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What is EDI in eCommerce and How Does it Work?

sahil bajaj

Sahil Bajaj

Senior Specialist - Marketing @ Shiprocket

February 20, 2024

9 min read

Understanding how EDI in eCommerce is transforming the data exchange process is crucial, especially after the complexities that came into global supply chains in 2020. If you’re a manufacturer or wholesaler looking to digitise your sales process, making the right EDI choices is key to building a more stable future. EDI is one of the most widely used digital sales channels. A mere 13% of online sales happen through the B2B eCommerce channels. Electronic Data Interchange (EDI) emerges as the leading sales channel nowadays, accounting for 75% of digital B2B sales. It entails developing efficiency to be competitive while also strategically and tactically aligning your company with the reality of supply chains.

Let’s explore how EDI significantly impacts how data is exchanged in eCommerce.

What is EDI in eCommerce

EDI: Know the Term

Electronic Data Interchange (EDI) is a technology that helps your organisation exchange business documents with others using computers. It replaces old-fashioned paper documents like purchase orders and invoices with digital files, ensuring quick and accurate data transfer. In your EDI transactions, you use hardware and software components to send messages between your computers. With EDI, you can directly transfer data between your company and others without needing translators or additional processing. It was developed to address the challenge of transferring documents between businesses.

The standard EDI documents, such as purchase orders, invoices, and shipping notifications, are created in a specific format that the recipient’s system can understand. Once you send the data, it’s checked against predefined rules to ensure accuracy.

EDI Categories

There are various types of Electronic Data Interchange (EDI) in eCommerce sales.They are listed below:

  1. Direct EDI/Point-to-Point

Point-to-point EDI, another name for direct EDI, creates a single point of contact for the eCommerce business and its partner. In this approach, you connect individually with each business partner. It offers control for the business partners and is commonly used between larger customers and suppliers with frequent transactions. The direct connection approach allows you to connect directly through the internet, making it a point-to-point EDI.

  1. EDI via VAN or EDI Network Services Provider

An alternative to the direct EDI model is an EDI Network Services Provider, formerly referred to as a Value-Added Network (VAN). This involves private networks where electronic business documents are exchanged between partners. The VAN provider handles the network and provides companies with mailboxes for sending and receiving EDI documents.

  1. EDI via AS2 (Applicability Statement 2)

AS2 is an internet communication protocol enabling secure data transmission. When EDI uses AS2, it combines parts of EDI with the fact that everyone can use the internet easily. When information are transferred over the internet, this ensures data security.

  1. Web EDI

Web EDI conducts EDI using a standard internet browser. Organisations use different online forums to exchange information with business partners. This makes EDI easy and affordable, especially for small and medium-sized organisations and companies that only occasionally need to utilise such a service.

  1. Mobile EDI

Traditionally, users accessed EDI through private networks or the internet. Mobile EDI is the emerging technology in this category. It allows users to send and receive EDI-related documents on mobile gadgets. While concerns about security and device limitations exist, there is a growing trend of developing apps for mobile devices, enhancing accessibility.

  1. Outsourcing EDI

EDI Outsourcing, also called B2B Managed Services, is a fast-growing option. It enables companies to use external specialist resources to manage their EDI environment daily. This is driven, in part, by companies wanting to integrate with back-office business systems such as Enterprise Resource Planning (ERP) platforms.

  1. EDI Software

Implementing EDI software behind a company firewall is sometimes the preferred option. This assumes that a company has the correct internal resources to continuously implement and maintain the software. This approach provides control and customisation for your EDI processes.

EDI Operating Mechanism

Understanding how EDI works is important for smooth electronic document exchange between companies. Think of it like a standardised language; the most common is ANSI X12. This language not only organises messages but also decides how things like prices and product details are structured and checked.

In the EDI world, messages are like strings of facts, prices, and product details and unique markers separate them. These strings, called data segments, make a transaction set when put between a start and end point. This set is like a message and often looks like a regular business document.

Now, let’s imagine sending these electronic messages through an EDI network. This network is like a helpful middle person, ensuring your data is safe and securely travels between you and your business partners.

Before proceeding, the systems of both the seller and the business partner must comprehend the message that has been sent. It’s like getting a package. Before opening the received message, you have to open it and check the content.

Advantages of Employing EDI in eCommerce

Using Electronic Data Interchange (EDI) in eCommerce offers multiple advantages for your business:

  • Efficiency and Accuracy: EDI automates the exchange of business documents, reducing manual processing and errors. This boosts efficiency and ensures more accurate data exchange.
  • Enhanced Communication: EDI provides a standardised electronic format, reducing misunderstandings and improving communication between you and your partners.
  • Real-Time Operations: Enjoy real-time updates on inventory levels and faster, more accurate order fulfillment through automated EDI processes.
  • Cost Savings: By eliminating the manual processing of paper documents, EDI reduces labour costs and improves efficiency, leading to cost savings.
  • Competitive Edge: Implementing EDI in eCommerce enhances operational efficiency, provides a competitive advantage, and improves the overall customer experience.
  • Environmental Impact: EDI reduces environmental footprint by reducing paper usage, storage, printing, and recycling.
  • Data Quality Improvement: EDI minimises data entry errors, ensuring a higher quality of information exchange.
  • Speed and Security: The use of EDI significantly increases the speed of data interchange while following strict protocols and standards. This ensures the security of your essential documents.
  • Information Accuracy and Connectivity: Information exchanged through EDI is always accurate due to standardised agreements and connectivity with various IT systems facilitating data gathering, transparency, and analysis.
  • Positive Customer Experiences: Rapid transaction execution and timely service and product delivery through EDI contribute to positive experiences for your customers.
  • Consistency for Large Organisations: EDI ensures consistent benefits for larger companies by implementing standards across trade partners, promoting better integration.

Barriers Preventing the Widespread Adoption of EDI

Adopting Electronic Data Interchange (EDI) brings numerous advantages, but several barriers may hold you back. Some of them are:

  • Financial Investment for Setup: Setting up an EDI system requires a significant financial commitment for software purchase and implementation. This can be challenging for smaller companies like yours.
  • Ongoing Maintenance Costs: EDI systems require regular maintenance and updates to keep up with changing technologies, adding to the overall cost.
  • Employee Training: Your employees need training to effectively understand and use the EDI system, demanding time and resources.
  • Software Compatibility Issues: Organisations may use different software versions or standards, leading to potential data entry errors if they don’t match exactly.
  • Technology Failures: If there’s a technology failure, like a power outage or server crash, any data not backed up or saved could be lost, posing a risk to your operations.
  • Time-Consuming Setup: The initial setup of EDI can be time-consuming, demanding your patience and dedication.
  • Changing EDI Standards: EDI standards evolve, and keeping up with these changes can challenge your business.
  • Need for Proper Data Backup: A systematic and proper backup system is crucial for EDI, as all the data relies on it. This requires diligence on your part.
  • High Setup and Maintenance Costs: The setup and maintenance of an EDI system can be expensive, impacting your budget significantly.

What Lies Ahead for EDI Documents?

Looking ahead, the future of EDI is promising for you and many businesses. Here’s what you can expect:

  1. Continued Growth

More and more businesses like yours will likely turn to EDI for efficient communication and data transfer in the coming years.

  1. Advanced Technology Solutions

Companies might adopt more advanced solutions for their EDI capabilities as technology progresses. This could involve using dedicated EDI service providers, ensuring faster and more secure transmission without manual intervention.

  1. Universal Standards Adoption

Expect organisations to embrace universal standards for seamless data exchange, regardless of their individual EDI systems. This could involve using an EDI Standard Format (XML) and a universal EDI Translator to interpret data into a common language, making communication between different applications easier.

  1. Supply Chain Modernisation

In the upcoming supply chains, EDI will support the latest technologies like Artificial intelligence (AI), blockchain, and the Internet of Things (IoT).

  1. IoT Integration

IoT sensors incorporated into shipments will improve visibility in near real-time. For example, tying IoT sensors to periodic EDI messages (like EDI 214) can enhance package condition visibility during transit.

  1. Blockchain Technology

Blockchain technology will likely underpin EDI information flows, offering a shared version of the truth. This can quickly resolve disputes and even avoid chargebacks for shipments.

  1. AI Integration

AI agents will become part of future EDI, monitoring events and shipment information. They can identify non-compliant events, determine if a reshipment is needed, analyse the most efficient replacement source, initiate a new shipment, and accept authorised returns.

Conclusion

Electronic data interchange has become essential in various business processes. It is essential to asset management, logistics, and supply chains. It enables businesses to maintain visibility and accountability effectively. As new data transfer methods emerge, it’s clear that EDI will persist as the foundational tool for business transactions. It’s a key part of building future systems. Since it makes data transfer faster and more accurate, you can get important info about your customers quicker than ever.

What is an example of EDI in eCommerce?

Company A needs to restock its inventory of custom-designed sneakers from Company B. Using EDI, Company A sends a purchase order electronically. This triggers company B to respond with a sales order and invoice in the same format. This seamless, automated process showcases how EDI transforms the procurement of unique products in eCommerce.

Is EDI only applicable to specific industries within eCommerce?

EDI is versatile and applicable across various industries within eCommerce. Regardless of industry, it can be customised to meet different businesses’ specific document exchange needs.

Does EDI integrate seamlessly with ERP systems for efficient pricing management?

Certainly. EDI integrates seamlessly with Enterprise Resource Planning (ERP) systems, ensuring pricing and promotion data alignment across the entire business process.

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