5 minute read

What is Electronic Data Interchange and What Are its Benefits?

What is Electronic Data Interchange?

The term Electronic Data Interchange (EDI) refers to the exchange of structured electronic business documents between different business partners. EDI is not a specific technology, but an interaction of electronic processes, exchange protocols and business document standards with ultimately one central goal:

“Automated communication of information, in the form of business documents directly between two IT systems, without human intervention”.

This seamless and direct communication enables a high process automation, as business information can be exchanged paperlessly and quickly between different systems. Direct means that no change of the information-carrying medium is necessary during the exchange (such as the manual typing of a paper bill). The data is transferred directly from one system to the other without anyone having to intervene manually.

What is being exchanged between systems in the context of electronic data interchange? Depending on the application, this can be electronic orders, delivery notes and invoices, but also master data or sector- or industry-specific data such as transfers, delivery schedules, time lists, personal data, etc.

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No EDI, no automated supply chain

Particularly in the area of ​​supply chain management, the use of EDI plays a very important role. The following figure shows a simplified representation of a typical supply chain scenario. For a supply chain, one thinks primarily of the flow of goods and payments. However, it is only the flow of information that makes the supply chain possible in the first place.

Simple Supply Chain
Simple Supply Chain

This flow of information was dominated by classical supply chains of paper and telephone. Later, new media such as fax or email were added.

When it came to the quantity to be ordered, the experience of the partners involved played a role – as in a classic convenience store in the 1950s.

Convenience Store
Convenience Store

The owners knew approximately about the expected sales and tried to manage the restocking accordingly. But, it often it came to misjudgements – then the product was simply not available, and the consumer had to wait until the goods were available again. This is an unthinkable scenario for today’s modern commerce.

The requirements for supply chains increased continuously in the industrial sector as well. Today’s supply chains have reached such high complexity and speed that the use of manual and unstructured information exchange is no longer possible.

Earlier supply chains were characterised by the motto “sell what you buy”. Producing companies bought production resources, produced products and passed them on to buyers. These processes were characterised by a “push” because the sub-suppliers pushed products to the buyers. If they did not need it, the subcontractors were stuck with their stocks. Conversely, there was also the case that the demand of the buyers could not be satisfied by the offer of the producers, because too little was produced.

Supply Chains Yesterday and Today
Supply Chains Yesterday and Today

Modern supply chains are characterized by a very close integration of the participating partners, in which customers communicate detailed forecasts of the anticipated demand for the pre-suppliers. The core motto is therefore “buy what you sell”. Products are no longer “pushed” by the producers, but “pulled” by the customers. Producers can plan production accordingly and avoid inventories which are too large or incorrect deliveries due to missing stocks.

Modern supply chains, such as those found in trade or in the automotive industry (especially just-in-time and just-in-sequence), would not be possible without the use of electronic data interchange.

Benefits of Electronic Data Interchange

The automation of business processes through EDI brings an extensive list of benefits in daily operations.
For example:

  • Faster transmission times
  • Lower transmission costs
  • Reduction of repeated input
  • Reduction of data entry errors
  • Increase the accuracy of the information
  • Reduction of the paper-based document flow
  • Cost savings in data handling activities
  • Increasing the processing speed
  • Reduction of storage costs (e.g. just-in-time or just-in-sequence)
  • Avoid duplications
  • Reduction of running times
  • Time reduced operations

However, the use of EDI also offers the company management a wide range of advantages, as business-relevant information is available more quickly and, above all, in a structured way. The evaluation of this data by appropriate business intelligence methods enables an improved process control by data which is constantly available and up-to-date.

For example, in the area of ​​planning, decision-making and control, the benefits are:

  • Easier target / actual comparisons
  • Difference analysis
  • New forecasting methods
  • New statistical findings
  • Faster information available
  • Simulations
  • Productivity evaluations
  • Improved cash management
  • Better inventory overview

No EDI? Also not an option…

When using EDI, the resulting disadvantages must be considered in the form of opportunity costs.

Thus, not using EDI can lead to the loss of business partners (as they insist on the use of EDI), as well as the loss of reputation, since not being EDI capable signals a lack of innovation readiness. Other disadvantages of not using EDI are the loss of competitive advantage, as well as impaired planning, decision-making and control, as corresponding management information – derived from the EDI data – is missing.

Image credits

  • Convenience Store, 1950s: GNU Free Documentation License, Version 1.2, via Wikimedia Commons

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