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What is EDI?
EDI stands for Electronic Data Interchange. It is the paperless exchange of
normal business documents between two trading partners. There are a number of
ways that the documents can be traded, but most commonly it is done through a
VAN (Value Added Network). A VAN takes documents from the sender’s mailbox and
places the documents in the receiver’s mailbox. This process is very similar to
e-mail except that there is a great deal of security to ensure that the
documents are legitimate and accurate. There are several VANs run by large
communication companies. Normally a business will use only one or two VANS. If
their trading partners are using a different VAN, then the documents will be
set up to automatically route between the two VANs, usually at an additional
charge.
When a document is transmitted to a trading partner, the receiver will transmit
a Functional Acknowledgment (FA) to acknowledge receipt of the document. In
this manner the sender knows that the document reached its intended
destination. Most EDI software will automatically create a FA as documents are
brought in from the mailbox.
EDI documents are not meant to be human readable. They are coded transmissions
designed to be quickly and accurately read by computer programs. The format of
the documents is agreed to at a national or international level (depending on
the EDI standard being used). For instance, the American National Standards
Institute (ANSI) publishes a format commonly used in the United States. There
are several hundreds of different types of documents that can be sent and for
each document the format handles nearly every conceivable detail of information
that would be passed between trading partners. Thus, between two trading
partners, not all of the information that can be included by format is used.
Trading partners use an agreed upon subset of the format to trade the
information that they consider important for their particular business
relationship. Additionally, new versions of each format come out every few
years. Some trading partners adopt the new versions and some prefer to continue
to use the older versions. It is usually the larger of the two trading partners
that establishes the standard, format subset, and version that will be used
(these are collectively called EDI mapping requirements). Therefore, a common
problem for a small trading partner dealing with several larger trading
partners is that each larger partner is likely to have different EDI mapping
requirements for the same document type. Thus the small partner must have the
means of accommodating all of these differences.
For manufacturers and distributors the most common documents traded include
purchase orders, invoices, advanced shipping notices (ASNs), sales information
and bills of lading (BOLs).
EDI can dramatically reduce the cost of processing documents like purchase
orders and invoices. This is because the information can be moved directly from
a database or ERP system to the trading partner (and vice versa) thus saving a
lot of manual processing of the documents. Hundreds or even thousands of
documents can be processed within a few minutes. However, the requirement of
trading EDI documents can be a significant burden for companies that lack the
computer network needed for sophisticated information processing. In this
circumstance, the company is faced with the additional time and expense of
converting the paper document into electronic form for EDI transmission or
converting received EDI documents into human readable form. In many cases this
burden is so large that the company is unable to successfully establish or
maintain a business relationship with trading partners that require EDI
documents.
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