What is EDI?
EDI or Electronic Data Interchange is the exchange—from computer to computer—of critical business data in a standardized format.
Why is EDI important?
Just like the standards within the phone industry that enable separate parties to easily communicate with one other, data may also be exchanged between parties using a standard. For example, some EDI standards include ANSI ASC X12, EDIFACT or TRADACOMS. When one organization exchanges business data with another organization via EDI, they become trading partners. All trading partners must choose the specific transaction sets, i.e. EDI business documents, that they will exchange electronically, what information is to be included within the documents, and the communications method to be used; for example, bisynchronous direct communications, or asynchronous communications via a VAN (Value-Added Network).
In most cases, the VAN is a subscription-based service. Additionally, similar to a cell phone carrier’s voice rate plan for minutes, the VAN is often a metered service. Although the fees are usually insignificant, the user will pay for transmission service—in other words, the more data that is transmitted, the more it costs. The charge is often per kilo-character (KC) and generally a single transaction consists of 2-3 kilo-characters.
The EDI Standard data format can be described as a common language that allows any organization to communicate with other organizations. That is, if everyone was able to accept and send data, not only in their company’s own internal format but also in an EDI standard format (including ANSI ASC X12, EDIFACT or TRADACOMS), then every company would share a common data format for trading EDI documents.
Imagine that the buyer mails a document via the USPS and the document is delivered to the recipient, who in this instance is the supplier. The document, which is enclosed in an envelope, is then routed to the mailbox of the supplier. The buyer’s envelope has all the required information in the acceptable format for the post office to interpret and accurately deliver to the supplier’s mailbox. The letter is written in a language that could be easily and precisely interpreted by the supplier. Therefore, the back-and-forth exchange of EDI documents, whether they are sent via a VAN or AS2, has to be consistent with a set of established and agreed upon standards.
In addition to EDI being a method for companies to exchange data, it also acts as a connection between sender and receiver without the need for manual intervention at either end. It is primarily the responsibility of the sending party to transmit EDI data in the correct format or standard, and the receiving party’s responsibility to correctly translate the data and then take the appropriate action. Machine applications must be able to interpret all EDI transactions—if the exchanged data includes mistakes or errors, it will result in errors called exceptions. Exceptions can cause chargebacks, or fines levied by the trading partner against the party in violation. It is critical that the EDI data being transmitted is in the correct format that meets agreed upon business standards in order to ensure that the receiving party can successfully upload the data into their respective system.