Electronic Data Interchange and how it works?
Quick data gathering, processing, and sharing ensure effective development for almost every business today. High customer demands for smooth omnichannel services, the necessity to communicate with multiple business partners and a high level of information silos between departments make companies search for new ways to improve their data flows and their management.
One of the ways to keep up with all those challenges is to implement a unifying system – EDI. EDI systems help businesses finely tune up their data flows and ensure that the shared data is fully displayed and leveraged across various business applications. In this article, we’ll have a detailed look at EDI systems and find out how they help companies to solve data management challenges in today’s highly competitive environments.
What Are EDI Systems?
What is an EDI system? An electronic data interchange system (EDI) is business software that ensures effective document management and data flow across diverse applications. The system standardizes data formats and adjusts them to the needs of a particular digital solution. As a result, companies can process and perform traditional B2B transactions much faster.
B2B transactions such as Sales Orders, Purchase Orders, Invoices, Advance Ship Notices, Functional Acknowledgement, and others usually require several steps to process. For example, the purchase order process involves order creation, approval, dispatch, binding contract, goods delivery, three-way match, and closure. All these steps often require several applications to exchange data with each other inside the company and with the business partners. EDI systems automate the process of data exchange, making it swift and simple.
According to Fortune Business Insights, the EDI software market size reached $ 1.70 bln in 2021 and is expected to increase from $1.88 bln in 2022 to $4.04 bln by 2029, growing at a CAGR of 11.6% during the forecasted period. This means that businesses see the value of EDI systems for their supply chains as they allow sending business-critical data on time and to its full extent.
EDI System Components and Services
For successful work, EDI systems require several key components. They include application services, translation software, and communication service. Let’s have a closer look at each of them.
- Application services link a business application and an EDI system. It allows businesses to send their data to an EDI system. As business data reaches an EDI, the system sends the data to its destination which can be either an inner company department or an external business partner.
- Translation software. It’s a system that includes several components and tools that help convert and share data between trading partners. They usually are standard agreed-upon document format, translation software that converts data into the standard format, mapping software that ensures seamless document sending as well as data importing/exporting.
- Communication service. This involves the process of document sending and receiving by using proper communication protocols or stand-alone software. Communication service ensures that the trading partners use compatible hardware and software for sending data.
How Does EDI Work?
When companies exchange data via EDI systems, the software performs 3 simple steps – preparation of documents, translation of documents into the proper format, and transmission of the documents to their destinations.
This step involves gathering and organizing data in a certain format. For example, instead of printing an invoice, an EDI system creates a document file with a certain data structure that can be simply transmitted through the system. There are different ways and data sources that can be used for creating EDI format documents. They can include:
- Manual data entering
- Exporting data from spreadsheets or database
- Reformatting electronic reports
- Using application data for creating EDI files
Documents Converting Into a Proper Format
At this step, the data is processed by translator software that converts the data to the EDI standard format. EDI translators can go as a part of EDI systems then they’re purchased and maintained by the company on their own or companies can use third-party services to translate their documents, e.g. EDI service provider translation services.
Transmission of the EDI Documents
This is the final step at which the company decides how it’ll transmit its data to its business partners. There are several ways to do so – to connect point-to-point with a direct communication link from one computer to another or use a VAN connection supported by the network provider.
Benefits of an Improved EDI System
A powerful EDI system can help businesses automate much of their document flow, accelerating order processing, picking, packing and shipment, invoicing, and many other operations. Many businesses already effectively implement EDI systems, making their data flow directly in and out of their ERP systems without any additional assistance.
If you’re also considering embedding an EDI system into your digital business environment, here are 6 reasons why this is the right decision.
- Decrease in operating costs. As it’s been already mentioned, an EDI system helps businesses decrease the number of manual operations. With EDI systems, employees don’t have to manually enter, fill, copy, review, or retrieve any business data. Apart from that EDI reduces the costs of materials and resources involved in the management of paper-based documents. This, in turn, also improves business sustainability as the employees don’t have to print, store, or send printed-on-paper documents.
- Accelerated data flow cycles. Automated data management also results in faster transmission and processing. This way, companies can many times speed up their transactions and increase their turnover.
- Minimization of errors and improved data accuracy. With automated data filling, EDI systems significantly reduce errors in their transactions. Moreover, EDI systems can prevent such things as illegible handwriting, entering wrong passwords, or lost emails.
- Enhanced overall business performance. EDI systems improve data visibility by providing real-time transaction statuses to companies, improving their decision-making. Also, they streamline the processes of data entry and processing, resulting in shorter delivery lead times and, therefore, better customer and business partner satisfaction.
- Enhanced transaction security. Companies can use several data-sharing security protocols to ensure that their data is well-protected. These are secure File Transfer Protocol (SFTP), Applicability Statement 2 (AS2), HTTPS-based protocols, Simple Object Access Protocol (SOAP), and many others.
Quick data processing and exchange is one of the principal factors for successful business development today. That’s why many businesses embed EDI systems in their digital environments. They help companies streamline their data flows and significantly improve data processing.
If you’re also searching for ways to leverage an EDI system for your company, then building your own digital solution might be a good option. Scand offers teams of professional software developers who have much experience in building and deploying enterprise-level software. Connect with us and find out more about how to build a thriving digital environment with an EDI solution for your business.