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Electronic Commerce Tenth Edition

Chapter 5 Business-to-Business Activities: Improving Efficiency and Reducing Costs

Electronic Commerce, Tenth Edition

Learning Objectives

In this chapter, you will learn about:

How businesses use the Internet 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

Learning Objectives (cont’d.)

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

Electronic Commerce, Tenth Edition

Purchasing, Logistics, and Business Support Processes

Recap

Strategy issues arise when providing information to potential customers

Value chain model’s primary activities

Identify customers, market and sell, and deliver

Many business models for selling on the Web

Used in B2B e-commerce

Apply to B2C e-commerce

Electronic Commerce, Tenth Edition

Purchasing, Logistics, and Business Support Processes (cont’d.)

Companies use electronic commerce to:

Improve purchasing and logistics

Improve all support activities

Provide potential cost reductions, business process improvements

Necessary characteristic: flexibility

Economic organizations evolving from hierarchical structures to new, more flexible network structures

Reduced transaction cost through Internet and Web technologies for business processes

Purchasing, Logistics, and Business Support Processes (cont’d.)

Outsourcing: use of other organizations to perform specific activities

Typically manufacturing

Offshoring: outsourcing done by organizations in other countries

Internet-enabled activities: purchasing, research and development, record keeping, information management

Business process offshoring

Impact sourcing or smart sourcing: offshoring done by or through not-for-profit organizations

Electronic Commerce, Tenth Edition

Purchasing Activities

Identify and evaluate vendors, select specific products, place orders, resolve any issues after receiving ordered goods or services

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

Electronic Commerce, Tenth Edition

Purchasing Activities (cont’d.)

Traditionally

Purchasing department buys components at lowest price possible

Bidding process focus: individual component cost

Procurement includes:

All purchasing activities

Monitoring all purchase transaction elements

Managing and developing supplier relationships

Electronic Commerce, Tenth Edition

Purchasing Activities (cont’d.)

Procurement also called supply management

Procurement staff have high product knowledge

Identify and evaluate appropriate suppliers

Sourcing procurement activity

Identifying suppliers, determining qualifications

e-sourcing

Using Internet technologies in sourcing activities

Purchasing Activities (cont’d.)

Business purchasing process

More complex than most consumer purchasing processes

Spend

Total yearly dollar amount for goods and services purchased

Institute for Supply Management (ISM)

Main organization for procurement professionals

Electronic Commerce, Tenth Edition

FIGURE 5-1 Steps in a typical business purchasing process

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Electronic Commerce, Tenth Edition

Direct vs. Indirect Materials Purchasing

Direct materials

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); demand exceeds estimates made for contract purchasing

Indirect materials

All other materials company purchases

Electronic Commerce, Tenth Edition

Direct vs. Indirect Materials Purchasing (cont’d.)

Maintenance, repair, and operating (MRO) supplies

Indirect materials purchased on a recurring basis

Standard items (commodities) with price as main criterion

Purchasing cards (p-cards) provide:

Managers ability to make multiple small purchases

Cost-tracking information to procurement

Leading Suppliers:

MRO: McMaster-Carr, W.W. Grainger,

Office Depot, Staples, Digi-Key, Newark.com

Electronic Commerce, Tenth Edition

FIGURE 5-2 Grainger.com Web store

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Logistics Activities

Classic objective

Provide the right goods in the right quantities in the right place at the right time

Important support activity for sales and purchasing

Includes managing the movements of:

Inbound materials and supplies

Outbound finished goods and services

Web and the Internet

Providing increasing number of opportunities to better manage activities

Electronic Commerce, Tenth Edition

Logistics Activities (cont’d.)

Example: Schneider Track and Trace system

Real-time shipment information: customers’ browsers

Third-party logistics (3PL) provider

Operates all (large portion) of customer’s materials movement activities

Examples: Ryder and Whirlpool

Excellent example of second-wave e-commerce

Marriage of GPS and portable computing technologies with the Internet (Examples: Fed Ex and UPS)

Third-wave e-commerce supported by smart phones

Electronic Commerce, Tenth Edition

Business Process Support Activities

General categories

Finance and administration, human resources, technology development

FIGURE 5-3 Categories of support activities

Business Process Support Activities (cont’d.)

Human resources and /or payroll functions often outsourced by small/midsized companies

Common support activity: training

Underlies multiple primary activities

Putting training materials on company intranet

Can distribute materials to many different sales offices

Can coordinate materials in corporate headquarters

Knowledge management

Intentional collection, classification, dissemination of information about a company, its products and processes (Examples: Ericsson, KMWorld)

Electronic Commerce, Tenth Edition

E-Government

Use of electronic commerce by governments and government agencies

Enhances functions performed for stakeholders

Enhances businesslike activity operations

U.S. government examples

Financial Management Service (FMS): Pay.gov site

Bureau of Public Debt: TreasuryDirect site

Department of Homeland Security (DHS)

Internet technology use initiatives to enable information sharing among agencies

Electronic Commerce, Tenth Edition

E-Government (cont’d.)

Examples in other countries

United Kingdom

Department for Work and Pensions Web site

Singapore Government Online site

State government sites

California’s one-stop portal site: CA.GOV

Similar sites for most other states

Examples in local government

Large cities: Minneapolis, New Orleans sites

Small cities: Cheviot, Ohio Web site as one example

Electronic Commerce, Tenth Edition

FIGURE 5-4 State of California portal site

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Network Model of Economic Organization in Purchasing: Supply Webs

Trend in purchasing, logistics, and support activities

Shift from hierarchical structures

Toward network structures

Procurement departments’ new tools (technology)

To negotiate with suppliers and form strategic alliances

Network model of economic organization

Other firms perform various support activities

Supply Web: term replacing “supply chain”

Due to parallel lines interconnected in a Web or network configuration

Electronic Commerce, Tenth Edition

Electronic Data Interchange

Computer-to-computer business information transfer

Between two businesses using a standard format

Trading partners

Two businesses exchanging information

EDI compatible

Firms exchanging data in specific standard formats

Reasons to be familiar with EDI

Most B2B e-commerce adapted from EDI or based on EDI principles

Dominant technology for electronic B2B transactions

Electronic Commerce, Tenth Edition

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

Efforts increased efficiency, reduced errors

Electronic Commerce, Tenth Edition

Early Business Information Interchange Efforts (cont’d.)

Issue: incompatible data translation programs

1968: freight, shipping companies joined together

Created standardized information set

Used a computer file

Transmittable to any freight company adopting the standard

Benefits limited to members of industries that created standard-setting groups

Full realization of EDI economies and efficiencies

Required standards for all companies in all industries

Electronic Commerce, Tenth Edition

Emergence of Broader Standards: The Birth of EDI

American National Standards Institute (ANSI)

United States coordinating body for standards

Accredited Standards Committee X12 (ASC X12)

Develops and maintains EDI standards

Data Interchange Standards Association (DISA)

Administrative body coordinating ASC X12 activities

Transaction sets: names of the formats for specific business data interchanges

EDI for Administration, Commerce, and Transport (EDIFACT, or UN/EDIFACT)

Electronic Commerce, Tenth Edition

FIGURE 5-5 Commonly used EDI transaction sets

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Electronic Commerce, Tenth Edition

How EDI Works

Basic idea: straightforward

Implementation: complicated

Example:

Company replacing metal-cutting machine

Steps to purchase using paper-based system

Steps to purchase using EDI

Electronic Commerce, Tenth Edition

How EDI Works (cont’d.)

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, fax

Information flows shown in Figure 5-6

Electronic Commerce, Tenth Edition

FIGURE 5-6 Information flows in a paper-based purchasing process

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Electronic Commerce, Tenth Edition

How EDI Works (cont’d.)

EDI purchasing process

Mail service replaced with EDI network data communications

Paper flows within buyer’s and vendor’s organizations replaced with computers

Running EDI translation software

Information flows shown in Figure 5-7

Electronic Commerce, Tenth Edition

FIGURE 5-7 Information flows in an EDI purchasing process

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Value-Added Networks

EDI network key elements

EDI network, two EDI translator computers

Direct connection EDI

Businesses operate on-site EDI translator computers

Connected directly to each

Few companies use direct connection EDI

Dedicated leased lines: expensive

Electronic Commerce, Tenth Edition

FIGURE 5-8 Direct connection EDI

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Value-Added Networks (cont’d.)

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

Companies providing VAN services

CovalentWorks, EasyLink Services, GXS, Kleinschmidt, Promethean Software Services, and SPS Commerce

Electronic Commerce, Tenth Edition

FIGURE 5-9 Indirect connection EDI through a VAN

Electronic Commerce, Tenth Edition

Value-Added Networks (cont’d.)

Advantages

Support one communications protocol (VAN)

VAN records message activity in audit log

Becomes independent transactions record

VAN provides translation between different transaction sets

VAN performs automatic compliance checking

VAN records message activity in audit log

Helps establish nonrepudiation: ability to establish that a particular transaction actually occurred

Value-Added Networks (cont’d.)

Disadvantages: In the past, cost (fees)

Today, affordable even for small companies

Internet presents low-cost communications medium used by VAN services

EDI on the Internet: Internet EDI, Web EDI, open EDI (Internet is open architect network)

Electronic Commerce, Tenth Edition

Value-Added Networks (cont’d.)

EDIINT (Electronic Data Interchange-Internet Integration, EDI-INT)

most common protocol for Internet EDI transaction sets

EDI exchanges encoded using

AS2 (Applicability Statement 2) or AS3 (Applicability Statement 3)

Secure electronic receipts returned to senders for every transaction, help establish repudiation

Electronic Commerce, Tenth Edition

EDI Payments

EDI transaction sets

Provide instructions to trading partner’s 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 with each other

Operated by U.S. Federal Reserve Banks, private ACHs

Electronic Commerce, Tenth Edition

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 product’s supply chain

Ultimate goal

Achieve higher-quality or lower-cost product at the end of the chain

Electronic Commerce, Tenth Edition

Value Creation in the Supply Chain

Firms engaging in supply chain management

Reaching beyond limits of their own organization’s hierarchical structure

Creating new network form of organization among members of supply chain

Originally developed to reduce costs

Today: value added in the form of benefits to the ultimate consumer

Requires more holistic view of the entire supply chain

Electronic Commerce, Tenth Edition

Value Creation in the Supply Chain (cont’d.)

Tier-one suppliers

Small number of very capable suppliers

Original business establishes a long-term relationship

Tier-two suppliers

Larger number of suppliers who tier-one suppliers develop long-term relationships with for components, raw materials

Tier-three suppliers

Next level of suppliers

Key element: trust

Electronic Commerce, Tenth Edition

Value Creation in the Supply Chain (cont’d.)

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 from suppliers

Electronic Commerce, Tenth Edition

Value Creation in the Supply Chain (cont’d.)

Marshall Fisher 1997 Harvard Business Review article

Described 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

Electronic Commerce, Tenth Edition

FIGURE 5-10 Advantages of using Internet technologies in supply chain management

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Increasing Supply Chain Efficiencies

Internet and Web technologies managing supply chains can:

Yield increases in efficiency throughout the chain

Increase process speed, reduce costs, increase manufacturing flexibility

Allows response to changes in quantity and nature of ultimate consumer demand

Example: Boeing

Invested in new information systems increasing production efficiency of the supply chain

Also launched spare parts Web site

Electronic Commerce, Tenth Edition

Increasing Supply Chain Efficiencies (cont’d.)

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

Tier-one suppliers can better plan their production

Dell accesses suppliers’ information

Electronic Commerce, Tenth Edition

Materials-Tracking Technologies

Troublesome task

Tracking materials as they move from one company to another

Optical scanners and bar codes

Help track movement of materials

Integration of bar coding and EDI: prevalent

Second wave of electronic commerce

Integration of new types of tracking into Internet-based materials-tracking systems

Electronic Commerce, Tenth Edition

FIGURE 5-11 Shipping label with bar-coded elements from EDI transaction set 856, Advance Ship Notification

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Electronic Commerce, Tenth Edition

Materials-Tracking Technologies (cont’d.)

Real-time location systems (RTLS)

Bar code tracking system

Used by fulfillment centers

Radio Frequency Identification Devices (RFIDs)

Small chips using radio transmissions to track inventory

RFIDs read much more quickly, higher degree of accuracy than bar codes

Important development: passive RFID tag

Made cheaply and in very small sizes

No power supply required

Electronic Commerce, Tenth Edition

Materials-Tracking Technologies (cont’d.)

Example: 2003 (Wal-Mart)

Tested RFID tag use on merchandise for inventory tracking and control

Initiated plan to have all suppliers install RFID tags in shipped goods

Reduced incidence of stockouts

Retailer loses sales because it does not have specific goods on its shelves

General acceptance of RFID tagging will not occur in most industries until 2015

Electronic Commerce, Tenth Edition

FIGURE 5-12 Passive RFID tag

Courtesy, Moeller-Horcher. Source: Metro

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Electronic Commerce, Tenth Edition

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

Electronic Commerce, Tenth Edition

Building and Maintaining Trust in the Supply Chain

Major issue: developing trust

Key elements

Continual communication and information sharing

Internet and the Web

Provide excellent ways to communicate and share information

Offer new avenues for building trust

Maintain contact with their customers

Afford buyers instant access to their sales representatives

Provide comprehensive information quickly

Electronic Commerce, Tenth Edition

Electronic Marketplaces and Portals

Vertical portals (vortals)

Industry-focused hubs

Offer marketplaces and auctions for contact and business transactions

Doorway (or portal) to the Internet for industry members

Vertically integrated: each hub services just one industry

Independent Industry Marketplaces

First vertical portals

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

Ventro opened industry marketplace Chemdex

Trade in bulk chemicals

Electronic Commerce, Tenth Edition

Independent Industry Marketplaces (cont’d.)

SciQuest founded industry marketplace in life science chemicals

By mid-2000: more than 2200 independent exchanges

By 2010: fewer than 70 industry marketplaces still operating

Due to lack of venture capital and profits

B2B marketplace models gradually replaced independent marketplaces

Electronic Commerce, Tenth Edition

Private Stores and Customer Portals

Large established sellers feared industry marketplaces diluting power

Large sellers have customer portal B2B sites

Offer private stores along with services

B2B private store has password-protected entrance

Offers negotiated price reductions on limited product selection

If large established sellers participated in industry marketplaces

Services would have been needlessly duplicated

Electronic Commerce, Tenth Edition

Private Company Marketplaces

Large companies purchasing from relatively small vendors

Exert power in purchasing negotiations

Using e-procurement software

Allows companies to manage purchasing function through Web interface

Automates authorizations, other steps

Includes marketplace functions

Electronic Commerce, Tenth Edition

Private Company Marketplaces (cont’d.)

Larger companies:

Reluctant to abandon investments in e-procurement software

Make software work with industry marketplaces’ software

Private company marketplace

Marketplace providing auctions, request for quote postings, other features

For companies that want to operate their own marketplaces

Electronic Commerce, Tenth Edition

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 by several large buyers in a particular industry

Characteristics of five general marketplace forms in B2B electronic commerce today (Figure 5-13)

Electronic Commerce, Tenth Edition

FIGURE 5-13 Characteristics of B2B marketplaces

Adapted from: Raisch, W. 2001. The eMarketplace, p. 225.

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Summary

Using Internet and Web technologies

Improves purchasing and logistics primary activities

Improves support activities

Companies and other large organizations extending reach of enterprise planning and control activities

Beyond organization’s legal definitions

Emerging network model of organization

Describes growth in interorganizational communications and coordination

Electronic Commerce, Tenth Edition

Summary (cont’d.)

History of EDI and how it works

Freight companies first introduced electronic commerce

Spread of EDI to virtually all large companies

Requires smaller businesses to seek an affordable way to participate in EDI

Internet providing inexpensive communications channel EDI lacked

Important force driving supply chain management technique adoption

Electronic Commerce, Tenth Edition

Summary (cont’d.)

Supply chain management

Incorporates several elements

Implemented, enhanced through Internet and Web use

Industry electronic marketplaces led to B2B electronic commerce models

Private stores

Customer portals

Private marketplaces

Industry consortia-sponsored marketplace

Models coexist with industry marketplace model