Whichever way that you are involved in the logistics sector, a freight forwarder, an NVOCC, a customs broker, a shipper, an importer, or even a large-scale manufacturer, you definitely have come across the term EDI (Electronic Data Interchange). Mostly, you would notice the term from when you are paying your freight and logistics charges with an item “EDI Charges”. But what is an EDI in logistics?
The EDI or Electronic Data Interchange is a form of information transfer that does not require physical papers. It is used in a wide variety of industry including the manufacturing and logistics sectors. One important point to note is that the term EDI simply denotes the concept of information transfer, whereas EDIFACT is the standard in which the UN has set to give structure, whereas there are several methods available for the transfer protocol of the EDIFACT data, predominantly an FTP protocol.
We think it is important to start off by clearing the fog behind the term EDI, electronic data interchange is usually misunderstood as a method of transmitting data. That is far from the truth, some also misconceive that EDI is the “language” in which information transfer is conducted, which does not represent clearly the idea of an EDI.
We approached this topic with a beginner’s mind. By all standards, we are not technologically savvy. But we think it is worth our time understanding what is EDI and how has it changed the logistics industry for the better.
What is EDI?
What EDI refers to is a systematic communicating system that is used to exchange information. Instead of the rudimentary documentation systems that use physical paper. An EDI system converts the information in the documents into ones and zeros and transmits the information through to the receiver.
Now, EDI is not a system that is uniquely designed for use in the logistics sector. In fact, any industry that you can think of that is heavily reliant on paper as a medium of transferring data before has switched to using some form of an EDI system to streamline operations.
A manufacturer can benefit from an EDI system where purchase orders, invoices, inventory sheets can be transferred from one another, especially where there is a network of business operation that lies far away from the manufacturer.
Basic EDI Infrastructure
The medical industry uses the EDI system structurally to transmit patient information from one hospital to another. Time is important, and any other method that is possible for faster information transfer might have saved a patient’s life.
Not only that, industries that are heavily reliant on documents such as insurance and banking sectors have used a form of EDI system, not only for the faster transfer of information but also for the more secure method of transferring information.
Reeling back to the logistics sector, which is also a paper dependant industry. The EDI transmission is widely used, those industry players that touch base with EDI systems on a day to day basis are, among others: –
- Freight Forwarders
- Customs Brokers
- Customs Officers
To reiterate, EDI systems are used to describe the electronic transmission of data.
Therefore, it is not accurate to describe EDI as a standard to which logistics industry players use as a guideline to transmit data.
In theory, browsing the internet, receiving emails, downloading songs on iTunes are technically also a form of EDI.
So, when you stumble upon an invoice charge item that mentions “EDI Fee”, don’t be alarmed, thinking “why am I charged for something that is free like sending an E-mail?”.
The truth is that the logistics EDI system requires infrastructure setup that costs money, and every transmission of data is charged. We will elaborate further on this later on.
What is EDIFACT in EDI?
EDIFACT is what industries use as a “language” to transfer information.
In reality, an English native speaker will never be successful conveying messages to an Italian native speaker, the Italian speaker will need to understand the English language in order to receive what was communicated.
That is essentially what EDIFACTs is, a structured schema for a sending computer to transmit data to a receiving computer.
Specifically, the UN/EDIFACT, the United Nation/Electronic Data Interchange for Administration, Commerce, and Transport.
This mouthful term aptly describes what the EDIFACT standard is purposed for: –
- Administrative Purpose
- Commercial Purpose
- Transportation Purpose
The UN/EDIFACT is approved as an ISO certified standard (ISO 9735). A standard EDIFACT message will look like gibberish. Something like this: –
IFT+3+NO MORE FLIGHTS’
Here are some other abbreviations that the UN/EDIFACT has established and is universally used when shipment information data is transmitted.
LOC – Place Location Identification
DTM – Date/Time/Period
BGM – Beginning of Message
MOA – Monetary Amount
CUX – Applicable currencies
And the list goes on…
Because the EDIFACT standards are set by the United Nation and certified by ISO standards, we can be assured that there is no room for ambiguities.
A standard maintained by and set for all participating nations will definitely garner acceptance from the private and government sector.
Nevertheless, there is no rule in place that forces everyone in the concerning sector to implement an EDI system under the framework of EDIFACT standards.
Alternatives to EDIFACT
Anyone can create their own data structure and schemas for their in-house usage. But surely, before they take on such endeavor, they would have asked themselves: –
- Do they have the resources necessary to develop such frameworks from scratch?
- Are their data structures going to be widely accepted by suppliers in their ecosystem?
- Are their data syntaxes logically flawed?
- Can their data framework withstand the test of time?
With the use of EDIFACT as the base of data communication, all those questions are absolved without any doubt. So, why wouldn’t they use a proven structure that is placed by the UN and certified by ISO?
With that in mind, all there is left for the users to develop a front-end software to interpret the data received, and create new EDIFACT files to transmit.
What is The Method of EDI Transfer?
You learned what an EDI system is, and how is the structure of the data transmitted in the EDIFACT, now let’s look into the methods in which these EDIFACT files are transmitted.
File Transfer Protocol via VAN
In this case, File Transfer Protocol (FTP), really helps us in remembering what that abbreviation is for (something that is not really common). As the name suggests, FTP is a protocol where files a transferred from one network to another.
The internet uses mainly HTTP protocol to call information for servers, the IMAP and POP are email clients used to send and receive messages, and XMPP is a protocol used to send and receive instant messages.
FTP is another such protocol. It is one of the oldest protocols in use today, dating back to the 70s when the concept of E-mail is in its infancy with ARPANET.
Imagine a person wishing to deliver food from Point A to Point B as an anecdote; Where EDI is the method of transportation. In this case, the person decides to get to Point B with road transportation.
Conceptually then, the FTP protocol is the map that a person uses to get to Point B, and the EDIFACT in this example is the food itself that the person is transporting.
Therefore, the only thing left that is needed is the actual road in which the person chooses to drive on to get to Point B.
What is the Network where EDI messages are transferred?
Now back to data transmission, the FTP protocols, similar to roads, require a network to transfer the data to the receiver. The network that FTP uses to transmit data varies as technology advances.
The rudimentary method that an FTP protocol uses to transmit data is via a direct line or a Local Area Network. A LAN connects the sender and the receiver over a LAN cable. This implementation has obvious geographical limitations as the data can only be transmitted as far as the cable can reach.
Building from the concept of LAN, a WAN or Wide Area Network allowed the connection to reach a larger geographical area, they are built from connecting different LAN networks together to form a large web of connectivity.
VAN networks, on the other hand, can be viewed as a private connection that is hosted by the service provider. they act as an intermediary for the networked data transmission.
For many industries, VAN networks are the road of choice for business to business (B2B) or business to government (B2G) EDI transmission.
The reason behind that is because a VAN network can be hosted privately to facilitate data interchange. Over the years, commercial networks provide such service at a fee that can offer an added level of security and other services such as EDI translation, data encryption, and secure e-mail.
This is why in most country’s logistics sector, the network of choice for data transmission is the VAN network.
How is EDI used in Logistics?
So, let’s summarize briefly. In the logistics and supply chain sector, an EDI structure is built in place for shipping data transmission. The data framework of choice is the UN/EDIFACT schema, the data transfer method used is an FTP transfer protocol. Lastly, the network the data is transferred with is a VAN network.
For different countries, there are different networks and FTP clients that are used. Since conceptually speaking, it does not matter how the data is transmitted, so long as the data is understood by the receiver. This is why the UN/EDIFACT is still widely used as the de facto data structure for the logistic providers.
Imagine the havoc shipping agents have to face when different countries use different data structures to communicate information? It is akin to an English native speaker trying in futile to communicate with a different language each time they reach a different country.
As with many other industries, information is key. Not only that, the timeliness of that information is also important.
In the logistics transportation sector, the root of information stems from the shipper or the initial cargo owner. Here we describe the main function and the users of the EDI framework.
Exporters or manufacturers may receive a purchase order from its client, they could have emailed one another to pass that purchase order (recall that E-mail is a form of EDI system as well). Or they could have a different setup in place.
They may utilize an EDI system with the UN/EDIFACT standards, specifically speaking, they may use the EDIFACT D97A EDIFACT Orders standard to receive incoming purchase orders.
As mentioned, freight forwarders prepare shipping documents. Immediately, the 3 shipping documents that come to mind are: –
- Packing List
- House Bill of Lading
Invoices and Packing Lists are prepared by the exporters and sent to the freight forwarders to prepare a shipping instruction and a House Bill of Lading.
Additional Reading: Difference between House BL and Master BL
However, behind the scenes, freight forwarders also need to submit a cargo manifest for every bill of lading issued. The manifest includes the cargo description, shipper and consignee details as well as vessel details.
Freight Forwarders use the EDI systems in place to submit a cargo manifest.
Customs broker, although reliant on EDI systems, transmits a different array of data for a different audience altogether.
A customs broker is an intermediary between the customs officer and cargo owners or freight forwarders. They are tasked with submitted custom declarations for any item imported or exported to-and-fro the country.
Hence, the UN/EDIFACT data standards customs brokers use are also different. They use the CUSDEC (Customs Declaration) standard to submit invoice items, it’s cargo value, cargo weight, and the representative tariff code for the customs officer.
Therefore, customs officers, are the recipients of the information transmitted by customs broker and the freight forwarder. They use the transmitted EDI information in order to run risk assessments on the cargo transported.
A custom officer then ascertains that the cargo meets the intended import and export requirements of government agencies. Once all the import and export requirements are met, the customs officer once again uses the EDIFACT’s CUSREC (Customs Response) standards to issue a customs response message to the customs broker.
The response can either be: –
- “CUSSACK” – Customs Acknowledged Receipt
- “CUSERR” – Customs Error Response (Reject)
Among other responses.
Shipping Agents and NVOCCs submits shipping manifests to port operators and customs officers via an EDI EDIFACT standard (CUSCAR), a customs cargo report message.
However, some shipping agents and its representative Ship carriers allow other forms of integration that facilitates an even more streamlined information transfer.
OOCL for example, allows direct customers and vendors to integrate with OOCL in house system, they too piggyback on the UNEDIFACT data standards, for obvious reasons too.
Additional Reading: OOCL EDI Facts
UN/EDIFACT offers data standards for
- Booking Requests
- Booking Confirmations
- Shipping Instructions
- Shipment Status
- Verified Gross Mass
Port Operators are the ones that receive the vessels. While the systems in place for each country to transmit data are different, the data required itself is similar in any type of port. The information in question may include: –
- Cargo Manifest
- Discharge List
- Transport Order (Cargo Hauliers)
- Customs Control (inspection, collection)
- Declaration of Dangerous Goods
- Equipment Interchange Receipt (EIR)
Why are there EDI charges?
As mentioned, the charge is not EDI transmission per se, more for the infrastructures in place that facilitates safe and secure EDI data transfer, and for the software and FTP clients in place to interpret UN/EDIFACT data information.
Broadly speaking, the whole logistics ecosystem entrusts private clearing centers to host data clearing centers for EDI transmission.
In addition, those private clearing centers maintain and secure value-added networks (VAN), as well as provide the software clients for their FTP data transfer.
Everything we listed above comes at a cost, EDI users pay an annual or monthly software and hardware maintenance fee to services providers such as IBM and Seagate to access its software.
Not only that, but every data transmission is also logged and charged to its user per kilobyte.