Suppliers and vendors that have been working with smaller retail partners have probably settled into a nice, easy groove that works well for them. The retailer probably emails a purchase order, which is entered into the inventory system. The order is packed and shipped, it’s sent off to where it needs to go, followed by an invoice shortly thereafter. It's a simple system, that maybe gets a bit clunky and labor-intensive, but everything works smoothly and all the steps in the process are easily accomplished.
Working your first big new retail partner, though, may bring on a shock to the system when they require you to have an EDI system before they'll start working with you. If they are willing to work with you sans EDI, they'll fine you two percent of your invoice total for noncompliance with their process. That two percent can take quite a bite out of what a smaller vendor earns.
Though it might seem like EDI is a “cost of admission” to get to those big fish retailers you want to work with, it’s not a true business expense – it’s an investment. Deploying an EDI solution isn’t just a way to avoid non-compliance fees, it can help you streamline, scale and grow your business.
What is EDI?
What is EDI? Why would any retailer require it? Is it worth the effort and investment?
EDI is an acronym for electronic data interchange. Depending on the scale of the business, EDI saves thousands, potentially millions of dollars in staffing resources, inventory issues and errors. And it can help businesses on both sides of the equation by improving clarity and speed of communication.
The typical ordering system without EDI probably goes something like this:
- Your retail partner faxes or emails a purchase order (PO).
- When it’s discovered in the email inbox or fax tray, you may or may not send back a PO acknowledgement (POA). You'll contact them if you're going to be short on a particular item, but otherwise you don’t communicate much with them.
- You send them the order, along with a packing list of what’s inside.
- You invoice them when it's all said and done.
- If there's an error in one of the documents, you have to track down the error was, and may need to discuss the errors with the retailer.
This whole process probably involved a handful of people and took hours – maybe even days – to process, send the paperwork, and get the error resolved. When you think of the pressures that a big retailer is under, that’s a system that leads to a lot of anxiety and inventory issues.
The pressure isn’t really any better when you’re a supplier or vendor trying to keep that retailer happy.
EDI makes processes easier
EDI enables your systems to handle all of that automatically without much human intervention and cuts the chances of errors down to nearly none. EDI automation is a way to electronically exchange transaction information between a supplier and a retailer. It breaks down the information of a single transaction into multiple steps, and each step triggers another step, so it can be managed without human involvement.
Here's what an automated EDI transaction looks like.
- The retailer sends a PO through their system and EDI translates it directly to yours, with all the information in the appropriate fields.
- EDI enables your system to send a POA to the retailer after checking the inventory available. It confirms the inventory is available or makes a request to amend the order if not enough is on hand.
- The confirmed or revised order is sent to the warehouse where it's picked, packed and shipped. Once the order is completed, the system sends an advanced Shipping Notice (ASN), which tells the retailer what to expect and when the delivery will arrive.
- The order arrives at the retailer's distribution center, where each item can be confirmed against the original ASN and the packing list. The retailer’s system sends a notification back to the supplier that everything is complete and that the order has been received.
- That triggers an automatic invoice from the supplier or vendor, which is sent to the retailer.
- Their EDI system does an automatic PO-to-invoice reconciliation or three-way match between the PO, invoice and ASN (or other receiving documents). If the three match, the system will automatically set up payment for the invoice. If there's a mismatch, that’s when a human will investigate to find and fix the problem.
When comparing an automated EDI solution to the manual entering of every step that many suppliers and retailers are currently using, EDI sounds much easier – in many ways, it is. EDI automates the processes that can take minutes, hours or even days to accomplish manually.
This is also why larger retailers require EDI. They want to eliminate manual processing as much as possible. They want to gain efficiencies and decrease head counts to increase profits. Retailers want an automated system that can manage their tens and hundreds of thousands of SKUs (millions if they’re Walmart or Amazon), provide them with point-of-sale information, and even potentially share that information with their suppliers as a way to get recommendations to increase in-store sales. They’re turning to EDI to do this for themselves, and they expect their trading partners to do the same.
A whole new world with EDI
It may seem like a strong-arm tactic, but suppliers can also benefit from subscribing to an EDI system.
Some of the larger retailer chains have moved to a vendor-managed inventory (VMI) system, where the vendor is telling the supplier what to order, when to order it, where to have it shipped and placed within the store. Imagine what it’s like being a vendor in charge of what your customers buy, how much and how often! Of course, the only way to accomplish this successfully is if you have access to their inventory information and a crystal-clear plan for communication. And the best way to do that in a timely and straightforward manner is if you have an EDI system.
Having EDI can also help you take part in your retailers' e-commerce fulfillment strategy, such as drop shipping and ship-to-store. This is where an end consumer will place an order from a retailer's e-commerce website, but the order is transmitted directly to the supplier or vendor who fulfills it from their own inventory and warehouse.
Drop shipping practices often include vendors and suppliers using the retailer's branded packing slips and other forms. This supports the retailer’s omnichannel marketing strategy of putting forth a unified experience for their end users — the in-store experience is like the online experience, which is the same as the mobile experience, and followed all the way through to the branded packaging delivered a few days after the order is placed. This all can be accommodated quickly and easily with EDI, but would be incredibly labor and time intensive to pull off without automation.
Enabling EDI automation
There are several ways to get started with EDI automation. The quickest, most basic way to get moving with EDI is through a web-based portal that connects directly with most of your systems and all of your trading partners (even those that already have their own web portal – you can access them all with a single portal through EDI). There's also a native EDI solution that acts like a network between all of your other systems, as well as all of your trading partners. With a native EDI solution, there’s no need for a portal, you simply access the ERP, WMS and other systems you have normally, while the EDI system shares all the information for you, directly where that information needs to be populated.
There’s also the question of whether the EDI system should be managed in-house or managed through an EDI service provider. Of course, you could build your own EDI system in-house, but that requires significant investment in up-front infrastructure, hardware and software costs, as well as permanently hiring skilled IT staff to manage the system, keep it running and constantly update it to accommodate new retailer requirements as needed. With an unproven system, the learning curve and the costs can be steep.
Or you could subscribe to an EDI service provider where all of that is managed for you. With a subscription, there are other costs to think about, but many businesses that have moved from in-house EDI to a subscription model have saved between 30 and 75 percent on their costs. That’s because much of the infrastructure, staffing and updating needs are included in the price. When you work with a knowledgeable and trusted EDI provider like SPS Commerce, retailer requirements and other updates are often made before you even know they need to be changed, ensuring smooth, uninterrupted service for your customers.
As a vendor or supplier who's new to EDI, you can choose to enable it for just the one retailer who is asking for it. That would make that customer happy and satisfy their demands, so your trading partner relationship could move forward. But what if you could use the same simple, time-saving solution to help manage the relationships with all of your other retailer customers? There’s a very good chance many of your other retail partners use EDI, but haven’t made it a strict requirement. You can gain the same efficiencies, streamlined processes, reduced costs and improved relationships with all of your other EDI-using retailers as well.
Many retailers have already seen the benefits of EDI and are asking their suppliers and vendors to get on board with the system. Though it might seem like it’s just another cost detracting from your bottom line, it can actually help you save money through lower staffing costs, gaining greater efficiency and improving accuracy. EDI opens up a whole new world of options for you – if you work with one retailer that requires EDI, you have the capabilities to work with all of them.
SPS Commerce perfects the power of trading partner relationships with the industry's most broadly adopted retail cloud services platform. As a leader in cloud-based supply chain management solutions, we provide proven integrations and comprehensive retail performance analytics to thousands of customers worldwide. SPS Commerce has achieved 69 consecutive quarters of revenue growth and is headquartered in Minneapolis, MN.