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Ultimate Guide to Electronic Data Interchange (EDI): 2019

By Ruthie Bowles logiwa-blog-author | Tags: Warehouse Management

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.

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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:

  1. Supplier types up and prints invoice 
  2. Supplier mails invoice to customer
  3. Customer receives and manually marks up the page
  4. Customer enters invoice information into its company system
  5. Supplier reaches out for confirmation of receipt
  6. 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. 

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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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.

Orders

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. 

By receiving ASNs, warehouses can also use their warehouse management system (WMS) to route incoming cartons efficiently using conveyor systems

Payment

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. 

Routing

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.

Organizational Relationships

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 demo today to see how our WMS and IMS system can bring your data together.

Ruthie Bowles

Written by Ruthie Bowles

Ruthie is a content marketing consultant for Logiwa. Her specialties include small business development and inventory management.