What is EDI?

     EDI stands for Electronic Data Interchange. It is the computer to computer exchange of business documents between companies. EDI documents use specific computer record formats that are based on widely accepted standards. EDI is used in a variety of industries, with over 90,000 companies making the switch to EDI to improve efficiency. Many of these companies are requiring all of their partners to use EDI too.
     One of the main reasons is computer to computer exchange of information is much less expensive than handling the paper documents. Industry studies have shown that a paper-based order can cost $65 or more to process while an EDI order costs less than $1. Less labor time is required and entry errors are vastly reduced because computer systems process the documents rather than human processing.
     EDI transactions between companies flow faster and more reliably than paper documents. Faster transactions support lower freight costs through fewer emergency expedites, reduction in inventory levels, better use of warehouse space, and fewer out-of-stock occurrences . Faxed or paper purchase orders can take 10 days from buyer preparation ofthe order to supplier shipment. EDI orders can reduce this to one day. EDI's efficiency has transformed the efficiency of business communications in almost every industry. Most business documents like purchase orders, invoices, and advanced ship notices can all be exchanged through EDI.

How does EDI work?

Here is an example of how an EDI transmission works:

1. A buyer prepares an order in his purchasing system and has it approved.

2. Next, the EDI order is translated into an EDI document format called an 850 purchase order.

3. The EDI 850 purchase order is then securely transmitted to the supplier either via the internet or through a VAN (Value Added Network).

• The buyer's VAN is a like an electronic post office that interconnects with the supplier's VAN.
• The VANs make sure that EDI transactions are sent and received.
• The supplier's VAN ensures that the supplier receives the order.
• The supplier's EDI system then processes the order.

     Data security and control are maintained through out the transmission process using passwords, user identification and encryption. Both the buyer's and supplier's EDI applications edit and check the documents for accuracy.
     Each trading partner has unique EDI requirements. These will include the specific kinds of EDI documents to be processed, such as the 850 purchase order used in the example above, 856 advance ship notices and 810 invoices. In fact, most any business document that one company would exchange with another company can be sent via EDI. However, each EDI document must be exchanged with each partner in exactly the format they specify. Many partners will have an EDI implementation guide or kit that explains their specific requirements. Maps are required to translate the EDI documents from the trading partner's format into the format that is useable by the receiving party.