Electronic Commerce Eighth Edition

Business-To-Business Online Strategies

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
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