Direct and Indirect EDI: Pros & Cons to Consider

Electronic Data Interchange (EDI) has become mandatory to maintain trading partner relationships. It maintains digital connectivity, which is crucial to attaining higher productivity and agility in this competitive era. Companies worldwide, be they large, medium, or minor, are looking forward to adding, modernizing, and expanding their EDI communication and software. And to assist them, many software development companies offer product engineering services that also provide robust EDI solutions. There is a lot to consider and many decisions to make when adopting EDI transactions in an enterprise. The two most fundamental and popular EDI formats are Direct EDI and EDI VAN (Value Added Network). Each offers different opportunities and challenges for businesses and supply chains throughout the EDI communication.

You must choose the right approach and the best EDI format to meet partner compliance requirements and reap maximum benefits from EDI connectivity. Yes, there are many options for EDI solutions available, but selecting the one that aligns with your business needs and partners’ EDI system is crucial. 

Being new to EDI, if you are also wondering which one is best for you, we are here to solve this confusion once and for all. We have listed the pros and cons of Direct and Indirect EDI below and other essential information to help you pick the right EDI approach. Take a read:

What Is Direct EDI?

As the name suggests, Direct EDI services connect a business and a trading partner with no middleman. Also known as point-to-point EDI, it doesn’t require service costs and uses AS2 and other protocols to build a secure line with various partners. Cloud solutions or on-premise EDI provide direct EDI and meet all communication needs, including highly robust cases with complex EDI mapping, file transfer, and translations. It can scale from a small number of partners and a low volume of transactions to a comparatively highly demanding workflow done on an enterprise level. The business can build an individual connection with each organization it wants to establish as an EDI trading partner.

After setting up the connections, the involved parties establish EDI protocols and start trading. It is pretty standard in large enterprises, such as Walmart, that trade and deal with their partners frequently. Direct EDI provides total ownership of the operation and more control. Although it is the most secure communication option, it can get complex as different partners use separate EDI protocols or languages, so businesses must support each. However, there is no accrued financial cost per document like EDI VAN. There is only an initial mapping fee, hardware resources, translation software, and essential maintenance cost.

Pros & Cons of Direct EDI

Pros

Improved Quality & Speed: Direct EDI connection gives you complete control as you can make the changes in-house or with the help of a cloud service provider. With a comprehensive EDI cloud solution, you also get an iPaas option. Hence, the company can onboard new partners within days or weeks with the right solution.

Reduced Costs: If you compare the cost, you can find that the direct EDI model is less expensive than other options for many transactions. Some businesses have reduced costs by 90% using AS2 and Direct EDI.

Automated & Flexibility: You can integrate modern solutions with the help of EDI solution providers who offer backend systems tools, such as ERP, CRM, and accounting tools. It automates the system, and data moves between the EDI software and other applications. Thereby eliminating the chances of data re-entry and errors in the processes. It can also integrate with Managed File Transfer, APIs, IoT/Industry 4.0, etc., and can be used as a hybrid integration platform.

Better Partner Support: Another advantage of direct EDI is that it supports all major EDI formats and communication standards that partners use to share business documents. Considering the current hyper-connected world and the rise of Industry 4.0, direct EDI will only get popular.

Reduced Human Errors: Manual processes are more prone to human errors. Since automation increases work efficiency, it can also eliminate the need for re-work. One of EDI’s significant benefits is that it reduces illegal handwriting, keying, re-keying errors, and incorrect document handling. It has been observed that EDI can reduce transaction errors by 30% to 40%.

Enhanced Business Efficiency: Minimized human errors benefit organizations through increased efficiency. Instead of focusing on mundane and tedious activities, EDI Integration services can ease employees to focus on a value-adding task. Moreover, an organization can strengthen its association with the partner company and deliver goods and services faster.

Enhanced Security: Companies looking to outsource EDI solutions are a significant step toward strengthening the security posture. The elite and experienced service providers deliver a wider variety of communications protocols and security standards optimum for business security.

Environment Friendly: Any technology’s most valuable and essential benefit is promoting a green environment. Electronic transactions help in reducing CO2 emissions and provisioning social responsibility.

Cons

High IT Investment: This connection demands more upfront work as you must understand every detail of your partners’ connection requirements and set up the connection yourself. You will also have to build EDI documents, perform file transfer and translation, and integrate documents with the backend system, including ERP, CRM, and accounting software. To overcome these challenges and focus on other core tasks, I prefer seeking help from a professional IT consultant for EDI implementation.

Costly setup and implementation: Setting up EDI systems and integrating them with business software can be expensive. It requires technical expertise and financial resources to develop the necessary infrastructure. It poses a barrier to small and mid-sized companies.

Ongoing costs: In addition to initial setup costs, there are regular costs for software licenses, network connections, training staff, and transaction fees. These ongoing costs can be budget heavy for some businesses.

Complex technology: EDI relies on complex technology standards and software that can be difficult for non-technical staff to understand and manage. It can lead to issues with implementation, integration and troubleshooting.

Inflexible systems: Once an EDI system is set up, it can be hard to change or modify it to adapt to evolving business needs. The systems tend to be standardized, which reduces flexibility.

Reliance on third parties: Businesses relying on EDI often depend on third parties for essential services like network access, directories and translation software. This reliance on external services introduces some risks.

Focus on transactions: EDI primarily focuses on efficient business transactions and electronic data sharing. However, it may lack support for other business processes or collaboration beyond transactions.

Lack of visibility: EDI systems typically handle business transactions in the background without much visibility. It can make it hard to track issues, optimize processes or gain business insights from electronic data. Visibility is limited without additional reporting and analytics tools.

Security and privacy concerns: There is a possibility of security breaches, hacking, viruses and loss of sensitive business data when using open computer networks and electronic data-sharing systems like EDI. Strict security practices need to be followed to minimize risks.

What Is Indirect EDI? (EDI VAN)

EDI VAN provides connections as a service with a secure and outsourced network that allows you to exchange EDI documents with trading partners. It simplifies EDI setup and communication by directly reducing the number of parties involved. Even today, most EDI occurs through VAN EDI and Van Communications, which uses a third party called Value Added Network. If the two business entities use the same EDI VAN, communication is easily possible. There is no need to learn and adhere to each partner’s document standards; you only have to manage a single VAN that acts as a translator instead. You can submit the documents manually to VANs using a web portal or by setting up a connection using any protocol you choose.

VANs use electronic mailboxes that need polling regularly to check new messages. VAN offers different business models. Some handle all translations for you and transmit the files to trading partners. While others require you to generate documents and help transmit files, and some deal with mapping EDI data structures. Many also offer hands-on guidance to assist you throughout the process of setup. Although VAN has various benefits, there is also recurring financial cost.

Pros of EDI VAN

Easy to Set Up: If you are looking for an easy and straightforward way to start with EDI, VAN is the best choice. VANs set up connections automatically for you, so you don’t have to learn the details of trading with each partner.

Low Initial Costs: You need to invest low initial costs, and it charges a fee per document or line item, which ranges from around 30 cents. So, the cost is significantly low for low-volume transactions and occasional EDI use.

Alerting Service: This service is provided by the VAN service provider, where the trading partner is alerted for message inboxing. Among the core work, they inform the sender of the message sent and alert the recipient of the awaiting message.

Authentication and Inspection: The EDI VAN has a protocol for verification and authentication. The sender’s identity and messages are verified for authentication and security purposes before opening.

Full Mailbox: An EDI VAN routes all emails to their respective mailboxes as they arrive. To retrieve them, the trading partners have to connect to VAN.

Reduced IT resources required: EDI VANs handle the network connectivity and translation software’s setup, maintenance, and administration. It minimizes the IT staff and resources needed at each business using the VAN.

Secure and scalable infrastructure: Reputable VAN providers have robust, scalable infrastructure designed specifically for high-volume EDI communications. It provides a secure and reliable network environment for businesses.

Interoperability: Using a shared network and standards allows businesses on the VAN to communicate and transact with each other easily. Partners can rapidly onboard new trading partners on the network.

Access to new partners: The shared network exposes companies to potential new trading partners from other industries. It allows businesses to explore new relationships and connections that might not otherwise be feasible.

Compliance expertise: VAN operators have extensive knowledge of EDI standards and regulations like HIPAA to ensure the network meets all requirements. It helps keep businesses compliant and reduces legal risks.

Miscellaneous: A VAN provider is also proficient in offering some necessary yet extensive solutions such as business continuity and disaster recovery, document mapping, and risk and compliance. Moreover, services include back-office integration, management information, and community & trading partner enablement.

Cons

Manual Data Entry: The VAN web portals need you to manually enter data for EDI documents, such as invoices or other incoming files from trading partners. For integrating EDI data into the backend ERP system, you will have to re enter it, which is tedious, time-consuming, and prone to errors. Also, onboarding and implementation are manual, which gets problematic and challenging for multiple new partners when you have to copy data from spreadsheets one by one. For EDI mapping, this gets even more cumbersome.

Operational Challenges: There are also operational issues to deal with that affect visibility during communication. The store-and-forward principle needs feedback status, which is non-existent and makes it unclear when the partner can retrieve the files. VAN also lacks a management and tracking tool essential for communication exchange. The problem gets more serious when partners use different VANs with costly interconnects.

Maintenance and Reliability: If VAN fails, then there is a risk of SLA fines, loss of revenue with the Trading Partner Community, and chargebacks.

Key Points to Remember When Integrating EDI Services

You should always consider outsourcing an IT professional services provider, as they can help you with the hassle of maintaining and integrating EDI within your organization.

Here are the few points you need to focus on regarding whether or not to hire an EDI service provider for a successful EDI Deployment.

Setup Time: However, it is said that even non-technical personnel can operate WebEDI. But, the unknown can invest a lot of time in the initial setup.

Meeting Standards: Different EDI types may have different standards and versions that organizations must meet. Small businesses trading with large organizations must have updated versions, such as UN/EDIFACT EDI standard, ANSI ASC X12 standards, GS1 EDI, TRADACOMS, and HL7.

System Protection Investment: Every software or hardware requires safety and security from defects and malware. Cyber risk is evolving and highly alerting, which requires optimum security. Hence, cloud solutions can aid in system protection.

Robust backups: For continuous business workflow and processes, it is requisite to have robust data backups of systems that can be restored when needed. Again, a dedicated cloud computing services provider can assist with optimum backup restoration services.

Hence, the right EDI service provider can assist with compatible standards and versions to eliminate the struggle.

Which Is Right for You – Direct EDI or Indirect EDI?

Yes, Direct EDI offers more benefits and most businesses that begin with VAN move to Direct EDI. However, the truth is that the final decision about the right EDI format for your organization depends on your preferences, goals, and other factors. You must also check the format used by your trading partners for communication, as it will make the decision easier. Make sure you meticulously compare the pros and cons of both options. The following factors should be considered before selecting between Direct EDI and Indirect EDI-

• Costs – Direct EDI typically has higher upfront costs to develop the necessary infrastructure and integration. Indirect EDI usually has lower startup costs but ongoing service fees. You need to evaluate the total cost of ownership for your needs.
• Technical requirements – Direct EDI requires more technical skills and resources to implement and manage the systems. Indirect EDI has less technical overhead since the vendor handles most of the work. Consider how much technical expertise you have in-house.
• Control and flexibility – Direct EDI provides the most control and ability to modify systems to meet evolving needs. Indirect EDI typically offers less flexibility as you depend on the vendor’s capabilities. Determine how much control and flexibility are essential for you.
• Integration – Direct EDI can be tightly integrated with your business software and processes. Indirect EDI may provide looser integration depending on the vendor’s offerings. Assess how much integration you require.
• Innovativeness – Vendors focusing entirely on EDI can provide innovative new capabilities over time. Direct EDI would rely on your ability to keep your systems innovative. Evaluate how much you value continuous innovation.
• Scalability – Direct EDI infrastructure would need to scale with your needs, requiring ongoing investments. Indirect EDI from a reputable vendor may provide a scalable networked solution with little additional cost. Consider your growth plans.
• Security – Both can support strong security practices, so this depends more on the specific solutions and hosting environments implemented than the direct/indirect model itself. Ensure security is prioritized regardless of the option.
• Training – Direct EDI may require more internal training as staff becomes responsible for the technology. Indirect EDI vendors handle more of the training with their software and services. Factor training requirements into your assessment.
• Support – Direct EDI relies on internal support, while indirect EDI leverages the vendor’s support organization and resources. Consider the level of support coverage needed for your business needs.
• Regulatory compliance – Both models can handle compliance, but vendors may have more expertise in specific regulations like HIPAA. Determine what regulations are most important for your organization.

Before EDI implementation, reach out to a trusted and reliable EDI service provider to gain better knowledge and understanding of all EDI software available. Put your queries forward, evaluate every detail, and then pick the best one. A3logics is an authentic company that has helped varied global clients choose the best EDI solution and implement it most efficiently. So, connect with us now, and we will help you with all our might.

Conclusion

In conclusion, Direct and Indirect EDI are two different methods for exchanging electronic data between trading partners. While both methods have advantages and disadvantages, choosing the right one depends on your business’s specific needs and circumstances.

Direct EDI offers a more direct and secure way of exchanging data, eliminating the need for a third-party service provider. It can lead to quicker and more efficient communication between trading partners. However, it requires a higher initial investment in software and infrastructure, which may not be feasible for small businesses.

On the other hand, Indirect EDI offers a more affordable and flexible option for businesses with limited resources or those that do not have a high volume of transactions. However, it relies on a third-party service provider, which can introduce risk and potential delays.

Ultimately, the decision to choose Direct or Indirect EDI depends on factors such as the volume of transactions, the complexity of data exchange, the level of control required, and the resources available. Businesses should carefully evaluate their options and choose the best method for their needs and goals.

Frequently Asked Questions (FAQs)

What is the difference between direct and indirect EDI connections?

A direct EDI connection refers to establishing in-house electronic data interchange infrastructure and systems. It provides the most control but requires the most resources to develop and maintain. An indirect EDI connection uses an intermediary service provider to handle the technology, networking, and trading partner connectivity.

While direct EDI offers tight integration with your business software and customized solutions, indirect EDI typically provides an established network and generic services. Direct EDI requires experienced IT staff to configure and support the systems, while indirect EDI employs EDI experts and vendors to manage the infrastructure.

What are the two types of EDI?

The two main types of EDI are direct and indirect connectivity, each with distinct characteristics, capabilities, costs, requirements, and benefits. The optimal EDI solution strikes the right balance for your organization.

What are the four major components of EDI?

The four major components of EDI include:

1. Software – Tools for translating documents into standard EDI formats and maps, converting between formats, and handling the EDI transaction process. It includes translation software, document mapping tools, and EDI transaction processors.
2. Connectivity – The telecommunications networks and protocols for electronically exchanging data between organizations. It includes value-added networks, private networks, internet-based networks, and EDI messaging protocols like EDIFACT and X12.
3. Standards – The standardized EDI formats, message types, and code sets used to structure electronic business documents. The primary standards are EDIFACT, developed by UN/CEFACT and X12 by the Accredited Standards Committee X12. These standards allow for consistent and interoperable EDI communications worldwide.
4. Service providers – Intermediary organizations that provide EDI connectivity, software, translations, mapping, hosting and managed services to facilitate EDI for businesses. It includes EDI VANs (Value Added Networks), AS2 gateway providers, and full-service EDI outsourcing partners.

These four components work together to enable the electronic exchange of structured data between businesses, their software applications and trading partners.

How many EDI formats are there?

The specific number of EDI formats is difficult to determine because each format has multiple standards and versions. However, some of the most commonly used EDI formats include X12, EDIFACT, TRADACOMS, and HL7. Each of these formats has its own standards and specifications that dictate how data should be structured, formatted, and exchanged between different computer systems. The choice of which EDI format to use depends on various factors, including the industry, location, and trading partners involved.

What is the difference between API and EDI?

API and EDI are both technologies used for integrating business systems and sharing data, but they have some key differences:

Purpose

• APIs (Application Programming Interfaces) provide access to application features and data. They are designed primarily to extend the functionality of an application by allowing other applications to interact with it. APIs make it easier to integrate applications within an organization or across organizations.
• EDI (Electronic Data Interchange) is explicitly used to exchange electronic business documents in a standardized format between organizations. EDI facilitates business-to-business messaging and e-commerce transactions. 

Initiation

• Application developers create APIs to allow integration with their software. Developers define the API resources and endpoints based on their application’s data and features.
• Standards organizations maintain EDI standards like EDIFACT and X12 to provide agreed-upon document layouts and message definitions. These standards evolve based on industry needs. EDI communications leverage the established EDI standards.

Complexity

• APIs can vary widely in complexity, from simple web services to rich, robust APIs. Some APIs have a shallow learning curve; others require significant expertise to integrate and consume.
• EDI standards and messages tend to be more complex, using rigid record structures, segment delimiters, element IDs, and coded values. However, the software and services implementing EDI abstract away much of this complexity from users. EDI has a steeper learning curve but is easier to start with than some APIs.

Security

• APIs can support security measures like OAuth, HTTPS, ACLs, etc. API security is the responsibility of the API developers.
• EDI communications also utilize security practices like value-added networks (VANs), private networks, VPNs, encryption, etc. However, standardized EDI messages do not typically contain sensitive data, so security focuses more on preventing unauthorized access to messages than their contents. 

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