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How Electronic Data Interchange works

Understanding the Basics of EDI

Electronic Data Interchange makes business to business transactions faster and more accurate. As an example, assume a business is sending a purchase order to a supplier. Without Electronic Data Interchange they would create a purchase order, print it and send it to the supplier by mail. The supplier would take the purchase order, manually key it into their computer for tracking and ship products to the customer along with an invoice. With Electronic Data Interchange the entire process can become electronic with the customer generating a purchase order that is sent via Electronic Data Interchange. The supplier in turn takes the received electronic document, sends products to customer and an invoice also using Electronic Data Interchange. Depending on the configurations used, the entire process can be electronic when using Electronic Data Interchange.

The principle behind Electronic Date Interchange may seem similar to numerous digital information transfer strategies, but EDI is unique in that it provides a highly secure data transmission solution used only by the business and its partners (suppliers, retailers, warehouses, etc). EDI exchanges are therefore faster and more secure than human-readable formats. Here are the EDI processes commonly used:

    • Point-to-point. Point-to-point, also called Direct EDI, involves creating a single secure connection between two specific partners, usually through an internet connection using File Transfer Protocol (FTP) or Applicability Standard 2 (AS2). This type of EDI solution was popularized by Walmart, which requires its many partners to comply with its own EDI protocols. It is an efficient solution for organizations that need to manage a constant influx of documents and trade requests. However, the EDI language is specific to the two partners, and in order to support additional trading partners, an EDI software package that allows for different protocols must be employed. Both the business and its partners must agree upon a common standard for each document exchange.
    • Value-added Network (VAN). VANs may be an efficient option for businesses who do not wish to use multiple EDI languages for all its different partners. VANs are third-party private hosting services that allow organizations to channel their EDI communications, without establishing separate protocols, through a single line, as long as all partners are using the same VAN.
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