What is EDI? electronic data interchange (EDI)

EDI refers to the electronic exchange of business information between two companies using a specific and structured format. The concept has been around since the 1970s and has traditionally been used to automate buyer-seller transactions such as invoices and purchase orders. But as more processes within a company become automated, EDI has expanded to areas such as inventory management and product distribution.

How does it work? EDI relies on standards, or common methods of defining classes of business data, which allow computers to recognize what data belongs to what department in a company. In the early days of EDI, many companies built in-house EDI standards, but as interest grew, industries started to agree on common standards, administered by standards organizations. These standards, which allow computers in different organizations to share information over privately built, closed networks known as value-added networks, led to the use of EDI for corporate purchasing.

What are the benefits? Consider a very simple non-EDI-based purchase: A buyer decides he needs 365 ballpeen hammers. He creates a purchase order, prints it out and pops it in the mail. When the supplier gets the order, she types it into her company's computer system. The inventory guy pulls the order and ships out the hammers. Next, the supplier prints out and mails an invoice. It's not hard to imagine that this process could take several days. EDI has the potential to cut massive amounts of time out of the process. Sending documents, such as purchase orders or invoices, electronically takes minutes, not days, and shipments can often go out the day the order comes in. Moreover, the electronic format does not need to be rekeyed upon arrival, which also eliminates the possibility of typos. And EDI reduces costs by cutting down on data input, routing and delivery.

What does all of this have to do with the Internet? Building an EDI system has traditionally required a substantial investment in some heavy-duty computers and networking equipment for both parties. Sometimes a large buyer, such as Wal-Mart, will require that all its suppliers be EDI-compliant. That puts a burden on smaller suppliers, forcing them to choose between a heavy technical investment or a loss of business. And EDI isn't instantaneous. Because it uses information that frequently resides in mainframes, the quality of information on an EDI network depends on how frequently the data is refreshed from the mainframe.

And that's the promise of the Web, which offers much lower connectivity costs. That, added to the lower costs of PCs and simpler software, makes EDI over the Web a compelling proposition. Moreover, XML, an open standard for sharing data on the Web, is starting to appear as a method of coding EDI standards, which could provide technical clarity across industries.