Electronic data interchange (EDI), as the name implies, is a method of electronic information exchange between two business entities. It involves the usage of computer networks and related software to transmit information related to businesses. EDI is an efficient method of decreasing costs, overheads and errors that commonly occur during business transactions. Additionally, business information between partners can easily be interchanged. Apart from information exchange, EDI helps in coordinating business transactions by performing tasks such as invoice generation and initiating delivery orders.
EDI is basically a subset of electronic commerce. While electronic commerce includes all the facets of electronic business interaction such as money transfers, person-to-person interaction and information sharing, EDI involves only the exchange of business information. The information is passed in the form of messages. Each message contains a basic information unit called a data element. A single message may contain more than one data element. These data elements form a compound document that corresponds to a business form. A field definition table containing information on the data elements is also included in the EDI message.
EDI was first used by the automobile industry during the 1970's. This system was then gradually adopted by other industries such as manufacturing, finance, healthcare, retail and shipping. The earlier EDI systems were operated on private company networks. Electronic data interchange is now increasingly done using the Internet. Even the open standard XML format is used for information exchange. Additionally, the older standard data entry forms are being replaced with custom designed interfaces. Special programming tools are provided so that companies can define their own interface.
Large corporations usually tend to build their own proprietary EDI systems. Small organizations have the option of utilizing the services of a VAN (value added network) provider. These providers act as third-party members in business transactions by providing transaction services, security, communication protocols and other services needed for an EDI system. Some VAN providers even offer the network required to implement the system.