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How Does EDI Facilitate Electronic Transactions? Basics of EDI

What is EDI meaning in business?

EDI (electronic data interchange) is a process of exchanging documents between organizations electronically in a standardized format adhered by both parties.

EDI has been in place since the 1960s replaces paper-based documents such as purchase orders or invoices. By automating paper-based transactions, organizations can save time and eliminate costly errors caused by manual processing.

EDI facilitates electronic transactions by moving information from one computer on one end/entity to another computer on the other end/entity that are supposed to interact with each other and transmit necessary information. With this method of data transmission, both parties can receive and send information within minutes free of any human error, safely and securely. Before the process starts, both parties agree on the same EDI standards they want to comply with. The information between both the parties is exchanged with respect to conforming to the standard they agreed upon.

How are EDI messages transmitted?

There are three major communication methods by which EDI messages can be transmitted from one computer to another. You need to choose one of them based on your internal infrastructure and what makes sense for your business. The most common method used is a VAN (value added network) that enables communication between both the parties. It acts as an intermediary between 2 parties sharing standards based on proprietary data. We usually recommend using AS2 for communication as it facilitates real time data push, is secure and is affordable for businesses.

How does EDI facilitate business? EDI Example

Let’s take a look at an example of a traditional order fulfillment process in a retail setting:

  1. A retailer sends out a purchasing order via fax, email or mail to a supplier.
  1. The supplier receives it, checks inventory, manually enters the order into an ERP/ accounting software and prepares to ship the product.
  1. The supplier sends an invoice to retailer and lets them know the details of the shipment when shipped.
  1. The retailer enters the invoice manually into their ERP system and waits for the product.
  1. Once the retailer receives the product, they pay the supplier and send confirmation of the shipment.

This whole process can take days to months to complete with multiple paid personnel involved in data entry into various systems. There is no visibility or tracking of the process which can make it difficult to track any errors or mistakes caused by humans. With EDI though, the time, effort and money spent to complete this order cycle is reduced to one-tenth. For businesses like retailers, distributors and manufacturers etc. to run their operations successfully and make money, speed is important to meet the needs of their trading partners and deliver products on time. EDI makes this order fulfillment process faster, smoother and secure. With the right EDI digital strategy in place, your business can see a much faster growth.

Now let’s look at how the order fulfillment process works with EDI and an integrated ERP:

How does ERP Integration with EDI work?

Retailer and Supplier agree on an EDI standard (for e.g. like ANSI or EDIFACT) that they will use to communicate with each other. Most often a retailer would mandate the supplier to use their chosen EDI standard.

  1. A retailer sends an EDI 850 (Purchase Order) to a supplier via one of the above EDI communication methods
  1. The supplier receives it and sends an EDI 855 (Purchase Order Acknowledgement) back to the retailer acknowledging the receipt of the PO.
  1. The EDI 850 if integrated with the supplier’s ERP, gets stored as an order in their ERP automatically.
  1. The supplier will check the inventory, gets ready to ship the product and sends an EDI 856 (Advance Ship Notice) to the retailer once the product is shipped with all the details.
  1. The supplier then sends an EDI 810 (Invoice) to retailer.
  1. The invoice gets stored in the retailer’s accounting/ERP software automatically if integrated with EDI.
  1. Once the retailer receives the product, the supplier is paid.

This entire process of sending and receiving documents can happen in minutes securely and safely without human errors (except the retailer is waiting for the product to be received and the supplier getting paid).

EDI will continue to be the norm for companies across several industries for exchanging documents electronically. Businesses that haven’t got on this bandwagon (which is rare) yet are losing the opportunity to multiply their revenue many fold and grow business relationships with others.

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Learn the steps required to send EDI documents to your trading partners