Technology has drastically improved how we interact with the world. Transportation has evolved from animal carts to fast cars; data transmission has changed from postal letters to instant emails. With the advent of the Internet, the world has turned into a connected village.
In such a connected world, your business needs to be able to share relevant information with stakeholders like suppliers. Thanks to technology, this process can be streamlined using EDI. You can electronically share information about purchase orders, invoices, and status information with your stakeholders using EDI.
In this article, we will discuss what EDI means and what challenges you may face while using EDI for your business. Let’s get started.
What is EDI?
EDI stands for Electronic Data Interchange, and it facilitates the computer-to-computer data transfer between two (or more) parties. In layman’s terms, EDI is similar to a chat messenger that delivers information from your device to your friend’s device.
The parties that exchange information through EDI are EDI trading partners. EDI software allows its users to create templates so that they can standardize documents shared with EDI trading partners.
Suppose you integrate EDI with your ERP (Enterprise Resource Planning) tool or inventory management system (IMS). Once complete, your EDI can automatically fetch the necessary documents from the ERP/IMS database and send it to trading partners as required. This way, you do not have to create documents from scratch.
In the absence of EDI, businesses had to rely on the postal service, faxing, or email all of which had drawbacks. Let us understand EDI better with the help of an example.
John runs an apparel business, and he replenishes the inventory by ordering goods from David – the manufacturer. In the past, his purchase manager would draft a purchase order, print it, and then postal mail to David to reorder stock. The order would be received by David’s sales representative, who would manually enter the items being ordered along with the respective quantity into the system to finalize the sale.
The process seems lengthy and time-consuming, right? With EDI, sending information takes seconds rather than its postal counterpart – which can take days (even weeks!).
John’s purchase manager simply needs to add order information – product specification, quantity – in his EDI software, which will be automatically forwarded to David’s (manufacturer) EDI software. David can easily integrate the EDI tool with his order management system, such that an order can be directly placed when John sends a purchase request through EDI.
It is evident that EDI can streamline the purchase process which is better than doing it manually. The manual process also has room for many errors; for starters, the sales representative can enter incorrect order quantities into the system.
EDI not only saves your processing time, but it also helps in boosting the accuracy as it minimizes human error.
EDI also brings labor cost savings, as you do not need to incur the charges of printing the order details and the cost of postal handling/faxing/email the documents. Even the recipient does not need to endure the hassle of sorting and storing the physical copies for the record.
Common EDI challenges
Now that we are clear about the use and benefits of EDI let us also discuss the challenges faced while implementing EDI.
#1 Compatibility with trading partners
Deciding to implement an EDI system involves revamping your database. This challenge can multiply if you choose to create and administer the EDI in-house. Even after successful implementation from your end, the challenges do not end.
As EDI facilitates the transactions between trading partners in real-time, it is essential that your EDI system successfully synchronizes with their system for accurate data transfer.
Another hurdle could be that some of your suppliers may not be so keen to implement an EDI due to a lack of knowledge and hesitation about data sharing.
Apart from the stakeholders, it is also essential to train your internal staff to work with the EDI system. You do not want your purchase manager to order 1,000 items instead of 100 accidentally! The repercussions of mistakes can be huge, and thus it makes sense to fully acquaint your employees with the relevant features of the EDI.
As the stakes are high, it is advisable to consult an EDI expert rather than trying to figure things out on your own.
#2 Standardized formatting
The complexity of EDI integration can be challenging when your trading partners customize the formatting guidelines to cater to their unique needs. For instance, the invoicing transaction code is referred to as EDI 810.
Some invoice fields are common across all trading partners. However, the partner may likely add some additional EDI segments specific to their business.
In such scenarios, compatibility can be an issue that can lead to transaction errors. Here the experience and support of EDI providers become crucial as they are experienced with handling such issues.
While doing B2G (Business-to-government) transactions, your EDI should be compliant with the document formats legislated by the government. For example, Since 2020, the majority of European governments have been mandated to accept invoices electronically. Even the federal German public bodies have stopped accepting unstructured invoices – PDFs, printed documents – and only accept e-invoices.
As your business expands, it is essential to comply with government standards to avoid penalties. The standards can be region-specific – like the VDA format in the German automobile industry – or industry-wide.
These are some widely adopted standards in the EDI industry:
- UN/EDIFACT (Electronic Data Interchange for Administration) was devised by the United Nations in 1987. It created standards for the syntax and structure of the messages to ensure that EDI is compatible with multi-industry transactions.
- GS1 is essentially a subset of EDIFACT, and it is widely used to standardize product data. It uses GS1 identification numbers to help identify each product, location, and trading partner. The GS1 identification numbers are usually in barcode format, which can be scanned to add the physical products into the database, and movement can be tracked.
You must also ensure that your EDI can accommodate various transmission protocols such as FTP, HTTP, SFTP, and AS2. AS2 (Applicability Statement 2) has gained popularity in the retail and consumer goods industry since its adoption by Walmart. AS2 is used to transmit EDI messages quickly, safely, and cheaply!
#3 Security considerations
Despite its wide adoption across various industries, some partners may still be concerned about implementing EDI due to the nature of information sharing.
These concerns may arise from various factors such as lack of trust and risk of information leak due to security breaches. International laws can further add to the challenges by introducing legal frameworks and data protection rules.
You must ensure that the information is shared via encrypted transfer protocols. It is best to discuss your security measures with your partners, to ensure that everyone is on the same page and comfortable with your business practices.
It should be noted that the sensitivity of the information varies, like your order data may not be as sensitive as the invoices (which can contain vital billing information). You need to take extra precautions while dealing with highly sensitive data – as with healthcare customers, for example.
A value-added network (VAN) is a hosted private network that is used to offer connectivity between EDI trading partners. It acts as the gateway to sharing documents between parties – in other words; it is like a digital postal service. You need to check the security certifications of your VAN network, like ISO 27001 accreditation.
#4 Rising EDI cost
EDI helps lower your operational costs and optimizes logistics; however, you need to spend to get started. A substantial investment to purchase the necessary infrastructure – hardware and software – for EDI transactions will be required. If you decide to build an in-house EDI, you also need a dedicated IT team for its maintenance.
If your EDI implementation does not go well, it could also tarnish your reputation amongst your trading partners. Your manufacturing vendors may even penalize you for incorrect ordering as it can impact their production lines.
To lower your costs, you can outsource to a cloud-based EDI system provider. In this case, you won’t have to invest in a dedicated set-up and transactions run in the cloud, leading to cost savings.
Additionally, a provider updates the EDI automatically, so it saves you from any hassle when scaling up.
#5 Data errors
According to a study by the University of Tennessee, 60% of B2B transactions are suspended or declined due to some anomaly in the data. This makes it crucial to take necessary steps for data governance, to make the most of your EDI’s potential.
The report further suggests that 16% of the orders placed in a month contain an incorrect price and 20% of orders are for items that are either discontinued or not available in stock. Surprisingly, 8% include a duplicate purchase order.
Such situations can be dealt with by adding EDI rules that monitor transactions for variables like price differences and PO validity. This way, the system can send alerts to your team whenever a discrepancy is found.
There are times when a manufacturer needs to increase the price of a particular product. Needless to say, it is crucial to alert the buyers so that they can alter their order quantity.
For instance, the purchase manager gets a specific budget (say $100) to order a quantity of goods. Presently, the manufacturer sells each unit at $10, so the buyer can avail of ten units ($100 budget / $10).
However, if the manufacturer increases the price from $10 to $20, the purchase manager will need to reduce the quantity from ten units to five units ($100 budget / $20). But if the manufacturer does not promptly inform the buyer about the price change, it could lead to disputes and damage their relationship.
Price changes are inevitable; to solve such issues, businesses use EDI 845 – the price authorization acknowledgment document. Vendors use it to communicate price changes to resellers. EDI 845 is used primarily in the pharmaceutical industry, but manufacturers and distributors also utilize it.
As your business operations scale, so does the volume of your EDI transactions. With greater volume, it can become challenging to avoid errors or spot missing fields. Popular EDI formats such as EDIFACT were not meant for humans to comprehend, and that is why spotting errors can be tricky.
Even if you somehow manage to do that, manual error inspection is time-consuming. Thereby, automating the error detection process can help you save time and increase your profit margins.
#6 Integration with your inventory management system
EDI should be flexible to adapt to your way of doing business instead of the other way around. The technical integration should allow you to use the formats that you prefer or commonly used by your trading partners.
Many businesses already use an ERP (Enterprise Resource Planning) system or inventory management solution to gain insights into their business processes. Look for an EDI that also integrates with your existing system so that you can directly process the EDI orders.
Instead of manually pulling the documents from EDI and then feeding them into your inventory system, you can do this in real-time by integrating them together. This helps you meet increased customer expectations.
#7 Offering transparency
As the complexities of the supply chain rise, the need for transparency between trading partners is more important than ever.
The functionality of EDI has evolved over the years. What started as a means to improve the B2B transaction process has now evolved into a tool that provides better inventory management.
You can adopt some EDI transactions that provide inventory information to boost transparency. EDI 846 can provide information about inventory levels, and EDI 214 offers buyers shipping status notifications.
With the right system, you can share alerts and notifications with your trading partners. Offering transparency ensures that information is not siloed and helps everyone to be on the same page.
We live in a period where the supply chain is constantly getting disrupted by various factors – be it pandemics or political factors. During such a period, investing in technology that can help optimize your supply chain – such as EDI – seems an obvious choice.
Implementing EDI can be beneficial as it streamlines your B2B transactions and provides much-needed transparency. Choosing the right EDI that integrates with your ERP can do wonders for your organization.
Vetting the best EDI is also vital as it contains sensitive information that can affect your business’s overall profitability.
To learn more about Cin7’s built-in EDI capabilities, request a demo.