The Role of EDI in Supply Chain Management

Posted by Brooke Lester on Feb 14, 2024 11:52 AM

working in a warehouse

Since its debut more than 50 years ago, Electronic Data Interchange (EDI) has transformed the face of supply chain logistics -- for the better. Across industries, EDI eases the burdens of supply chain management: It saves money, reduces errors, speeds goods movement and improves customer satisfaction. And the future for EDI is even brighter.

Key Takeaways

  • Electronic Data Interchange has been a supply-chain game-changer since its introduction in the 1960s, resulting in cost savings, increased accuracy, boosted efficiency, and greater security for users.
  • EDI improves trading-partner communication and onboarding, inventory management and regulatory compliance--and gives companies a competitive edge.
  • The technology’s evolution has been marked by standardization, automated processes and a movement beyond procure-to-pay and order-to-cash cycles.
  • Forecasted EDI trends include a merger with Application Programming Interfaces and a continued need for skilled IT professionals to work with the technology.

Table of Contents

  1. EDI in Supply Chain Management Defined
  2. Benefits of EDI in the Supply Chain
  3. Why EDI is Critical to Successful Supply Chain Management
  4. How has EDI Evolved in the Supply Chain?
  5. How is EDI Used in the Supply Chain Today?
  6. Does EDI Have Downsides?
  7. The Future of EDI in the Supply Chain
  8. Conclusion

EDI in Supply Chain Management Defined

Like a language, EDI enables communication between computer systems, allowing shipping-related information to be shared in real-time. In replacing the multiple paper-based forms and processes of days past, EDI has allowed logistics firms, retailers, and manufacturers worldwide to significantly increase their efficiency and reduce their carbon footprints. With EDI, they can send and receive dozens of standardized-format transactions nearly instantaneously, no matter where they or their trading partners are located.

5 Benefits of EDI in the Supply Chain

The benefits of using EDI are many. Some of the top reasons to use the technology are as follows:

  • Cost savings: Enterprises that employ EDI technology experience significant cash savings in the long run. They will spend less on overhead when they find themselves buying far less paper – and then not needing a place to store that paper. Furthermore, the streamlined documentation process that EDI brings about helps businesses avoid fines owing to delays, service level agreement (SLA) violations and more.
  • Increased accuracy: A major role of EDI in the supply chain is to ensure accuracy. The main way it does so is through automation. Because manually performed tasks invariably result in mistakes of some kind at one time or another, automating them greatly reduces room for human error.
  • Boosted efficiency: EDI moves quickly, in real-time, to send and receive large amounts of data to multiple trading partners. This means the company that implements it will see its efficiency skyrocket.
    Greater efficiency can also mean better customer servicing. EDI lets entities sync inventory management across multiple channels and keep all data inventory in one place so it knows exactly how much stock it has. This will cut down on the need for product replacement and it will reduce shipping delays, keeping customers satisfied.
  • Greater security: EDI solutions were designed with information security in mind. They only allow authorized users to access information and come equipped with audit-trail and archive-tracking capabilities. The data being exchanged is also encrypted, guaranteeing confidentiality and information integrity.
  • Faster processing times: With automation, EDI lets businesses slash their processing times, speeding up the order-to-pay cycle. And since EDI is constantly enhancing data by supplementing missing information and/or updating old information, a company is always using the most up-to-date data, allowing it to process orders as quickly as possible.

Why EDI is Critical to Successful Supply Chain Management

Despite the handful of drawbacks that are sometimes associated with EDI, for entities involved in the supply chain it is difficult to overstate the benefits of using EDI. In addition to its advantages, though, are the reasons it is outright crucial to the success of logistics businesses. Some of the top such reasons are:

Enhanced partner communication yields more sales

It isn’t just transactions that EDI makes faster, clearer and simpler. EDI streamlines all communication between trading partners. This can shorten sales cycles and get orders completed and confirmed sooner, netting the company more sales and improving its reputation, (leading to more sales still).

Optimal inventory management

Since its inception EDI has been helping enterprises keep their inventory at optimal levels. This allows them to be sure they can fill immediate orders and plan for future orders. With access to the real-time updates provided by EDI companies can use the data provided to them to set up automatic reordering and alerts when stock gets too low or too high, preventing overspending on excess product or on rush orders to quickly shore up fallen levels.

A competitive edge

By keeping logistics businesses fast, efficient and up-to-date on the movement of its and its trading partners’ goods across the supply chain, EDI also helps companies reach a larger network. Global connectivity means access to more potential trading partners.

Better compliance

As discussed earlier, not implementing an EDI solution can cost a logistics firm large amounts of money, both in lost potential business and in fines from SLA violations. It can also cost them any trust they might have managed to build up with trading partners, lowering their competitive threshold and jeopardizing their future business success.

Easier, superior partner onboarding

Reaching an agreement with a new trading partner is worth celebrating – but frequently, the lengthy, complex process of onboarding that new partner is less joyous. When a company has an EDI platform, however, onboarding can be a breeze.

Through a series of standardized steps taken once a new partnership has been established, enterprises can ensure they and their new partners use the same EDI format. They can also run automatic tests to check that data can be transmitted and received.

How has EDI Evolved in the Supply Chain?

EDI solutions were first used to improve and speed up procure-to-pay and order-to-cash cycles. By removing the need for human intervention in payables and receivables, EDI increases accuracy in accounting.

EDI allows large volumes of critical information to be automatically sent to trading partners and received almost right away. Any errors are quickly rooted out by the system and corrected. The paper-based version of this process might have taken days or weeks; EDI makes it happen in minutes or hours.

Because of EDI's success in billing and payment receipt, not long after it was introduced logistics entities began using it to enhance other parts of the supply chain. Warehousing and shipping had many inefficiencies, and soon transaction sets to up the efficiency in these areas were developed. These documents came to include customs documents, bills of lading, shipment authorizations and acknowledgment forms, inventory lists, shipping status records, payment information documents, and more. Not long after, businesses began to establish transaction sets with their financial institutions, too, creating easily shareable funds-transfer documents, letters of credit, and more.

EDI supply chain management is made possible mainly through its standardized formats and transactions. Among the most commonly used are:

ASC X12 

X12 is the main standard used in North America. Created by the American National Standards Institute in the late 1970s to make trading between partners easier, it is reviewed and revised every three to five years.

UN/EDIFACT

About a decade after ANSI developed X12, the United Nations came out with the European answer: the UN/EDIFACT. Though UN/EDIFACT is still used mainly by nations in Europe, American logistics enterprises that do international business frequently also support it. 

TRADACOMS

TRAding DAA COMmunicationS, referred to simply as TRADACOMS, is the main EDI standard for logistics transactions in the United Kingdom. It is a precursor to UN/EDIFACT that was maintained by GS1 UK (formerly known as the UK Article Numbering Association) after UN/EDIFACT came out. 

ODETTE

ODETTE (the Organization for Data Exchange by Tele Transmission in Europe) was created to be the EDI standard for the European auto industry. Like the X12, It is regularly updated. 

How is EDI used in the Supply Chain Today?

typing on a laptop-1

These days, EDI is used across multiple industries, in everything from retail to automotive to health care. 

Hundreds of thousands of enterprises now use EDI to make their businesses competitive in the marketplace and ease daily processes. In fact, many companies even require that their trading partners have EDI capability and are EDI compliant, so lacking EDI integration can mean that a business loses out on large sums of potential revenue. 

Below, we outline some of the sectors in which having EDI is most crucial. 

Manufacturing

Given the constant movement of goods that manufacturing necessitates, it’s no surprise manufacturers make good use of the many benefits of EDI and have for years. Through automation, EDI software bolsters the effectiveness of communication, letting manufacturers focus on innovation, quality, and customer service.

When it comes to manufacturers and EDI, the name of the game is reduction. An EDI platform lets manufacturing firms reduce the time it takes them to connect with suppliers, distributors and other partners. It lets them reduce data-exchange errors, which means reduced chargebacks. It allows them to reduce their operational maintenance costs, which can be significant. 

Logistics

The logistics industry routinely uses EDI transactions to quickly and easily convey information about incoming or outgoing business activity. Entities in the sector use EDI’s standardized forms to send and receive shipment confirmations, stock statuses, receipts, load tender transactions and more. For logistics companies, EDI has become crucial to the easy, organized management of warehousing, shipments, and other aspects of distribution.

Retail

The retail sector has used EDI for decades. In the 1980s, it developed the complementary Vendor Managed Inventory (VMI) model to streamline the selling of goods to consumers. VMI uses EDI formats to send and receive important customer data. 

With VMI, a supplier makes the main inventory-reordering decisions, so that company has far more control of stock. This leads to less waste and better customer servicing.

Retail was also among the first industries to use automation in orders and invoicing. Using EDI, companies in this sector can now also automate the previously time-consuming direct-to-store shipment process, which clears bottlenecks that used to exist and slashes check-in times.

Does EDI have downsides?

As with all software solutions designed to make processes easier, EDI can present some challenges. These include:

  • Up-front costs: EDI saves companies large amounts of money, in the long run, owing to its leaner associated resource and administrative costs. However, implementing it can be expensive. Most of this outlay comes from hardware and software purchases, as well as staff training or hiring and onsite maintenance. Also to consider is the cost to redevelop applications already being used so that they work with EDI.
  • Back-up needs: EDI requires the maintenance of sufficient, robust backup systems in case of a crash. These can add up to a regular, sizable expense for a company.
  • Implementation complexity: The implementation of an EDI solution is a painstaking process that can take weeks to implement. It cannot be done by just any member of a company’s staff, either, but rather must be undertaken and monitored by trained, knowledgeable IT personnel.
  • Additional security requirements: A company’s EDI platform will transmit and receive huge volumes of sensitive data. As such, it will require the protection of additional security, including robust malware-, hacking and virus-protection systems.
  • Multiple standards: As mentioned previously, there are multiple commonly used EDI standards. Each was developed and is maintained and updated by a separate agency or body. While one trading partner may use one, others may use another. Alternatively, one trading partner may be using an older version of one standard, while other partners are using the updated iteration. All this can lead to confusion, headache and most importantly the inability to conduct business with the other enterprises.

The Future of EDI in the Supply Chain

What does the future hold for EDI in the supply chain? Predictions abound, but most agree on one thing: EDI may change in coming years, but it’s likely to remain a crucial component of supply chain operations in some form for some time. 

Below are some of the top forecasts for EDI. 

A merger of EDI and APIs

In recent years some experts have speculated about whether Application Programming Interfaces (APIs) will replace EDI. As critical to organizations as EDI has proven itself, however, the more likely scenario is a sort of combination between the two. Supporting both EDI and API-based processes at the same time can give enterprises the ability to support a wide range of technologies.

Evolved IT 

Skilled IT professionals will continue to be highly sought after, likely even more so. Enterprises will keep needing trained personnel capable of managing their EDI integration needs. Because EDI will evolve, so, too, will the skills sets needed to support it. That means the professionals trained to work with it will become scarcer. 

Increasingly, traditional EDI analysts are becoming business analysts who do less EDI data mapping and more trend analysis.

Modernized EDI

If there was any question about EDI’s ability to transform with the times, its agile history should answer it. Having adapted since the decades it was developed, EDI now has far greater value to the supply chain than it did in its infancy. It is a modern, flexible platform capable of the evolution logistics enterprises need. 

Conclusion

Some six decades after coming onto the scene, EDI continues to transform supply chain logistics with its numerous benefits – from cost savings and increased accuracy to improved partner communication. The technology’s development, marked by standardization and expanded applications, has solidified its place as a critical technology across industries. While EDI presents challenges (such as implementation costs and the need for greater security measures) it will likely remain a crucial tool of businesses worldwide for years to come.

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