What Is EDI and Why It Is Vital for Business Today?

Businesses are always looking for ways to make communication and data exchange easier, especially when working with trading partners. One tool that helps streamline these processes is Electronic Data Interchange (EDI). Companies use EDI to manage their supply chains more efficiently, reduce paperwork, and minimize errors.

However, adding EDI to existing systems — like enterprise resource planning (ERP) software — isn’t as simple as installing a new app. It takes planning, setup, and expertise to make sure everything works smoothly. Businesses need to ensure that their systems can communicate properly and that data is transferred in the right format.

In this guide, we’ll discuss what EDI software is, its benefits, and its implementation process. We’ll also explore common EDI examples and transaction types.

What Is EDI? EDI Meaning

EDI, or Electronic Data Interchange, is a way for businesses to send and receive important documents digitally instead of using paper or email. Things like purchase orders, invoices, and shipping notices are sent electronically in a standardized format so that different computer systems can understand them. Because everything follows a set structure, businesses don’t have to manually enter data, which helps prevent mistakes and speeds up transactions.

EDI systems are widely used across industries, from retail and manufacturing to healthcare and logistics. In the next sections, we’ll take a closer look at how EDI works, its benefits, and how businesses use it in real-world situations.

How Does EDI Work? 

Businesses use EDI to send and receive important documents digitally. Since different companies have their own systems, EDI software relies on specific codes that act like a universal language. These codes make communication easier by ensuring that businesses can quickly exchange and understand important information, no matter what system they use.

Because EDI messaging follows strict formats, organizations have developed document standards to ensure consistency. Some of the most widely used standards include ODETTE, X12, TRADACOMS, and GS1. These frameworks help businesses structure their data in the same way, reducing confusion and errors when processing orders, invoices, and shipments.

EDI and Keeping Data Safe

Security plays a major role in EDI transmissions. Businesses need to protect sensitive information, so they follow security protocols that control how data is sent, encrypted, and received. Before exchanging documents, companies must agree on an EDI standard and a security protocol. If two businesses use different systems, they may rely on a third-party EDI provider, such as a value-added network (VAN), to help transfer data securely.

To ensure safe communication, companies use secure internet protocols like AS2, SOAP, HTTPS, and SFTP when sending EDI messages. These protocols prevent unauthorized access and ensure that data reaches the right recipient without being altered. EDI software transactions also organize transaction details into structured segments, making documents easier to read and process automatically.

EDI and Data Mapping

Since not all businesses use the same EDI format, they need a way to convert data into a format the receiving system can understand. This process, called transaction mapping, translates information so that both systems interpret it correctly. Without mapping, businesses could struggle to read each other’s data, leading to delays or costly mistakes. By using mapping tools, companies can streamline transactions and maintain smooth communication with their trading partners.

5 EDI Transaction Types 

Electronic Data Interchange (EDI) allows businesses to exchange documents electronically. By automating communication with trading partners, EDI eliminates manual data entry, reduces errors, and speeds up procurement. Because every EDI transaction follows a standardized format, businesses can interpret transaction details consistently, ensuring clear and accurate communication.

While businesses use hundreds of EDI transaction types, some appear more frequently than others. Below are five important EDI transactions and their functions in business operations.

1. EDI 850 (Purchase Order)

The EDI 850 (Purchase Order) serves as the first step in the EDI transaction cycle. When a buyer wants to order goods, they generate this digital document and send it to the supplier. The purchase order includes key details such as item descriptions, prices, quantities, and shipping instructions.

2. EDI 855 (Purchase Order Acknowledgement)

After receiving a purchase order, the supplier responds with the EDI 855 (Purchase Order Acknowledgment). This document confirms whether they have accepted, rejected, or modified the order. By verifying order details upfront, the EDI 855 helps businesses avoid miscommunications and ensures accuracy before the supplier moves forward with fulfillment.

3. EDI 810 (Invoice)

Once the supplier delivers the goods, they send the EDI 810 (Invoice) to request payment. The invoice outlines itemized charges, tax details, an invoice number, and payment terms. Upon receiving the invoice, the buyer compares it to the original purchase order and the Advanced Shipping Notice to confirm that all details match before proceeding with payment.

4. EDI 856 (Advance Shipping Notice)

The EDI 856 (Advanced Shipping Notice) alerts the buyer about an upcoming delivery. This document allows businesses to coordinate with their warehouse by providing essential shipping details, including carrier information, tracking numbers, and packaging specifics. With this information, buyers can prepare for incoming shipments more efficiently.

5. EDI 997 (Functional Acknowledgement)

Finally, the EDI 997 (Functional Acknowledgment) confirms that a trading partner has received and processed an EDI message. This document acts as a receipt for electronic transactions, helping businesses maintain reliable communication and ensuring that no messages go missing.

Benefits of EDI

EDI integration offers numerous benefits to B2Bs, whether managing relationships with trading partners or streamlining supply chains. Here are the upsides of EDI:

1. Improved Efficiency

Because EDI allows businesses to send and receive data instantly, it reduces the time needed for processing orders, approvals, and documentation. Automating these tasks helps companies move products through the supply chain more quickly, making business operations faster and more reliable.

2. Supply Chain Visibility

With EDI’s real-time tracking, businesses can monitor shipments, adjust inventory levels, and reduce the risk of shortages or overstocking. EDI also stores historical transaction data, which allows companies to analyze trends and plan for future demand. By improving communication between trading partners, EDI helps minimize delays and keeps the supply chain running smoothly.

3. Strengthened Business Relationships

When businesses can exchange accurate information quickly and reliably, they build trust with their trading partners. Because EDI reduces errors and communication delays, companies can collaborate more effectively and maintain long-term business partnerships.

4. Cost Savings

By eliminating paper-based transactions, EDI allows businesses to save money on printing, document storage, and labor costs. Automating processes like data entry and record-keeping reduces the need for manual work, freeing up resources for other important tasks.

5. System Integration

Modern EDI systems also integrate with other business software, such as customer relationship management (CRM) platforms, enterprise resource planning (ERP) systems, accounting software, and warehouse management systems (WMS). These integrations help businesses share data across different departments, improving decision-making and overall efficiency.

Getting Started With EDI: 4 Steps

Setting up an EDI system can seem complicated, but following a step-by-step process makes it more manageable. Here are four important steps businesses take to successfully implement EDI:

1. Choosing an EDI Standard

EDI works by using standardized formats so different businesses can exchange information smoothly. Common EDI standards include ANSI X12, EDIFACT, TRADACOMS, and VDA. If a company chooses to manage its own EDI system instead of outsourcing, it must decide on a standard with its trading partners to ensure compatibility.

2. Selecting an EDI Solution

Companies need an EDI software solution that fits their business needs and works well with their trading partners’ systems. The right software helps prevent errors and ensures that data is formatted correctly, reducing issues like chargebacks or processing delays.

3. Setting Up the EDI System

Once a company selects its EDI software, the next step is to set it up for secure and efficient data exchange. This process involves several key steps:

First, the company must configure communication protocols, such as AS2, SFTP, or API integration. These protocols allow businesses to send and receive electronic data safely.

Next, the company must map its internal data so that it follows the chosen EDI standard. Since different businesses store and organize data in various ways, EDI mapping tools help translate this information into a format that trading partners can understand.

After mapping the data, the EDI system must be integrated with other business software, such as warehouse management systems to help track inventory and shipments, ERP systems to manage overall business operations, and customer relationship management software to keep track of client interactions and orders.

Finally, security measures must be in place to protect sensitive business data. This includes using encryption, access controls, and regular system updates to prevent unauthorized access.

4. Testing the EDI System

Before launching the system, businesses must test it thoroughly to ensure that data is exchanged accurately. This process includes unit testing to check document formatting, simulated transactions to verify real-world functionality, and troubleshooting tests to find and fix errors.

Using EDI validation tools and partner testing portals helps businesses identify and correct issues before fully launching their system. Once everything is running smoothly, the EDI system can go live.

4 Key Considerations for Implementing EDI Effectively

When setting up an EDI system, businesses need to plan carefully to make sure it works smoothly and efficiently. Here are four important factors to consider:

1. Choosing a Provider

An EDI provider helps businesses set up and manage their system. The right provider will streamline the process, reduce technical issues, and ensure the system can grow with the business.

2. Data Mapping

EDI allows businesses to exchange information electronically, but different companies use different internal systems. Data mapping ensures that information is properly converted into a standard format so it can be shared correctly. Many businesses use EDI translation software to make this process easier and to avoid errors.

3. Security Measures

Since EDI is used to send important business information, strong security measures are necessary. Companies use encryption, access controls, and system updates to protect their data and ensure that only authorized users can access it.

4. Cost and Budgeting

Implementing EDI requires an initial investment as well as ongoing costs for maintenance and upgrades. Businesses need to budget for software, training, system expansion, and hardware to ensure they can afford to keep the system running effectively.

4 Challenges of EDI

Implementing an EDI system can make business processes more efficient, but it also comes with challenges. Here are four common difficulties companies may face:

1. Ongoing Monitoring

Once an EDI system is set up, businesses must continuously monitor it to ensure secure and accurate data exchange. However, this process can be challenging due to limitations in monitoring tools, difficulty detecting errors, and the need for ongoing technical support.

2. Scaling the System

As businesses grow, their EDI needs change. Expanding an EDI system can be complicated because it may require upgrading software, managing system downtime, and integrating with older technology (legacy systems). If a company’s EDI system cannot scale properly, it may cause delays, missed business opportunities, and frustration for trading partners.

3. Implementation Costs

Setting up an EDI system requires a significant financial investment. Businesses must budget for software, employee training, system integration, and ongoing maintenance. These costs can be especially challenging for smaller businesses, and if not managed properly, they can delay the system’s return on investment (ROI).

4. Data Mapping Challenges

EDI requires businesses to convert their internal data into standardized formats so it can be shared electronically. This process, known as data mapping, is highly technical and can lead to errors if not done correctly. Poor data mapping may result in delayed transactions, inaccurate information, and increased long-term maintenance costs.

The Future of EDI

EDI continues to change as businesses rely more on digital tools to exchange information. Over time, EDI has become more flexible, automated, and better connected to modern systems, making it easier for companies to manage business transactions.

Even though traditional EDI is still widely used, many businesses are now combining it with modern API-driven systems to send and receive data faster. In the past, companies used batch processing, where information was sent in large groups at scheduled times. Today, businesses are shifting toward real-time, on-demand data exchanges, which allow for quicker decision-making and fewer delays.

As EDI technology improves, companies will be able to process information more quickly, accurately, and securely, helping them stay competitive in a fast-moving digital world. Cloud-based EDI solutions are also becoming more popular, especially for smaller businesses. Instead of investing in expensive software, companies can now use subscription-based EDI services that make adoption easier and more affordable.

New technologies like artificial intelligence (AI) and machine learning are also shaping the future of EDI. These tools help businesses automate complex processes, such as translating data formats, with minimal human effort. At the same time, blockchain technology is expected to improve security by creating tamper-proof audit trails so that records remain accurate and transparent.

The Internet of Things (IoT) will also play a role in the future of EDI by providing real-time supply chain data. Businesses will be able to track shipments, monitor inventory, and respond to changes more quickly by integrating live data directly into their systems.

Get Started with Cloud-Based EDI Today

Implementing an EDI system may seem complex, but working with a reliable provider can make the process easier. Some EDI solutions consolidate infrastructure, speed up partner onboarding, and offer cost-effective options for businesses of all sizes. Cloud-based EDI services, in particular, allow companies to integrate EDI into their existing systems without needing extensive hardware or software upgrades.

Ready to learn more? Connect with an EDI expert to discover what Orderful’s cloud-based EDI solution can do for you.