Electronic Data Interchange (EDI) | Its Work, Uses & Benefits

Electronic Data Interchange (EDI) is the computer-to-computer exchange of business documents in a standard electronic format between business partners. A process which allows one company to send information to another company electronically rather than with paper.

By moving from a paper-based exchange of business document to one that is electronic, businesses enjoy major benefits such as reduced cost, increased processing speed, reduced errors and improved relationships with business partners.

Components of Electronic Data Interchange (EDI)

From a financial perspective alone, there are impressive benefits of implementing EDI. Not to mention, exchanging documents electronically improves transaction speed and visibility. While decreasing the amount of money you spend on manual processes. But cost savings is far from the only benefit of using EDI. Below are the general components of Electronic Data Interchange. Including,

  • Modem – It is a hardware device that transmits data from one computer to another.
  • VAN – A network that connects the computer system of one organization to another.
  • Point to Point link – A direct communication link between two computers.

The types of EDI were constructed based on how EDI communication connections and conversion were organized. Based on this EDI service or EDI communication, there are two main categories. Which are;

Proprietary Electronic Data Interchange Solution

One is the “proprietary EDI solution” in which tools required for EDI communication and conversion are in the own property of the customer. And the user of the EDI is responsible for the development and the operation of the EDI.

Electronic Data Interchange Service Provider

In the other category, all of these services are offered by the EDI provider. Whereas, the EDI users do not have to deal with communication protocols or EDI standards. Eventually, neither do they need to invest considerable amounts in it in advance.  However, due to historical reasons, there are “mixed” transitions between the two basic solutions. But eventually, these will rather be heading towards service provider outsourcing.

In general, we can say that nowadays EDI communication solutions offered by service providers are getting considerably dominant. In everyday language, EDI communication methods distinguish the types of EDI into more categories.

Benefits of Electronic Data Interchange

According to a recent research study from Forrester, Electronic Data Interchange continues to prove its worth as an electronic message data format. This research states that “the annual volume of global EDI transactions exceeds 20 billion per year and is still growing.”

Business entities conducting business electronically are called trading partners.

For buyers that handle numerous transactions, using EDI can result in millions of dollars of annual savings due to early payment discounts. From a financial perspective alone, there are impressive benefits of implementing EDI. Exchanging documents electronically improves transaction speed and visibility while decreasing the amount of money you spend on manual processes. But cost savings is far from the only benefit of using EDI.

But let’s start with cost savings anyway:

  • Expenses associated with paper, printing, reproduction, storage, filing, postage and document retrieval are all reduced. Or even eliminated when you switch to EDI transactions, lowering your transaction costs by at least 35%
  • A major electronics manufacturer calculates the cost of processing an order manually at $38 compared to just $1.35 for an order processed using EDI
  • Errors due to illegible faxes lost orders or incorrectly taken phone orders are eliminated. Saving your staff valuable time from handling data disputes

Speed and Accuracy

  • EDI can speed up your business cycles by 61%. Exchange transactions in minutes instead of the days or weeks of wait time from the postal service
  • Improves data quality, delivering at least a 30—40% reduction in transactions with errors—eliminating errors from illegible handwriting, lost faxes/mail and keying and re-keying errors
  • Using EDI can reduce the order-to-cash cycle time by more than 20%, improving business partner transactions and relationships

However, the increase in business efficiency is also a major factor:

  • Automating paper-based tasks allows your staff to concentrate on higher-value tasks and provides them with the tools to be more productive
  • Quick processing of accurate business documents leads to less re-working of orders, fewer stock-outs, and fewer canceled orders
  • Automating the exchange of data between applications across a supply chain can ensure that business-critical data is sent on time and can be tracked in real time. Sellers benefit from improved cash flow and reduced order-to-cash cycles
  • Shortening the order processing and delivery times means that organizations can reduce their inventory levels

In many cases, the greatest EDI benefits come at the strategic business level:

  • Enables real-time visibility into transaction status. This, in turn, enables faster decision-making and improved responsiveness to changing customer and market demands and allows businesses to adopt a demand-driven business model rather than a supply-driven one
  • Shortens the lead times for product enhancements and new product delivery
  • Streamlines your ability to enter new territories and markets. EDI provides a common business language that facilitates business partner onboarding anywhere in the world
  • Promotes corporate social responsibility and sustainability by replacing paper-based processes with electronic alternatives. This will both save you money and reduce your CO2 emissions

How we use Electronic Data Interchange in daily life

EDI continues to prove its major business value by lowering costs, improving speed, accuracy and business efficiency. The greatest EDI benefits often come at the strategic business level. Whereby, below is an exampled usage of Electronic Data Interchange. Including,


EDI replaces postal mail, fax, and email. Whereby, involving people slows down the processing of the documents. And also introduces errors.

Instead, EDI documents can flow straight through to the appropriate application on the receiver’s computer (e.g., the Order Management System) and processing can begin immediately. A typical manual process looks like this, with lots of paper and people involvement:

Business documents

The most common documents exchanged via EDI are purchase orders, invoices and advance ship notices. But there are many, many others such as the bill of lading, customs documents, inventory documents, shipping status documents, and payment documents.

Electronic Data Interchange Processing

Since EDI documents must be computer processed through a standard format. Rather than human processing. In that case, so that the computer will be able to read and understand the documents. A standard format describes what each piece of information is and in what format (e.g., integer, decimal, mmddyy).

Without a standard format, each company would send documents using its company-specific format and, much as an English-speaking person probably doesn’t understand Japanese, the receiver’s computer system doesn’t understand the company-specific format of the sender’s format.

Standard format

There are several EDI standards in use today, including ANSI, EDIFACT, TRADACOMS, and ebXML. And, for each standard there are many different versions, e.g., ANSI 5010 or EDIFACT version D12, Release A. When two businesses decide to exchange EDI documents, they must agree on the specific EDI standard and version.

Businesses typically use an EDI translator – either as in-house software or via an EDI service provider – to translate the EDI format so the data can be used by their internal applications and thus enable straight-through processing of documents.

Business partners

The exchange of EDI documents is typically between two different companies. Oftenly, referred to as business partners or trading partners. For example, Company A may buy goods from Company B. Company A sends orders to Company B. Company A and Company B are business partners.

For your information, EDI helped transform a paper-heavy process to one using computers. Whereby, technology has advanced huge amounts since the inaugural roll-out of EDI. As a matter of fact, 85% of the industry polled is still using EDI. Gather more useful and related information on this and more affiliated topics using the links below.

  1. Edicom Group: Getting Started with Electronic Data Interchange
  2. Is EDI dead? We asked 200 Supply Chain Executives on Their Thoughts

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