EDI integration in ecommerce: The beginner’s guide

Commerce is fully reliant on efficient communication. It would have never really worked without it — not if you imagine the first barter trades from before written history, not along the Silk Road, and least of all in today’s increasingly complex trade networks. 

Moreover, in the age of electronic communication and cloud-based solutions, it’s not just people who have to understand each other well, but it’s just as crucial for computer systems to speak the same language, too. That’s where EDI comes in.

What is EDI?

Simply put, EDI or electronic data interchange is a communication standard for computer systems. It allows the fast and efficient exchange of business documents between business partners. It also enables you to integrate the data from those documents directly into your internal systems.

Many retail businesses use EDI, for the most part, to exchange documents accompanying transactions — invoices, purchase orders, PO acknowledgments, and shipping notices. With many of today’s ERPs and accounting systems being EDI-compatible, you can automate a lot of repetitive processes. In this way, EDI improves speed, accuracy, and security in trade communication. Still, although its early versions popped up in the 1960s, many businesses have remained unaware of EDI, and could benefit greatly from adopting it. 

Benefits of EDI for ecommerce

There are many ways EDI can help your ecommerce business streamline its operations and gain a competitive edge. Below you’ll find some of the most impactful ones.

Efficiency and error reduction

EDI standardizes and automates transaction processes. This way, exchanges become easier to track, and incorrect orders and data entry errors are minimized, leading to quicker transactions, fewer shipping problems, and better overall operational efficiency. 

Improved supply chain management and bottom line

Better communication between you and your trading partners unlocks faster order processing, invoice reconciliation, and payment settlement, giving you more control over your inventory, all while cutting expenses. Implementing EDI for ecommerce can also help reduce labor costs by improving productivity without increasing staff.

Enhanced record-keeping and compliance

Automated receipt verification and electronic documentation help streamline your record-keeping processes and ensure compliance with industry regulations.

Better planning and competitive advantage

Early notifications of likely orders through EDI can help you improve the accuracy of your forecasting, allowing you to optimize your inventory and avoid stockouts. EDI capabilities also open the door for more opportunities for growth and profitability, giving you a competitive edge over non-EDI-enabled suppliers.

How does EDI work?

EDI uses standardized formats to communicate data between trading partners. These formats are sets of rules defining how data is structured and transmitted. EDI systems require a complex interface to coordinate the communication between trading partners.

To better understand how EDI works and how it adds value to your ecommerce business, it’s best to first reiterate how a transaction is processed without it. For example, a purchase order starts out as electronic data as pretty much any other document these days, right? However, somewhere along the process, it often finds its way to a sheet of paper, which means it will soon have to be manually retyped into your business system. This process, apart from wasting valuable time and resources, creates opportunities for error.

A well-configured EDI system makes quick work of all these problems with minimal effort on your part.

EDI simplifies document exchange with three easy steps

1. Prepare documents — Gather and organize data, opting for electronic files over printed receipts for efficiency.
2. Translate to EDI format — Convert internal data to the EDI standard format using translator software (more on this below).
3. Connect and transmit — Once translated, transmit documents to partners directly via the EDI network, tailoring connections based on partner needs and transaction volume.

With an end-to-end integrated EDI solution, orders are automatically populated into your accounting software or ERP system as soon as your client sends you the PO. That’s because these documents are created in a specific format that can be interpreted by the recipient’s system. 

Once sent, the data is validated against predefined rules to ensure accuracy. This means transactions are also checked in parallel for errors when sending and receiving. Additionally, EDI transactions are verified in real time so the vendors and suppliers involved have peace of mind that they’ve all been sent and received successfully.

The essential components of a fully integrated EDI solution

In order to enjoy the benefits of EDI to the fullest, your solution needs to have four key components:

1. EDI translator

To receive incoming documents from your customers, you need to have an EDI translator in place. It does exactly what it says on the tin — translating documents from the EDI standard into a human-readable format, and back. This way your employees can interpret the documents and process them the traditional way, if needed, and also transmit documents with the same efficiency. 

2. Data mapping 

There is an additional step between the EDI translator and your accounting software or ERP system. Data mapping is necessary in order for the transferred EDI data to appear correctly on all associated electronic documents, such as sales orders and invoices. Data is also mapped properly to your customers’ data schemas to ensure that it’s sent in the correct format and properly received. 

3. Secure trading network 

EDI networks are an important intermediary between business partners, but they are also a potential point of attack. Since the process involves sending sensitive data from one system to another, a secure and reliable trading network with proper encryption protocols is a must-have, and a common interest of all parties involved in an EDI transaction. 

4. Support and maintenance

Same as any other component of your software suite, your EDI network is only as good as the support that comes with it. Reliable customer care is especially important in B2B sales, so make sure to choose a provider that will be there when you’re implementing the EDI system, as well as down the road.

Is EDI different from ecommerce?

While ecommerce is simply a type of commerce, EDI is a framework that makes conducting commerce easier, whether it be running under the hood of an online shopping platform or a traditional sales business. 

In other words, although EDI does fit ecommerce businesses like a glove, it’s not specifically made for online sales. In fact, it’s focused on document transfer rather than sales, which makes it suitable for a variety of other businesses, too.

Challenges of ecommerce EDI integration

As we pointed out, integrating EDI into your ecommerce operations improves your efficiency as well as your competitiveness. That said, you should also be aware of the potential pitfalls you have to overcome before you can fully leverage the benefits of EDI.

Initial setup and cost

Setting up an EDI system can require a significant financial investment for software purchase and implementation, which can prove to be particularly challenging for smaller companies.

Maintenance and training

As with any complex system with many moving parts, EDI requires attention to ensure smooth operation and accurate data entry. Expect to add regular maintenance, updates, and employee training to your to-do list and budget.

Software incompatibility and human error

Different software versions and standards across organizations can lead to data entry errors, while manual data entry is inherently more prone to mistakes if employees are not adequately trained.

Technology failure risks

A simple power outage or server crash can spell disaster for your EDI system. Avoid data loss by building redundancy into all your mission-critical systems and backing up all your data regularly. 

Types of EDI

By the mid-1960s, some large companies began using their own linked computer systems to exchange invoices. As more businesses began to adopt similar processes, there was a growing need to standardize them, and with each step in this evolution, trading partners expanded their opportunities and boosted their potential for profit. These efforts gave birth to three important EDI formats that are commonly used today:

1. ANSI X12

By the ‘80s, the American National Standards Institute published its X12 standards for EDI. ANSI X12 is now the backbone of North American trade. It contains codes for financial transactions without a payment hub and provides a framework for businesses to exchange data between different programs and applications.

It has separate transaction sets for industries like healthcare, finance, transportation, and government. For example, when you receive an electronic bill or pay online, there’s a good chance it’s processed using ANSI X12 standards.

2. EDIFACT

In Europe, a similar initiative resulted in a European standard called Electronic Data Interchange For Administration, Commerce, and Transport, or EDIFACT for short. First developed by the United Nations, EDIFACT is designed for multinational use, and includes an extensive library of messages that include many types of business documents.

EDIFACT helps smooth out potential bumps in the process when ordering a product from another country. Think of it as a common language that both the buyer’s and seller’s computer systems can understand, even though they otherwise work in vastly different environments.

3. XML 

Another popular EDI format is Extensible Markup Language, aka. XML — an open-source language that provides greater flexibility in personalizing data exchange rules. Setting up an XML-based EDI system takes more time and effort, but that may be a small, one-off price to pay if your business needs a much more customizable system.

Large online retailers use XML to handle vast amounts of data from different sources, ensuring the accurate exchange of complex product information between suppliers.

Streamline your ecommerce operations with Katana

Katana is a cloud-based inventory platform that’s a central piece of your entire business. It equips you with everything you need to manage your inventory, sales, manufacturing, and more. In addition, it integrates seamlessly with the best business tools out there, from ecommerce to accounting to shipping, making it easy to have all your information synced across different platforms.

What’s more, Katana offers additional integration through Syncware and Zapier, offering you a ton of different connections to any apps you may want to use, including EDI systems, marketplaces, shipping solutions, and more. This ensures effortless document transfers and data syncing across channels.

Ready for integration? Get a demo now to discover the power of Katana, and embrace efficiency, scalability, and growth as you wave goodbye to manual work.