How EDI and ERP Systems Benefit Your Business
It was like switching from clay tablets to papyrus.
The invention of Electronic Data Interchange (EDI) in the 1970s enabled businesses to take document exchange to a revolutionary level of speed, accuracy, and transparency.
As the term EDI indicates, this exchange happens electronically between one computer and another. Through this technology, a wide range of documents that used to be exchanged physically, such as sales orders, invoices, shipping status statements, and payments, can be transmitted electronically, without human intervention to input or interpret the data.
Take for example an invoice sent by fax or mail. It’s manually entered by the receiving company’s accounting team. If EDI sends the invoice, the company’s information system will receive it and process it automatically.
Any company exchanging a meaningful volume of documents, even a small, quickly growing firm, can benefit from using EDI with their suppliers, customers, banks, and other parties in their ecosystem.
Why do companies use electronic data interchange (EDI)?
EDI offers businesses the following compelling reasons for its use:
Dramatic reduction of paperwork and manual input errors
In an EDI transaction, both the sender and receiver save a lot of time. That’s because they’re no longer involved in time-consuming manual data entry, which is prone to error, and paper-processing activities. Through EDI, transmitted documents can be viewed almost instantly on any screen providing access.
If you manufacture chocolate cakes and your EDI-connected retailer is short of cakes, they can send you an order instantly. Your system will process it in seconds, and your team can respond to the order so much more quickly.
In fact, you may have an arrangement with your retailer that enables you to see their inventory of cakes. When stock levels reach agreed-to minimums, you may nudge them for a P.O., or even automatically ship them cakes to maintain agreed-to quantities.
Similarly, your EDI-connected supplier of cardboard boxes in which you ship these cakes can replenish your stock of boxes in a timely way.
Thus, everybody in your EDI-connected supply chain has greater visibility into their partners' actions. Orders get issued faster, reducing the time from order to cash.
As the cake and box example shows, EDI also accelerates and streamlines your procurement by reducing or eliminating paper-based processes.
Given the advantages of EDI noted above, it’s not surprising that businesses that use Enterprise Resource Planning (ERP) systems are drawn to EDI.
These forward-thinking companies already have a mindset for benefiting from technology that elevates the productivity and profitability of their businesses.
What is ERP?
An ERP system is an all-in-one software solution that combines all the data from the various functions of your business - from accounting, production, and provisioning, to sales, human resources, and many others - and centralizes it. As a result, you can manage all of your company's business processes from one hub in real time while benefitting from 360-degree visibility into every cranny of your operation.
What’s more, this end-to-end centralization of data saves you money and time by eliminating or automating processes.
To learn more about ERP systems and how they can elevate the performance of your business, read our article, “What is ERP? Your Most Common Questions are Answered Here”
How EDI and ERP work together
Trading partners wishing to communicate through EDI must agree on the technical standards to be used before documents are sent.
Once that’s done, let’s say you wish to send a purchase order (P.O.). Your system digitizes the P.O. into an EDI format using translator software.
Once the P.O. is transmitted, the receiving party converts the EDI document into an internal document format like XML (Extensible Markup Language), Idoc (document intermediate), or FF (flat file).
At this point, your ERP can integrate the new P.O. and your warehouse team or any other team can view it on their screens via an API - all this happens without any human intervention.
What is the difference between API and EDI?
While EDI is a long-established and popular protocol for exchanging documents electronically, the use of an API (Application Programming Interface) is on the rise. Both EDI and API accomplish the same goals but through different protocols.
An API is a web-based protocol that simplifies the way different systems can share data with each other. Think of an API as acting like a multi-lingual interpreter at a United Nations meeting.
Integrating EDI with an ERP
In the past, EDI and ERP systems worked independently in a business, with each system fulfilling tasks on its own. Custom integrations would be attempted to create a smooth flow of information between the systems. These attempts involved hundreds or thousands of hours of labour and often did not work out satisfactorily. Some companies resorted to manually entering EDI information into their ERP.
Recent advances in technology have changed all that. Today, EDI integrations in ERP systems work seamlessly to elevate your company’s performance.
Moreover, this ERP-EDI integration enables small and medium-sized businesses to work with larger retail chains and companies that make EDI a requirement for doing business.
For example, an EDI connection is a must if you’re a food and beverage company willing to distribute your product at Costco, Loblaws, or Metro.
Building a better business with ERP-EDI integration
In addition to the advantages of EDI noted above - elimination of manual data entry, reduction of human error, and better supply chain visibility - ERP-EDI integration offers your business the following benefits:
100% centralization of all data, on one platform. As a result, you get an instant end-to-end view of all your operation’s data in real time.
Enhanced data accuracy increases your business’ efficiency. Data errors can create company-wide productivity losses.
Improved monitoring of pricing and quantity errors. Because the data are not scattered among different paper or electronic documents (e.g., invoices, emails, P.O.s) but are centralized in one database, they can be easily manipulated for analysis. As a result, errors and pricing discrepancies surface much more easily.
Instant data traceability. The sources of your data are always clear in an ERP. So if you need to take a deep dive into your numbers or if you’re the subject of an audit or product recall, you’ll have a clear, instantly accessible trail revealing the sources of all your numbers.
Reduced costs. Since everybody on your team, from clerks to senior management, is less involved in chasing, inputting, analyzing, and comparing paper documents, they can spend more time working on projects that deliver greater value to the business.
Faster response times. With so many important business documents instantly available on screen, all your teams involved in paper-based processes - accounting, purchasing, and sales, among others - can now resolve tasks in minutes that may have taken days to complete. Imagine how this efficiency can impact customer satisfaction.
To profit from these benefits, ensure that your ERP includes a well-designed EDI module.