Electronic data interchange (EDI) is a standard documentation format used for electronic data exchange between businesses. It is a list of rules and codes for the information that appears on documents, and it ensures that every customer and vendor uses an identical list of information and codes so there is consistency. This standardised list of values is used for communication between businesses that want to exchange money for products.
EDI includes references to software programs which manage business communications that use this standardised code. EDI software produces transaction documents like purchase orders or invoices and converts them into messages to be sent digitally to another business. That business then receives and processes the message by their own EDI software. EDI is a trusted electronic transaction tool that will only accept messages that comply with the standards on formatting and information codes.
EDI messages contain data segments, which in turn consist of data elements such as the price and model number of a product. These elements are separated by a delimiter. Data segments with a header and trailer make up a transaction set. This is the EDI unit of transmission, or the EDI message. A transaction set contains information that’s commonly found in business documents or forms. EDI transmissions can be encrypted, and those who exchange EDI messages are known as trading partners.
EDI is a powerful tool for business communications. Businesses use EDI to pay their vendors to deliver the products to them, and in return the business’s customers pay them for the products. For example, when buying from a vendor, a business uses a purchase order. The purchase order lists the type and number of item/s they want, including the size, colour or model, as well as when and where to ship the item/s. The buyer would then receive an invoice for their order telling them how much they should pay, the currency, and the payment deadline.
Through the exchange of standardised documents like EDI, businesses will know:
- What type and amount of products to purchase from their vendor
- What products their customers want from them
- How much and when to pay
With EDI, paper use is reduced and replaced by automated and efficient electronic transactions. Other key benefits of EDI include:
- Improving efficiency
- Reducing errors
- Eliminating mailing costs
- Being cost-effective
- Having accurate data