What is EDI?
EDI is an abbreviation for electronic data interchange. Using EDI, companies send information digitally from one business system to another, using a standardized format.
The term EDI describes both the transmission of the data as well as the translation into a standard data format.
EDI allows companies to exchange data electronically rather than by paper. It’s an important component for automation in business processes.
How does EDI work?
EDI replaces order processes, transactions and communications that were done with paper or fax in the past.
For example, when a buying organization wants to place an order with a supplier, the buyer will create a digital purchase order. EDI software (or an EDI provider) will then make an EDI standard version of that purchase order (known as an EDI 850) and send it to the supplier. Even though the supplier is likely using different technology than the buyer, their order system will be able to receive the information since it’s in a standard format.
The supplier will send back an acknowledgement that the order was received (an EDI 997). After the order is ready, the supplier will send another electronic communication, the invoice (EDI 810), which requests payment for the items that were purchased. And so on.
In simpler terms, EDI ensures that all of your business systems (and those of your suppliers) are speaking the same language.
Where do we find savings?
Purchase order (PO) acknowledgements confirm for the buyer the actual price for cost plus agreements. Other data in the PO acknowledgements include the actual quantities (gallons, feet, etc.) and the supplier’s expected delivery date. This assists the purchasing department to better manage (i.e., dollar savings) material inventories.
Digital invoices have been proven to dramatically improve efficiency in accounts payable functions, and experience has shown this to be an area where major savings are realized.