What is EDI (Electronic Data Interchange) & How Does it Work?

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Automatically sending and receiving EDI standard-format business documents, like purchase orders and invoices, between trading partners, eliminates the need for human involvement. 

What is EDI?

EDI (electronic data interchange) is cost-saving business process automation used by trading partners to send and receive validated electronic documents data exchange from computer system to computer system in standard formats without human intervention. EDI documents include purchase orders, invoices, payment documents, bills of lading, inventory documents, customs documents, and ship notices.

EDI began with use in U.S. military logistics in the late 1940s, with large companies starting to apply it to their operations in the 1970s and gaining more popularity in the 1980s and later years.  A more recent EDI alternative is API, which may eventually replace EDI.  EDI is used in B2B e-commerce, healthcare, and many other industries. 

EDI is used for purchase orders,  e-invoicing, e-payables, and e-payments, plus other uses that go beyond supply chain procurement, accounts payable, and accounting, as explained in our EDI examples. 

An in-house EDI system reduces procurement and accounting costs when the scale of business partner transactions is sufficient to cost-justify the investment decision. Instead, small businesses and medium-sized companies can outsource EDI by choosing a managed service. 

EDI integration with a company’s  ERP system completes the process to use business-to-business electronic documents in the business management system automatically.

How Does EDI Work?

EDI (electronic data interchange) works in minutes by using either a software system or an outsourced managed service to automatically send business documents and data between trading partners from computer to computer in EDI standard format, without humans.

EDI implementation in-house (on-premises) is done by onboarding business trading partners, mapping document fields, and achieving  EDI integration with an enterprise resource planning (ERP) system.

Small businesses and medium-sized companies may outsource an EDI solution using cloud-based SaaS or PaaS EDI software through a managed service that integrates with ERP and AP automation software. Automation software may include a supplier portal for onboarding vendors and sharing documents and status and use flat-file or API integration with an ERP.

EDI standards include ANSI (including ASC X12),EDIFACT (also called UN/EDIFACT from the United Nations), TRADACOMS, and ebXML, with each EDI standardized format including different versions that must be the same version for both trading partners.

An EDI translator within the EDI software or outsourced EDI managed service translates EDI data elements formats to enable real-time business document processing by integrated ERP and AP automation systems at each business trading partner. 

What are the Types of EDI?

Different types of EDI methods for electronic data interchange include:

• Direct EDI (point-to-point EDI)
• EDI via VAN (value-added networks)
• EDI via AS2 (using the Internet)
• Web EDI (using a standard Internet browser)
• Mobile EDI (using mobile devices)
• EDI Outsourcing (managed services)

FTP-EDI Transport Method is an EDI method for file transfer over a computer network for the exchange of business documents, using the TCP/IP protocol. FTP is file transfer protocol. 

Examples of EDI

Whether it’s in-house EDI software or an EDI service, an electronic data interchange solution is used in many industries, including general business, e-commerce, operations management, and healthcare, to streamline and automate workflows. EDI examples for industry-specific use cases follow. 

EDI in e-commerce 

EDI standardization of computer-to-computer documents exchange and business information between trading partners is used in B2B e-commerce for ordering and invoicing. E-commerce EDI is also called retail EDI.  Retailers like Walmart have been using electronic data interchange / EDI software for purchase orders, advance ship notices, and invoices for many decades. 

Other parts of an e-commerce solution may include API and flat-file integration. 

EDI in Operations Management 

EDI is used in operations management, including logistics, supply chain, procurement, and manufacturing production. Operations management uses electronic documents in standardized formats, including purchase orders transmitted directly and automatically between trading partners’ computers without humans, and provides status messages and other business information. 

EDI in Healthcare 

EDI (electronic data interchange) is used in healthcare between service providers, payers, and patients, ensuring HIPAA compliance within the EDI process and using ASC X12 for transmission of EDI transaction sets. 

Patients enrolling in healthcare plans use EDI. In addition, both private insurance companies and Medicare use electronic data interchange.

In an EMR (electronics medical records) software system with EDI capable technology, the medical provider can enter a patient’s information in a form as an inquiry in EDI format to check for insurance coverage, deductible, and copays before a patient’s appointment to determine how to bill that patient for healthcare services. The EDI system automates the response as an EDI message. 

After the healthcare service is performed, providers use EDI to receive payments for patient invoices or billing from insurance companies. EDI payment requests may be submitted in transaction sets for more than one insured member, and remittances can be sent using EDI. 

A clearinghouse may provide eligibility and benefits verification or claim status for EDI transactions between the healthcare service provider and payers. 

Benefits of EDI

Electronic data interchange improves productivity and produces cost savings by eliminating manual processes, including manual data entry.  EDI also speeds up processing time compared to mailed documents, letting businesses receive invoices and match documents in time to take early discounts. Business-to-business electronic documents are more accurate than those requiring manual data entry. 

With an EDI electronic data interchange solution, vendor invoices are received on a timely basis, and accounts payables are recorded much earlier than via mail receipt. Financial statements and cash flow management are more accurate when supplier invoices are recorded in the accounting system on a real-time basis instead of accruing them through a cut-off date procedure. 

Risks of EDI

EDI risks include security risks that require a risk assessment to determine the levels of necessary risk controls. According to an ITT Today risk assessment analysis explanatory document based on Logistics Management Institute methodology, EDI risks to be assessed include:

  • “Unauthorized disclosure of data
  • Unauthorized modification of data
  • Sender repudiation of transactions
  • Receiver repudiation of transactions
  • Unauthorized system access, and
  • Lack of system availability.”

In a risk assessment, EDI actions and sensitive data are evaluated to determine necessary security requirements to reduce risk.  

Conclusion – EDI (Electronic data interchange)

EDI stands for electronic data interchange. EDI is computer-to-computer business documents and business information file transfers between trading partners without human intervention. EDI uses standard formats for transferring the information, purchase orders, status, invoices, advance shipping notices, bills of lading, or payments with remittance advices

EDI is an older technology than API or flat-file transfers (of CSV or other files). Yet it’s still being used in healthcare, e-commerce, and many other industries for document exchange to replace manual processes. Smaller businesses may use a managed services EDI platform instead of a costly in-house electronic data interchange system. 

Electronic data interchange(EDI) provides excellent features and cost savings and no data entry errors advantages, yet it has security risks. But EDI is considered safe enough to use for HIPAA patient privacy compliance. Companies should assess the risks of using EDI connectivity in their company and establish security measures to lessen the risks. 

Businesses must also ensure they’re in EDI compliance by sending information using required methods and standardized data structure to trading partners with electronic data interchange software.

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