Electronic Commerce Eighth Edition

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Electronic CommerceEighth Edition

• Chapter 5Business-To-Business Online Strategies

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Learning Objectives

• In this chapter, you will learn about
• Strategies that businesses use to improve
  purchasing, logistics, and other support
  activities
• Electronic data interchange and how it works
• How businesses have moved some of their
  electronic data interchange operations to the
  Internet

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Learning Objectives (contd.)

• Supply chain management and how businesses are
  using Internet technologies to improve it
• Electronic marketplaces and portals that make
  purchase-sale negotiations easier and more
  efficient

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Purchasing, Logistics, and Support Activities

• Electronic commerce
• Improves primary and support activities
• Tremendous potential for
• Cost reductions, business process improvements
• e-government
• Collective set of electronic commerce activities
• Improving government support activities
• Supporting activities and serving stakeholders
  better
• Potential for synergies increase with Internet
  technologies use
• Necessary characteristic flexibility

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Purchasing Activities

• Supply chain
• Part of industry value chain preceding a
  particular strategic business unit
• Includes all activities undertaken by every
  predecessor in the value chain to
• Design, produce, promote, market, deliver,
  support each individual component of a product or
  service
• Traditionally
• Purchasing Department charged with buying
  components at lowest price possible
• Process focused excessively on individual
  components cost ignored total supply chain costs

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Purchasing Activities (contd.)

• Procurement includes
• All purchasing activities
• Monitoring all elements in purchase transactions
• Supply management
• Describes procurement activities
• Procurement staff
• Require product knowledge
• Identify and evaluate appropriate suppliers
• Sourcing
• Procurement activity
• Identifying suppliers, determining qualifications

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Purchasing Activities (contd.)

• e-sourcing
• Use of Internet technologies in sourcing
  activities
• Specialized Web-purchasing sites
• Figure 5-1
• Typical business purchasing process steps
• Many steps and people involved
• Spend
• Total goods and services dollar amount company
  buys during a year
• Institute for Supply Management (ISM)
• Main organization for procurement professionals

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Direct vs. Indirect Materials Purchasing

• Direct materials
• Materials that become part of finished product
• Direct materials purchasing two types
• Replenishment purchasing (contract purchasing)
• Company negotiates long-term material contracts
• Spot purchasing
• Purchases made in loosely organized market (spot
  market)
• Indirect materials
• All other materials company purchases

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Direct vs. Indirect Materials Purchasing (contd.)

• Maintenance, repair, and operating (MRO) supplies
• Indirect material products purchased on a
  recurring basis
• Standard items (commodities) buyers usually
  select
• Price main criterion
• Purchasing cards (p-cards)
• Give individual managers ability to make multiple
  small purchases at their discretion
• Provide cost-tracking information to procurement
• MRO suppliers McMaster-Carr, W.W. Grainger

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Logistics Activities

• Provide the right goods in the right quantities
  in the right place at the right time
• Important support activity for sales and
  purchasing
• Inbound materials and supplies movements
• Outbound finished goods and services movements
• Example Schneider Track and Trace system
• Real-time shipment information customers
  browsers
• Third-party logistics (3PL) provider
• Operates all (large portion) of customers
  materials movement activities
• Examples Ryder and Whirlpool, FedEx, UPS

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Support Activities

• General categories
• Finance and administration, human resources,
  technology development
• Example Allegiance and A.D.A.M. Web site
• Training
• Common support activity
• Underlies multiple primary activities
• Advantages training materials on company
  intranet
• Distribute materials to many different sales
  offices
• Coordinate use of materials in corporate
  headquarters

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Support Activities (contd.)

• Examples Ericson, BroadVisions K-Net
• Knowledge management
• Intentional collection, classification,
  dissemination of information
• About a company, its products, and its processes

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E-Government

• e-government
• Use of electronic commerce by governments and
  government agencies
• Perform functions for stakeholders
• Operate businesslike activities
• Examples in U.S. government
• Financial Management Service (FMS)
• Pay.gov Web site
• Department of Homeland Security (DHS)
• Internet technology use initiatives

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E-Government (contd.)

• Examples in other countries
• United Kingdom
• Department for Work and Pensions Web site
• Singapores SINGOV site
• Examples in state government
• Californias one-stop portal site (my.ca.gov)
• New York State Citizen Guide site
• Examples in local government
• Large cities Minneapolis, New Orleans
• New York City (MyNYC.gov)

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Network Model of Economic Organization

• Trend in purchasing, logistics, and support
  activities
• Shift from hierarchical structures
• Toward network structures
• Procurement Departments new tools (technology)
• To negotiate with suppliers
• Including possibility of forming strategic
  alliances
• Network model of economic organization
• Other firms perform various support activities
• Manage payroll, administer employee benefits
  plans, handle document storage needs
• Web enabling shift from hierarchical to network

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Electronic Data Interchange

• Trading partners
• Two businesses exchanging information
• EDI compatible
• Firms that exchange data in specific standard
  formats
• EDI importance
• Most B2B electronic commerce
• An adaptation of EDI or based on EDI principles
• Still the method used for most electronic B2B
  transactions

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Early Business Information Interchange Efforts

• 1800s and early 1900s
• Need to create formal business transactions
  records
• 1950s
• Computers store, process internal transaction
  records
• Information flows printed on paper
• 1960s large volume transactions
• Exchanged on punched cards or magnetic tape
• 1960s and 1970s
• Transferred data over telephone lines
• All efforts increased efficiency and reduced
  errors

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Early Business Information Interchange Efforts
(contd.)

• These information transfer agreements were not
  the ideal solution
• Data translation programs incompatible
• 1968 freight, shipping companies joined together
• Transportation Data Coordinating Committee (TDCC)
• Created standardized information set
• Allowed electronic computer file transmission to
  any freight company adopting TDCC format
• Benefits limited to members of industries that
  created standard-setting groups
• Full realization of EDI
• Required standards used by companies in all
  industries

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Emergence of Broader EDI Standards

• The American National Standards Institute (ANSI)
• United States coordinating body for standards
• 1979
• Accredited Standards Committee X12 (ASC X12)
• Develop and maintain EDI standards
• Data Interchange Standards Association (DISA)
• Administrative body coordinating ASC X12
  activities
• 1987 International standards
• Administration, Commerce, and Transport (EDIFACT,
  UN/EDIFACT)

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How EDI Works

• Basic idea straightforward
• Implementation complicated
• Example company to replace metal-cutting machine
• Assume vendor uses its own vehicles instead to
  deliver purchased machine
• Steps to purchase using paper-based system
• Figure 5-6
• Steps to purchase using EDI
• Figure 5-7

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How EDI Works (contd.)

• Paper-based purchasing process
• Buyer and vendor
• Not using integrated software for business
  processes
• Each information processing step results in paper
  document
• Must be delivered to department handling next
  step
• Paper-based information transfer
• Mail, courier, or fax
• Figure 5-6
• Information flows

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How EDI Works (contd.)

• EDI purchasing process
• Mail service replaced with EDI network data
  communications
• Flows of paper within the buyers and vendors
  organizations replaced with computers
• Running EDI translation software
• Figure 5-7
• Information flows

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Value-Added Networks

• EDI network key elements
• EDI network, two EDI translator computers
• Direct connection EDI
• Each business operates an on-site EDI translator
  computer
• Value-added network (VAN)
• Receives, stores, forwards electronic messages
  containing EDI transaction sets
• Indirect connection EDI
• Trading partners use VAN to retrieve
  EDI-formatted messages

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Value-Added Networks (contd.)

• Advantages
• Support one communications protocol (VAN)
• VAN records message activity in audit log
  (independent record of transactions)
• VAN provides translation between different
  transaction sets
• VAN performs automatic compliance checking
• Disadvantages
• Cost (fees)
• Cumbersome, expensive (if using different VANs)

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EDI Payments

• Transaction sets provide instructions to trading
  partners bank
• Negotiable instruments
• Electronic equivalent of checks
• Electronic funds transfers (EFTs)
• Movement of money from one bank account to
  another
• Automated clearing house (ACH) system
• Service banks use to manage accounts
• Operated by U.S. Federal Reserve Banks or private
  ACHs

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EDI on the Internet

• Potential replacement of
• Expensive leased lines, dial-up connections
• Required to support direct and VAN-aided EDI
• Initial roadblock concerns
• Security
• Internets inability to provide audit logs and
  third-party verification of message transmission
  and delivery
• TCP/IP structure was enhanced with secure
  protocols and encryption schemes
• Lack of third-party verification concerns
  continued

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EDI on the Internet (contd.)

• Nonrepudiation
• Ability to establish that a particular
  transaction actually occurred
• Prevents either party from repudiating (denying)
  the transactions validity or existence
• Previously provided by
• VANs audit logs (indirect connection EDI)
• Comparison of trading partners message logs
  (direct connection EDI)

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Open Architecture of the Internet

• Internet EDI (Web EDI)
• EDI on the Internet
• Also called open EDI
• Internet is an open architecture network
• EDI offerings go beyond traditional EDI
• Allow more complex information interchanges
• Growing rapidly
• Not replacing traditional EDI
• Large companies have significant investments in
  traditional EDI computing infrastructure
• Most VANs offer Internet EDI services,
  traditional EDI

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Open Architecture of the Internet (contd.)

• More flexible exchange of information
• Accomplished with new tools (XML)
• ASC X12 task group
• Convert ASC X12 EDI data elements and transaction
  set structures to XML
• Context Inspired Component Architecture (CICA)
• Set of standards for assembling business messages
• Provides predictable structure for message
  content
• Provides more flexibility than EDI transaction
  sets
• Basis for future development of electronic
  business message standards using XML

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Open Architecture of the Internet (contd.)

• Firms extending internal networks (intranets) to
  trading partners
• Turns intranets into extranets
• Virtual private networks (VPNs) provide security
• Example Nintendo USA
• EDI-based product registration system to prevent
  fraudulent returns
• Huge investment in EDI systems, trained personnel
• Reluctant to change business processes, move to
  Internet EDI, approaches based on XML
  technologies
• Move away from EDI will gradually occur

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Supply Chain Management Using Internet
Technologies

• Supply chain management
• Job of managing integration of company supply
  management and logistics activities
• Across multiple participants in a particular
  products supply chain
• Ultimate goal
• Achieve higher-quality or lower-cost product at
  the end of the chain

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Value Creation in the Supply Chain

• Firms engaging in supply chain management
• Reaching beyond limits of their own
  organizations hierarchical structure
• Creating new network
• Form of organization among members of supply
  chain
• Originally a way to reduce costs
• Today, value added in the form of benefits to the
  ultimate consumer
• Requires more holistic view of the entire supply
  chain

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Value Creation in the Supply Chain (contd.)

• Tier-one suppliers
• Very capable suppliers, a small number of which a
  firm establishes long-term relationships with
• Tier-two suppliers
• Larger number of suppliers that tier-one
  suppliers develop long-term relationships with
• Provide components and raw materials
• Tier-three suppliers
• Next level of suppliers
• Trust is a key element

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Value Creation in the Supply Chain (contd.)

• Supply alliances
• Long-term relationships among participants in the
  supply chain
• Major barrier
• Level of information sharing
• Example Dell Computer
• Reduced supply chain costs by sharing information
  with suppliers
• Buyers expect annual price reductions, quality
  improvements

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Value Creation in the Supply Chain (contd.)

• Marshall Fisher 1997 Harvard Business Review
  article
• Two types of organization goals
• Efficient process goals
• Market-responsive flexibility goals
• Successful supply chain management key elements
• Clear communications
• Quick responses to those communications
• Internet and Web technologies
• Effective communications enhancers

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Increasing Supply Chain Efficiencies

• Internet and Web technologies used to manage
  supply chains
• Yield increases in efficiency throughout the
  chain
• Increase process speed, reduce costs, increase
  manufacturing flexibility
• Respond to changes in quantity and nature of
  ultimate consumer demand
• Example Boeing
• Invested in new information systems
• Increase production efficiency
• Launched spare parts Web site

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Increasing Supply Chain Efficiencies (contd.)

• Example Dell Computer
• Famous for use of Web to sell custom-configured
  computers
• Also used technology-enabled supply chain
  management
• Give customers exactly what they want
• Reduced inventory amount (three weeks to two
  hours)
• Top suppliers have access to secure Web site
• Know Dells customers and what they are buying
• Tier-one suppliers better plan their production

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Using Materials-Tracking Technologies with EDI
and Electronic Commerce

• Troublesome task
• Tracking materials as they move from one company
  to another
• Use optical scanners and bar codes
• Integration of bar coding and EDI is prevalent
• Figure 5-11
• Electronic commerce second wave
• Integrating new types of tracking into
  Internet-based materials-tracking systems

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Using Materials-Tracking Technologies with EDI
and Electronic Commerce (contd.)

• Radio Frequency Identification Devices (RFIDs)
• Small chips
• Use radio transmissions to track inventory
• Older RFID technology
• Each RFID required its own power supply
• Important development passive RFID tag
• Made cheaply and in very small sizes
• No power supply required
• RFIDs
• Read much more quickly, with higher degree of
  accuracy

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Using Materials-Tracking Technologies with EDI
and Electronic Commerce (contd.)

• 2003 (Wal-Mart)
• Tested use of RFID tags on merchandise for
  inventory tracking and control
• Initiated plan to have all suppliers install RFID
  tags in goods they shipped
• Reduced incidence of stockouts
• Retailer loses sales because it does not have
  specific goods on its shelves
• Suppliers found RFID tags, readers, computer
  systems to be quite expensive
• Pushed for slowdown in Wal-Marts RFID initiative

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Creating an Ultimate Consumer Orientation in the
Supply Chain

• Ultimate consumer orientation
• Customer focus
• Difficult to maintain
• Michelin North America
• Pioneered use of Internet technology
• To go beyond next step in its value chain
• 1995 launched electronic commerce initiative
• BIB NET extranet
• Allowed dealer access to tire specifications,
  inventory status, and promotional information
• Through simple-to-use Web browser interface

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Building and Maintaining Trust in the Supply Chain

• Major issue in forming supply chain alliances
• Developing trust
• Key elements
• Continual communication and information sharing
• Internet and the Web
• Provide excellent ways to communicate and share
  information
• Provide opportunity to stay in contact with
  customers
• More easily and less expensively
• Instant access to sales representatives, vendors
• Comprehensive information at a moments notice

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Electronic Market Places and Portals

• Vertical portals (vortal)
• Information hubs for each major industry
• Offer news, research reports, trend analyses,
  in-depth reports on companies, marketplaces, and
  auctions
• Doorway (or portal) to the Internet for industry
  members
• Vertically integrated
• Predicted to change business forever
• Not exactly correct

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Independent Industry Marketplaces

• First industry hubs following vertical portal
  model
• Trading exchanges focused on a particular
  industry
• Independent industry marketplaces
• Industry marketplaces
• Focused on a single industry
• Independent exchanges
• Not controlled by established buyer or seller in
  the industry
• Public marketplaces
• Open to new buyers and sellers just entering the
  industry

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Independent Industry Marketplaces (contd.)

• Example Ventro
• 1997 opened industry marketplace Chemdex
• Trade in bulk chemicals
• By mid-2000
• More than 2200 independent exchanges
• By 2008
• Fewer than 80 industry marketplaces still
  operating
• Other B2B marketplace models arose
• Took business away from the independent
  marketplaces

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Private Stores and Customer Portals

• Large seller concern
• Independent operators would take control of
  transactions in supply chains
• Industry marketplaces would dilute power
• Customer portal sites
• Cisco and Dell private store with
  password-protected entrance
• Grainger provide additional services for
  customers
• Needlessly duplicated if sellers participated in
  industry marketplace

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Private Company Marketplaces

• Large companies purchasing from relatively small
  vendors
• Exert power in purchasing negotiations
• e-procurement software
• Company manages purchasing function through Web
• Procurement software companies
• Ariba, CommerceOne
• Automates authorizations, other steps
• Marketplace functions

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Private Company Marketplaces (contd.)

• Companies implementing e-procurement software
• Require suppliers bid on business
• Private company marketplace
• Marketplace providing auctions, request for quote
  postings, other features
• For companies who want to operate their own
  marketplaces
• Example United Technologies
• Sells 35 billion of high-technology products,
  services

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Industry Consortia-Sponsored Marketplaces

• Companies with strong negotiating positions in
  their industry supply chains
• Not enough power to force suppliers to deal with
  them
• Through a private company marketplace
• Industry consortia-sponsored marketplace
• Marketplace formed several large buyers in a
  particular industry
• Example Covisint (2000)
• Consortium of DaimlerChrysler, Ford, General
  Motors

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Industry Consortia-Sponsored Marketplaces
(contd.)

• Example Agenda marketplace
• Consortium formed by Marriott, Hyatt, three other
  major hotel chains
• Example Exostar marketplace
• Boeing led group of aerospace industry companies
• Example Transora marketplace
• Procter Gamble joined with Sara Lee, Coca Cola,
  several other companies
• Consortiums have taken large part of market from
  the industry marketplaces

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Industry Consortia-Sponsored Marketplaces
(contd.)

• Supplier concern
• Ownership structure
• Independent operators for fair bargaining
  (Covisint)
• Including industry participants may be helpful
  (ChemConnect)

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Summary

• Using Internet and Web technologies improves
  purchasing and logistics primary activities
• Emerging network model of organization
• Governments extending reach of enterprise
  planning and control activities
• Beyond legal definitions
• History of EDI and how it works
• Conducting EDI better than processing mountains
  of paper transactions
• Internet providing inexpensive communications
  channel EDI lacked

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Summary (contd.)

• Supply chain management techniques
• Fueled by increase in communications capabilities
  offered by the Internet and the Web
• Development of several different B2B electronic
  commerce models
• Private stores
• Customer portals
• Private marketplaces
• Industry consortia-sponsored marketplaces
• Most successful today