11 February 2021
Before examining the benefits which Electronic Data Interchange (EDI) can bring to a range of businesses within the manufacturing sector, it’s worth setting out a brief definition of what EDI actually involves. In simple terms, it is an exchange of business documents which takes place entirely electronically between business partners. Rather than a document such as a purchase order having to be sent via email and processed by the recipient before being entered into their own system and dealt with, EDI ensures that the exchange of documents is entirely automated and contained within the systems of each party. A purchase order, for example, will be directed instantly to the order management system of the recipient where it will be processed on arrival. The number of contacts and interventions required in order to maintain the flow of goods along a supply chain and between the business and a customer or other business is instantly reduced from multiple interventions at each stage – such as ordering, invoicing, creating dispatch labels, sending shipment notices etc. – to a single smooth and free-flowing process. The result is increased efficiency, lower costs, better relationships between the businesses along a supply chain and the elimination of problems caused by human error.
Process Automation
The benefits of automation across a range of business processes have been clear for many years. According to experts such as the National Association of Software and Services Companies (NASSCOM), the introduction of automated business processes within a business can cut the costs of process operations by between 35% and 65%, while Deloitte found that the average period for return on investment (ROI) in process automation was 12 months. In the same survey it was found that improvements across a range of businesses which had automated processes included the following:
- Improved compliance – 92%
- Quality and accuracy – 90%
- Productivity – 86%
EDI takes the principle of automation and the benefits it accrues and delivers those benefits across an entire supply chain, enabling different companies to work together in a seamless manner. Although EDI is used across the widest possible range of industries it is particularly useful within the manufacturing sector, streamlining the communication that is necessary to keep supply chains moving in a manner which frees manufacturers up to concentrate on areas such as product innovation, customer service and quality control. For any manufacturer, EDI offers the chance to communicate across a complex ecosystem of suppliers, distributors, retailers, customers and logistics partners in a way which scales the benefits of automation across that ecosystem and enables the adoption of a just in time philosophy.
Manufacturing EDI Example
In order for EDI to work successfully the communications sent between each party must be formatted in compliance with the rules governing the standard which applies across the industry. Working within a prescribed format in this manner means that the computer receiving the EDI document will know exactly where to look in order to find items such as the purchase order number, the items being ordered and the price for each item. This information can then be fed into the relevant order entry system to be processed without any manual intervention. EDI documents which are frequently used in manufacturing include the following:
EDI 850
This is the purchase order which plays a part whenever a customer buys something from a manufacturer. The EDI purchase order will specify the items being ordered, the number of each item needed and the shipping details and pricing information. Having all of this formatted in line with the standard being used enables the details to be processed onto the systems of the manufacturer seamlessly and without having to be picked up, registered and entered manually by a member of the manufacturers workforce.
EDI 997
The receipt of an EDI 850 will automatically prompt the system to produce an EDI 997, a functional acknowledgement. This informs the customer that the purchase order has been received and is being processed or was rejected. The automated creation of the EDI 997 means that if an order is rejected for some reason, the customer can quickly resubmit with any amendments needed, thus avoiding any delays.
EDI 856
This is an advanced shipping notice which tells the customer that the manufacturer is shipping their order. The details on this EDI should include the contents of the shipment and the tracking number. The inclusion of the tracking number enables the customers to keep tabs one exactly when their order will be arriving and is an example of how EDI streamlines a process such as ordering products and makes it much easier for any customer to manage their own inventory in respect of inbound shipments.
Perhaps the best means of illustrating the benefits which even the most basic application of EDI can bring to a manufacturer is to break down a simple order into its constituent steps:
- Retailer ‘Spick and Span’ places an EDI 850 (Purchase Order) with Assorted Cleaning Items for 650 replacement vacuum cleaner hoses to be sold across their chain of outlets
- Assorted Cleaning Items acknowledge the receipt of the Purchase Order via an EDI 855
- After reviewing their inventory levels Assorted Cleaning Items find that they only have 500 vacuum cleaner hoses in stock, and so they send out an EDI 997 explaining that the order as it stands can’t be fulfilled and is being rejected
- Spick and Span send an EDI 860, which is a Purchase Order Change, which sets out that they would now like 500 vacuum cleaner hoses and also the delivery window during which they need to be delivered
- Now able to meet the order, Assorted Cleaning Items send an Advanced Shipping Notice (EDI 856) which explains that the order has been shipped, recaps the PO information and tells Spick and Span when it will arrive at their hub, complete with a tracking number to follow its progress
- Having received the order, Spick and Span inform Assorted Cleaning Items that it has arrived, enabling them to send an invoice, EDI 810
This sets out a relatively simple order fulfilment which doesn’t feature the manufacturer, for example, having to liaise with any of their suppliers, and in which the only hiccup is the inability to meet the number of items originally requested. Despite this simplicity, the process still includes at least eight individual steps which, without EDI, would have been performed manually by a member of the teams at Spick and Span and Assorted Cleaning Products. Not only would this take considerable valuable time and force the employees concerned to engage in repetitive and deeply unfulfilling tasks, it would also open up the possibilities of human error creeping in at any single stage (i.e. a product number wrongly inputted) and slowing things down even further. With EDI in place the whole process set out above would take place within a sealed automated system with maximum speed and efficiency.
What this example also doesn’t explicitly include is the fact that the EDI involved would also include the courier company involved in delivering the items, and would link back to the website of Assorted Cleaning Items, enabling the stock availability there to be adjusted in real time.
Automate Reporting
In the longer term, the manufacturer would also be able to send the retailer a request for a Product Activity report (EDI 852), which would set out the sales of the vacuum cleaner hoses across each of Spick and Span’s individual retail units, enabling the manufacturer to optimise their planning for the future supply and manufacture of vacuum cleaner hoses. This demonstrates another of the in-built advantages of EDI – the fact that it enables a wide set of data points to be pulled from a range of sources in order to automatically create reports offering valuable strategic insights into how the business is operating and the ways in which the demands of customers or the standards of suppliers and other partners are likely to impact on that operation in the future. A genuinely modern EDI solution will be one which integrates seamlessly with the systems used by wholesalers, suppliers and logistics partners as well as with all of the platforms which operate within the manufacturing business itself, such as their ecommerce platform, inventory and sales. The ultimate aim of any EDI solution will be to enable complete business continuity as the business grows and more customers, suppliers and partners have to be on boarded.
