Everything You Need to Know About Electronic Data Interchange

You may not realize it yet, but EDI is all around you. EDI is a technology businesses use for communication in virtually every industry around the world.

EDI sounds complicated because of all the different acronyms associated with it, but it’s actually quite simple when you break it down to its core.

Whether you want to learn more about the cost and time-saving benefits EDI provides, or you’re looking to do business with another company that requires EDI – you’ve come to the right place.

What is EDI?

Electronic data interchange (EDI) is the exchange of business data or documents between two computers. It’s an electronic version of mailing paper documents that’s far more efficient (and secure) than using a fax machine.

Businesses send documents back and forth in various formats that are encrypted during delivery and decoded by EDI software upon receipt. These different formats are called “standards” and many industries have their unique set of standards they use most often. Standards can also be adjusted to be company-specific.

Hundreds of thousands of businesses have adopted EDI to save time, reduce costs, and make their supply chain more efficient – other companies initially started using EDI because it was required by a company they started doing business with. People or organizations that exchange EDI are called “trading partners” and many companies have specific requirements to become a trading partner, which we’ll get into later.

How Does EDI Work?

Let’s look at a typical business scenario, sending a purchase order, to illustrate how EDI works.

The old way of sending purchase orders

The buyer decides to make a purchase and prepares a purchase order to print
The buyer then mails (or faxes) the purchase order to the supplier
The supplier finally receives the purchase order several days or weeks later
The supplier enters the purchase order into their system for processing
Either the buyer calls the supplier for confirmation or the supplier mails an acknowledgment to the buyer

The first problem with this scenario is that it wastes a lot of time. Your business will never keep up with the competition at such a slow pace.

The other issue is how much involvement is required by humans – more specifically, employees who require a fair wage to get work done. In addition to the unnecessary labor costs, more human involvement means more opportunity for human errors.

Life is better with technology and so is business.

The convenience of sending a purchase order through EDI…

The buyer makes a purchasing decision and creates an electronic purchase order
Their EDI software automatically creates an EDI document (850 purchase order) and sends it through the internet or a value-added network (VAN)
The supplier’s EDI software receives the document and translates it into an electronic purchase order, automatically updating their system upon receipt
The supplier’s EDI software then creates an acknowledgment of receipt and sends it to the buyer

A process that would have normally taken days or weeks is completed in a few minutes – with far less room for human errors or logistical mishaps.

Plus, the entire process is transparent for both parties.

The Benefits of EDI

EDI is well-known for saving businesses time and money – that’s what made EDI so attractive in the first place, and why it’s the standard technology used for data exchange in most industries.

Save time and money with EDI

EDI saves businesses an average of 35% on transaction costs by eliminating paper-based processes
EDI transactions can speed up business cycles by 61% and reduce cash-to-order cycle time by 20%
By drastically reducing the amount of human involvement, errors are reduced up to 40% and employees don’t have to waste time fixing those errors

However, EDI has many indirect benefits, as well.

EDI improves business relationships through shortened cash-to-order cycles, transparent communication, and up-to-date logistics information. This is why so many companies require businesses to use EDI when working with them.

All of this added efficiency also helps you maintain healthy inventory levels, be more strategic with warehouse space, and easily manage all of the moving parts in your supply chain from one interface.

How to Get Started with EDI

There are two primary ways to start using EDI – you can build your in-house EDI infrastructure, or you can outsource to an EDI service provider like us.

For the sake of being thorough, we’ll assume you want to hire and train your EDI team to build an in-house EDI infrastructure. Otherwise, you can just skip all of this because as a NEXUS VAN customer we handle all of this technical stuff for you.

How to Become EDI Capable

Being “EDI capable” means you have the capability to send and receive EDI documents.

These are the basic steps to get EDI capable

Purchase and configure hardware, including a server, computers, and other communication devices as needed
Purchase and install EDI software for sending, receiving, storing, mapping, and translating EDI documents
Create a secure environment with monitored security to keep your EDI data safe while in storage
Configure automatic data backups and redundant power to maintain reliability of data access and transfer
Purchase and configure software to integrate EDI data with existing in-house systems (optional)
Contract a value-added network (VAN) for ongoing EDI transactions
Hire and train staff to manage, update, and repair your EDI infrastructure
Develop maps for each EDI document type you will need to use (there are thousands)

There are other requirements, depending on your situation and your trading partners, but those are the basic steps to use EDI in-house.

Obviously, this presents a huge time and money investment upfront, as well as ongoing maintenance costs, which is why most businesses prefer to outsource their EDI.

How to Become EDI Compliant

Every trading partner that you potentially exchange EDI data with will have specific requirements to be “EDI compliant.”

Most of these requirements are industry-specific. However, the big companies that you likely want to do business with, such as Amazon, Costco, and Walmart, have strict company-specific requirements.

The majority of companies prefer to communicate via a VAN because they are secure and widely available. However, your trading partner might require FTP or AS2, which will require additional hardware and software.

Depending on what EDI documents you’ll be exchanging, you’ll most likely have to do additional EDI mapping to be compliant with your trading partner’s unique protocols.

Fortunately, many companies provide guidelines that list everything you need to be compliant – you simply have to do all of the work to get things set up. From there, you can run a number of tests to ensure you’re properly connected to your trading partner and EDI documents are successfully received.

The first few times can be a big hassle, but after a while you start to get the hang of it, and it’s not as intimidating anymore. It seems worse than it is because you’re eager to start doing business with your new trading partners and don’t want to wait any longer than you have to.

Outsourcing Your EDI to NEXUS VAN

As a NEXUS VAN customer, you’ll never have to worry about any of this – we handle all EDI compliance for you. In fact, we handle everything for you.

We are your EDI team – and unlike the people you hire and train, we have nearly three decades of experience with EDI.

You don’t need any technical knowledge. There’s no hardware or software to install, and in most cases we can have you exchanging EDI documents within one business day.

All you need is an internet connection to get started.

Best of all, our EDI service is a fraction of the cost of an in-house EDI system. After all, EDI is supposed to save your business money, right?