Although electronic data interchange (EDI) has been around since the early 1970s, many businesses are taking a fresh look at how this powerful commerce platform can affect their cash conversion cycle. A strong EDI strategy can increase efficiency and reduce errors, streamlining trading partner onboarding and transactions. In this post we’ll review expectations for the future of this technology as well as how it’s changing.
In our world of 24/7 commerce and ever-increasing customer expectations, electronic transactions between trading partners is the gift that keeps on giving. And yet, not all companies have embraced the possibilities of EDI. Why is this?
The Benefits of Electronic Data Interchange (EDI)
Overall, Electronic Data Interchange reduces cost, decreases lead times, and improves service levels—and brings trading partners together in the process. In fact, many large companies have been transacting electronically for decades now. It’s no wonder many Fortune 1000 companies actually refuse to complete transactions via phone or email and rely wholly on EDI for suppliers to do business with them.
Businesses that exchange information digitally also generate fewer errors. For industries with low margins, the effort and cost involved in fixing an error or getting fined for non-compliance on a sales transaction can completely erode profit margins. Because of this, error reduction is critical.
Likewise, the ease with which you can onboard trading partners via Electronic Data Interchange has a direct impact on your cash conversion cycle. This is the number of days it takes for your company to convert inventory investments into cash. This is good news for any CFO or CEO who has long recognized that a digital strategy can dramatically reduce the cost of processing inbound and outbound orders.
How Electronic Data Interchange Is Changing
Gartner has stated some interesting predictions about EDI that underscore its importance. Analysts have said that through 2022 1, EDI and legacy connectivity methods (daily inventory feeds, hourly incrementals, or real-time access to inventory availability from an ERP) will represent more than 50 percent of incoming supply chain transactions. And by 2025, they expect 50 percent of low- to medium-touch B2B sales transactions to be conducted solely via self-service commerce, EDI, and intelligent bots.
Given this increasing reliance on Electronic Data Interchange, let’s look at how the technology choices for transmitting data electronically have changed. Below you’ll find some of the various methods.
EDI Service Provider
An EDI service provider supplies a secure, value-added network (VAN) for businesses to receive and retrieve electronic transactions via dedicated ‘mailboxes.’ They may also provide other services such as data translation and alerts on inbound transactions.
Direct EDI was the first widely used alternative for companies wishing to avoid the expense of using an EDI service provider. In this scenario, two trading partners essentially establish a unique, secure connection. Companies that implement this approach must establish and manage a secure connection for each individual trading partner. Once this has been created, the two partners then agree on a communication protocol such as FTP, FTPS, or AS2.
EDI via FTP with VPN
Used by many businesses today, file transfer protocol (FTP) was the first truly reliable way to exchange. It was primarily developed for internal data transfers, but with the advent of virtual private networks (VPNs), FTP became a common method for external trading partners as well.
With a web form, all your trading partner needs is a browser. This is a great alternative for small business with limited IT resources. There are companies that specialize in the creation of interactive web forms that can even include workflows based on business rules. Although not the most efficient method, this can be very cost effective and easy to deploy for organizations that don’t have high volumes.
A Variety of Digital Transactions
Due to the inequality of trading partner IT resources and the volume of transactions, it is not uncommon for businesses to implement more than one communication strategy. Today’s modern supply chains are highly digitized, which permits fast, efficient transactional processes while enabling collaboration opportunities.
An important aspect to digitizing business transactions is the exercise of standardizing and mapping the data contained within the transaction so it can flow seamlessly between the software systems used by the sender and receiver. There are many standards, with some used more widely in certain industries than others. However, a simple CVS or XML data format will often suffice.
If your business is still relying on low-tech or paper-based transactions, Electronic Data Interchange is worth a closer look, particularly if you want to deal with big box retailers. The cost of outdated approaches to information exchange dramatically adds to your overall cost-to-serve, which greatly impacts your margins. Adopting an EDI strategy goes beyond creating a competitive advantage—it may be necessary to support the long-term health of your business and open up new market opportunities.
1 Gartner, “100 Data and Analytics Predictions Through 2022,” 21 May 2018
2 Gartner, “Predicts 2018: Chief Supply Chain Officers Will Reshape Operating Models in Response to Digital Drivers,” 3 November 2017