Using EDI to transmit purchase orders
Filed Under Blog
Speed and efficiency are key tools that provide competitive advantage for many businesses. Its not unsurprising then that many businesses look to automate many of their traditional paper based processes, with this extending into the sphere of purchasing and its key activity, that of exchanging information.
Whilst EDI is not a new technology, it’s been around with us since the 1960’s, it is a transaction method that offers vast improvement over administering the purchasing process manually. EDI, Electronic Data Interchange, simply relates to exchanging documents electronically. This offers opportunities to speed up the exchange of data between different companies, reduce delays and improve accuracy.
Electronic Eyes Only
If we take the example of a traditional purchase order, a requisition is raised, followed by a purchase order which is sent to the supplier, the supplier then interprets the order and transcribes into their ERP system. This process can be time consuming, costly to administer and offers various opportunities for bottlenecks to emerge causing delays to material supply.
With EDI the buying organization’s system creates an order sends it electronically, it is received by the suppliers system and placed directly into the ERP/MRP. Perhaps the most fundamental aspect of EDI is that it is no longer simply about sending a purchase order electronically ( by e-mail for example), so it will be read and transcribed by another person. The document can be created, sent, and then read, without any human input.
EDI Standards
Whilst EDI is not technology dependent, with many options to chose from. EDI does employ the use of standards. Standards relate to the format of the documents being exchanged – this ensures that documents are read correctly. Whilst some companies have created their own standards (particularly those companies that have a dominant position in the market and can dictate to their supply chain.) In other cases Industry associations have developed standards for their own industries (e.g Automotive) many of which are based on the TDCC standards (Transportation Data Coordinating Committee.)
The X12 Edi standards are becoming widely used and the de-facto standard for EDI. The administerial body for the x12 standard, the TDCC, provides a data dictionary that defines the data attributes (field names, types, formats etc) that can be used, and defines what constitutes a valid EDI message.
Benefits of EDI
There are various benefits associated with EDI and these can be both purchaser and supplier side. Some advantages include
Elimination of order entry errors
Reduced administrative overhead
Inventory reductions
Improved supplier payments process and improved Cash Flow
Improved Customer Service
Obviously the key benefit of any electronic system is speed. Greatly reducing the traditional time taken for raising and processing documents can allow organisations to focus on more value add tasks. Consider a traditional PO this would, in many companies, take several days to be raised and approved and there was always a delay when the order was sent in the post and it had to be handled by various personnel within the supplier company, all of which takes time.
The use of EDI ensures that 100% of orders are received, sent and processed appropriately. There is no longer a problem with orders being lost, falling behind the filing cabinet or simply not handled properly. Taking humans out of the process has ensured that there can be no room for human error.
A bi-product of EDI is that it can also facilitate information to be stored more efficiently. There is no longer a need to have a huge storage area for purchase orders and they no longer have to be filed, then retained for a certain period of time, instead all the information is kept electronically. So there are less staff costs and less need for resources to store the information. This ensures that Purchase Orders cost less to generate, handle and then store, which all helps to keep costs down and the system is as lean as possible.
As with any technology there is investment required and EDI should not be seen as a panacea and may not be suitable for all companies. However where the benefits outweigh the cost of the investment and the costs of the software can soon be recouped, so it soon pays for itself and can really help to revolutionise transactional procurement. It is a system that takes some time and care to implement and requires re-engineering of key business processes; but it is worth the time and effort and if all the suppliers in a supply chain are also using EDI, the time and money saved can be significant.