EDI System Growth

How retailers can benefit from an EDI system

8 min read
Erik Deckers

As a retailer, you might be getting ready for spring sales or feeling the sweet relief of the post-holiday calm. But for many, the first portion of the year is when they start asking, "What are we doing for the next holiday shopping season?"

That's because preparing for the holiday shopping season is a year-long process.

You're looking at what worked and what didn't work last year, figuring out how to find new products, and analyzing the sales data to see what people wanted and what they couldn't get enough of.

This is also the time when retailers start looking at new technologies and processes, such as an electronic data interchange system, or EDI system.

An EDI system is a way for retailers and suppliers to communicate with each other, exchange order transaction information, keep track of inventory, automate ordering, and streamline their entire process.

Companies get paid faster, errors are reduced, stock outs are reduced, and orders are completed faster.

EDI is one of the most important tools in the retail supply chain, and smaller retailers and ecommerce stores are beginning to learn how they can put this to work for them.

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The ‘old way’ transactions worked

Before EDI, a retailer would place an order with their supplier — let's say 100 pairs of running shoes. They would fax or phone the supplier with the information, and read it off line by line, with model numbers, colors and quantities. Later, people updated to emailing those orders, but it was still a question of the supplier manually entering the order. If you wanted 10 different sizes and colors, that was 10 different line items on the purchase order.

Once the order was placed, the supplier would send a copy of it on to the warehouse, who would pick and pack the order. Sometimes the supplier would then let the retailer know the order was on the way, but often they would not. The retailer was never sure when the order would arrive or whether they were going to get all the shoes they wanted, and they certainly couldn't track its progress.

After the order was received (and double- and triple-checked for accuracy), the supplier would send the invoice to the retailer. The retailer would then have to pull the original order, the packing list and the confirmation receipt from their own warehouse. If there was an advanced shipping notification that amended the original order, that also had to be dug out.

Then an accounts payable staffer would make sure that all those documents matched up, that all 100 pairs of shoes were delivered, and that there was no discrepancy on the price.

Then and only then, the invoice would be paid.

If they didn't match up, the staffer would have to research everything and figure out where and why there was a mismatch in all the documentation. Invoices would often take more than 30 days to be paid just to complete all of these checks, and it was usually because there was a problem between what was ordered and what the supplier had on hand (but hadn't notified the retailer about during the order fulfillment process).

Related: Habits of business owners who get paid on time

How an EDI system solves these problems

EDI systems have all but eliminated these old problems. They have helped retailers and suppliers reduce the size of their accounts departments, and it has helped reduce the number of shipping errors and even out-of-stock issues in the retail store.

When a retailer adopts an EDI system, there's a good chance their suppliers are using it too.

If you're a small retailer working with a large supplier, there's a very good chance they have one, and they'd love it if you'd use one as well.

And if a larger retailer is using an EDI system (they are, trust me), they will often require their suppliers to use them. This allows the two parties to automatically exchange information so transactions take minutes, not days.

Related: Small business secrets to competing with big box stores

Here's how an EDI system typically works:

EDI System Flowchart
Photo: EDIBasics
  • The retailer sends a purchase order (PO) to the supplier, containing the quantities, product numbers, shipping instructions, and so on. In some cases, the retailer can even see what the supplier has on hand because the EDI software provides inventory transparency.
  • When the supplier receives the order, the system checks the inventory and sees that there is enough to fill the order. It automatically sends a PO acknowledgement that says "Yes, we can fill this," and it confirms the price.
  • The order is then sent to the warehouse where it will be picked and packed. Once everything has been scanned via barcode, a packing list is then generated, which is then sent back to the retailer as an Advanced Shipping Notification (ASN). This confirms the original PO, amends it, and alerts the retailer that there was a change to the original PO. It also tells the retailer when the shipment is going to arrive.
  • The retailer receives the order and packing list in the warehouse, and they use their own scanners to confirm that it's complete. That confirmation is then uploaded to the EDI system, and the retailer can see that they have received everything they ordered.
  • When the supplier sends the invoice, the EDI system then does a three-way match between the PO (and sometimes the POA), the ASN, and the packing list to make sure that everything matches up. If it does, the system approves payment on the invoice. If it doesn't, the order is flagged so a human can investigate to determine why there is a discrepancy.

Since all of this happens automatically, it reduces the need for a large staff to manage accounts payable and accounts receivable. I've heard of 20-person departments being run by two people thanks to EDI.

There are several other benefits an EDI system can offer retailers.

It saves time in communicating with suppliers

You can set up automatic reorders if inventory levels drop below a certain point, check the status of your orders to see when they'll arrive, and order everything to arrive "just in time."

You can work with drop-ship capable suppliers

Some retailers, especially in ecommerce, can find suppliers to handle their fulfillment and shipping. EDI systems let those retailers display the suppliers' own inventory on their websites as their own, making it look like the retailer has those items in stock. Then, as the supplier's inventory is reduced, so is the retailer's. Orders come in to the retailers, are passed on to the suppliers, and the suppliers ship everything out.

Related: Everything you need to know about dropshipping

EDI System Package

You can measure supplier performance

Retailers can see which of their suppliers respond quickly, fulfill their orders completely, and deliver on time. It helps them decide whether they need to find new suppliers.

You can analyze your products' performance

How much of each product are you selling? Does it do better during certain times of the year or in different locations? Do certain items do better than others?

An EDI system lets you analyze these elements and keep an eye on a large portion of your entire inventory.

It also allows you to identify problem areas and fix them in a matter of hours or days, not weeks or months.

Related: How to choose inventory tracking software for your brick-and-mortar store

Inventory transparency allows suppliers to help you out

You can let suppliers see their own brand's performance within your stores. They can be an extra pair of eyes on their products' performance. For example, if one store hasn't sold any of that suppliers' products, it could be that the store never put the product out on the floor. You might not think to look for that, but the supplier would be more likely to catch it since they're checking everything on a store-by-store level.

EDI is scalable

Even if your business is fairly small and you're still in a growth phase, a good EDI system will grow with you, expanding and allowing you to add more suppliers and more products. A good EDI system like www.spscommerce.com can help retailers grow what's called the “Endless Aisle,” that seemingly never-ending warehouse that holds almost everything. While we normally think of Amazon and Walmart having an Endless Aisle, a good EDI system can let you strive for that kind of growth by working with other EDI-compliant suppliers who are able to manage your drop shipping of their products.

Related: Everything you need to know about Fulfillment by Amazon

Wrapping up

Electronic data interchange is almost a must-have for retailers that want to take advantage of new technology, communicate faster and more effectively, and eventually grow and increase their product offerings and market share. Even the most basic EDI system will help you grow and make these changes, but you want to start as early in the year as possible, not wait until a couple months before the holidays.

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