The Concept and Characteristics of EDI in SAP

Electronic data interchange (EDI) streamlines the business document process electronically, without the need to print, sign, fax, or email paperwork.

Instead documents flow through the system from the buyer to the supplier and back again; for example, a purchase order from the buyer goes to the supplier, and then an invoice is sent back to the buyer.

In this blog post, we’ll discuss this process flow and look at some of the key components, benefits, and limitations of EDI, as well as how it integrates with SAP S/4HANA.

EDI Process Flow

Let’s start with an overview of how EDI works. Some of the key characteristics of EDI include the following:

• Standardization: EDI uses standardized message formats, such as ANSI X12, EDIFACT, or XML, which enable businesses to exchange information in a uniform way, regardless of the systems or applications used.
• Automation: EDI enables the automation of business processes, including the creation, transmission, and receipt of business documents, reducing the need for manual data entry and paper-based processes.
• Speed and accuracy: EDI enables the fast and accurate exchange of business information, reducing the time requirements and errors associated with manual data entry and paper-based processes.
• Security: EDI provides secure transmission of business information, using encryption and other security measures to protect data confidentiality and integrity.
• Cost savings: EDI can help organizations save costs associated with paper-based processes, such as printing, mailing, and storage, as well as reduce errors and improve operational efficiency.

Typically, the most common business documents exchanged through EDI are purchase orders, invoices, and advance shipping notifications (ASNs), but there are many other business documents that can also be exchanged, such as paperwork relating to logistics.

As EDI documents are processed by computers, there must be a standardized format so that the computer can understand the language and read the documents. This is standardized across the EDI system, rather than being set by each company, and it describes each piece of information and what the format is. When businesses exchange documents through EDI, they must first agree on which standard and version they will use—for example, ANSI 5010 or EDIFACT version D12. To allow the processing of the business documents, usually either in-house software or a service provider allows for translation of the EDI documents. The exchange of these EDI documents occurs via two different companies, which are called business partners or trading partners.

Before we go further into detail about EDI, let’s review the traditional way of processing a purchase order and invoice between a customer and supplier, as shown in the figure below. Here, the purchase order is created manually via a phone call and clarifying if any document is sent. No standard purchase order template is maintained, apart from the customer and seller's own systems and data formats to process their requirements, so manual intervention is required in this time-consuming process.

In contrast to this figure, the one below shows the basic EDI process flow, where the buyer sends the purchase order to the supplier, indicating types, quantities, and agreed-upon prices for products or services required. In return, an invoice is sent from the supplier to a buyer for a sales transaction, indicating the products, quantities, and agreed-upon prices for products or services.

The next figure shows where the EDI transmission is involved during the purchase order and invoice process between the buyer and supplier. A buyer creates a purchase order in their format and sends it across to the EDI translator to convert into EDI purchase order format 850, which is then sent across the EDI network to the seller, where the EDI translator converts the purchase order into their own format that their internal system can accept. After processing the purchase order, the seller sends the invoice in their format, which is converted into EDI format and sent across to the buyer; the EDI translator on the receiver side then converts invoice 810 into an acceptable internal format in the buyer's system.

EDI Basic Structure: An EDI data structure resembles layers of envelopes. The envelopes separate different types of data and carry the sender and receiver address information. A receiver uses these envelopes to determine if all of the data has been received.

There are three steps to send EDI documents—preparing the document, translating the document into EDI format, and transmitting the EDI document to respective partners:

1. Prepare the document: The first step is to collect and organize the data. The sources of data and the methods available to generate the electronic documents can be shared in different ways, like entering the data manually in the system, exporting the data, or using any application for the file.
2. Translate the document into EDI format: The second step is to convert the internal data format into the EDI standard format using the appropriate segments and data elements. This can be achieved by EDI translation software or by mapping to the EDI data. Alternatively, there are translation services for EDI format that handle translation to and from the EDI format on an organization's behalf.
3. Transmit the EDI document to respective partners: After the data is converted to the appropriate EDI format, it is ready to be transmitted to business partners. For this a channel is required, and there are several options: to connect directly using AS2 or another secure internet protocol; to connect to an EDI network provider (also referred to as a VAN provider) using your preferred communications protocol and relying on the network provider to connect to your business partners using whatever communications protocol your partners prefer; or a combination of both, depending on the particular partner and the volume of transactions you expect to exchange.

The next figure shows the buyer using a EDI translator to convert his internal format document to standard EDI. By the assistance of EDI transmission, the purchase order in EDI format is sent to the seller, where the seller uses an EDI translator to convert the document into his required format using an EDI translator so that the seller can process the received purchase order in his own format.

Key Components

The key components of EDI include the following:

• Standards: EDI standards define the format and structure of electronic documents exchanged between trading partners. Some of the commonly used EDI standards include ANSI X12, EDIFACT, TRADACOMS, and XML.
• Communication protocols: EDI requires communication protocols to enable the exchange of electronic documents between different computer systems or applications. Some of the commonly used communication protocols for EDI include AS2, FTP, and VAN.
• Translation software: EDI documents must be translated from the standard format used by the sender to the standard format used by the receiver. This is typically done using EDI translation software, which converts the data into the appropriate format for each trading partner.
• Mapping software: EDI mapping software is used to transform data between different formats, allowing trading partners to exchange information using their own internal formats.
• Security software: EDI documents contain sensitive business information and require secure transmission. EDI security software, including encryption and digital signatures, is used to protect the confidentiality and integrity of the data being exchanged.
• Business process automation: EDI enables the automation of business processes, including the creation, transmission, and receipt of electronic documents, reducing the need for manual data entry and paper-based processes.

Overall, the key components of EDI work together to enable the electronic exchange of business documents and information, providing standardization, secure communication, translation and mapping, and business process automation.

Benefits and Limitations

EDI offers several benefits for organizations, including the following:

• Improved efficiency: EDI streamlines business processes by automating data entry and document processing, reducing the time and errors associated with manual processing.
• Cost savings: EDI can help organizations save costs associated with paper-based processes, such as printing, mailing, and storage, as well as reduce errors and improve operational efficiency.
• Improved accuracy: EDI eliminates manual data entry, reducing errors and improving data accuracy.
• Faster response times: EDI enables faster communication and response times between trading partners, leading to improved customer satisfaction and operational efficiency.
• Increased visibility: EDI provides greater visibility into the status of orders and transactions, enabling better supply chain management and forecasting.
• Scalability: EDI systems are scalable and can handle large volumes of transactions efficiently. As businesses grow, EDI can easily accommodate increased data exchange requirements without significant upgrades or changes.
• Compliance: Many industries and trading partners require compliance with a standard for business transactions. Implementing EDI ensures organizations meet regulatory and industry standards, ensuring smooth business operations.
• Strategic benefits: All transaction statuses are available in real time via EDI, enabling customers to adjust to changing consumer demands and market trends. This also gives companies the ability to speed up the supply of new products and enhance existing products.

However, EDI also has some limitations:

• High initial investment: Implementing EDI requires significant upfront investment in hardware, software, and training.
• Complexity: EDI can be complex, requiring specialized knowledge and skills to implement and maintain.
• Limited flexibility: EDI requires a standardized format for data exchange, which may limit the flexibility of organizations to customize their processes.
• Security concerns: EDI documents contain sensitive business information and require secure transmission. Security risks such as data breaches or cyberattacks can compromise the confidentiality and integrity of the data.
• Limited adoption: Despite the benefits, EDI adoption can be limited, particularly among small and medium-sized enterprises that may lack the resources and expertise to implement and maintain an EDI system.

Organizations need to weigh the benefits against the potential limitations and risks before implementing an EDI system.

EDI Integration with SAP S/4HANA

EDI is a multitude of standards for electronic communication between organizations that enable them to not only integrate but also automate their business processes through the use of various EDI transactions, such as purchase orders, purchase order acknowledgments, purchase order changes, ASNs, invoices (810), and so on. These EDI transactions are integrated with SAP S/4HANA to automate business processes in an organization.

Let us consider a scenario where a business partner would like to send an EDI message to SAP S/4HANA for a business process. Per SAP, the best practice is integrating SAP S/4HANA via SAP Integration Suite, which is a service in SAP BTP.

A business partner is a non-SAP system that receives or sends an EDI message. To set up a connection with a business partner is to engage with the partner to understand three main things. The first is how to connect to their organization. This is the connectivity aspect that leverages SFTP, FTP, FTPS, VAN, or a direct encrypted connection using AS2.

Second, you need to understand the EDI standard that your business partners require or would like to exchange. Finally, you need to understand and agree to the EDI message types, also known as EDI transactions, with your partner. The key is understanding which partner dictates what EDI transactions, protocols, and standards to use. EDI allows businesses to exchange business documents such as purchase orders, invoices, ASNs, and other transactional information electronically in a standardized format.

The following figure shows how a non-SAP business partner sends an EDI message to a business running SAP via standard communication channels to SAP integration tools, where the EDI messages are transformed to the IDoc format, SAP's standard document type, to be processed internally in the SAP system.

API Options for EDIFACT and ANSI X.12: The option of integrating via APIs directly in SAP S/4HANA isn’t as effective and does not perform as well when we look at it in terms of transactional volume.

Editor’s note: This post has been adapted from a section of the book Architecting EDI for SAP S/4HANA by Marek Piaseczny and Agasthuri Doss. Marek has more than 25 years of experience in IT, with more than 20 years working in various roles within the SAP and non-SAP integration areas. He has played leading roles in the integration stream of dozens of global-scale SAP projects, including implementations, migrations, and rollouts. Agasthuri is a seasoned IT professional with more than 20 years of progressive experience in the areas of architecture, solutioning, development, planning, digitization, and support in SAP and cloud-based implementation. He worked with several multinational corporations in various countries as an expert in more than 17 ERP implementations.