What is EDI? The Complete Guide to Electronic Data Interchange for Dropshipping

Like a typical eCommerce retailer, dropshippers specialize in selling goods online — but with one important difference. As a dropshipper, you don’t have to handle inventory. Trading partners like your suppliers and third-party logistics partners do all the heavy lifting so you can focus on marketing and sales. 

Dropshipping might sound like a walk in the park, but you know it isn’t. As a dropshipper, you need to operate as lean as possible to earn more profits. That means you have to ditch manual processes and automate as much of your business as possible.

Electronic data interchange (EDI) is one of the best ways to streamline your dropshipping business. 

But what is EDI? Whether you’re a seasoned dropshipper already or you’re planning to start your own dropshipping business, here’s everything you need to know about EDI.

What is EDI?

Electronic data interchange is a method for exchanging large amounts of data between businesses. It standardizes the information going between your business and your suppliers or logistics providers so everything runs smoothly.

With EDI, you don’t have to worry about writing purchase orders or printing invoices. It standardizes both incoming and outgoing documents and spreadsheets, automatically translating data so you don’t have to lift a finger. 

Many vendors (which are called "trading partners" in EDI) require you to send orders in a specific EDI format, so if you want to become a successful dropshipper, this is something you’ll need to provide. EDI can get pretty technical, but this guide will provide you with a high-level breakdown of how EDI works for dropshippers specifically.

How Does Electronic Data Interchange Work?

No two businesses are the same. You might have a good reason for labeling data fields one way, and your trading partners might have a good reason for labeling them a different way. 

The problem is that these two different labeling systems aren’t a match: if you try to exchange data with your suppliers without EDI, you’ll get tons of errors. 

If you think you can get by without EDI and just handle all of the paperwork manually, that’s a bad idea, too. 

In the days before high-speed internet, retailers had to do all of their business via paper documents and postal mail. That meant they had to submit paper orders, transaction details, invoices, communications, shipping confirmations, purchase orders, and more — through the mail, fax, or email. 

Employees had to enter and reenter this data into their systems, so errors are bound to happen without EDI. That not only took forever, but it limited retailers’ ability to turn a profit. Without EDI, there’s a lot of waiting and not a lot of doing. 

EDI service providers make it possible to digitally send information between your systems and your trading partners’ systems, automatically. Since you both agree to an EDI code, you know all of your data will port over to your suppliers correctly. 

Electronic data interchange codes are data that correspond to information in your business documents, like an invoice or a purchase order. Think of an EDI code as an agreed-upon standard format for how you’ll format certain data points. For example, if you tell your trading partners you want EDI 856, they know that means you want to standardize your shipping information in a particular way. 

There are hundreds of EDI codes out there, but these are some of the most common: 

• EDI 856: Shipping notice or manifest

• EDI 810: Invoice

• EDI 945: Warehouse shipping

• EDI 846: Inventory information

• EDI 850: Purchase order

Technically, EDI isn’t new: it’s been in use as far back as the 1960s. Fortunately, the EDI solutions we have today are much faster and more efficient thanks to digitization.

How Do EDI Documents Work for Dropshippers?

Without EDI, every business would invent its own systems for managing its data — and that would make things so messy that you couldn’t do business with anyone. 

For dropshipping, EDI creates a standard format for how your systems talk to your suppliers and logistics providers. 

Dropshippers mostly use EDI for ordering and invoicing, but it’s helpful for inventory and shipping, too. EDI standardizes the data exchange between your business and all of the vendors you rely on to make sales. 

If you get an EDI solution with the right amount of firepower, you can quickly synchronize thousands of records, regardless of how many trading partners you work with.

The dropshipping EDI process usually works in three steps: 

• Create a document: This is usually in the form of a spreadsheet. This document contains your data formatted in the EDI code that you and the other party have agreed on. 

• Process EDI transactions: Your EDI platform will map the data sent from your trading partners to the format you use internally, and vice versa. There’s no need to copy-paste or translate the codes yourself — this all happens automatically. 

• Use the data internally: You take the data the EDI system sent and use it however you need. If you need to send information back to your supplier, the EDI system will translate your data into whatever EDI codes or standards your supplier uses. Neat, right?

What Are The Benefits of EDI Software?

The electronic data interchange market will grow from $1.88 billion in 2022 to over $4 billion by 2029, so this technology is clearly in demand. Retailers, healthcare providers, and IT rely on EDI to do better business, but it’s a smart solution for dropshippers, too. Dropshippers are opting for EDI to see these five benefits. 

1. Save Time and Money

You don’t have to rely on paper processes that take forever and cost you a fortune in paper and ink. Plus, you don’t have to deal with manual data entry ever again. Since EDI happens automatically (and quickly), you’ll have less downtime in your business. That means you can rapidly fulfill orders without the wait and increase your revenue as a result. 

2. Reduce Transfer Errors

Some retailers report seeing a 20% error rate before switching to an EDI. EDI removes the human element from the data mapping and translation process, protecting your business from dreaded errors, typos, and the headaches they cause.

3. Improve Supplier Relationships

One of the biggest benefits of EDI is improved supplier relationships. Electronic data interchange makes it a cinch to comply with your suppliers’ requirements. If you work with a supplier who has strict data processing rules, you can automatically map your data fields to whatever they need. 

Plus, vendors want to work with dropshippers who make their jobs as easy as possible. Switching to an EDI will encourage quality suppliers to keep you around. 

And who knows? Being a good customer might earn you favorable pricing or better payment terms down the road, so it never hurts to treat your suppliers well.

4. Be More Competitive

Dropshipping can be pretty cutthroat. You can’t afford to move at a snail’s pace if your competitors are already using EDI. EDI makes it possible to scale your dropshipping operation with ease. It automates the areas of your business that are begging for transformation, so if you want to outdo the other dropshippers in your niche, EDI is a must.

5. Improve Accuracy

Human error can cost you time and money. Fortunately, EDI automates a process that humans do badly. Let robots do what they do best while your human employees focus on more value-added projects.

EDI Systems and Components

All EDI systems are a little bit different, but by and large, they include these four components.

1. Standard Formatting

First and foremost, every EDI system needs a standard document format that both parties agree to. In practice, this is already provided by the EDI codes, but you will need to ensure that your system covers all of the codes that you will need in your business.

2. EDI Translator and Mapping

Next, your solution will take your data, translate it, and map it to your suppliers’ fields. The translator converts your internal data into a standard EDI format so you can use your suppliers' data internally, and vice versa. EDI mapping then takes fields like names, addresses, quantities, and more to standardize them to the receiver’s preferred format.

3. Communication

From there, the EDI system will send the EDI document to your suppliers. All EDI systems exchange data, but how they exchange data depends on the solution you choose. Some EDI systems exchange data over the internet while others create a direct connection between two systems.

4. Network

EDI systems will often create a dedicated network between you and your suppliers to send and receive EDI data. This keeps your data secure so third parties can’t spy on your communications.

Different Types of EDI Systems

While EDI is a standardization technology, EDI itself is far from standard. There’s no one “right” way to do EDI: there are several types of EDI systems to choose from according to your business needs.

Direct

With a direct EDI system, you create a direct data connection between you and your supplier. This is ideal if you send a lot of data to a single supplier that you work with closely. But this will likely be too much of a hassle if you rely on multiple suppliers to fulfill your products.

VAN

A value-added network (VAN) EDI uses a network services provider to transmit data securely to multiple suppliers. If you use different EDI protocols for all of your suppliers, a VAN makes it easy to translate all of these standards.

AS2

Applicability Statement version 2 (AS2) is a communications protocol for EDI. This is where two computers connect point-to-point over the internet to exchange EDI data. AS2 encrypts the data so it's secure and less prone to tampering while it’s in transmission.

FTP

File Transfer Protocol over a Virtual Private Network (FTP VPN) is a secure protocol like AS2 that will also encrypt your data. The difference is that FTP VPN will then decrypt data when it arrives on your computer. If you’re okay with storing less-secure, unencrypted data, FTP VPN could be a good option.

Web

Web EDI systems transfer everything through a web browser like Google Chrome. The entire business process happens via an online form. The system then converts the data into EDI and transmits it via secure protocols over the internet to your supplier’s web browser.

Mobile

Mobile EDI systems are still fairly new. If you mostly run your dropshipping business from your phone, this is a great solution that doesn’t require a desktop to do EDI.

How to Choose the Right EDI System

There’s no such thing as “the best” EDI solution. It comes down to your personal preferences and how you want to run your dropshipping business. If you’re evaluating several EDI solutions, assess them based on these three factors.

1. Price

First and foremost, how much does the EDI system cost? If you’re just starting and you’re on a tight budget, you might be more price sensitive. That might mean you should opt for a lower-cost solution that does less but works for your budget. You might need to pay more if you’re an established dropshipper and you need more advanced features.

Make sure you’re comparing apples to apples here. You might find a cheaper solution, but what value do you get for the money? Compare each EDI system’s features so you understand exactly what you’re paying for.

2. Your Business Size

Do you need a bigger, more complex solution? Or will something small and simple work for your business right now? If you work with a lot of suppliers, it might be best to choose a bigger EDI solution that can process more data. Your business is probably going to grow, too, so make sure your EDI solution has the chops to support your dropshipping business as you scale. 

3. Maintenance and Support

EDI comes with a learning curve. The downside is that most EDI solutions don’t offer support. If you’re new to using EDI, that could make a huge difference to your business, so go with EDI solutions that offer support and ongoing maintenance.

How Spark Shipping Can Help with EDI

Electronic data interchange is complicated, but to be a successful dropshipper, you do need to have an EDI solution. Luckily, EDI can help your business, even if you don’t understand all of the technical details.

You don’t need to be an EDI expert to avoid doing everything manually. You can sleep better at night by going with solutions like Spark Shipping. 

You don’t need to worry about which EDI system to choose, either. Spark Shipping comes with a complete EDI solution for dropshippers. We handle all EDI functionality, from mapping your documents to exchanging EDI codes with your vendors.

See how Spark Shipping can implement and automate EDI for your eCommerce store and simplify your workload!