What Is EDI?
Electronic data interchange (EDI) is the digital exchange of business documents between companies using computers, replacing old school faxing and mailing methods. Standard documents exchanged through EDI include purchase orders, invoices, and shipping documents. EDI is used in a variety of industries by more than 100,000 companies, most of whom require their trading partners also to adopt EDI to ensure continuity, collaboration, and the standardization or ordering and communication.
Electronic data interchange is now widely used both in the United States and globally, based on a number of standards that have been enacted that provide basic guidelines for its use. The two standards bodies that are most frequently associated with Electronic Data Interchange are the ANSI X12 standard, used primarily in the US, and the UN EDIFACT standard that is used outside of the United States.
To truly understand EDI, you need to break down each step in the exchange process. How EDI differs from traditional communication between businesses lies within how information is transferred. EDI is a computer-to-computer exchange, without the need for any manual input. It aims to completely replace the time-consuming nature of mail, fax, or even electronic mail.
When humans intervene in a communication process, it inevitably slows the exchange process while increasing the risk of error. With each supplier and client having unique requirements when it comes to conducting business, trying to remember small nuances can be impossible. EDI uses this data to seamlessly ensure all business requirements are met in order for companies, suppliers, manufacturers, and merchants can meet all expectations.
A traditional ordering process is a long and arduous process, that looks something like this:
1. A buyer fills out a purchasing order and then faxes or mails it to a supplier.
2. The supplier checks inventory and then manually enters the order into an ERP system.
3. The supplier sends an invoice to the buyer and waits.
4. The buyer enters the invoice manually into their ERP system and waits for processing.
5. Once the supplier is paid, they send confirmation of shipment.
EDI dramatically simplifies the exchange between a buyer and supplier. A buyer’s internal system uses EDI to send a purchase order, which is accepted by the supplier’s internal network. Everything is exchanged in real-time without the need for faxing, mailing, or manual entry.
This automated exchange between computer systems allows for much faster and more accurate transactions between businesses. For retailers, distributors, and vendors, speed is necessary to meet the needs of their clients and run a successful company. EDI assists in orchestrating and organizing these transactions so businesses can consistently meet the needs of their customers and clients. While EDI is commonly implemented for the benefit of larger firms, it can be incredibly beneficial for small and mid-sized businesses too. If a company expects explosive growth, having an EDI solution in place will better prepare them for a successful future in meeting increasing demand.
EDI Standard Language
For this automated exchange to take place, it must be processed in a form that the internal computing systems can understand. EDI has several standard formats and versions that are in use: ANSI and EDIFACT. Think of each format as a different language. For businesses to exchange documents, they must agree upon a specific EDI standard and version to communicate effectively. For this reason, companies rely on an EDI translator. An EDI translator can be implemented via software or a third-party EDI provider to process the documents accurately.
There are generally two readable formats for EDI. The "rip and read" is a machine to readable format that presents a printable report from the electronic exchange. The other type is a translation of EDI into an ERP or accounting system. This makes the entire process a complete computer to computer transactions. This is known as Integrated Electronic Data Interchange.
Benefits of EDI?
Before the use of EDI, businesses used existing paper systems for B2B transactions like Purchase Order, Sales Order, Invoice, and Shipping Notice. All these forms were sent through fax or mail, leading to significant lag time. Since every step in the transaction process was completed manually, mistakes and errors were commonplace.
Using EDI for electronic transactions throughout the business cycle results in significant savings in time and resources, as the need for manual order entry is significantly reduced. Replacing repetitive manual processes with fast, accurate electronic system streamlines your entire supply chain, meaning that business resources can be used for more valuable, revenue-building activities.
EDI Implementation Results in Significant Cost Savings
The financial benefits of EDI are extensive. Businesses that have implemented EDI in replacement of traditional transaction methods have seen millions in annual savings, and that isn’t even counting the dramatic reduction in labor costs.
Paper transactions are not only archaic, but they are also much more expensive than the electronic counterpart. Printing, storage, filing, postage, and the cost of paper itself quickly adds up. By simply switching to an EDI system, companies can save up to 35% on transaction costs.
By implementing electronic data interchange, organizations can reduce clerical tasks and eliminate most data entry errors. Companies that switched to an EDI transaction system from a traditional legacy system saw a 30% to 40% reduction in errors. For suppliers, error reduction translates to fewer chargebacks due to order errors. For retailers, the result is a dramatic improvement in customer satisfaction. With EDI, current trading partners benefit from the seamless flow of information, which opens doors for new business opportunities.
EDI Increases Business Efficiency
The most significant benefit, aside from the financial savings, is the increase in overall productivity and efficiency. Business cycle time can be increased by 65% or more with EDI implementation. By creating an automated internal system, transactions between businesses can occur in lightening-speed. The processing of everyday documents and orders is handled automatically, with real-time tracking of the supply chain, without the lag that manual input can create.
Without the need for constant human intervention, you can eliminate labor costs associated with processing business documents. Your employees can concentrate on higher-value tasks, leaving you with a more productive workforce.
A further benefit, EDI can reduce order-to-cash cycle time due to its real-time processing of information. Aside from producing more overall business, it also helps to form a better relationship between trading partners and customers.
EDI Supports the Development of Business Strategies
Unlike traditional manual input, EDI provides businesses with the unique ability to see real-time transactions taking place. Corporate leadership can take preemptive steps to keep up with market demand. This quickened responsiveness is key to staying relevant in a demand-driven business model.
Product enhancement strategies can be implemented quickly, with no gap in lead times for deliveries. Everything can be automated, leading to overall improved customer experience and higher customer retention.
If a business is looking to expand internationally, EDI standards are used globally. A company who has implemented EDI into their internal system can seamlessly enter international markets. Vendors, suppliers, and manufacturers primarily rely on EDI systems to connect with retailers all over the world.
EDI Assists Businesses in Reducing CO2 Emissions
More and more companies realize that they have a social responsibility to take steps to reduce their environmental impact. EDI promotes eco-friendly business practices by eliminating paper from the transactional process. Everything in EDI can be programmed to run electronically. Not only do companies benefit from the reduction in cost from reducing paper consumption, but they also can drastically reduce their carbon footprint. EDI provides a win/win scenario for businesses, customers, and the environment.
EDI Enhances Transactional Security
EDI software is exclusively used to interpret transactions between trading partners. The communication protocol between systems has a high standard of security when compared to traditional methods of fax, mail, and electronic mail. Data sent via EDI is encrypted to protect sensitive business data and preserve the privacy of its users.
EDI is the primary protocol when it comes to business to business transactions between trading partners. For companies to remain successful in a tech-forward world, they must employ the right tools, like EDI, to streamline and automate their operations.
What Is EDI Used For?
Electronic Data Interchange was created to ease the management and flow of transaction information. Before EDI, all transactions were completed manually and exchanged via fax or mail. This would lead to a long, drawn-out process that could take days.
For example, if a buyer created a purchase order, they would have to create that document mentally. The purchase order would be sent via mail to the supplier. The supplier would receive the purchase order and enter into their inventory system. Often, the buyer would have to call and confirm the purchase order with the seller and inquire about the shipping time of the item. This entire process is extremely labor-intensive and risked significant delays and errors. With EDI, any data that is part of a business document can be transmitted using Electronic Data Interchange. EDI provides process improvements that dramatically improve the timeline for business transactions. An EDI transaction can be completed in hours, not days.
Trade documents are some of the most frequently exchanged data using Electronic Data Interchange. These include bills of lading, status reports, purchase orders, invoices, quotes, and other more esoteric forms like residential mortgage insurance applications and healthcare claim payments. Thanks to EDI, document processing time has been dramatically reduced, leading to an exponential increase in efficiency and improved customer experience.
Instead of requiring human intervention at each step of the transaction process, EDI allows trading partners to automate the sending and receiving of documents based on the ordinary course of business. For example, a customer purchases an item from a retailer. That retailer than transmit the purchase order automatically to the supplier with EDI. The supplier’s EDI system recognizes the purchase order, checks inventory, and sends back an invoice to the retailer. The retailer’s EDI system is programmed to process the invoice and then send back the customer notice that the item has been purchased and provides real-time shipping information. No matter what step of the ordering process, the retailer, supplier, and customer are all informed in real-time.
Since Electronic Data Interchange is the exchange of information between systems, rather than between people, the information sent via Electronic Data Interchange is in a style that is only recognizable by a machine. This improves overall security for customers and trading partners by protecting potentially sensitive financial data. Both the sending and receiving computer must have Electronic Data Interchange software that can interpret the data and transform it into a form usable by the business.
There are two common forms of translation for Electronic Data Interchange - a machine to a readable format, also known as "rip and read" that creates a printed report. The other form is an automatic translation of Electronic Data Interchange into an ERP or accounting system, also known as Integrated Electronic Data Interchange.
Specific industries may utilize EDI for different business documents, but its adaptability is a crucial benefit of EDI. With different standards and versions, companies can experience the advantages of EDI implementation across various sectors.
How Does EDI Work?
Electronic Data Interchange makes business to business transactions faster and more accurate. EDI connects to your company’s ERP or accounting system, allowing for the seamless exchange of business documents between trading partners. By changing a traditionally manual process into a fully automated electronic transaction, companies are able to quickly and accurately exchange necessary data for doing business faster and more efficiently.
As an example, assume a business is sending a purchase order to a supplier. Without Electronic Data Interchange, an employee would need to create a purchase order manually, print it, and send it to the supplier by mail. The mail could take several days to arrive. Once received, the supplier’s employee would take the purchase order, manually key it into their computer for tracking. The supplier would ship products to the customer along with an invoice. Often, the retailer would have to call the supplier to ensure the purchase order was received. The entire process is time-consuming and labor-intensive. Additionally, as with any extensive human intervention, you open up the process to mistakes and errors. This can negatively impact the customer experience and trading partner relationships.
With Electronic Data Interchange, the entire process becomes digital. The customer generates a purchase order that is sent via Electronic Data Interchange. The supplier, in turn, takes the received electronic document, ships products to the customer and an invoice also using Electronic Data Interchange. EDI allows companies to easily adapt document transfers based upon the specific requirements of each retailer or supplier, like unique pricing structures or ship-to-ship address requirements. Depending on the configurations used, the entire process can be electronic. By eliminating the reliance on paper, businesses can reduce to cost of transactions by more than 36%.
While there are numerous other ways to transmit data between businesses digitally, EDI is unique. Electronic Data Interchange provides a fast and secure way to transfer business documents between partners using different readable formats. There are two main EDI processes: point-to-point (Direct EDI) and value-added network (VAN).
This EDI process, also called Direct EDI, is the creation of a single secure connection between trading partners. Typically, a point-to-point connection is created using an internet connection and a File Transfer Protocol (FTP) or Applicability Standard 2 (AS2). This is ideal for trading partners that have a consistent flow of documents between each other. The EDI language exchanged between the two partners is specific, as to protect the potentially sensitive data being transmitted. Both companies must agree on an EDI standard for each transfer. The exchange can be completed once each business implements the correct EDI software package in order to exchange efficiently.
Value-added Network (VAN)
If a company does not want to assign a specific EDI standard to each trading partner, VAN may be a better option. VAN involves a third-party as an intermediary between EDI communications. As long as trading partners are using the same VAN, business data can flow freely between them without the need for language-specific EDI software.
EDI for Small Businesses?
While Electronic Data Interchange (EDI) was invented for the benefit of large corporations, it's since been made accessible to small and mid-sized businesses (SMBs) as well. Large retailers often mandate the use of EDI, forcing smaller companies to comply to do business. In response to retailer requirements, SMBs tend to adopt the most affordable, cloud-based EDI solutions. However, research shows that when small companies leverage EDI as a competitive advantage, they're better prepared for rapid growth and increasing buyer demands.
Finding the right EDI solution can be challenging. Two key considerations are crucial: Finding software that is easy to install and manage, as well as software that offers flexibility through the ability to manage multiple trading partners. Additionally, the software should provide a high degree of automation, giving the business the ability to manage electronic data interchange with little if any human involvement. When implemented correctly, EDI can assist small businesses in maintaining large corporate relationships and establish a firm foundation for continued success in the future.
Benefits for Small Businesses
The idea of switching your SMB to an electronic automated data system can seem overwhelming and cost-prohibitive at first. However, in a world that is relying much more heavily on digital systems, you may not be able to afford not to make the switch. Manual input processes are riddled with human error and significant lag time. In today's "now" economy, customers and trading partners are not willing to wait around. EDI provides a quick and accurate way for small businesses to thrive among online corporate giants. Switching to an automated electronic system like EDI offers a wide range of key benefits.
EDI Reduces Labor Costs
One of the highest monthly costs for a small business is salaries and wages for employees. As such, an SMB will want to ensure each employee is remaining as efficient as possible. With EDI, personnel requirements associated with trading, purchasing, and other critical business operations can be kept lean. EDI supported by VAN can replace low-skill office tasks, such as processing purchasing orders, updating inventories, and sending invoices. Instead, SMB employees can focus on higher-level duties.
When a massive influx of business occurs, it can be difficult for any small business to handle. Unfortunately, this often leads to significant lag time, negatively impacting business and customer relationships. With EDI implementation, small businesses can drastically improve productivity by creating a complete automated system. Trading partners and customers can be accommodated quickly, enhancing the chances of retention and overall business success.
EDI Grows with You
As small businesses start to expand, there is always the fear and uncertainty of switching how the business operates. EDI is incredibly adaptive. As your company begins to grow, EDI can evolve and change to the needs of your business.
Customers and trading partners' needs are relatively simple: quality products that are shipped quickly without error. EDI assists any sized business in helping to facilitate a customer experience that creates loyalty and a positive ongoing business relationship.
You know you need to implement EDI, so now what? Start by taking stock of your trading partner requirements, business goals, and current expenses. This will help you select an EDI solution that will meet the needs of your growing organization. There are many options for EDI, ranging from basic web platforms to sophisticated integrated systems that incorporate inventory and order management software.
Get in touch with one of our product consultants to see how EDI can help you.