What is EDI in Logistics

The first time you get your product on the shelves at a big box store is a huge business win. It is also a common point at which many businesses may start to feel some growing pains, including the forced adoption of new technology and the sudden need to understand standardized EDI protocols. Large retail chains often rely on EDI programs to transfer information back and forth and expect their vendors to use this format as well. 

Big box retailers require EDI for the same reason some traders on Wall Street still use COBOL applications: The technology might not be the most advanced, but it is extremely reliable and has been at the core of their processes for decades. If your goal is to do business with some of the retail titans, now is the time to learn about EDI.

This article is a general overview of all things EDI: what it means, how it works, the benefits of using EDI, and more. Keep reading for in-depth answers to your biggest questions. If you already get the gist of EDI but are looking for more information, take a look at our Overview of EDI to see specific details about what documents Infoplus supports, how to set up an AS2 partner, and more. 

Top 3 Takeaways: 

• Many big-box retailers require their vendors to communicate with them via a digital process called EDI
• EDI converts business application data into an approved format and then exchanges that information between business partners
• One of the main benefits of EDI is a streamlined and automated flow of information that leads to time savings and improved operational efficiency

What is EDI and What Does it Stand For?

EDI is short for “electronic data interchange.” It is a communication protocol that handles the digital transfer of data about shipments, purchase orders, invoices, and other critical business information. EDI programs offer quick ways to transfer and process business documents in a standardized format. The formats are agreed upon and prescribed by various committees depending on the location of the business (for example, the American National Standards Institute, or ANSI, in North America). 

Transferring data via EDI is extremely efficient compared to the business processes it replaced, such as email, fax, mail, and other methods of document exchange. Adopting and using EDI does take a bit more preparation than simply sending documents in an email, though. To optimize the use of EDI, a business must first master the basics of electronic data interchanges as well as the specific requirements set by their business partners' programs.

How Does EDI Work?

The function of EDI hinges on a translator that converts business application data into the appropriate format before that information is exchanged between partners. For example, the workflow between a buyer and a supplier might look something like this:

Step 1: The buyer prepares a purchase order. This information is in the back-office format they use internally, which is theoretically something easy for their employees to read, write, and understand.

Step 2: Once the internal document is finished being prepared, it gets passed through an EDI translator and becomes an EDI document. Each of these documents follows a standardized format that includes specific components called transactions, segments, elements, identifiers, and delimiters. This format is harder for most humans to read, but ensures a consistent format and language is used when transferring and processing data between partners.

Step 3: The EDI document is transferred between partners either via an EDI network service provider or a direct transfer. The exact method of the data transfer varies slightly depending on the buyer’s process: 

• The most common method used to be over a value-added network (VAN). 
• Recently, a method called Applicability Statement 2 (AS2) has become more common after being championed by Walmart and required of all Walmart vendors. 
  • **Note that these are far from the only two options, as there are many ways to transfer files over the internet
  • **Infoplus only offers AS2 over X12 (10401)

Step 4: Upon receiving the EDI document, the supplier can pass it through its own EDI translator, which automatically changes the format of the information. The translator from the supplier must be in tune with the translator on the buyer’s side to ensure that all data is handled correctly. The EDI translator returns the purchase order to a more human-friendly format.

Step 5: With the data back in an internal format, the purchase order can be processed by the supplier. The supplier brings it into their enterprise resource planning (ERP) system or other back-office solutions.

Step 6: In response, the supplier generates an invoice for the buyer, and the process begins again (this time traveling the same path but in the opposite direction). Information flows both ways through the established connection.

EDI programs are not limited to relationships between buyers and vendors. The process can transfer many different types of information, which is why it produces such significant benefits for companies in many industries.

Benefits of EDI

Recall that EDI is replacing manual processes that often involve mail, fax, and email. As these old methods of communication are phased out in favor of more efficient data transfers, organizations experience decreased need for human involvement and fewer communication delays. Businesses that adopt EDI programs experience numerous benefits, including the following:

• With less opportunity for human error, EDI is associated with superior accuracy.
• Streamlined information flows and automated processes lead to time savings and improved operational efficiency.
• Eliminating dependence on human data entry and vulnerable communication methods ensures greater security, especially when paired with encryption and authentication protocols.
• Efficient communication provides updated visibility, decreasing inventory costs.

These benefits of EDI primarily appealed to retail and automotive businesses in the past, but the format has become more prevalent over time.

Which Industries Use EDI?

In recent years, EDI programs have become widely adopted by businesses that need consistent and reliable processing of information transactions. In addition to retail and automotive enterprises, organizations in the transportation management, utility, government, construction, healthcare, pharmaceutical, finance, and manufacturing industries often leverage EDI. Whenever warehouses, shipping logistics, or inventory management are involved, partners need to implement effective data exchanges, and EDI has proven successful for many years.

How to Implement EDI

To implement EDI, organizations need a way to transmit the data, either directly or through an EDI network service provider. VANs offer support for a wide variety of different file transfer options and protocols. These include, but are not limited to, the following: 

• AS2
• FTP
• FTPS
• SFTP
• Dial-ups
• T1 and T3 leased lines
  • Please note that Infoplus only supports AS2 over X12 (10401)

Next, there should be some sort of authentication protocol in place to verify the sender and protect the integrity of the transmission. Also referred to as an electronic signature from the days of signing for documents, this identity verification helps keep the process secure. The sender of an EDI transmission typically has to include a digital certificate or identity certificate, which is somewhat like a password in the form of a file. Encrypted connections ensure that transactions cannot be completed unless the sender’s identity is authenticated. 

Finally, it is time to prepare and maintain the EDI translator, which is often the most difficult part of the entire process. There are standardized translation protocols, but most big box retailers set their own translation standards. Making sense of a retailer’s documentation can be a challenge, so many businesses ultimately turn to EDI experts or service providers that specialize in establishing connections. Even after establishing the initial link, this is not a “set it and forget it” connection like an API.

Challenges of Managing EDI

EDI standards in North America are determined by the American National Standards Institute (ANSI). In theory, a governing body like this should make everything relatively standardized and easy to adopt. Unfortunately, though, many companies are somewhat inconsistent when it comes to following ANSI standards. Big box retailers might make 35 changes in a single day, and it falls upon their vendors to keep up.

All vendors need to follow the same transmission guidelines for integration to be successful. The partner with the negotiating power (e.g. large chains like Walmart in the retail space) is the one who ultimately decides on the methods, translations, and standards of the data. EDI is a relatively outdated software dating back to the 1960s, so bending it to proprietary standards is not as easy as it might be with new solutions.

These challenges make it difficult to adopt EDI for the first time, and it may take months before the data transfers are running smoothly. Training employees and customizing the process requires time, effort, and consistent manual intervention. It is difficult to teach EDI expertise, and expensive to hire a dedicated specialist. Even so, many businesses find it necessary to stick with this technology, so they are left with the choice between hiring a dedicated EDI expert or contracting with a service that specializes in EDI communication.

Why Use an EDI?

In many cases, the pros of EDI outweigh the cons. Despite the complication of maintaining compatibility with each partner’s EDI requirements, the process itself is relatively simple and extremely secure. Of course, the most persuasive reason to use EDI is somewhat of a trump card: Big box retailers demand it. 

EDI is still the primary form of data transmission in some industries. Any supplier that wants to sell to retail giants has to meet their requirements, which are currently likely to include adherence to proprietary EDI protocols. Until something changes, the time and money spent on EDI implementation and maintenance are costs of doing business.