How Does EDI Work?

by Carol Finch

Companies use electronic data interchange systems to exchange business information automatically by computer as paperless transactions. Although large businesses have used forms of EDI since the 1960s, it took off in the 1980s when developments in PC technology made it a more affordable solution for smaller businesses. The growth of the Internet in subsequent years also contributed to its popularity.

Overview of EDI

EDI enables one business to communicate information to another without the need to create and share paper versions of documents. In the past, for example, your invoicing process might have involved creating the invoice, printing it and mailing it to the customer. With an EDI system, the data on the invoice is transmitted automatically, thus reducing time and labor costs. Like emails and faxes, EDI relies on electronic transmission; however, it works automatically and follows standardized procedures. This enables two or more businesses to exchange data securely in relevant formats, even if they use different systems and applications.

Preparing EDI Documents

EDI systems don't send exact copies of documents; they take relevant data from them and transmit that from the sender to the receiver. Systems typically work to standardized formats that use transaction sets to dictate the data that a document should contain. For example, if you're sending a purchase order, you would create it on your internal system as usual. The EDI system extracts the relevant bits of data and translates it into an electronic version of the document before transmitting it. It would use the same process on an invoice, but would use different data parameters.

Transmitting EDI Documents

The traditional way to send EDI files in the days of dial-up was to use a value added network. The VAN takes the transmitted data from your computer system and stores it securely before the receiver's system tells it that it is ready to pick it up. Internet network systems work in a similar way, but can make automatic connections, bypassing the VAN's storage system. These point-to-point systems may be cheaper and quicker than a VAN.

Receiving EDI Documents

An EDI system takes incoming files and processes the data they contain, reversing the procedures made before transmission. It translates data and integrates it into the receiving company's system. The receiver now has its own versions of the transmitted documents in its preferred format and can process them according to its internal procedures. Some systems then send an acknowledgement to show that the transmission was successful.

About the Author

Carol Finch has been writing technology, careers, business and finance articles since 2000, tapping into her experience in sales, marketing and technology consulting. She has a bachelor's degree in Modern Languages, a Chartered Institute of Marketing.certificate and unofficial tech and gaming geek status with her long-suffering friends and family.

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