What is EDI? A Guide to Understanding Electronic Data Interchange

The retail sector has enjoyed the benefits of EDI for decades. Yet, many brands still use some form of paper-based process for ordering, invoicing, and dispatching. This article has everything you need to upgrade your operation with Electronic Data Interchange (EDI) technology. 

What is Electronic Data Interchange

Electronic Data Interchange (EDI) is the computer-to-computer exchange of business information in a standard electronic format between business partners. Unlike email, fax, and postal mail, which require a human to process, EDI documents move directly from the sender’s computer application to the receiver’s computer application. 

In other words, EDI enables businesses to share data in moments instead of the hours, days, or weeks it would take to exchange documents via postal mail, fax, and email. EDI integration also helps businesses get more done faster by speeding up logistics timelines and eliminating manual errors through B2B communication automation.

What Are The Benefits of EDI

In a manual buyer-supplier transaction, the buyer generates a purchase order and sends it to the supplier via fax or other manual process. Once the supplier receives the order they manually enter the purchase order into their system, execute the purchase order, then create and send an invoice to the buyer via fax, email or postal mail. 

Once the buyer receives the invoice, they manually enter the invoice into their computer system to be processed and paid. This process is not only time consuming, it relies on tedious manual data entry, which increases the likelihood of human error and costly delays.

An EDI transaction automates these manual processes to provide seamless electronic document exchange between partners. This electronic communication not only saves time and costs associated with manual processes, it’s also the key part of the workflow for business process automation and the environmentally friendly option. 

How the EDI Process Works

Businesses store information like purchase orders, inventory, billing, and shipping details on an enterprise resource planning system, also known as an ERP. EDI software integrates with the ERP to use the stored data elements for EDI document transactions. 

The ERP system then creates the purchase orders and invoices, which are transferred to the EDI system through a file drop or web service call. The system finally sends these documents between the company and the appropriate partners. 

What are EDI Standards

Trading partners often use different information systems and have different requirements for sending and receiving information. To ensure that the exchanged documents are compatible between the companies, an EDI standard or format is used.

There are many EDI standards, as well as versions of each standard. Therefore, partners must decide which standardized format to use during the implementation process. A trading partner will typically use a subset of the standard for each transaction they implement. The most common EDI translation formats are ANSI X12 or EDIFACT. 

How to Implement Electronic Data Interchange

Implementing EDI across your organization and network of trading partners is a complex process. Taking a systematic approach will help you deliver an effective EDI program. This 10- step process for successful EDI implementation will help you construct your EDI infrastructure, align your EDI solution with that of your partners, and establish common standards:

  1. Develop Organizational Structure

EDI is a significant investment. Developing the correct organizational structure from the beginning will pay dividends as the program evolves. This on-going communication is vital for educating all organizations as to how the EDI program will benefit them and how it will impact their processes. The primary elements of the structure include:

  • The EDI Coordinator – An IT professional with in-depth experience in delivering EDI solutions. As an important part of his/her function, the EDI Expert must stay in communication with all sectors of the company that will be affected by the EDI program to ensure their support and buy-in.
  • The Steering Committee – Headed by the EDI Coordinator, the committee typically consists of department heads of affected business units, the head of IT and legal representatives.
  • Senior Management Support – As with any major IT program, there needs to be senior management commitment if the EDI implementation is to work.
  • Dedicated EDI Team – The EDI team is responsible for the actual implementation of the system. 
  1. Conduct A Strategic Review

A strategic review will help to identify the most likely corporate applications for EDI deployment and set priorities for conversion to EDI. To that end, factors to be considered include the number of suppliers, customers or other trading partners, and the volume and type of transactions to be exchanged. 

The strategic review should also include a description of the present systems in each functional area and an explanation of how EDI technology will improve them. Remember, the goal should be to improve the business cycle rather than simply automate it.

  1. Conduct In-depth Analysis

Though the strategic review identifies the areas of  your organization that would most benefit from EDI, there are other elements to consider before selecting which business cycle to focus on initially, like: 

  • Which part of the organization is most ready for EDI?
  • Which cycle will cost the least to implement EDI?
  • Which will deliver the greatest savings/increase in profitability?

Brands typically answer these questions via a Cost Benefits Analysis (CBA), or an EDI survey of partners to ensure that any EDI system that is created will be supported across your trading partner network.

  1.  Develop a Comprehensive Specification for the EDI System

The results of the analysis step should provide the information you need to develop a comprehensive specification for the EDI system. This includes:

  • The volume of expected EDI traffic, and the IT infrastructure needed to support it
  • The capacity of internal network infrastructure to support EDI data
  • The network connections you need to manage traffic with trading partners
  • The programing required to ensure that internal systems comply with the data required by trading partners and EDI standards
  • The amount of customization required to integrate internal and EDI systems

Once you have this information you can start designing your EDI system. 

  1. Select The Correct EDI Network Provider (Van)

Your selection of an EDI Network Provider should be focused on your business requirements more than the provider’s technical capabilities. There are many important issues to consider, like: 

  • What do you want the EDI Provider to do?
  • What is the Provider’s reach?
  • What is the Provider’s pricing structure?
  • What is the Provider’s influence in your industry?
  1. Integrate EDI With Your Business

For most EDI systems, the greatest development task is integrating EDI systems with existing corporate applications. Data required by trading partners and EDI standards must be “mapped” onto data contained in existing systems.

  1. Integrate Data Across The Business

Before you can integrate data across the business, you will have to undertake a good deal of data analysis. An important reason to analyze each affected business system is to ensure its ability to share data. Sometimes, obstacles need to be overcome, such as different business systems may contain the same data, but in different formats.

  1. Conduct Data-Mapping

Once the data analysis is complete and data structures understood, the ‘map’ is defined to the EDI translation software. For most EDI software packages or VAN services, the EDI Coordinator will be able to define the map.

  1. Establish A Pilot Project

Before your EDI system goes live within your entire trading community, it is important to select a small number of partners to test the system in ‘near live’ conditions. Pilot project results must then be analysed from an internal perspective to answer the following questions:

  • Can the EDI system maintain adequate control?
  • Does the system appear to provide the benefits projected in the original EDI study?
  • Will the system handle anticipated EDI traffic?
  • Are internal users satisfied with the result?
  1. Roll Out To Trading Partners

The last action is to implement EDI across your trading partners. This should be done in a staged manner that reflects your current business priorities. 

Flowspace for Enterprise

Now that you know everything about Electronic Data Interchange you can begin the EDI implementation process with your organization. The only thing you need to get started is a partner. 

With Flowspace you’ll have one platform to help you store, manage, and fulfill your inventory from all your warehouses and fulfillment centers anywhere in the country. Contact us today to integrate seamlessly with Shopify, Walmart, ShipStation, Amazon, or your custom software.

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