Chapter 05 business to business online strategies

Electronic CommerceEighth Edition

Chapter 5Business-To-Business Online Strategies

Electronic Commerce, Eighth Edition 2

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


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


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

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



Purchasing Activities (cont’d.)

• 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


Purchasing Activities (cont’d.)

• 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



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


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

• 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


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 customer’s materials

movement activities• Examples: Ryder and Whirlpool, FedEx, UPS



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


Support Activities (cont’d.)

• Examples: Ericson, BroadVision’s K-Net

• Knowledge management– Intentional collection, classification, dissemination of

information• About a company, its products, and its processes


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


E-Government (cont’d.)

• Examples in other countries– United Kingdom

• Department for Work and Pensions Web site

– Singapore’s SINGOV site

• Examples in state government– California’s 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)


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 networkElectronic Commerce, Eighth Edition 18


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


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


Early Business Information Interchange Efforts (cont’d.)

• 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


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)




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


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, or fax

– Figure 5-6 • Information flows



How EDI Works (cont’d.)

• EDI purchasing process– Mail service replaced with EDI network data

communications– Flows of paper within the buyer’s and vendor’s

organizations replaced with computers• Running EDI translation software

– Figure 5-7 • Information flows


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





Value-Added Networks (cont’d.)

• 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)


EDI Payments

• 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• Operated by U.S. Federal Reserve Banks or private

ACHs


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 – Internet’s 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


EDI on the Internet (cont’d.)

• Nonrepudiation– Ability to establish that a particular transaction

actually occurred– Prevents either party from repudiating (denying) the

transaction’s validity or existence– Previously provided by:

• VAN’s audit logs (indirect connection EDI)

• Comparison of trading partners’ message logs (direct connection EDI)

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


Open Architecture of the Internet (cont’d.)

• 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


Open Architecture of the Internet (cont’d.)

• 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 occurElectronic Commerce, Eighth Edition 39


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


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 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


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

• 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



• 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



• 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


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 siteElectronic Commerce, Eighth Edition 46


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• Know Dell’s customers and what they are buying

• Tier-one suppliers better plan their production


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




(cont’d.)• 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




(cont’d.)• 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-Mart’s RFID initiative


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


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 moment’s notice


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

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

industryElectronic Commerce, Eighth Edition 56


Independent Industry Marketplaces (cont’d.)

• 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


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


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


Private Company Marketplaces (cont’d.)

• 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


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


Industry Consortia-Sponsored Marketplaces (cont’d.)

• 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


Industry Consortia-Sponsored Marketplaces (cont’d.)

• Supplier concern– Ownership structure

• Independent operators for fair bargaining (Covisint)

• Including industry participants may be helpful (ChemConnect)


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 lackedElectronic Commerce, Eighth Edition 65


Summary (cont’d.)

• 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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