Electronic Data Interchange (EDI)
Originally published on June 27, 2019 by Logiwa Marketing, Updated on January 6, 2023
Ultimate Guide to Electronic Data Interchange (EDI)
What is Electronic Data Interchange? Electronic data interchange (EDI) reduces business costs and minimizes errors by standardizing key communication between suppliers and buyers. On average, businesses process 7 documents during each purchasing cycle. The larger your business is, the more complex payment becomes. You’ll likely see more errors or missing documents. The stakes go up, too.
If a buyer denies an order you’ve already fulfilled, a missing purchase order makes it hard to force payment.
If you issue an invoice with the wrong total, you impede your cash flow while taking time to identify the issue and send a new one.
Are missing documents and data entry errors an unavoidable part of growing your business?
Absolutely not. At the organizational level, EDI systems standardize your relationship with both buyers and suppliers. At the warehouse and logistics level, it facilitates smooth electronic document exchange and eases a number of traditional supply chain pain points.
To help explain how an Electronic Data Interchange can elevate your business processes, we’re going to go over:
- What an EDI is
- How they streamline your current processes and protect your business
- The different types of EDI systems
- The logistics advantages you can experience with an EDI
- Selecting the Best EDI Solution
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What is Electronic Document Interchange (EDI)?
Electronic document interchange, or EDI, is your supply chain manager’s way of using digital technology to simplify the process of ordering from suppliers, liaising with shippers, and communicating with customers.
EDI is a standardized communication system that uses structured data. In other words, it digitizes information that was previously transmitted manually. In the past, employees handled documents like purchase orders and invoices manually. They often executed several redundant steps that delayed transactions and increased the likelihood of errors.
With EDI, businesses standardize common process like invoicing. In the past, a company sending an invoice would go through the following steps:
- Supplier types up and prints invoice
- Supplier mails invoice to customer
- Customer receives and manually marks up the page
- Customer enters invoice information into its company system
- Supplier reaches out for confirmation of receipt
- Supplier sends confirmation of receipt
While this can take several days, an EDI manages the process in a manner of hours or minutes. Your supplier enters invoice details using a standardized method, that invoice information instantly appears in your system, and the system sends a confirmation of receipt. When it comes to purchase orders, the same idea applies.
EDI Systems Streamline the Exchange of Crucial Documents
Paperwork gets a bad reputation, and it’s a little unfair given its issues have more to do with the process surrounding it. At a high level, proper documentation legitimizes your business, builds trust with your investors and customers, keeps your organization compliant, and strengthens your governance procedures.
At the more detailed level, proper documentation protects your bottom line and your cash flow. Consider the documents exchanged during the average purchasing cycle. This could include:
- Purchase Requisition: A department identifies a need and prepares an internal document requesting a specific purchase from procurement. Small businesses usually don’t include this step as the owner is usually the one approving all orders.
- Purchase Order: An employee documents an order, its quantity, and its specifications. Smaller organizations should use purchase orders, even if they communicate informally with their suppliers. Once negotiations finish and a vendor approves a purchase order, that document is legally binding, eliminating any “he said, she said” issues later.
- Goods Receipt: The buyer receives the goods and inspects them to ensure they comply with the purchase order. They send this document to confirm that the promised goods were received.
- Invoice: The supplier sends a document requesting payment. It’s a less detailed version of the purchase order. An organization checks that the purchase order, the goods receipt, and the vendor’s invoice matches before approving the invoice.
EDI Systems Streamline the Exchange of Crucial Documents
EDI enables straight-through processing and easy integration of different systems. This is a huge value-add for businesses that want to extend the capabilities of their straight-through processing systems.
For instance, Logiwa’s allows customers to directly connect their systems through any of its EDI partners below.
SPS Commerce: SPS Commerce helps customers automate their supply chains and cut time spent on order processing by more than 50 percent. SPS offers quick set up with 100% compliant EDI solutions. Customers can quickly find a specific retail partner that requires EDI, or browse more than 200 pre-built solutions for EDI integrations in a range of enterprise systems.
Commercehub: Ecommerce companies using Commercehub to organize their global drop-shipping strategies can easily link this “intelligent inventory” solution to their system.
Truecommerce: Retailers and distribution centers using ecommerce for a more integrated supply chain strategy can easily link their systems. Using this system, companies achieve higher customer service levels.
B2B Gateway: B2B Gateway has been in business since 1999, evolving with the needs of their customers. This company offers international fulfillment support, from full EDI integration to 3PL logistics.
How Do These Documents Safeguard Your Business?
All of these documents protect your company and are far from frivolous.
Purchase requisitions prevent reckless expenditures. A proper requisition includes high level specifications as well as a Statement of Work (SoW) or Terms of Reference (ToR). As such, employees are less likely to request purchases that don’t have a clear organizational value.
Purchase orders ensure you don’t pay for products you never ordered. On the flip side, if you’re a supplier, a purchase order ensures you get payment for goods you spent money to produce.
A goods receipt protects sellers from a buyer’s negligence or dishonesty. For example, if a buyer damages the received goods, they can’t later insist they received them that way.
And of course, an invoice ensures timely payment which is an essential element of good cash flow. A late invoice delays payment, especially when there’s net-15, net-30, or even net-60 payment terms.
A poorly managed process minimizes the business benefit of a paper trail. Sometimes, the process is so poor, employees circumvent them altogether, exposing the company to risk.
By using EDI solutions to turn this paper trail into an electronic paper trail, a company can benefit from reduced costs and stronger communication with its business partners.
Understanding the Different Types of EDI Systems
Perhaps the most confusing element of EDI is distinguishing it from other forms of communication.
For instance, email is an electronic form of communication but it isn’t electronic data interchange. A human must manage the data within an email. If a buyer sends a purchase order via email, the information has to be manually transferred to the supplier’s system. On the other hand, EDI communication eliminates the need for human intervention when moving information from one system to another.
With EDI, there is a rigid format to ensure the receiving computer can read the information. Therefore, the information from the buyer can easily move to the supplier’s system. While there are several different EDI standards in circulation, two trading partners must agree on the standard they’ll use.
The most common EDI standard is EDIFACT, and within every standard EDI language there are:
- Elements: The smallest EDI unit
- Segments: Composed of elements
- Transaction sets: Group of segments that are also known as “messages”
When segments come together, they create transaction sets which serve as electronic documents. For instance, the transaction set for invoices is referred to as EDI 810. Oftentimes, businesses send an EDI 810 in response to an EDI 850 or purchase order.
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Understanding the Different Types of EDI Systems
There are a number of EDI transaction sets or file types that are useful for logistics and warehousing businesses, including:
|EDI 850||A Purchase Order transaction set used to place an order for goods or services.|
|EDI 856||Refers to an Advance Ship Notice (ASN) used to describe the contents of each shipment and how items within the shipment were packed.|
|EDI 940||Used to instruct remote warehouses to ship orders.|
|EDI 945||Refers to the Warehouse Shipping Advice transaction. It is used by warehouses to notify a trading partner that a shipment was made.|
|EDI 753||Refers to the Request for Routing Instructions document. A supplier uses this code to ask a purchaser how they want their products to be shipped. It is generally used for shipments originating from a single location and bound to be delivered to one or many destinations.|
|EDI 754||Used in retail to manage inbound freight from suppliers. A retailer sends a message to suppliers indicating who the carrier is and when the shipment will be picked up. An EDI 754 is used in response to an EDI 753.|
|EDI 846||Inventory Inquiry or Advice is an electronic document that allows suppliers to share inventory information with their trading partners.|
|EDI 855||Purchase Order Acknowledgment is an electronic version of a phone call or fax. It tells the buyer (who issued a purchase order) that the supplier will be filling the purchase order as requested.|
|UCC-128 Shipping Label||The UCC-128, along with an ASN (856), deliver the relevant details of a shipment to the retailer. Each label has information about the origin, destination, and contents of the shipment.|
Logistics Advantages of the EDI Format
While EDI can assist virtually any business with their procure-to-pay processes, EDI brings specific benefits for logistics managers.
The presence of an EDI system can make or break a manufacturer’s ability to work with big box retailers. They move an enormous volume of goods on a regular basis, making manual or semi-manual processes for moving goods a dealbreaker. In order to ensure accuracy, many big box retailers require supplier partners to have EDI communication systems in place.
In addition to growing your manufacturing or warehousing business, implementing an EDI solution introduces the following benefits:
- 24/7 visibility of movement of goods
- Reduced cost thanks to fewer clerical workers hired and paper used
- Increased speed and efficiency thanks to the easy movement of information from one computer to another
- A more environmentally friendly operation due to reduced paper usage
While logistics centers on the movement of goods into, out of, and within one business, the supply chain encompasses all of the movements across several businesses required to move goods to the end customer. As a result, the EDI benefits are magnified within a supply chain by enabling multiple businesses and third parties to communicate specific information more efficiently with each other.
An order can sometimes consist of more than a purchase order document. If a business needs more or less units or wants to add another SKU, they must make an amendment. In a manual environment, this means printing a new amendment, sending it to the supplier, and then confirming they’ve received it.
In an EDI environment, your business can electronically transmit a purchase order or purchase order amendment before receiving an electronic order acknowledgement.
Advanced Ship Notices
When a supplier ships an order, they send an EDI communication to their trading partner in the form of an ASN. An ASN:
- Alerts the buyer that their shipment is en route
- Provides an estimated time of arrival
- Details the contents of the pending delivery
- Streamlines receiving through barcode scanning
From a logistics point of view, advance ship notices provide several benefits. They reduce costs by removing the need to inspect packages at the component level. Instead, they can scan barcodes and compare, drastically reducing unloading costs.
They also improve accuracy since an ASN quickly alerts buyers to discrepancies between the purchase order and the shipment. An ASN also allows warehouses to plan for large deliveries ahead of time thanks to the estimated time of arrival.
For just-in-time inventory (JIT), efficient customer response (ECR), and cross-docking operations, ASNs are essential.
Your invoicing process impact your cash flow. As discussed earlier, using an EDI with your trading partners allows you to quickly convey the right information. It also ensures you receive a remittance advice, which is a notice that your invoice has been paid.
Alternatively, when your business receives invoices, they’re promptly processed, preventing late payments and interest charges.
Route management planning is an important part of the modern supply chain. It’s no longer enough to simply get the package to the customer. Today’s customers want real-time information about their shipments as well as different shipping options.
Route management isn’t just about customer service. It’s also about operational efficiency. Routing analysis in supply chain management helps companies choose the best route. It also allows them to re-route shipments in the event of any obstructions in the usual route.
A buyer controls their costs by issuing routing instructions to suppliers. EDI enables a carrier to issue these instructions quickly and effectively.
When goods are ready for shipment, the supplier will send a request for routing instructions to the buyer.
The EDI format allows this to happen quickly with structured data. Moreover, the EDI system allows companies to take advantage of the benefits of routing without assigning additional people and paper to this process. Without EDI, requesting and providing routing instructions would be a tedious process with several steps.
A specific EDI standard manages your organizational relationships. With this EDI transaction set, a company either communicates:
- Its specific location
- Its relationship with other locations (e.g. parent company, retail locations)
This EDI transaction set often supplements communications regarding purchase orders and invoices. These EDI communications don’t include information about locations, so an organizational relationship transaction set performs this function. For example, the organizational EDI could indicate whether a specific store location is authorized by the parent company to work with a specific supplier.
Additionally, certain retail partners, like Costco, Target, and Wayfair, only integrate via EDI. If you plan on working with these marketplaces, you need to have the infrastructure in place to meet their requirements.
Thanks to Logiwa’s EDI integration and API options, you can easily sync across all of your marketplace stores.
Selecting the Best EDI Solution For Your Supply Chain
Implementing an EDI system brings enormous benefits, but to receive the most bang for your buck, it’s important to carefully select an EDI provider. You should keep the following EDI system considerations in mind:
- Versatility: Your EDI system should accommodate all of the most common EDI languages such as EDIFACT, ANSI, and AS2. This way, adding to your customer network is easy. Rather than adopting a new system for a new customer, or losing that customer altogether, you can easily start exchanging EDI transaction sets.
- Scalability: An EDI system facilitates your business’s growth, so ensure your system can keep up with that growth. A cloud-based system that grows with your business may be an option.
- Integrability: Ideally, your EDI system allows information to flow through most of your supply chain with minimal intervention. The best systems allow integration with your enterprise resource planning (ERP) software, accounting system, warehouse management system (WMS), transportation management system (TMS), and your Product Lifecycle Management (PLM) system.
Potential drawbacks of the EDI system are the various languages and the multiple versions within each language. While larger companies can adopt hybrid solutions, it can be expensive for smaller companies working with big businesses to keep up.
APIs, or Application Programming Interfaces, present a solution to this, but they aren’t yet as widespread as EDI. EDI remains the more popular, widely used tool for document exchange within businesses.
EDI Brings Your Supply Chain Closer to Digital Transformation
There are numerous EDI benefits. EDI empowers your business to reduce costs, eliminate manual processes, minimize errors, and communicate more effectively with trading partners. In addition, moving away from manual processes to structured document exchange processes lays the groundwork for future digital transformation initiatives that will power tomorrow’s supply chains.
Logiwa is a partner for B2B and B2C businesses who sell across multiple channels. Schedule your WMS demo today to see how Logiwa can bring your data together.