A Beginner’s Guide to EDI (Electronic Data Interchange)

As business partners expand their sales channel reach via the retail segment, many retailers require EDI as the standard in which to communicate. EDI has been around for years, and although it can be daunting to implement, EDI automation will help streamline the communications process and help reduce errors and delays that often occur during the ordering, fulfillment and administrative processes.

What is EDI?

EDI stands for electronic data interchange (sometimes also referred to as data exchange). It is an amalgamation of computer systems and processes that allows manufacturers the ability to share business documents and a variety of transactional information with the vendors, suppliers, and brands that they work with. It creates organization, structure, and flow of important information that needs to be separated to these various groups or destinations, by using an electronic format that can integrate into any number of communication channels.

With the growth in popularity, in recent years, of web based solutions which allow for the transfer of data over the Internet at a low cost structure, VAN (Value Added Networks) providers began offering additional services such as EDI data, encryption, management reporting and secure e-mail, as part of their ‘value-add’ packages.

EDI systems help improve both the speed and accuracy of a manufacturers’ business documents as they are shared with their various counterparts. Using EDI automation eliminates the need for paper documents, while also making sure that no information—such as orders or transactions—gets lost along the way. Costs of manual data entry and document exchange (and the time that takes!) are reduced, along with the human data entry errors all too often accompany the meticulous and detailed information processing needed for logistics. EDI standards can also provide an important layer of protection against fraud and documentation errors that can hurt a manufacturers’ bottom line.

At a very pragmatic level as it relates to how a manufacturer (brand) can work with a retailer (also, referred to as a Trading Partner): a retailer can use EDI transactions to send their purchase orders digitally to their manufacturers in a more timely and automated method than emailing, faxing or mailing paper documents. EDI documents allow information to flow back to the manufacturer efficiently,  enabling a retailer to send their invoices and transactional documents to the manufacturer electronically.

The type of exchange of business documents that can be standardized and exchanged utilizing EDI implementation include, but are not limited to:

  • Most Common
    • Purchase Orders (PO) – 850
    • Purchase Order Acknowledgements – 855
    • Invoices – 810
    • Advance Ship Notice – 856
  • Other
    • Inventory Inquiries – 846
    • Purchase Order Changes – 860
    • Credit and Debit Adjustments – 812
    • Product Activity – 852

How Can EDI Standards Help a Manufacturer (Brand)?

EDI works as a smooth, standard method to connect all of the links across a manufacturer’s supply chain. It helps to speed up the lines of communication creating efficiencies that cut down on delays and other problems that can inhibit a manufacturer or a manufacturer’s third-party logistics provider 3PL from accurately fulfilling orders.

Businesses can also use EDI not just between a manufacturer and retailer but other partners as well such as other sellers or trading partners, distributors, contract manufacturers, freight forwarders, and suppliers to communicate in real-time, which vastly improves inventory management. These various partners of the supply chain have divergent systems and needs.  Improved inventory communication can lead to a clearer view of dwindling inventory, at which point a manufacturer can adjust the inventory; this benefits the retailer’s customers because it means less backorders, stockouts, and delayed shipments.

Using EDI automated processes can help manufacturers scale quickly too. An influx of product orders is an easy adjustment to get moving quickly. This efficiency increase allows the manufacturers to work with the various requirements of trading partners, and communicate much more cost effectively. Automation via EDI means accuracy throughout the supply chain.

To illustrate the benefits of using a singular electronic system to coordinate communication between many supply chain partners, here is a hypothetical (yet very common) list of steps between a manufacturer and retailer using EDI: :

  1. Big Box Retailer places a Purchase Order (850) for 500 widgets to ACME Company
  2. ACME acknowledges (855) that they received the PO from Big Box
  3. ACME reviews their inventory levels and realizes that they only have 300 widgets in stock, so they notify Big Box that they don’t have enough product to fulfill the order
  4. Big Box sends a Purchase Order Change (860) for 300 widgets to ACME, stating the order the delivery window that the order must be received in at their store
  5. ACME fulfills the order for 300 widgets, sends an Advance Ship Notice (856) back to Big Box, stating in the ASN when the order was shipped, the PO information as well as its expected arrival at the store
  6. Big Box receives the order at the store and confirms the count received. This will allow ACME to trigger an electronic Invoice (810) sent to Big Box Retailer
  7. At a later time, ACME can request a Product Activity (852) report, which will provide ACME with sales of their product at each of Big Box’s individual retail stores, allowing ACME to optimize their inventory plan for future supply/manufacture of widgets.

This example is basic, but imagine if all these steps  had to be performed manually, by email and phone calls. And at scale? It would be cumbersome, clunky and time consuming to say the least.

Major Benefits of EDI Integration

There are a variety of different EDI options available, and each comes with various strengths and weaknesses. An EDI can be very basic, which can simply be a web portal where documents are entered and uploaded. For example, many brands just starting to sell product to Amazon may work with Amazon Vendor Central in a very manual way. Amazon will issue Purchase Orders to the manufacturer and once the order is shipped, the manufacturer will trigger an Advanced Shipment Notice – all this activity is done manually within the Amazon Vendor Central portal, which requires a person to update all this information accurately and on time. As brands start to gain more sales traction with Amazon, they can work with Amazon to handle this entire order process via EDI, eliminating the need to handle the order process manually via a portal.

As explained earlier, EDI can also be a more sophisticated system that is fully integrated to allow connections to a broader ecosystem of other systems and partners (not just connecting manufacturer to retailer). Some EDI solutions have a limited number of different systems that they can connect to, while others can be configured to connect just about any system or channel that a manufacturer uses. It is important for a manufacturer to understand what type is best for them based on current needs, as well as keeping in mind needs or changes that might occur in the future.

A fully integrated EDI solution can connect to:

The more a manufacturer can enable EDI to integrate with their business processes, the more it can help create efficiencies while reducing errors that inhibit growth and productivity. Utilizing EDI can help to ease communication between the multitude of systems that a manufacturer might use for different departments and tasks. By enabling these systems a manufacturer can allow for cross-departmental and cross-channel communication at much higher speed, helping to facilitate supply chain and fulfillment requirements, increasing productivity and output along the way.

Implementing EDI

Almost as important as the type of EDI system is how a manufacturer chooses to implement it across its processes. The two most typical options are in-house and outsourced, usually cloud based EDI.

1. In-House EDI

Implementing traditional EDI software is done at the manufacturer level, with all of the resources and processes existing onsite at the physical location of the manufacturer. Using this type of EDI, there are often considerable initial costs due to the software, hardware, staffing, and other resources that are necessary to get it up and running. After it is implemented, the costs might decrease as all of the physical pieces are in place and the kinks are ironed out. As a company grows, it might then see another influx of costs as upgrades and changes to the system become necessary. Today, most manufacturers and 3PLs do not have their own EDI solution built in-house as it requires considerable resources to build and maintain. However, those that do may have have a competitive advantage.

2. Cloud Based EDI

A cloud based EDI system can often be the best solution for any manufacturer. They maintain all of the hardware, software, network, upgrades, etc., which can significantly cut down on the costs of infrastructure and staffing needs that exist in an in-house or online based EDI. They come with an initial setup cost and a monthly fee, but those are often far lower than those that come with an in-house EDI. Cloud based EDI systems can be accessed via a web browser or app. This can be very helpful for a small company or startup, as they eliminate some of the expenses associated with an in-house system. The most significant benefit of a cloud based EDI is its ability to facilitate growth and scale to meet a manufacturers’ ever changing needs.

Bottom Line

As a manufacturer begins to ship more volume, broaden their retail network, and grow their supplier and retail partner base, the importance of speed, accuracy and efficiency becomes increasingly important for a manufacturer. Consumers demand products to arrive sooner and with less complications more than ever before. To meet those demands, manufacturers need to improve their communication and processes both internal and external. Choosing the right EDI strategy and implementation can help ease all of that and more, and ensure customer expectations are met in an efficient and cost effective manner.

There are many benefits to working with a third party logistics company (3PL), especially one that utilizes EDI to help your business. If you are seeking logistics support we’d love to hear from you. You can read DCL’s list of services to learn more, or check out the many companies we work with to ensure great logistics support. Send us a note to connect about how we can help your company grow.

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