA (Health Insurance Portability and Accountability Act) is a variant of X12 with changes specific to healthcare needs. HIPAA seeks to develop and establish standardized systems for electronic data interchange for all healthcare-related data.  HIPAA's main purpose is to ensure doctor-patient confidentiality. It also seeks to prevent the misuse of patient information by criminals or other external forces to violate human rights.


EDIFACT, which stands for Electronic Data Interchange for Administration, Commerce, and Transport, was developed by the United Nations as an international standard. The EDIFACT standard enables multi-national data interchange and is compatible with most industry software around the world.


Tradacoms is an EDI standard created for the UK retail industry. Tradacoms was established in the early 1980s and it is now managed by the UK Article Numbering Association, often known as GS1 UK.

Types of EDI

Within the different EDI standards, we also have types of EDI:

  • Web EDI (using a standard Internet browser)
  • Mobile EDI (using mobile devices)
  • Direct EDI (point-to-point EDI)
  • EDI via VAN (value-added networks)
  • EDI via AS2 (using the Internet)
  • EDI Outsourcing (managed services)

We now know all the different EDI standards, the different types of EDI, and what exactly EDI does in a company, especially for supply chains. Here is how it works and what to expect when using EDI.

How Does EDI Work?

As we had already mentioned in passing, EDI is a tool that EDI-compliant B2B partners use to transfer data in standardized formats. EDI can also be implemented in the form of an outsourced service that automatically transmits data between buyers and suppliers. 

In-house or on-premises EDI implementation is done by onboarding business trading partners and achieving EDI integration and EDI-compliant conditions with an ERP (Enterprise Resource Planning) system.

Small and medium-sized enterprises can outsource an EDI solution via a managed service that interacts with ERP and AP automation tools utilizing cloud-based SaaS EDI software. Automation software may contain a supplier portal for onboarding vendors, document exchange, and status updates, as well as API interaction with an ERP.

EDI solutions eliminate human intervention, and burdensome paperwork, thus saving valuable time. But what exactly should you expect when working with EDI?

The Three Steps of the EDI Process

EDI is praised for being relatively easy to use, despite the numerous resources needed to support it. The reason for this is that EDI runs with only three steps: preparation, translation, and transmission.


First, you will collect, clean, and organize the data. This is the only manual step and as you will see, it does not involve the transmission itself. With an appropriate ERP connection, this step can be skipped because the relevant data will be uploaded automatically. The following data sources and technologies for producing electronic documents are available:

  • Exporting data from spreadsheets
  • Reformatting data files
  • Enhancing current apps to provide output files that are suitable for automatic translation into an EDI standard
  • Purchasing application software with in-built EDI file interfaces built-in.


The second step is to transform your internal data format into a suitable EDI standard format, then feed your electronic data through translator software. 

Software for EDI translation is available for purchase and may be either outsourced or managed and maintained on your premises. To manage your EDI on-premises, you need specialized mapping expertise to define how your internal data is to be mapped to the EDI documents. 

There is translation software for practically any computer environment and price range. However, the most important thing to look at is the volume of data you are dealing with, not the price of the software. You need to prioritize efficiency.


Once your business data has been translated to the appropriate formats, the next step is transmitting them to your business partner. Here are different ways you can choose to connect with your business partner for transmission:

  • Direct connection through AS2 or other secure, reliable internet protocols
  • Using an EDI network provider that will be responsible for connecting your business partners to you with your partners’ preferred communications protocol
  • Combining both methods.

And with only three steps, the EDI process is complete.

Key Takeaways

  • EDI is a tool used to effectively and securely transmit data between B2B companies in standardized formats.
  • There are several different standards and types of EDI available in the market.
  • EDI works in three simple steps; preparation, translation, and transmission.


Working with EDI is a smart move for your business. Your data transfer woes will be gone in a matter of days. The best aspect of the whole experience is how easy it will be to get used to EDI, regardless of how inexperienced you may feel.

Table of Contents