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What Is Electronic Data Interchange (EDI)?

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What Is Electronic Data Interchange (EDI)?

Did you know that the idea for electronic data interchange (EDI) started during the Cold War as a solution for delivering supplies to West Germany?

Since the earliest versions of EDI found their way into the transportation industry, the standardization of communication between American businesses contributed to new heights.

In the 2020s, it’s not possible to ignore the benefits of EDI software. You may have partners who demand it as part of doing business.

You’ve had conversations about electronic data interchange, but how do you connect the pieces? Read this guide to understand how other business owners stopped hassling with documents and started using EDI.

What Is Electronic Data Interchange?

Electronic Data Interchange (EDI) is the computer-to-computer exchange of documents between business partners using a standard format. Organization leaders interested in going paperless, reducing their environmental impact, or saving money should consider adding this to their enterprise software.

A Brief History of EDI

Ed Guilbert, the “Father of EDI,” introduced the concept in the 1960s. During his service as an Army Master Seargent in 1948, he faced a significant challenge. Ed needed to deliver troops to Western Berlin after the Soviet Union cut off access to West Germany.

As a result, Master Sargent Guilbert created a system that allowed the Berlin Airlift to succeed. Tracking the millions of tons of supplies presented a problem due to complex forms that often came in different languages. The logistician and his team created a manifest system that was transmitted by radio.

As a result, the Berlin Airlift delivered over 2 million tons of supplies and food despite the Soviet Union’s efforts to cut off access.

During the 1960s, Ed Guilbert introduced the term EDI to the transportation industry. Since that time, the software and capabilities have only grown to allow a standard exchange of business communications between organizations.

Basics of EDI Software

Consultants who set up EDI for businesses take the data from accounting software and match fields for transactions. Vendors and customers today may have requirements for how to do business with them. Unique pricing or ship-to addresses, among other things, drive when transactions take place and how to account for them. 

EDI software today uses a series of transmission protocols to exchange standardized data. For data quality and governance, EDI transactions have established message standards like the following:

When your system receives a request, data goes to that business partner with standardized information. All outgoing or incoming EDI file types generate business documents for transactions. What used to happen with an exchange of paperwork can take place in the cloud today.

Types of EDI

Different types of EDI exist to meet the needs of industries around the world. Cloud hybrid solutions gained more popularity in 2020, and that trend should continue through the decade. In brief, the following represents the usual methods offered by your EDI provider:

Direct or Point-to-Point EDI

Direct EDI creates a single connection between two companies. Employees have to manage hundreds or thousands of individual connections. As a result, most companies usually don’t connect to every vendor or other business partners.

This type of EDI offers a flexible variety of communication protocols for secure connections. Other options exist that need less manual work from the accounting team.

EDI via VAN

Most EDI transactions today happen with a value-added network (VAN). This solution creates a private network to trade documents between companies. Each organization has a mailbox for outbound or inbound communication.

The lower cost for other EDI solutions may catch up to this type, but it remains popular because of the services that come along with it.

EDI via AS2

EDI via AS2 involves connecting two computers with a point-to-point connection over the internet. The software creates “envelopes” for data that travel through a secure channel with encryption and digital certificates. The most famous adopter of this technology is the retail giant Walmart.

FTP With VPN

File Transfer Protocol (FTP) provided organizations with the first reliable transfer protocol for documents that businesses still use in 2021. It cannot provide a secure connection by itself. A virtual private network (VPN) connection must exist for an appropriate amount of security.

SFTP and FTPS

Secure File Transfer Protocol (SFTP) and FTPS (File Transfer Protocol Secure) allow data to transfer safely. One does not work as well without the other for secure exchanges of information. The protocols have two different approaches to how they perform encryption.

Web EDI

If you prefer a more visual and accessible form of electronic data interchange, a Web EDI offers a solution that’s growing in popularity. Users log in through a browser and exchange documents using a graphical interface. Standardized fields exist for users to enter information that converts into an EDI transmission that uses FTPS, HTTPS, or AS2 protocol.

Benefits of EDI

B2B business relies on EDI to process transactions and exchange critical data. For companies or organizations of any size, including electronic data interchange with your accounting system drives benefits like the following:

  • Exceed customer expectations
  • Support your growth strategies
  • Improve reporting and analysis
  • Prevent blockages in the supply chain
  • Reduce costly errors with a strict process
  • Improve efficiency, productivity, and accuracy
  • Save time and money without paper documents

Don’t look at this as a comprehensive list because the positive effects ripple outward in an organization. The environmental impact alone motivates companies around the world to implement EDI.

Need to Know More About EDI?

Whether EDI deploys for flying supplies past Soviets or growing a business. Electronic data interchange offers a massive ROI. B2B business in the 2020s cannot exist without it.

EDI solutions may work differently for one organization versus another. Take the time to study more resources or contact a local provider for a quote. It’s not advisable to attempt a DIY implementation.

Did you find this article useful? Don’t forget to check out more content from our blog.

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