What is EDI?
EDI (Electronic Data Interchange) is the computer-to-computer exchange of business documents in a “standard” electronic format between business partners. EDI has existed since the 1970s, and there are many EDI standards (X12, EDIFACT, etc.) There are currently over 300 specific e‐document formats, such as purchase orders, invoices, and advanced shipping notices. Code numbers are assigned to these formats such as 850, 810, and 856, in the examples above.
The reasons EDI has been so widely adopted are that it is intended to save time, and makes the order‐to‐cash and procure‐to‐pay cycles faster with fewer errors, such as missed orders, mislabeled cartons, and late or incomplete shipments. Because most of the largest buyers will not do business any other way, EDI enables a third of the US Gross Domestic Product. Many of these buyers exact fines called “chargebacks” for certain errors in EDI transmissions. It is for the reasons above that choosing the best possible EDI for your business is so important.
There are many uses for EDI, such as medical and insurance claims, but we’ll be discussing only “supply chain” EDI in this document. Here are four of the ways EDI can be processed at your business.
What are the different types of EDI?
The four types of EDI services from which you must choose are Webforms, On-premises software, Managed EDI cloud services, and third party logistics processing. Let’s look at each.
Webforms are online browser applications that are used either directly on the trading partner’s site, or through a webforms aggregator that links to multiple retailers. EDI Webforms allow the user to log onto a site to receive orders, send acknowledgements and invoices, and so forth. Information is exchanged through manually reading the documents sent to you, which you would enter into your ERP system much the way you would with a fax, and keying-in the documents you need to transmit to your trading partner. Since interfaces are manual, scaling for business growth happens by adding people. Webforms are ideal for low volumes. If the need is light and process integration is not critical, webforms can be the best method for your business.
In summary, webforms are inexpensive, labor intensive, and not integrated with Enterprise Resource Planning. It is a great choice for businesses with a small number of trading partners and few EDI transactions.
On-premises software, often misnamed “premise” software, is another method some businesses use to connect to their trading partners. It generally requires an in‐house person or persons to manage the transactions transmitted through a VAN (value‐added network). While the EDI software is generally in-house, it can also reside “on the cloud”. It makes little difference. It needs to be self‐managed. Where the application is housed is less significant. With EDI software, someone, usually in-house personnel, must understand the intricacies of EDI communications, formats, errors, and interfaces. Interfaces to some ERP systems and ancillary applications are commonly available from EDI software vendors. Each company using EDI software sets up and manages its own connections to trading partners, including updates to maps and labels, as customer specifications change. EDI software vendors can handle the setups and maintenance for you, but that will generally be more expensive and less timely than if performed by your own staff.
Each individual EDI provider’s software can have “hooks” so that it can be integrated successfully with some ERP systems. You will need to locate a package that works with your particular ERP system. Trying to write an EDI/ERP interface can be very time-consuming and error prone. That seldom is the best choice unless there is sufficient in-house expertise, which is seldom the case unless your business is very large. The question is whether or not the in‐house staff is capable and available at the right cost.
In summary, this is a great choice for businesses with a large number of trading partners and many EDI transactions.
Managed EDI cloud services are a relatively new alternative, occupying the space between webforms and on-premises software. It came into being due to the migration to cloud technology, and it made sense for mid‐sized businesses to outsource some functions, like EDI, to remain competitive. Managed EDI cloud services do not require software purchase, so the one-time expense is lower than on-premises software. It includes the services of EDI experts to set up and operate EDI on behalf of the user. These services are usually the most expensive part of the process. The technology delivered is in the cloud, and the service manages trading partner relationships. The setup, mapping, testing, and go-live is done by trained EDI people as part of the service. Ongoing transaction processing and maintenance is managed in the cloud, and each change applies to every one of their clients, so the frequent changes mandated by trading partners can be made one place and automatically apply to all users. The EDI capability bundled into the service means in‐house expertise is not needed.
Managed EDI cloud services involve outsourcing of a complete EDI capability. Managed EDI cloud services are appropriate for small to medium companies that have a new EDI mandate from multiple trading partners, and for users that have outgrown webforms.
Third party logistics processing
The final type of EDI involves third party logistics (3PL) warehouse service companies. Many of these companies are capable of handling the EDI transactions that customers typically mandate, including (850) purchase orders, (855) Order Confirmation , (856) Advance Ship Notice, (753) Routing, and (810) invoices. If keeping your ERP system updated is a requirement, 3PLs can usually provide the data necessary, via what is often called a “flatfile”. This can encompass purchase orders, invoices, and other documents. You would then only need your ERP vendor to provide a program to upload that data on a timely basis.
While 3PLs typically charge for the data they receive and transmit, it can often be less than the transmission charges you would otherwise pay, because they want to retain your business for their warehousing capability. The one-time charges would be limited to whatever fees your ERP vendor would charge for the upload programs.
If you are currently using a 3PL, or thinking about using one, this may be an option worth considering. Under the right circumstances this can save a lot of money, and provide a cleaner EDI environment.
What are the most important factors to the EDI decision?
These are the factors which are most important in determining which type of EDI makes the most sense for a given business:
- Volume of transactions
- Number of trading partners
- Number of document types required
- ERP integration requirements
- Your staff’s capabilities
The EDI types we discussed, in order of increasing cost and time requirements are:
- Third party logistics processing
- Managed EDI cloud services
- On-premises software
Let’s look at the important factors and the EDI types, and how they relate to each other
Volume of transactions
The more monthly EDI transactions that need to be handled, the further down the list of EDI types we need to go. For a handful of transactions per month, data entry effort for webforms may not be a big deal. At some point, manual effort can become a limitation, manifesting as unacceptable error rates and poor customer service. Adding personnel is a big expense, and takes time to implement, making a lot of manual entry work impractical.
Number of trading partners
The more trading partners that need to be handled, the further down the list we need to go. Dealing with many trading partners means that there will be constant changes and additions to requirements.
Number of document types required
If you only need to receive (850) purchase orders and transmit (810) invoices, the task is not too great. As you add other document types ((855) Order Confirmation , (856) Advance Ship Notice, (753) Routing, etc.) the task becomes more and more difficult.
Integration is not too difficult a task if you can keep your ERP system updated by manually entering EDI data, without a lot of effort. As more and more transactions need to be communicated to your ERP database, we are forced further down our list of cost and time expense.
Your staff’s capabilities
The spectrum of your staff’s capabilities could range anywhere from having an experienced EDI programmer on staff, to a clerk that has trouble using Excel. The closer your EDI staff is to the latter, the further down our list of cost and time expense we need to go.
Where do I go from here?
Each ERP system has individual factors which make EDI and true end‐to‐end integration a unique experience. Both ERP and EDI vendors each make claims about ease of integration. You must look extremely hard into the capabilities and responsibilities for making things work.
By now, you may have an idea of which direction you may need to go to satisfy your customer’s EDI mandates. I would recommend that you engage an independent EDI consultant who can analyze your business, your ERP system, and the EDI vendors and, with you, arrive at the best solution.
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