How to Understand EDI: A blog around the fundamental principles of EDI

EDI is a digital method of transferring business documents. Using electronic data interchange reduces costs by reducing paperwork, speeding up processes, and improving customer satisfaction. In this blog, we cover the basic fundamental principles of electronic data interchange. This is a standardized, universal, and open format of data exchange. It is used in many industries such as banking, healthcare, financial services, and government.

Introduction to EDI

Data and information exchange have always been an important part of business and communication. But with the digital revolution, businesses have started to move from exchanging information through paper and telephones to exchanging information through data and digital communication. One tool that is used for this kind of data exchange is electronic data interchange. This blog will look at exactly what an EDI is, how it is used, and how it can be used to improve communication between businesses.

What is electronic data interchange?

EDI stands for Electronic Data Interchange and has been in use for some time. The purpose of this article is to provide an overview of the electronic data interchange method, including what it is, how it started, why firms are implementing electronic data interchange, the benefits it delivers, and the other components that comprise the process. This material is very useful for folks who are new to electronic data interchange technology.

What is EDI

The electronic exchange of business documents between computers is referred to as electronic data interchange, sometimes known as electronic document interchange. By doing so, laborious entry of paper-based information or documents is eliminated while facilitating seamless communication between platforms. Exchange of various documents, including invoices, purchase orders, and shipment notifications, is made easier .

The exchange of electronic data business records between the computers of business partners using a common format over the internet is referred to as “electronic data interchange.” Paperless exchange is also known as electronic data interchange. This definition is an excellent method to summarise the complete process in a few words; yet, real-time installation of a good electronic interchange system necessitates a great deal of effort and help.

Paper vs. Electronic Data Interchange

  • Paper Document-Digital Transaction
  • Paper-based Envelope-Electronic data interchange uses Functional Group
  • Paper Big Envelope-Interchange of Data
  • Traditional Postal Service-Value added network
  • Traditional Delivery Courier-Point to Point Communication
  • Human Audit Trail-Automated Machine Audit log

The Evolution of Electronic Data Interchange

Take a look at a typical business scenario. A client who wishes to buy an item writes an order to purchase the item and sends it by fax or post directly to the supplier. The vendor gets the purchase order and then manually enters a sales order. The vendor’s system creates a confirmation date, which is then faxed or mailed to the customer. The things are subsequently delivered by a carrier by the merchant. The goods are subsequently delivered to the client by the carrier. Vendors bill the buyer after the product is delivered to the client. The customer pays with a check, which is deposited into the vendor’s bank account. The funds are then transferred from the customer’s account to the vendor’s bank account. This is a straightforward process that requires the exchange of documents among several business partners on various dates. The term “business process” refers to an array of activities or tasks that produce a business outcome, and there are inherent issues that arise from this situation

  • Is highly inefficient and laborious
  • Cannot be tracked easily
  • Gives no visibility into the process
  • Has a very long lead time
  • Includes redundant data entry at various points

Electronic data interchange isn’t a new invention, it’s been in use for more than 30 years. Transportation was the first industry to use this technology and is the primary reason for its current structure. However, many industries have recognized the benefits of making use of electronic communication. 

Nowadays, almost every industry or business can benefit from electronic data interchange. The automotive and retail industries are the most significant Electronic Data Interchange users. Technology is also employed in a variety of other sectors, such as healthcare and government agencies in real estate, health care, and education. In actual fact, electronic data interchange can be implemented not just within organizations, but also within them, which is growing in popularity in recent times.

The Internet is sure to play a key role in the development of E.D.I. XML (Extensible Markup Language), an HTML-based protocol for structuring structured data, has been gaining traction as a viable technique for making the exchange of electronic data-like operations available on the Internet. However, as I’ll explain later, there are a number of roadblocks that must be cleared before significant electronic data exchange can be implemented with these technologies.

The Benefits of the Electronic Data Interchange Process

Implementing Electronic Data Interchange can benefit both the sender and the receiver. It’s a communal effort, and the benefits are amplified by the speed with which information is shared. The advantages include fewer mistakes in data entry. Interchange of electronic data does not require data entry at several locations. In the conventional process, the sender creates a purchase request on this system. They print out the order and then fax or mail it to the trading partner. The recipient then retypes the identical information into their computer. The technique is prone to data entry errors. The process is repeated when invoices are generated. The interchange of electronic data allows data to be transferred from one system to the next without the need for human intervention.


The processing time is reduced.

 The most significant benefit is the reduction in the processing time of the entire cycle. When orders are entered into the system, they are processed by the receiver side within minutes. By processing them in batches, it is possible to save a significant amount of time on document transfers.

Data is available in electronic format

The data that comes from electronic data is stored in electronic form, which makes it simple to share with other departments within the company. For example, a buying department might use the data to analyze vendors, and marketing departments could use the data to study the demands and trends of clients.

Paperwork is reduced. 

The entire data interchange process can be completed without the use of a single piece of paper. Some businesses think that they need the proper documentation to handle audits and legal concerns. The IRS accepts an electronic format as a valid document under the Paperwork Reduction Act if the supplier or vendor can authenticate the source and give detailed details on how the data was created. An organization must be able to control the processes that handle the flow of information in and out. This judgment has resulted in onerous auditing standards; yet, ensuring compliance is worthwhile.

Cost reduction.

 It’s time to save some money. Saving time is directly related to the savings in money. The initial cost of setting up an Interchange of electronic data exchange system will be more than that of paper, but it will save you money in the long term. In the long run, the overall cost of moving business papers on paper will be between $10 and $15 for each transaction. If the procedure has to be redone for any reason (for example, if an invoice is misplaced), it could cost around $45. However, the average transaction costs around $2.

Lower inventories as well as better plan. 

Businesses do not need to maintain a safety stock to cover the time required for the process of processing orders. Any changes to the schedule can be announced immediately. When an Advance Ship notice (EDI 856) transaction is received, MRP (Material Requirements Planning) can be able to take into account the status of a shipment.

Standard methods of communication

Since the interchange of electronic data establishes standards for the content of data, consistent naming standards, as well as field size, have developed. This consistency results in more clear communication and less confusion.

More efficient business processes. 

When compared to traditional methods for exchanging business documents is definitely a better method of communicating with your trading partners. Businesses are more willing to share data and engage in inter-organizational discussions. This helps improve supply chain management.

Competitive advantage. 

Businesses that use Interchange of electronic data are often ahead of their competitors, especially when interacting with government agencies or large organizations. For example, prospective vendors must submit bids for certain government contracts using EDI. The procurement departments of government agencies post the RFPs (Request for Proposal) on the EDI network. 

Additionally, big corporations and retailers discourage doing deals with business partners when the partner is unable to send electronic data transactions. This is also true in the auto industry. To become a certified auto-industry vendor, the company must be capable of communicating electronically. Clearing products through customs can be difficult if the documents aren’t provided in EDI format and haven’t been distributed at the time of need.

Integrating business processes within a company and between various firms is critical to the success of any SAP implementation. In business integration, it is essential to interface with old systems, interact with third-party products, and integrate business processes across multiple SAP systems. The two most frequently used methods for this kind of integration include ALE(Application Link and Enabling) and (Electronic Data Interchange) technologies that utilize the well-known IDoc (Intermediate Document) interface to exchange information.

EDI: Architecture

Electronic Data Interchange
Electronic Data Interchange


The transportation industry was the pioneer in the exchange of documents for business in electronic format. However, there was no universally agreed standard among the firms involved, resulting in a variety of digital forms for the same type of document for enterprises. I

In 1975, the corporate community recognized the need for standardization, and the ANSI ASC X12 group was founded to address the issue. The letter X denotes the committee’s relevance to the computing industry, while the number 12 is the next in the series of numbers assigned to each committee. In 1979, the committee published the first standard. The standards define a variety of electronic messages that regulate the format, rules, and content of the data that is exchanged during the course of a transaction. There is a one-to-one correlation between the components of a paper-based document and the components of an Interchange of electronic data message.

The terminology used in electronics varies from one standard to the next. The structure of the packet used to send information is also dictated by the standards. Standardization has a number of advantages.

Standardization permits representation that is easily processed by computers. Standardization allows businesses to exchange data that is separate from the software used to create applications. Third-party software can offer Interchange of electronic data translation and therefore relieve the need to keep up with changing standards. The business and the standards used by the company’s trading partners are the main determinants of standard selection. Because different consumers have different expectations, it is normal for a corporation to have a variety of standards. The ANSI X12 and EDIFACT standards are two of the most widely utilized.


The ANSI ASC X12 standard is prevalent across North America, New Zealand, and Australia. The ASC X12 committee consists of representatives from large institutions, government bodies, and Interchange of electronic data companies that offer software. Every communication (a purchase request, for instance) is enclosed in the format of a head of a transaction (ST) and a transaction set trailer (SE). 

A number of messages that are similar to each other could be put together into functional groups. For instance, in the case where an EDI message has 3 purchase orders, they’ll be combined into a functional group. The functional heading (GS) and a functional group trailer are applied to each functional group (GE). Several functional groups could be included in an EDI message. These are bundled together and wrapped around an EDI header and a trailer. The interchange control header (ISA) and the interchange control trailer (IEA) are both interchange control headers and interchange control trailers (IEA). The network sends an additional header as well as a trailer over the EDI message.


EDI Standards & Idoc

“The electronic exchange of business documents between the computer systems of business partners across a communication network using a standard format.”. The two most widely used specifications for transmitting information electronically are ANSI ASC X12 and EDIFACT. The ANSI ASC X12 is a committee made up of members from significant organizations, government agencies, and software companies that establishes the standards and procedures for EDI information exchange. UN/EDIFACT stands for United Nations EDI for Administration, Commerce, and Transport, and it was founded in 1985 using the base standards ANSI X12 and UNTDI (United Nations Trade Data Interchange). Business documents are referred to as “transactions” in ANSI X12. Each transaction is identified by three digits, such as Purchase Order (850) and Purchase Order Acknowledgement (855), which are two different types of purchase orders. An EDIFACT is a business document that describes messages using common names like e-mail addresses. Purchase Order Orders

How EDI Works

Sending Data

  • The computer system serves as a data storing device.
  • EDI is a technology that extracts data from current computer programs.
  • Paperless, computer-readable documents are transmitted via telephone lines.

Receiving Data

  • The information is fed straight into a computer system.
  • Internal apps are automatically processed and interfaced with.

Processing Time

  • It took only a few minutes to complete.
  • There will be no re-keying.
  • There will be no manipulation of papers.

There are no additional expenses associated with manual document processing and delivery.

electronic data interchange
electronic data interchange

Steps in EDI Setup

  1. Create a logical system and assign it to a client.
  2. Activate the SAP Workflow
  3. Activate the event-receiver linkage
  4. Set up an IDoc administrator.
  5. Define a port
  6. Define user-specific parameters

The purpose of EDI is to exchange business documents and data between businesses. So why is EDI so important? Because EDI allows businesses to communicate electronically with each other. This means that even if the businesses are thousands of miles apart from each other, they can still communicate. EDI is a very important aspect of business communication and has improved over the years.


Electronic Data Interchange (EDI) is a significant benefit for firms looking to streamline their operations, improve efficiency and improve collaboration between trading partners. Implementing EDI can help companies cut expenses, speed up the processing of transactions and get ahead in the digital age. It is important to plan carefully, select an efficient EDI solution, and building solid relationships are vital to the success of its implementation. Take advantage of the power of EDI to create a smoother and more efficient business future!

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FAQs about EDI

What is the main purpose of EDI?

The fundamental goal of EDI is to promote the secure and efficient interchange of business documents in a standardized electronic format between trading partners, eliminating manual processes and improving data accuracy and speed.

How does EDI improve business efficiency?

By automating data sharing, minimizing mistakes, optimizing processes, and shortening transaction times, EDI enhances corporate efficiency. It removes human data entry and the costs and delays that come with it.

Is EDI only for large enterprises?

No, EDI isn’t exclusively for big businesses. Small businesses can benefit from EDI deployment as well because it boosts efficiency, improves order accuracy, and reduces costs.

Can EDI integrate with existing systems like ERP?

Yes, by linking with existing systems such as ERP, EDI can be utilized to automate order processing, inventory management, and other company functions. Integrating EDI and ERP enhances data accuracy, streamlines operations, and raises supply chain visibility.

Is EDI secure for transmitting sensitive data?

To protect sensitive data during transmission, EDI includes rigorous security features such as encryption and secure connection protocols. Implementing authentication systems and access controls improves data security even more.

How can I choose the right EDI solution for my business?

Consider scalability, security, integration capabilities, support, and training when selecting an EDI solution. Evaluate several providers, analyze their services, and choose a solution that meets your business needs.

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