Managing the vast amount of information needed to complete business-to-business (B2B) transactions is a complex and time-consuming task to run manually, with mistakes in the processes proving costly. However, this all can be greatly simplified for firms as they scale up their operations with the use of electronic data interchange (meaning EDI) and EDI software.
In this article
Electronic data interchange can improve business communications with suppliers and customers and enhance efficiency for small and large businesses. It can also be a vital partner in helping to cut manual paperwork, avoid missed payments and improve the ability to track transactions.
In this article, we will look closely at EDI’s definition as well as the application of EDI in business settings.
What does EDI mean in business?
Electronic data interchange is a process companies use to quickly and efficiently share transactional documents with each other. It uses standardised computer-to-computer protocols to streamline the transfer of information and automates many of the administrative parts of the sales or purchasing process for firms.
It does this by creating an electronic standard of documentation and informational inputs to reduce the time and effort needed to communicate paperwork such as invoices and purchase orders between suppliers and customers. This system of document management can offer many advantages for businesses with supply chains or when communicating a large number of financial transactions.
Additionally, EDI is a tried and tested means of sharing information, which has been around for many decades. These systems predate the Internet and previously offered companies a quick way to communicate transactional information before purchasing and cloud integration software became a reality.
Nevertheless, electronic methods such as EDI are still widely used and have many advantages that small to midsize enterprises (SMEs) can enjoy.
Why EDI is important for business?
EDI is highly important for companies in a number of ways. It speeds up business transactions greatly by automating manual business-to-business (B2B) processes. It also saves costs by reducing errors and workloads accordingly.
Instead of manually creating and submitting individual documents for each step of the purchasing process, EDI software is used to simplify and automate these steps so that transactions are quickly responded to and suppliers are promptly paid.
EDI can be used to generate and send the following B2B documents:
- Advance ship notices
- Bills of lading (BoL)
- Customs documentation
- Inventory documents
- Purchase orders (POs)
- Shipping status documents
Did you know?
According to the latest Office for National Statistics (ONS) data published in 2021, EDI eCommerce sales in the UK amounted to £334 billion in 2019. The ONS observed that this had grown by over a quarter since 2009 and comprised approximately half of the eCommerce sales overall in the UK’s non-financial sector.
How does electronic data interchange (EDI) work?
Electronic data interchange creates a definition for message standards and structures for data exchanged between businesses. This allows connected systems to quickly and correctly parse and process the relevant transactional information being shared between companies.
There are two ways that EDI data can be transferred:
- Direct connections: when computer systems communicate directly with each other
- Value-added networks (VANs): where a third-party network is used to manage the sharing of data
It is important to remember that data governance is essential for the proper functioning of EDI information. If data is entered in the wrong places or is missed during the transmission, the document may not be processed correctly, leaving an order potentially unfulfilled.
Broadly speaking, data needs to pass through a few important steps to be transmitted between businesses by EDI. Firstly the information must be converted into an appropriate EDI format. Next, the data is shared with the receiver of the information via the EDI protocol or network provider. Finally, it is converted from its electronic form into a readable format on the recipient's system.
Protocol standards for EDI
Electronic data interchange systems run off a number of different transfer protocols rather than using just one network channel. These protocols create the infrastructure through which the electronic communications sent between businesses are managed and allocated and affect how data can be read. This influences the precise format that documents must use in order for the B2B systems to read them correctly.
Some of the most common EDI network standards used in the UK and internationally include:
ANSI: a commonly used cross-industry EDI standard for US companies
UN/EDIFACT: created by the UN and one of the most commonly used EDI standards across Europe
TRADACOMS: the most used UK EDI standard for retail firms
What is an example of the EDI data transfer process?
When considering EDI’s meaning in business, it is worth looking at practical examples to understand its usage more completely. One very common task EDI can automate is the supply and distribution of parts.
For instance, an EDI solution might be used by companies to react quickly to low levels of stock in their warehouses. When this happens, firms can set up their systems to create electronic purchase orders for their suppliers to trigger the resupply of their stock when it runs low. This process is shown in the infographic below.
Naturally, there are many other practical uses of EDI across multiple sectors, such as international shipping, the financial services industry, the car industry and the retail industry, amongst others.
Tips for SMEs
Companies shipping supplies to and from foreign countries should make sure that their systems comply with the EDI standards used in the countries they are trading in.
For companies that trade internationally, it may be necessary to use an EDI standard such as EDIFACT or ANSI, depending on their systems and the location of their suppliers and customers. Additionally, the information sent should also meet the correct customs standards needed to allow goods to travel across international borders to avoid delays during customs and excise checks.
Is EDI the same as ERP?
Enterprise resource planning (ERP) software are programs that give firms a single system to manage the many functions a business takes on, such as managing accounts, distributing products and tackling human resource management.
This encompasses the many diverse processes and departments an organisation may require, such as:
However, ERP software can be combined with EDI processes too. It is common for ERP tools to have EDI communication capabilities that are complementary to their administrative functions. For example, an accounting software system may feature a PO data entry form that allows firms to transfer information via an EDI system to company suppliers.
So whilst EDI is highly useful when paired with ERP software, they are two distinct systems rather than one in the same.
Key points to know about EDI
The answer to the question, what does EDI mean? is a simple one. EDI is a highly useful technology for small businesses. It offers a practical solution to firms to save on costs and reduce the time and effort needed to transfer important transactional information.
There are a few important points to remember when trying to understand this system:
- EDI is an electronic data standard used to transfer important documentation
- EDI uses a standard format to ease the sharing of information between entities
- It is well-established amongst UK businesses and is used across many different sectors
- ERP software can feature an EDI integration to manage and automate the transmission of transactional business documents
Using EDI offers many advantages for smaller businesses with lower headcounts. Not least that it can automate processes which can prove time-consuming and work-intensive otherwise. It is also a useful tool to maintain a decent level of supply of goods and ensures that your business pays its bills on time.