What is EDI?

EDI stands for Electronic Data Interchange, and that name does a pretty good job of identifying its main purpose. EDI helps businesses share important business documents with trading partners quickly, securely, and with much less risk of human error. 

Before delving into the specifics of EDI, it’s worth noting its evolution. Originating in the 1960s, EDI was initially a way to expedite cargo documentation. Over time, it has evolved into a comprehensive system that facilitates efficient data exchange across a multitude of industries, reflecting its adaptability and enduring relevance.

It can be used in a variety of situations, allowing businesses to share purchase orders, invoices, shipping manifests, inventory reports, and a variety of other documents that are a crucial part of working with partners.

Whether you are working with large retailers, manufacturers, transportation providers, 3PL service providers, or government agencies, EDI transmission is often the standard practice of exchanging documents for larger transactions.

How Does EDI Work?

An EDI system is based on automated computer-to-computer communication, minimizing the need for human intervention and creating a consistent process for sharing important documents between two business entities.

Once set up, the process is relatively simple, involving just a few steps:

1. When an invoice, purchase order, or another document is created, it gets converted into the right format, with the data being organized in a consistent way.
2. The sender can then transfer the electronic document to the receiver using the EDI network, a process that can happen automatically once it is set up.
3. The receiver’s system gets the document and processes it to be included in the business records.

What’s more, the EDI process can function without human intervention at all. For example, when set up correctly, the buyer’s procurement system can automatically send a PO using the EDI system when inventory goes below a certain threshold. 

Then, the seller’s system receives the purchase order and creates an automatic notification for the goods to be shipped. Once the item is ready to ship, the buyer will be automatically informed and will receive an invoice through the same EDI system. All of this happens without manual intervention and with no risk of someone inputting the wrong info or forgetting to send a document.

Instead of having to rely on email, fax, or other manual methods that are prone to human error, EDI ensures a standardized process that will be consistent and accurate, no matter if you send one, ten, or thousands of documents every single day.

Types of EDI Transactions

A significant advantage of EDI systems lies in their ability to simplify and automate the dispatch of a diverse range of documents. Here’s a list of some of the possible documents that an EDI system can help you share:

• Invoice: Serving as a detailed bill from the seller to the buyer, an invoice includes transaction specifics like product lists and pricing. For businesses in retail or wholesale, this ensures transparent and error-free financial transactions.
• Shipping Manifest: Essential for logistics and supply chain management, a shipping manifest details the contents of a shipment. This document is crucial for suppliers and transporters to ensure accurate and timely delivery, particularly vital for businesses dealing in physical goods.
• Purchase Order (PO): This document is a formal request from the buyer to the seller for products or services. For businesses that operate in a B2B environment, a PO is a critical component for initiating transactions and managing supply chains.
• Order Confirmation: This acknowledgment from the seller to the buyer verifies receipt and processing of an order. It’s a crucial step in customer service and order management, reassuring the buyer and confirming the details of the transaction.
• Inventory Updates: Regular updates between trading partners about product availability are critical for managing stock levels effectively. For businesses with a dynamic inventory, such as retail or manufacturing, this ensures seamless operations and timely restocking.
• Customs Declarations: Essential for international trade, these documents declare the contents of shipments to customs officials. They are indispensable for businesses engaged in exporting or importing, ensuring compliance with international trade regulations.
• Order Cancellations (OCs): These documents, sent from buyer to seller, nullify a previously issued purchase order. In fast-paced business environments, such as retail or services, efficient handling of OCs is crucial to adapt to changing customer needs and maintain operational flexibility.

Understanding EDI Transaction Codes

As we explore the various types of EDI transactions, it’s beneficial to know their corresponding EDI transaction codes. These codes are standardized identifiers that make communication more efficient between businesses. Below is a table that pairs each transaction type with its EDI code:

What are EDI Codes?

EDI transaction codes are standardized numeric or alphanumeric codes assigned to specific types of electronic business documents. They are used universally across industries, enabling businesses to streamline communication processes. For example, an ‘EDI 810’ always refers to an ‘Invoice’, making it immediately clear what type of document is being discussed or sent.

Why Include EDI Codes?

Including EDI codes in your business communications ensures clarity and efficiency. If your trading partner mentions an ‘EDI 856’, you immediately know they are talking about a ‘Shipping Manifest’. This clarity is vital in fast-paced business environments where quick and accurate information exchange is critical.