What is electronic data interchange (EDI)?

Historically, the exchange of business documents between business partners required the manual delivery of paper documents. EDI streamlines and simplifies the process by transforming documents into standardized digital formats and removing the middleman. No people are needed to send or accept documents; they flow between systems automatically.

In EDI transactions, information moves directly from a computer application in one organization to a computer application in another. EDI standards define the location and order of information in each document. Organizations use EDI to share a range of documents and data types, such as requests for quotes, loan applications, advance ship notices and more.

Recently, the addition of artificial intelligence (AI) tools to EDI systems has delivered new benefits and capabilities including improved scalability, increased processing speed and proactive error handling.

The EDI process involves the creation, conversion, sending, retrieval and integration of business documents. For example, let’s say the document in question is an invoice for auto parts. First, that invoice must be created.

The creation of the invoice might involve pulling data from various sources: spreadsheets, emails, PDFs and more. In EDI, this is not a manual data entry process. An EDI translator, typically a third-party software application, can automatically pull this data from internal systems and databases. For our invoice example, the EDI translator might look through internal spreadsheets to pull data for those auto parts: product numbers, prices, quantities and more.

In many businesses, an enterprise resource planning (ERP) system manages this data. The ERP system integrates with an EDI translator, which then converts and structures this data into a chosen standard. Third-party EDI service providers that handle translation, such as Cleo, TrueCommerce and MuleSoft, aid in this process. (Manual conversion is technically possible but would be difficult and introduce errors.) In our invoice example, this auto part data would be converted to a standard readable by the receiver of the invoice.

The document is then sent by using one of two common types of EDI document exchange:

Direct EDI is a computer-to-computer connection over the internet, generally with secure communication protocols. Secure File Transfer Protocol (SFTP), for example, supports various authentication methods as well as encryption.

In a value-added network a third-party network manages the data transmission. Often VAN methods use what’s called a mailbox, a sort of file storage area, which temporarily stores the documents before the recipient retrieves them. Today, this mailbox is often in the cloud, as part of a VAN provider’s service package. VAN providers often also handle the conversion and validation of documents.

EDI enables the transmission of documents through several different protocols. These protocols include:

• AS2 (Applicability Statement 2): A common HTTP protocol that supports encryption, as well as features including digital signatures and delivery notifications. It’s compliant with HIPAA.  
  
  
• SFTP (Secure File Transfer Protocol): Uses secure shell (SSH) encryption and is simple to use, but does not offer the same lifecycle tracking and proof of receipt as AS2.
  
  
• FTP (File Transfer Protocol): Simple, basic and not secure. It’s not widely used for EDI due to its security limitations.
  
  
• MFT (Managed File Transfer): Sort of an evolution of FTP, MFT offers end-to-end security, audit trails and scheduling. It can also be compliant with regulations such as HIPAA.
  
  
• SOAP (Simple Object Access Protocol): An XML-based messaging platform, SOAP is platform-agnostic, but is older and more common in legacy systems.

Each protocol has strengths and weaknesses that make it ideal for different applications and industries. AS2, for example, is compliant with HIPAA. SFTP has significant security and authentication features, but those features can be tricky to navigate for nonexperts.

EDI has its roots in the 1960s, in massive infrastructure, automotive and military projects. Organizations and institutions sought to not only automate the process of sending and receiving documents, but—perhaps more importantly—to standardize them.

Ever since, standard formats have been the backbone of EDI practices. The sender’s and receiver’s computer systems must both be able to read and understand documents or the entire system falls apart.

Several organizations have created widely used EDI standards. Some are industry-specific, some are general. The most common standards include:

A general-use standard created by the American National Standards Institute, and most common in North America. ASC stands for Accredited Standards Committee.

Established as part of the Health Insurance Portability and Accountability Act (HIPAA) in 1996, this American standard is a subset of ANSI ASC X12 focused specifically on the exchange of healthcare data.

Odette is a “European standardization, services and networking platform for the entire automotive supply chain.” The name is an acronym for “Organisation for Data Exchange through Tele-Transmission in Europe.”

Developed by the United Nations, EDIFACT (Electronic Data Interchange For Administration, Commerce, and Transport) is a set of international standards meant to facilitate business document exchange regardless of industry or location. It is commonly used for international trade.

RosettaNet is an XML-based set of standards primarily used in high tech industries, notably the global semiconductor industry.

EDI transactions are the preferred means for the exchange of business documents between businesses both small and large, from huge e-commerce platforms to mom-and-pop shops. EDI technology delivers key business benefits through automation and business-to-business (B2B) integration:

EDI saves time through the automation of a workflow that previously relied on manual processes. EDI removes the repetitive and tedious labor of digging through spreadsheets to find data, as well as the need to send and receive emails.

Imagine that a component company needs to provide a manufacturer with information about the parts in its supply chain. Instead of manually locating, collating and sending that information, then trusting the manufacturer to receive the email and integrate that data into its own databases, the component company can use EDI to automate this entire data exchange process.

The supply chain data can be pulled from the component company’s records, securely and automatically sent to the manufacturer, and then added to the manufacturer’s own tables—all without the need for human intervention.

EDI can reduce labor costs through automation, reduce the frequency of costly human errors and reduce or even eliminate the need for paper and paper-based expenses. 

EDI data transfer reduces errors through rigid standardization, which helps ensure that information is correctly formatted before it enters business processes or applications. Implementing EDI can eliminate human hang ups such as typographical mistakes, hard-to-parse handwriting, forgotten data fields or misinterpreted categories.

EDI integration improves traceability, observability and reporting by enabling electronic documents to be incorporated with various IT systems. Such integration facilitates data collection, visibility and analysis.

For large organizations, EDI promotes a consistent standard across various divisions and business partners, wherever they operate. For smaller organizations, adherence to EDI offers greater data integration with larger firms. For businesses of all sizes and forms, EDI provides a consistent means of exchange, one that enables organizations to trace a transaction throughout its entire lifespan, gauge how long each step takes, create error-free audit trails and even notify relevant parties of any changes or issues.

EDI implementation can be complex. Government regulations and industry standards can vary across locations and change over time, and each trading partner in an EDI network can have its own individual requirements.

Whether in-house or outsourced, EDI solutions require some basic conditions, capabilities and resources to be effective. EDI implementation considerations include:

Stakeholders should collaborate to decide on the goals of an EDI implementation. This collaboration involves discussing business needs, whether that’s scalability, cost or security features, and learning about the EDI structures of trading partners to help ensure ease of communication.

This type of transformation software takes fields such as names, addresses, currency amounts, part numbers and quantities, and maps them from business application formats into standardized documents and vice versa. For our auto parts example, this software would monitor all sales, incorporating specific part names and model numbers, as well as pricing, date of purchase and more.

These capabilities support large EDI message batches by enabling senders and receivers to include multiple EDI transactions in a single “envelope” for more efficient transmission, a bit like cramming several letters into a single envelope. De-enveloping refers to the extraction of individual transactions from these larger batches on the receiving end.

Batch enveloping enables more efficient transmission of large amounts of data and can streamline the EDI process. It reduces overhead and cost, an essential advantage for organizations with a high volume of transactions, such as retail businesses.  

After a message is de-enveloped, routing mechanisms are required to sort the messages for different groups and deliver them to the appropriate targets. Message transformation might also be required to get the message into the correct EDI format for its destination.

For example, a batch envelope for our auto parts invoice might include receipts from many different departments: engine components, navigation software or interior upgrades, all with different types of documents. The recipient’s EDI software can then separate these documents based on type and target, and route them to the appropriate destination.

TPAs are contracts that clarify terms and conditions (such as compliance and liability terms, length of contract and contact information), establish standards for business documents and define communications and business protocols between trading partners. Suppliers might have specific security needs, technical specifications, or other particulars in data transmission, and TPAs are where this information is detailed.

AI is providing new possibilities in the EDI software space. For example, AI can enhance fraud detection and error prevention, learn and adjust in real-time based on past business transactions, and predict both trends and potential issues based on historical precedent.

In our auto parts invoice example, the invoice might typically note sales of spark plugs in the range of one to two hundred per month. If that number suddenly rises to 10,000, AI can detect that anomaly and trigger an automatic alert to client and seller that something unusual is happening. And if that number rises steadily to three hundred, an AI tool could determine that while a security alert is likely not necessary, a notification should be sent to the seller in case a supply increase is needed.

In general, the increasing sophistication of large language models and natural language processing holds lots of potential for analyzing human communication and extracting relevant data from, for example, business texts and emails.

Agentic AI, a form of artificial intelligence designed to function and make decisions without the need for human intervention, is also a promising transformation for EDI. Agentic EDI systems can monitor and act on anomalies in the supply chain that might indicate fraud or errors, cross-check invoices and resolve those problems independently. AI agents can even automate certain functions such as return authorizations.

Application programming interfaces (APIs) present another method for exchanging real-time data between software applications. But there are key differences between EDI and APIs and when they are generally used: