What is EDI (Electronic Data Interchange) and How It Works

EDI (Electronic Data Interchange) is a method for computers to exchange business documents in a standardized electronic format. Rather than sending paper purchase orders, invoices, shipping notices, or inventory reports, companies use EDI to send these documents directly from one system to another, reducing manual data entry, errors, and processing time. EDI has been used across industries such as retail, manufacturing, transportation, and healthcare for decades, and remains a backbone technology for supply chain automation.

At its core, EDI is about three things: the document, the standard, and the communication method. The document is the business message, like an invoice or advanced ship notice. Standards define the structure and data elements in that document so both sender and receiver understand the same fields. Common standards include ANSI X12 (widely used in North America) and UN/EDIFACT (common internationally). The communication method is how the formatted document travels between systems, through direct internet protocols like AS2, secure FTP, or through value added networks (VANs).

How it typically works in practice

• Document creation: An internal system such as an ERP, WMS, or order management system generates a business document based on an event, for example creating an invoice when an order ships.
• Translation and mapping: A translator converts the internal data into the agreed EDI standard format. Mapping defines where each internal data field goes in the EDI document.
• Transmission: The EDI document is sent over a chosen transport method. This could be a direct secure protocol such as AS2, or via a VAN that routes messages between trading partners.
• Acknowledgement and processing: The receiver's system acknowledges receipt and processes the EDI file, translating it into its internal format and triggering downstream actions like payment processing or inventory updates.

Useful EDI documents you may see in logistics and warehousing include:

• Purchase Order (850 in ANSI X12 terms) - buyer sends order to supplier
• Advanced Ship Notice / ASN (856) - supplier notifies carrier and buyer that goods are on the way; used heavily in distribution and cross-dock operations
• Invoice (810) - supplier issues billing to buyer
• Functional Acknowledgement (997) - confirms receipt and syntactic validation of an EDI message

Why organizations adopt EDI

• Speed and efficiency: Electronic exchange is much faster than mail or fax and automates manual tasks.
• Accuracy: Structured data and automated translation reduce data entry errors and mismatches.
• Cost savings: Less labor for document handling, fewer errors, and faster processing reduce operational costs.
• Compliance: Many large retailers and manufacturers require trading partners to use EDI, especially for standardized documents like ASNs.

Common technologies and providers

• EDI translators and middleware that map and convert between internal and EDI formats.
• Communication methods such as AS2, SFTP, and FTPS, or cloud-based EDI platforms and VANs that manage routing, security, and tracking.
• Integration with ERP, WMS, and TMS systems so EDI messages trigger business processes automatically.

Real-world example

A retailer requires a supplier to send an ASN before receiving a palletized shipment. The supplier's ERP generates the shipment details, the EDI translator converts that to an 856 ASN, and the ASN is transmitted to the retailer via AS2. The retailer's systems read the ASN to prepare receiving, allocate dock resources, and validate the shipment against the purchase order automatically. The improved visibility leads to faster dock turns and fewer receiving errors.

Beginner tips

• Learn the common document types and standards used in your industry.
• Decide whether to use a direct connection to partners or an EDI service provider for simpler onboarding.
• Plan for mapping and testing with each trading partner since even the same document standard can have partner-specific requirements.

In summary, EDI (Electronic Data Interchange) replaces paper and manual processes with standardized electronic documents, improving speed, accuracy, and visibility across supply chains. For organizations starting with EDI, understanding document standards, choosing the right transport and translation tools, and creating clear partner agreements are key steps to a successful EDI program.