Electronic Data Interchange (EDI)

Electronic data interchange (EDI) is the computer-to-computer exchange of business documents between organisations in an agreed, standard format. Instead of printing a purchase order or an invoice and posting or emailing it, one company's system creates a structured message that the other company's system can read and process without anyone retyping it. Retailers, manufacturers, logistics firms, healthcare payers and governments use EDI to handle high volumes of routine transactions.

EDI predates the commercial internet and is still widely used in supply chains, often alongside newer interfaces. Its two dominant standards are ANSI ASC X12, used mainly in North America, and UN/EDIFACT, maintained under the United Nations and used widely in Europe and international trade. When the documents exchanged are payment instructions and remittance details, the practice is usually called financial EDI.

Imagine two companies that agree to fill in exactly the same paper form, with every box in the same place, every time they place or fill an order. A clerk at the receiving company could process such forms quickly because nothing ever moves. EDI is that agreement turned into software: both sides agree which piece of information goes in which position of a message, so their computers can read each other's documents automatically.

The benefit is the same as with any shared form, only much faster. Orders flow straight into the supplier's warehouse system, shipping notices update the buyer's stock records, and invoices land in the accounts team's queue already matched to the original order. People only step in when something does not match.

EDI grew out of efforts in the 1960s and 1970s by transport and retail companies to replace paper shipping and ordering documents. In the United States, the American National Standards Institute chartered the Accredited Standards Committee X12 in 1979 to develop cross-industry standards. In the 1980s the United Nations Economic Commission for Europe led work on an international standard that became UN/EDIFACT. Large retailers and car makers then required their suppliers to trade by EDI, which spread the practice through supply chains.

An EDI exchange typically follows these steps:

1. The sender's enterprise resource planning (ERP) or order system produces a business document from its own data.
2. Translation software maps that data into the agreed standard, such as an X12 850 purchase order or an EDIFACT ORDERS message.
3. The message is transmitted, either directly over a secure internet protocol such as AS2 or through a value-added network that acts as a mailbox service between trading partners.
4. The receiver's software checks the message, sends a functional acknowledgement and translates it into its own system's format.
5. The receiving system processes the document, for example creating a sales order, and later sends back related documents such as a shipping notice or invoice.

Before trading, partners agree an implementation guide that sets out which standard, version and optional fields they will use. This setup work is one reason EDI is most common in large, stable business-to-business (B2B) relationships.

• Orders. Purchase orders, order changes and acknowledgements let buyers and suppliers agree what will be delivered.
• Logistics. Advance shipping notices and transport status messages tell the buyer what is on its way and when.
• Billing. Electronic invoices and commercial invoices feed accounts payable systems directly.
• Payments and remittance. Payment orders and remittance advices tell banks what to pay and tell suppliers what a payment covers, which supports cash application in accounts receivable.
• Customs and trade. Customs declarations and some transport documents are exchanged in EDIFACT formats in many countries, while the electronic bill of lading has developed on its own platforms.

EDI is reliable and well understood, but it is also rigid. Messages are batch-oriented, standards change slowly and every new trading partner needs mapping and testing. Newer approaches address some of these limits. An application programming interface (API) lets systems exchange data in real time on request, and XML-based ISO 20022 messages carry richer structured data for payments. Electronic invoicing mandates in Europe and elsewhere also use their own formats, some of which can be converted to and from EDI.

In practice large organisations run these side by side. A retailer may receive orders by EDI from long-standing suppliers, use APIs for marketplace sellers and send payments to its bank in ISO 20022 format, with integration software translating between them.

• X12
• UN/CEFACT (UNECE)