What Does EDI Stand for in Business?

In a business setting, EDI stands for “Electronic Data Interchange” and is used to exchange electronic documents between trading partners in the supply chain. EDI represents a set of standards (or formats) for information that can be electronically exchanged between two different parties. 

Larger companies (for example, big-box retailers) commonly require that their suppliers and vendors in the supply chain can support EDI transactions to do business with them.  This makes it easy for large companies to communicate electronically with multiple other businesses (all following the same data format) no matter what types of systems these companies are using. Having a universal format for specific document types makes it easy to submit and receive information from a variety of different partners in the supply chain – assuming you have the proper systems in place to translate that information. Every type of EDI transaction will require some level of integration between two or more systems to translate the data. 

Examples of EDI use in Business:

  • EDI allows for easy communication between warehouse and business locations
  • EDI helps businesses track and update inventory information
  • EDI enables the sharing of information between different members of the supply chain (such as suppliers and distributors)
  • EDI can even be used to transmit financial information and payment in electronic form – known as Electronic Funds Transfer or EFT

EDI Business Example:

Let’s pretend that a large retail business (Company ABC) wants to send your distribution business a purchase order for more product through EDI. Essentially how this works is that the large retail business’ ERP system will send out a purchase order that gets translated into an EDI specific file type, known as an 850. This 850 then gets stored online, transferred via AS2 or FTP for your business to retrieve. To retrieve the 850 and translate it back into a format that is readable by your software system, you would either subscribe to a web portal service, work with a piece of EDI middleware software, or develop a custom software for doing so. Choosing one of the two latter options will not only translate the 850 but also automatically populate the purchase order information into your ERP.

NEW: Whitepaper - What is EDI

The EDI translation service that you choose will depend on how many EDI transactions you deal with regularly and how automated you want the process to be. Your options are as follows:

(1) Subscribe to a web portal service – this option does not provide any automation and instead, the information flow is facilitated by a web portal and requires manual data entry (you have to manually export the data from the web portal and then manually input the data into your ERP system).

(2) Work with a piece of EDI middleware software – this option does include automation where the flow of information between systems is facilitated by a third-party EDI middleware company instead of manual processes – meaning both systems get automatically updated.

(3) Build a custom system - some businesses may choose to internally customize a system to manage the automatic flow of information which requires the knowledge and resources to do so

If you choose either of the latter options, you will need to make sure that the EDI middleware system or custom system you have developed, can properly integrate into your back-end ERP system. This integration will allow the import and export of transactions between your ERP system and approved EDI trading partners.

For more information and for specific examples of how EDI works, download our Whitepaper: What is EDI. This document also takes an in-depth look at the different types of EDI files, provides examples of EDI and compares the different EDI translation options that are best for your business.