EDI and its future from a DX perspective

With the recent demand for Digital Transformation (DX) in the corporate world, EDI is once again attracting a great deal of attention. In this article, we will explore the definition and history of EDI, and examine what future EDI will look like by considering its use in Japan and abroad.

EDI Past and Present

EDI is an abbreviation for Electronic Data Interchange, which in Japanese translates to electronic data interchange. It is a mechanism for exchanging transaction-related data between companies in the form of electronic data. While EDI is often associated with the Internet today, it actually predates the advent of computers. In 1968, the Transportation Data Coordinating Committee (TDCC) was established in the United States. In 1968, the Transportation Data Coordinating Committee (TDCC) established in the U.S. began developing a standard for EDI in the logistics industry, and in the 1980s, the standard "ASC X.12" was established in the United States. At the same time, Japan developed rules for EDI standardization in the distribution, banking, and manufacturing industries. The EDI in use today is Web-EDI using Internet connections, which was developed after the 1990s and has become the foundation for business-to-business transactions in all industries, including logistics, manufacturing, healthcare, and retail.

Although EDI was once predicted to disappear, it continues to be widely used by companies worldwide. Most recently, COVID-19 has accelerated DX efforts, with supply chain being the most impacted area. EDI plays a significant role in e-commerce, and in healthcare alone, the market was valued at approximately $3.9 billion in 2023. EDI is expected to grow from about $3.9 billion in 2023 to about $6.3 billion in 2028¹.

Types of EDI

EDI is broadly divided into three categories: Direct EDI, VAN (Value-Added Network), and Web-EDI. Direct EDI, also known as point-to-point EDI, connects two partners directly. To use Direct EDI, you must use the same communication methods and protocols as your trading partners, connect directly through the Internet, and purchase a software package that allows you to use all agreed-upon protocols. Although it is costly, it is used by many large companies because it is effective for frequent data exchange with large numbers of trading partners.

VAN (Value-Added Network), also called Indirect EDI, is EDI that uses a third-party service provider, VAN, as an alternative to Direct EDI. The VAN provider acts as a mailbox, and the mailbox is shared with specific trading partners. An alert service notifies parties when messages are sent or received.

Web-EDI is an EDI transaction conducted through an Internet browser. With no sophisticated hardware or software requirements, it is a cost-effective option, especially for small and medium-sized businesses. Users can generate, send, and receive EDI documents using a Web browser. Using a Web browser makes it an ideal option for collaborating with trading partners who have limited IT and EDI expertise.

We will now focus on how EDI is used in the U.S. and Japan, and what the differences are.

Changes in EDI in the U.S. and Japan

The most notable change in EDI in the U.S. is iPaaS (Integration Platform as a Service). iPaaS is a cloud-based integration platform, a concept first advocated by Boomy² in 2008. With iPaaS, two or more systems, SaaS, cloud applications, and data can be connected to one central hub. Why is iPaaS attracting more attention in the U.S. than EDI itself? Using a I will explain this from two main perspectives browser makes it an ideal option for collaborating with trading partners who have limited IT and EDI expertise.

The first is that EDI standards differ by region and industry. In general, it is quite common for companies to be required to use EDI as a condition of doing business with their suppliers. This means that it is almost mandatory to use EDI in order to maintain business-to-business relationships. iPaaS is a cloud-based integration platform As a cloud-based integration platform, iPaaS can seamlessly connect with partners in different geographies and industries through Application Programming Interface (API) integration to further simplify operations.

One global manufacturer routinely exchanges about 55 different document types with nearly 2,000 partners. One global manufacturer routinely exchanges about 55 different document types with nearly 2,000 partners.) ³

The second is business integration. Let us assume commercial EDI. In commercial EDI, data is exchanged as the flow of order receipt/placement, shipping/delivery, and billing/payment is repeated many times between companies, but at the same time, logistics data is exchanged as transactions are made. A 2023 survey shows that the average number of SaaS applications in a single U.S. organization is 180⁴, while only about 30% of major Japanese companies use 10 or more SaaS solutions. only about 30%⁵. Given these findings, the use of iPaaS in the U.S. may be a natural progression.

What about the situation in Japan? With the termination of ISDN (ISDNet, digital mode) services in 2024, EDI operators will need to make system changes. In addition, in response to the qualified invoice storage method (invoice system) from October 2023, JP PINT, a standard specification for digital invoices in Japan based on Peppol, an international standard for electronic document specifications for ordering and billing, has been established ⁶. Against this backdrop, it became necessary to review the company's standard business practices and rules, and this triggered the acceleration of the company's DX efforts.

The government was aiming for about 50%⁷ of SMEs to adopt electronic order and supply systems by 2023, but the latest figures show only 40% adoption, meaning digitization has not progressed as expected. However, there is still a need to ensure interoperability between existing industry-standard EDI and cross-industry standards. In addition, the digitization of order and supply is being led by the government, but at this point it is limited to the domestic market, so it is necessary to consider what should be done to actively promote data exchange with overseas companies in the future.

Relationship between DX and EDI

It is no exaggeration to say that EDI is the key to success in DX for Japanese companies. The Ministry of Economy, Trade and Industry's definition of DX is expressed as follows.

DX is not the introduction of digital technologies and tools per se, but the use of data and digital technologies to create new value from the customer's perspective. It is also about working to transform business models and corporate culture to achieve this. ⁸

If success in DX is about using data and digital technology to create new value, then the introduction of EDI is likely to make DX a success. However, EDI also has a history of about 60 years, and there are a variety of services offered. You need to carefully consider what kind of EDI is best suited for your company and what kind of EDI will create new value. From here, we would like to explore what kind of EDI will be required in the future.

What the EDI of the future will look like

What will the EDI of the future look like? There are three key words: scalability, security, and visibility.

The first, scalability, has already been mentioned in the description of iPaaS in the US, but it is necessary to think not only of EDI in isolation, but also to extend the scope of EDI to other operations. For example, even if billing and payment operations are performed through EDI, there is still the need for subsequent transfers and journal entries, and manual input into the accounting software used within the company is required. It is true that simply implementing EDI is sufficient to improve operational efficiency and reduce costs, but it is only half the DX. Therefore, one answer to scalability is iPaaS. iPaaS is not limited to EDI alone, but integrates data, applications, etc. so that operations can be performed on a single screen.

One of the leading iPaaS companies is Mulesoft. The company was founded in 2006 and became part of Salesforce in 2018. It provides a cloud-based integration platform that links multiple systems in different environments through APIs, and is expected to generate synergies with its parent company, Saleforce, as well as SAP, Oracle, NetSuite, and others. The global iPaaS market is expected to grow at a CAGR of 35.2% and reach US$43.42 billion by 2028, and is expected to continue to expand⁹.

The second keyword is security: EDI is highly secure because encrypted data is exchanged using specific protocols and standards to begin with. However, the use of Web-EDI has been expanding recently, especially among small and medium-sized companies, and although EDI is often available via a Web browser with low cost hurdles, the risk of hacking is also increasing. While companies that provide Web-EDI are making efforts to ensure the continued operation of their business, they also need to formulate their own security policies, educate their employees, manage access privileges, and check the security measures of their business partners, access authority management, and checking the security measures of business partners may become a formality. To ensure the continued use of EDI in the future, it is essential to ensure the security of one's own company.

Third, visibility. Visibility in the supply chain generally means visibility or visibility, but visibility in the supply chain means tracking various goods and products in transit, and by understanding inventory and the movement of goods and products, the entire supply chain can be managed. This is exactly the kind of supply chain visibility EDI requires. The reason companies use EDI is to make decisions through business-to-business data exchange. In order to make decisions, it is important to have high visibility of all information. In order to increase visibility, necessary information should be displayed to the necessary people (in charge/roles) at the necessary timing to enable more effective decision making. Although many dashboards and BI tools already exist, I believe that EDI can be made more visible if the information on a single platform can be viewed by multiple authorized members according to their respective authorities.

Summary

What has not changed much from the concept of EDI, which was created in 1948 for the delivery of goods, is the need to securely exchange information with other parties in order to make decisions. There are already a variety of EDI services in Japan and overseas, but the key to determining what kind of service is appropriate for your company and your business partners is to create an environment where accurate data can be exchanged securely and where decision makers can easily make decisions based on that data. The EDI of the future may be to provide a highly visible "control tower" for decision makers by connecting all data to a single platform while ensuring security.