When your retailer asks to trade electronically with EDI

by | Apr 17, 2018 | Suppliers

Smaller suppliers that have been selling to smaller retail partners have probably found a nice little groove — your retail buyer emails a purchase order, which you enter into your inventory system. The order gets packed and shipped, and you send it off to your retailer, followed by an invoice a few days later. It’s a nice little system, maybe a little clunky and labor-intensive, but you know how everything works and how to juggle all the steps in the process.

So you’ll be in for a big shock when your big new retail partners require you to have an EDI system before they’ll start trading with you. Either that, or without that EDI, they’ll fine you(!) 2 percent of your invoice total for noncompliance with their trading process. And since you don’t make great profits anyway, 2 percent is a big bite of what you earned.

So what is EDI? Why is it such a big deal? And who’s using it anyway?

Answer: Electronic data interchange. Depending on the size of the company, it saves thousands, potentially millions of dollars in staff resources and error prevention.

Think back to your typical ordering system: your retail partner faxes or emails a purchase order (PO). You may or may not send back a purchase order acknowledgement (POA), although they would probably like it if you did. You’ll call them if you’re going to be short on a particular item, but otherwise you try not to bother them. You send them a packing list with the order, and then invoice them when it’s all over. And they call you if there’s an error in one of the documents, and the two of you figure out where the error happened.

That whole process probably took three or four people to be involved, and took a couple hours to process, send the paperwork, and get the error resolved.

So what if you could do all of that automatically, do it with minimal human involvement, and having it all handled by a computer system so you didn’t have any errors to begin with. That’s what an EDI system does. It’s a way to electronically exchange information about a transaction between a supplier and a retailer. It breaks down a single transaction into several steps, and each step triggers another step, so it can all be handled without human intervention.

Here’s what an EDI transaction looks like.

1. The retailer sends a PO through their EDI system to yours.

2. Your EDI system sends a POA after checking the inventory available. It confirms the order or amends it based on the available inventory.

3. The confirmed order is sent to the warehouse where it’s picked, packed, and shipped. A barcode scanner scans each item as it’s packed up, and once the order is completed, it sends an Advanced Shipping Notice (ASN), which tells the retailer what they can expect and when it will arrive.

4. The order arrives at the retailer’s distribution center, where each case is scanned as it’s offloaded, thus confirming the original ASN and the packing list. That sends a confirmation back to the retailer’s EDI that everything is A-OK. You also receive a confirmation that the order has been received.

5. That triggers an automatic invoice, which is sent to the retailer.

6. Their EDI system does an automatic purchase order-to-invoice reconciliation three-way match between the PO, ASN, and packing list. If the three match, the system will automatically pay the invoice at the appropriate time. If there’s a mismatch, a human will investigate to find and fix the problem.

Now, compare that to the hand-enter-every-step process that many small suppliers and retailers are currently using. Doesn’t this sound like an easier system where everything is done in seconds by a computer, not minutes and hours by humans?

Big retailers don’t want a lot of people working on a lot of forms. They want to find efficiencies and reduce head counts to increase profits. So they want an automated system that can handle their tens and hundreds of thousands of SKUs, provide them with point-of-sale analytics, and even share those analytics with their suppliers as a way to get additional help and recommendations to increase in-store sales. So they’re turning to EDI and expecting their trading partners to do the same.

We’re also seeing some of the larger stores move to a vendor-managed inventory (VMI) system, where the vendor is telling the supplier what to order, when to order it, and where to have it shipped and placed. Imagine being in charge of what your customers buy, how much, and now often! Of course, the only way to know what to tell them is if you have access to their POS data. And the only way you’ll get that in a timely and easy-to-understand manner is if you’re on an EDI system.

Having an EDI system in place can also help you participate in more varied e-commerce fulfillment options, such as drop shipping. This is where an end user will place an order from a retailer’s website, but the order is transmitted to the supplier who actually fulfills it from their own warehouse.

This practice will often include suppliers using the retailer’s branded packaging and forms, as a way to make the suppliers part of their omnichannel marketing and sales. That’s where a retailer tries to create a unified experience for their end users — the in-store experience is like the online experience, which is like the mobile experience, all the way through to the package that gets delivered to their house a few days after they place their order. Again, this all happens with EDI.

Getting connected to an EDI system doesn’t have to be complicated. There’s an EDI solution that can integrate with all of your other systems, or you can start smaller and use a web forms solution that lets you begin sharing your product information and trading transaction information without committing fully to an EDI subscription.

Of course, you could try to build your own EDI system rather than paying a subscription rate. But you need to be able to communicate with not only every retailer you’re currently partnered with, but every new retailer you add. That means onboarding to their system in weeks and months (compared to a couple of days with an EDI subscription). That means hiring a few programmers who are constantly trying to make the system work, dealing with errors, as well as paying for all the hardware and software to make it all work.

Or you could just subscribe to an EDI system where all of that is managed for you.

As a vendor or supplier who’s new to EDI, you can choose to use it for just one retailer. That would make that retailer very happy and satisfy their demands so your new trading relationship could move forward. But what if you could use that same simple, time-saving technology for your other retailer customers? They could gain the same efficiencies, streamline their own processes, reduce their costs, and improve their relationships with their other EDI-using vendors as well.

Plus, several of your retail customers are probably already using EDI right now. If started using it, you could see the benefits of your own improved efficiencies, solved problems, and reduced errors.

If you would like to learn more about EDI, please visit the SPS Commerce website. You can also speak to one of our EDI experts and learn more about how to put this system to work for you.

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Christina Borglund
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