ONLINE FILE W5.1 BUYING FROM VIRTUAL SELLER...

Chapter Five: B2B E-Commerce 1

ONLINE FILE W5.1

BUYING FROM VIRTUAL SELLER BIGBOXX.COMBigboxx.com (bigboxx.com), based in Hong Kong, is a B2Bretailer of office supplies. It has no physical stores andsells products through its online catalog; thus,Bigboxx.com is an online intermediary. The companyhas three types of customers: large corporate clients,medium-sized corporate clients, and small office/homeoffices (SOHOs). It offers more than 8,000 items from300 suppliers. Bigboxx.com’s goal is to sell its productsin various countries in Southeast Asia.

The company’s portal is attractive and easy to useand includes tutorials that instruct users on how touse the Web site. Once registered, the user can startshopping using the online shopping cart. Users canlook for items by browsing through the online catalogor by searching the site with a search engine. Theordering system is integrated with a SAP-basedback-office system.

Users can pay by cash or by check (upon delivery),via automatic bank drafts, by credit card, or by purchasingcard. Soon users will be able to pay through Internet-based direct debit, by electronic bill presentation and payment, or by Internet banking.

Bigboxx.com uses its own trucks and warehousesto make deliveries within 24 hours of when anorder is placed.

Bigboxx.com provides numerous value-added servicesfor customers. Among these are the ability to check itemavailability in real time; the ability to track the status ofeach item in an order; promotions and suggested itemsbased on customers’ user profiles; customized prices forevery product, for every customer; control and central-approval features; automatic activation at desired timeintervals of standing orders for repeat purchasing; anda large number of Excel reports and data, includingcomparative management reports.

Bigboxx.com began operations in spring 2000. By theend of 2006, it had over 8,500 registered customers.

Questions1. Enter bigboxx.com and staples.com and compare

their B2B offerings and purchase processes. (Takethe tutorial at bigboxx.com.) What support servicesare provided?

2. Someday customers may become accustomed tobuying office supplies online. Then, they may try tobuy directly from the manufacturers. Will Bigboxx.comor Staples.com then be disintermediated? Why orwhy not?

REFERENCES FOR ONLINE FILE W5.1bigboxx.com (accessed January 2008).Chan, W. C., T. C. Chu, A. R. Gold, and G. Leibowitz.

“Thinking Out of the Box.” The McKinsey Quarterly,no. 2 (2001).

2 Part 3: Business-to-Business E-Commerce

ONLINE FILE W5.2

CISCO CONNECTION ONLINECustomer ServiceCisco began providing electronic support in 1991 usingvalue-added networks (VANs). The first applications offeredwere software downloads, defects diagnosis, and technicaladvice. In spring 1994, Cisco moved its system to the Weband named it Cisco Connection Online (CCO). By 2004,Cisco’s customers and reseller partners were logging ontoCisco’s Web site over 2 million times a month to receivetechnical assistance, place and check orders, or downloadsoftware. The online service has been so well received thatnearly 85 percent of all customer service inquiries and 95 percent of software updates are delivered online. Theservice is delivered globally in 16 languages. The CCO isconsidered a model for B2B success, and several bookshave been written about it (e.g., Slater 2003).

Online Ordering by CustomersVirtually all of Cisco’s products are made-to-order. BeforeCCO, ordering a product was a lengthy, complicated, anderror-prone process because it was done by fax or by “snailmail.” Cisco began deploying Web-based commerce tools inJuly 1995, and within a year its Internet Product Centerallowed users to configure and purchase any Cisco productover the Web. Today, a business customer’s engineer can sit down at a PC, configure a product, and find out immedi-ately if there are any errors in the configuration (somefeedback is given by intelligent agents).

By providing online pricing and configuration tools tocustomers, 99 percent of orders are now placed throughCCO, saving time for both Cisco and its customers. In thefirst 5 months of online ordering operations in 1996, Ciscobooked over $100 million in online sales. This figure grewto $4 billion in 1998, to over $8 billion in 2002, and toabout $12 billion in 2005 (Cisco Annual Report 2005).(Note: data for Cisco’s online and offline sales are not separated after 2005.)

Tracking Order StatusEach month Cisco used to receive over 150,000 order-status inquiries such as, “When will my order be ready?”“How should the order be classified for customs?” “Is theproduct eligible for NAFTA agreement?” “What export control issues apply?” Cisco provides self-tracking and FAQtools so that customers can find the answers to many oftheir questions by themselves. In addition, the company’sprimary domestic and international freight forwardersupdate Cisco’s database electronically about the status of

each shipment. CCO can record the shipping date, themethod of shipment, and the current location of eachproduct. All new information is made available to customers immediately. As soon as an order ships,Cisco notifies the customer via e-mail.

BenefitsCisco reaps many benefits from the CCO system. The most important benefits include the following, perInterwoven (2001):

◗ Reduced operating costs for order taking. By takingits order process online in 1998, Cisco has saved$363 million per year, or approximately 17.5 percentof its total operating costs. This is due primarily toincreased productivity of the employees who takeand process orders.

◗ Improved quality. The system facilitates the Six Sigmamission of Cisco.

◗ Enhanced technical support and customer service.With more than 85 percent of its technical supportand customer service calls handled online, Cisco’s technical support productivity has increased by 250 percent per year.

◗ Reduced technical support staff cost. Online technicalsupport has reduced technical support staff costs byroughly $125 million each year.

◗ Reduced software distribution costs. Customers download new software releases directly from Cisco’s site, saving the company $180 million in distribution, packaging, and duplicating costs each year. Having product and pricing informationon the Web and Web-based CD-ROMs saves Ciscoan additional $50 million annually in printing anddistributing catalogs and marketing materials tocustomers.

◗ Faster service. Lead times were reduced from 4–10 daysto 2–3 days.

The CCO system also benefits customers. Cisco customers can configure orders more quickly, immediatelydetermine costs, and collaborate much more rapidly andeffectively with Cisco’s staff. Also, customer service andtechnical support are faster.

In 2006, Cisco moved to selling its hardware (routersand switches and VoIP) and the software that powers themseparately. This unbundling gives customers more flexibility(see Hoover 2006).


REFERENCES FOR ONLINE FILE W5.2Cisco Annual Report. Cisco Systems, 2005. cisco.com/

web/about/ac49/ac20/ac19/ar2005/index.html(accessed January 2008).

Hoover, J. N. “The Cisco Premium.” InformationWeek,July 31–August 7, 2006.

Interwoven, Inc. “Interwoven Solutions Power CiscoConnection Online.” Interwoven case study, 2001.

writeit4u.net/documents/interwoven/casestudy_cisco.pdf (accessed January 2008).

Slater, R. The Eye of the Storm: How John ChambersSteered Cisco through the Technology Collapse. NewYork: Harper-Collins, 2003.

Online File W5.3 Extranets

An extranet uses the TCP/IP protocol to link intranets in different locations (as shown inExhibit W5.3.1). Extranet transmissions usually are conducted over the Internet, which offerslittle privacy or transmission security. Therefore, it is necessary to add security features. This isdone by creating tunnels of secured data flows, using cryptography and authorization algo-rithms, to provide secure transport of private communications. An Internet with tunnelingtechnology is known as a virtual private network (VPN) (see en.wikipedia.org/wiki/Virtual_private_network).

Extranets provide secured connectivity between a corporation’s intranets and the intranets ofits business partners, materials suppliers, financial services, government, and customers. Access toan extranet is usually limited by agreements of the collaborating parties, is strictly controlled, andis available only to authorized personnel using a secure password and login. The protected envi-ronment of an extranet allows partners to collaborate and share information and to perform theseactivities securely.

Because an extranet allows connectivity between businesses through the Internet, it isan open and flexible platform suitable for B2B. To increase security, many companies replicatethe portions of their databases that they are willing to share with their business partners andseparate them physically from their regular intranets. However, even separated data need tobe secured. (See Chapter 10 for more on EC network security.)

According to Szuprowicz (1998), extranet benefits fall into five categories:

1. Enhanced communications. The extranet enables improved internal communications;improved business partnership channels; effective marketing, sales, and customer support; and facilitated collaborativeactivities support.

2. Productivity enhancements. The extranet enables just-in-time information delivery, reduction of information overload,productive collaboration between workgroups, and training on demand.

3. Business enhancements. The extranet enables faster time-to-market, potential for simultaneous engineeringand collaboration, lower design and production costs, improved client relationships, and creation of new businessopportunities.

4. Cost reduction. The extranet results in fewer errors, improved comparison shopping, reduced travel and meeting timeand cost, reduced administrative and operational costs, and elimination of paper publishing costs.

5. Information delivery. The extranet enables low-cost publishing, leveraging of legacy systems, standard delivery sys-tems, ease of maintenance and implementation, and elimination of paper-based publishing and mailing costs.

virtual private network(VPN)A network that createstunnels of secured dataflows, using cryptogra-phy and authorizationalgorithms, to providesecure transport ofprivate communicationsover the public Internet.

extranetA network that uses avirtual private networkto link intranets indifferent locations overthe Internet; an“extended intranet.”

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Rihao-Ling and Yen (2001) reported additional advantages of extranets, such as ready access to information, ease ofuse, freedom of choice, moderate setup cost, simplified workflow, lower training cost, and better group dynamics. Theyalso listed disadvantages, such as difficulty in justifying the investment (measuring benefits and costs), high user expec-tations, and drain on resources. Finally, Chow (2004) describes success factors of using extranets in e-supply chains.

Online File W5.3 (continued)

OtherBusinessPartners,

Government

My SuppliersA, B, C . . .

Intranets

Intranets

Intranet

IntranetInternet

with VPN

Internetwith VPN

Internetwith VPN

My Customers

B2B

My Company

My Field Employees

EXHIBIT W5.3.1 The Structure of an Extranet

KEY TERMSExtranet 3 Virtual private network (VPN) 3

REFERENCES FOR ONLINE FILE W5.3Chow, W. S. “An Exploratory Study of the Success Factors

for Extranet Adoption in E-Supply Chain.” Journal ofGlobal Information Management ( January–March2004).

Rihao-Ling, R., and D. C. Yen. “Extranet: A NewWave of Internet.” SAM Advanced ManagementJournal (Spring 2001).

Szuprowicz, B. Extranet and Intranet: E-CommerceBusiness Strategies for the Future. Charleston, SC:Computer Technology Research Corp., 1998.


The vast majority of B2B transactions are supported by EDI, XML, and extranets. Here we describe EDI and its transition tothe Internet platform. Extranets are covered in Online File W5.2.

Traditional EDIEDI is a communication standard that enables the electronic transfer of routine documents, such as purchasing orders, betweenbusiness partners. It formats these documents according to an agreed-upon structure. An EDI implementation is a process inwhich two or more organizations determine how to work together more effectively through the use of EDI. For other organiza-tions, it is an internal decision spurred by the desire for competitive advantage. EDI is basically a computer-to-computermessaging system with a minimum of human intervention. For a comparison of EDI versus no EDI, see Exhibit W5.4.1.

EDI often serves as a catalyst and a stimulus to improve the business processes that flow between organizations.It reduces costs, delays, and errors inherent in a manual document-delivery system:

◗ Business transaction messages. EDI primarily is used to electronically transfer repetitive business transactions. Theseinclude purchase orders, invoices, credit approvals, shipping notices, confirmations, and so on.

◗ Data-formatting standards. Because EDI messages are repetitive, it makes sense to use formatting (coding) standards.Standards can shorten the length of the messages and eliminate data entry errors, because data entry occurs only once. EDIdeals with standard transactions, whereas e-mail is more open. EDI uses a special standard language and is secure, wherease-mail is not. When a user enters data into the EDI system, the data are automatically converted to EDI language. If there aremissing or incorrect data, the EDI converter offers assistance. EDI fosters collaborative relationships and strategic partner-ships. In the United States and Canada, data are formatted according to the ANSI X.12 standard or the UCS code. An interna-tional standard developed by the United Nations is called EDIFACT (see bambooweb.com).

◗ EDI translators. An EDI translator automatically translates data. The software organizes information into a standard format.

EDI has been around for about 30 years in the non-Internet environment. To distinguish it from Internet-based EDI,we call EDI on the non-Internet platform traditional EDI.

How Does EDI Work?The following example illustrates how EDI works in a hospital. Information flows from the hospital’s information systems intoan EDI station that includes a PC and an EDI translator. From there, the information moves, using a modem if necessary, to aVAN. The VAN transfers the formatted information to a vendor(s), where an EDI translator converts it to a desired format.

How EDI Cuts Costs of Ordering SuppliesAn average hospital generates about 15,000 purchase orders each year, at a processing cost of about $70 per order. TheHealth Industry Business Communication Council estimates that EDI can reduce this cost to $14 per order—generatingyearly savings of $840,000 per hospital. The required investment ranges between $8,000 and $15,000, which includespurchase of a PC with an EDI translator, a modem, and a link to the mainframe-based information system. The hospital canhave two or three ordering points. These are connected to a value-added network (VAN), which connects the hospital to itssuppliers (see Exhibit W5.4.2). The system also can connect to other hospitals or to centralized joint purchasing agencies.

Applications of Traditional EDITraditional EDI has changed the business landscape, triggering new definitions of entire industries. It is used extensively bylarge corporations, sometimes in a global network, such as the one operated by General Electric Information System (which hasover 100,000 corporate users). Well-known retailers such as Home Depot and Wal-Mart would operate very differently withoutEDI, because it is an integral and essential element of their business strategies. Thousands of global manufacturers, includingProcter & Gamble, Levi Strauss, Toyota, and Unilever, have used EDI to redefine relationships with their customers through suchpractices as quick-response retailing and just-in-time (JIT) manufacturing. These highly visible, high-impact applications of EDIby large companies have been extremely successful. The benefits of EDI are listed next.

Online File W5.4 From Traditional to Internet-Based EDI

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Purchasing

Accounting/Finance

Mail Room

Order Fulfillment

Accounting/Finance

Mail Room

Sales

Payment Delivery

Order Confirmation Bill Delivery

P.O. Delivery

Receiving Order Fulfillment

P.O. Standardized

P.O. Form

Start

Order Placer

Shipping Receiving

Buyer

Shipping

Seller

Without EDI

Product Delivery

Buyer

Shipping

Seller

With EDI

Product Delivery

P.O.

Start

Departmental Buyer

EDI Converter

Computer Convertor Generates Standardized P.O. Form

Instant Data to • Sales • Inventory • Manufacturing • Engineering

Invoice Flash Report

EXHIBIT W5.4.1 Purchase Order (PO) Fulfillment withand Without EDI

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Benefits of EDI◗ EDI enables companies to send and receive large amounts of routine transaction information quickly around the globe.◗ Computer-to-computer data transfer reduces the number of errors.◗ Information can flow among several trading partners consistently and freely.◗ Companies can access partners’ databases to retrieve and store standard transactions.◗ EDI fosters true (and strategic) partnership relationships because it involves a commitment to a long-term investment

and the refinement of the system over time.◗ EDI creates a complete paperless TPS (transaction processing system) environment, saving money and increasing efficiency.◗ Payment collection can be shortened by several weeks.◗ Data may be entered offline, in batch mode, without tying up ports to the mainframe.◗ When an EDI document is received, the data may be used immediately.◗ Sales information is delivered to manufactures, shippers, and warehouses almost in real time.◗ EDI can save companies a considerable amount of money.

Limitations of Traditional EDIHowever, despite the tremendous impact of traditional EDI among industry leaders, the set of adopters represented only asmall fraction of potential EDI users. In the United States, where several million businesses participate in commerce everyday, fewer than 100,000 companies have adopted traditional EDI. Furthermore, most of these companies have had only a


HospitalInformation

System

Pharmacy:PC/EDI

Translator

Dietary:PC/EDI

Translator

PC/EDIModem VAN

MaterialManagement:

PC/EDITranslator

Hospitals

PC to Mainframe Links

Telephone Lines

PC/EDI Translator

MaterialsSupplier’sSystem

Mainframe

PC/EDI Translator

DietarySupplier’sSystem

Other Hospitals’PC/EDITranslators

PC/EDI Translator

PharmaceuticalSupplier’sSystem

Mainframe

Mainframe

EXHIBIT W5.4.2 How EDI Cuts the Cost of Ordering Supplies

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small number of their business partners on EDI, mainly due to its high cost. Therefore, in reality, few businesses havebenefited from EDI. The major factors that held back more universal implementation of traditional EDI include the following:

◗ Significant initial investment is needed, and ongoing operating costs are high.◗ Business processes must be restructured to fit EDI requirements.◗ A long start-up period is needed.◗ EDI requires use of expensive private VANs.◗ EDI has a high operating cost.◗ Multiple EDI standards exist, so one company may have to use several standards in order to communicate with different

business partners.◗ The system is difficult to use.◗ A converter is required to translate business transactions to EDI code.◗ The system is inflexible; it is difficult to make quick changes, such as adding business partners.

These factors suggest that traditional EDI—relying on formal transaction sets, translation software, and VANs—is notsuitable as a long-term solution for most corporations. Therefore, a better infrastructure was needed; Internet-based EDI issuch an infrastructure. For details, see Harris and Chen (2006).

Internet-Based EDIInternet-based (or Web-based) EDI is becoming very popular. Let’s see why this is the case and review the various types ofWeb-based EDI.

Why Internet-Based EDI?When considered as a channel for EDI, the Internet appears to be the most feasible alternative for putting online B2Btrading within reach of virtually any organization, large or small. Firms should use Internet-based EDI for several reasons:

◗ The Internet is a publicly accessible network with few geographic constraints. Its largest attribute, large-scale connec-tivity (without the need for any special company networking architecture), is a seedbed for growth of a vast range ofbusiness applications.

◗ The Internet’s global network connections offer the potential to reach the widest possible number of trading partners ofany viable alternative currently available.

◗ Using the Internet instead of a VAN can cut communication costs by over 50 percent.◗ Using the Internet to exchange EDI transactions is consistent with the growing interest in delivering an ever-increasing

variety of products and services electronically, particularly via the Web.◗ Internet-based EDI can complement or replace many current EDI applications.◗ Internet tools such as browsers and search engines are very user-friendly, and most employees today know how to use them.◗ Internet-based EDI has several functionalities not provided by traditional EDI, such as collaboration, workflow, and search

engine capabilities (see Boucher-Ferguson 2002).

Types of Internet-Based EDIThe Internet can support EDI in a variety of ways:

◗ Internet e-mail can be used to transport EDI messages in place of a VAN. To this end, standards for encapsulating themessages within Secure Internet Mail Extension (S/MIME) have been established.

◗ A company can create an extranet that enables its trading partners to enter information into a Web form, the fields ofwhich correspond to the fields in an EDI message or document.


(continued)


◗ Companies can use a Web-based EDI hosting service in much the same way that companies rely on third parties to hosttheir EC sites. Netscape Enterprise is an example of the type of Web-based EDI software that enables a company to provideits own EDI services over the Internet. Harbinger Express is an example of a company that provides third-party hostingservices.

◗ Internet-based EDI is frequently XML based to ease integration among business partners.

The Prospects of Internet-Based EDICompanies that used traditional EDI in the past have had a positive response to Internet-based EDI. With traditionalEDI, companies have to pay for network transport, translation, and routing of EDI messages into their legacy processingsystems. The Internet simply serves as a cheaper alternative transport mechanism. For a discussion, see Witte et al.(2003). The combination of the Web, XML, and Java makes EDI worthwhile even for small, infrequent transactions.Whereas EDI is not interactive, the Web and Java were designed specifically for interactivity as well as ease of use.

The following examples demonstrate the benefits of Internet-based EDI:

◗ Compucom Systems was averaging 5,000 transactions per month with traditional EDI. In just a short time after the transitionto Web-based EDI, the company was able to average 35,000 transactions. The system helped the company to grow rapidly.

◗ Tradelink of Hong Kong was successful in recruiting only several hundred of the potential 70,000 companies to a tradi-tional EDI that communicated with government agencies regarding export/import transactions. In 2001, Tradelink’sInternet-based system had thousands of companies registered, and hundreds were being added monthly.

◗ Atkins Carlyle Corp., which buys from 6,000 suppliers and has 12,000 customers in Australia, is a wholesaler of industrial,electrical, and automotive parts. The large suppliers were using three different EDI platforms. By moving to an Internet-based EDI, the company is able to collaborate with many more business partners, reducing transaction costs by about $2 per message.

◗ Procter & Gamble replaced a traditional EDI system that had 4,000 business partners with an Internet-based system that hastens of thousands of suppliers.

Note that many companies no longer refer to their collaborative systems as EDI. However, the properties of EDI areembedded into new e-commerce initiatives such as collaborative commerce and electronic exchanges.


REFERENCES FOR ONLINE FILE W5.4Boucher-Ferguson, R. “Writing the Playbook for B2B.”

Wilson Internet, January 29, 2002.Harris, A. L., and C. Chen. “Traditional and Internet

EDI Adoption Barriers,” in Khosrow-Pour (2006).Khosrow-Pour, M. (ed.). Encyclopedia of E-Commerce,

E-Government, and Mobile Commerce, Hershey, PA:Idea Group Reference, 2006.

Witte, C. L., M. Grünhagen, and R. L. Clarke. “TheIntegration of EDI and the Internet.” InformationSystems Management (Fall 2003).


Boeing (boeing.com) is the world’s largest maker of airplanes for commercial and military customers. It also plays the roleof intermediary in supplying replacement and maintenance parts to airlines. Unlike other online B2B intermediaries,revenue from its intermediary activities may be a minor concern to Boeing, which makes most of its revenue from sellingairplanes. The major goal of Boeing’s intermediary parts market, called PART (Part Analysis and Requirement Tracking), issupporting customers’ maintenance needs as a customer service.

The objective of PART is to link airlines that need maintenance parts with suppliers who are producing the parts forBoeing aircraft (see boeing.com/commercial/spares/part_page.html). Boeing’s online strategy is to provide a single point ofonline access through which airlines (the buyers of Boeing’s aircraft) and the maintenance and parts providers (Boeing’ssuppliers) can access data about the parts they need. These data might come from the airframe builder, the componentsupplier, the engine manufacturer, or the airline itself. Thus, Boeing is acting as an intermediary between the airlines andthe parts suppliers. With data from 300 key suppliers of Boeing’s airplane parts, Boeing’s goal is to provide its customerswith one-stop shopping for online maintenance information and ordering.

The Spare Parts Business Using Traditional EDIOrdering spare parts had been a multistep process for many of Boeing’s customers. For example, an airline’s mechanic informedthe purchasing department of his company that a specific part was needed; the purchasing department approved the purchaseorder and sent it to Boeing by phone or fax. The mechanic did not need to know who produced the part, because the aircraftwas purchased from Boeing as one body. However, Boeing had to find out who produced the part and then ask the producerto deliver the part to the customer (unless Boeing happened to keep an inventory of that part).

The largest airlines began to streamline the ordering process about 20 years ago. Because of the volume and regular-ity of their orders, they established EDI connections with Boeing over VANs. Not all airlines were quick to follow suit, how-ever. It took until 1992 to induce 10 percent of the largest customers, representing 60 percent of the volume, to orderthrough EDI. The numbers did not change much until 1996 due to the cost and complexity of VAN-based EDI.

Debut of Part on the InternetBoeing viewed the Internet as an opportunity to encourage more of its customers to order parts electronically. With theinitial investment now limited to a standard PC and basic Internet access, even its smallest customers can now participatein PART. Because of its interactive capabilities, many customer service functions that were handled over the telephone arenow handled over the Internet.

In November 1996, Boeing introduced its PART page on the Internet, giving its customers around the world theability to check parts availability and pricing, order parts, and track order status, all online. Less than a year later,about 50 percent of Boeing’s customers used PART for parts orders and customer service inquiries. In its first year ofoperation, the Boeing PART portal handled over half a million inquiries and transactions from customers around theworld. Boeing’s spare parts business processed about 20 percent more shipments per month in 1997 than it did in1996 with the same number of data entry people. In addition, as many as 600 phone calls a day to customer servicestaff were eliminated because customers had access to information about pricing, availability, and order status online.The use of PART online resulted in fewer parts being returned due to administrative errors. Furthermore, the servicemay encourage airlines to buy Boeing aircraft the next time they make an aircraft purchase. (For a demo of PART,visit boeing.com.)

As a result of PART’s success, Boeing started a complementary EC initiative called Boeing OnLine Data (BOLD), whichenables mechanics and technicians at the airport to access the technical manuals they need for repairs. These manuals arenow available in digital form, and mechanics and technicians can access them via wireline or wireless devices. In May2000, Boeing also launched a new e-business site for airline customers based on PART and BOLD.

Online File W5.5 Boeing’s Parts Marketplace


REFERENCES FOR ONLINE FILE W5.5“Boeing Launches New E-Business Web Site.” Aerotech

News and Review—Journal of Aerospace and DefenseIndustry News, May 12, 2000.

Boeing. “Portal Power: E-Business at Boeing GainingVelocity.” August 29, 2002. boeing.com/commercial/news/feature/ebiz.html (accessed January 2008).

ONLINE FILE W5.6

E-PROCUREMENT AT SCHLUMBERGERSchlumberger is the world’s largest oil service company,with over 50,000 employees in 100 countries and annualsales of over $10 billion (schlumberger.com). In 2000, thecompany installed a Web-based automated procurementsystem in Oilfield Services, its largest division. With thissystem, employees can buy office supplies and equipment,as well as computers, straight from their desktops.

The system replaced a number of older systems, including automated and paper-based ones. The single system streamlines and speeds up the purchasing operation,reducing costs as well as the number of people involved inthe process. It also enables the company to consolidate purchases for volume discounts from vendors.

The new procurement system gives buyers centralizedcontrol over the entire procurement process and offers acomplete purchase-to-pay solution for MRO items tostrategic-indirect items. This solution improves efficiencyand decreases labor costs by eliminating manual, paper-based processes and providing enterprisewide self-service procurement by:

◗ Eliminating paper-based business documents◗ Reducing maverick spending and generating savings by

enforcing contract-based purchasing◗ Radically reducing PO processing time from days or

weeks to minutes◗ Eliminating the need for additional headcount to

support internal e-procurement◗ Eliminating the need for the buyer’s resources to load

and manage catalogs and price files◗ Integrating ERP or existing accounting systems◗ Integrating ERP for master data users such as

cost centers, shipping and billing addresses, and organizational structures

◗ Providing advanced functionality for streamlined processing

◗ Providing standardized purchasing reports by cost center, supplier, organization, commodity, and others

Prices are negotiated with individual vendorsbefore their items are put into Schlumberger’s system.

For example, Office Depot’s entire catalog is posted onthe MarketSite (now part of Product Manager fromPerfect.com), but Schlumberger employees only seenegotiated products and prices. In 2005, the companyplans to negotiate prices in real time through auctionsand other bidding systems.

The benefits of the procurement system are clear. Thecost of goods has been reduced; transaction costs also havefallen. Employees spend much less time in the orderingprocess, thus giving them more time for their core work. Thesystem also is more cost-efficient for the suppliers, who canthen pass along savings to Schlumberger. By using one system worldwide, employees who are transferred do nothave to learn a new system at their new location.Procurement effectiveness has been increased, because it is now possible to track all procurement activities.

Getting the system up and running was easy becauseit was implemented in stages and ran at the same time asexisting systems. Employees did not have to deal withimplementation issues—once the system was in place, theold system was disabled, and there were no complaintswith regard to the old system being shut down, because itwas no longer in use.

By 2006, the system was used by over 6,000 usersin 83 countries for the procurement of over $2 billion ingoods and services each year. The system delivers signifi-cant cost savings, improved productivity, and errorreduction. The RFQ process and special request purchasesare now automated, connecting business processesbetween systems and partners.

Questions1. Describe the benefits of the new system over the old

system.

2. Describe how the e-procurement system operates.

3. Summarize the benefits of e-procurement to thecompany and its employees.


REFERENCES FOR ONLINE FILE W5.6Commerce One. “Schlumberger: Customer Profile.”

commerceone.com/customers/profiles/schlumberger.pdf (no longer available online).

Ovans, A. “E-Procurement at Schlumberger.” HarvardBusiness Review (May–June 2000).

Perfect.com. “Procurement Manager.” 2006. perfect.com/solutions/procurement_manager.html (accessedJanuary 2008).

Schlumberger. “Schlumberger Corporate Profile.”slb.com/content/about/who.asp? (accessed January2008).

E-procurement is relatively easy to implement (see Zhao 2006). Channel conflict usually does not occur, and resistance tochange is minimal. Also, a wide selection of e-procurement software packages and other infrastructure is available at areasonable cost. For details, see en.wikipedia.org/wiki/E-procurement.

MROs often are the initial target for e-procurement. However, improvements can be made in the purchasing of directmaterials as well. All existing manual processes of requisition creation, requests for quotation, invitation to tender,purchase order issuance, receiving goods, and making payments can be streamlined and automated. However, to mosteffectively implement such automated support, the people involved in procurement must collaborate with the suppliersalong the supply chain, as described in Chapter 6.

Putting the buying department on the Internet is the easy part of e-procurement. The more difficult part is imple-menting it. The components of e-procurement systems are shown in Exhibit W5.7.1. For a model that simplifies theprocurement process by performing tasks electronically, see Podlogar (2006).

Online File W5.7 Implementing E-Procurement

EXHIBIT W5.7.1 Potential E-Procurement ComponentsModule ComponentsCatalog Management Module• Facilitates the creation of products, subassemblies, • Catalog manager

and components in a hierarchical manner. • Catalog exchanger• AVL (Approved Vendor List) editor

Collaborative Planning Module• Supports collaborative planning between buyers and • Request for Quote (RFQ)

suppliers. • Request for Proposal (RFP)• Demand forecaster• Contract manager• Inventory manager• Information flow controller

(continued)



Module ComponentsOnline Purchase Module• Supports both systematic and spot procurement for direct • Purchase via contracts

and indirect materials and for contracts (for both goods • Purchase from catalogand services). • Reverse auction service for direct/indirect materials

• Reverse auction service for contracts• Auction service

Purchase-Order Handling Module• Enables buyers to place purchase orders via on/off • Purchase order manager

item master, reverse auction, contract purchasing, • Demand aggregatorand spot market requisition. • Consignment manager

• Just-in-time order manager

Document Service Module• Facilitates a broad range of services for procurement • Document indexing

documentation such as RFQ, RFP, PO, goods receipt, • SML exchangerand accounts payable. • Document version controller

Historical Performance Service Module• Provides easy access to historical statistics • Periodical reports

of all transactions. • Customized reports• Statistical analysis

Information Service Module• Provides a unified information and message service • Message/task center

that allows users to receive/send e-mails and view • Status of procurement operationsstatus of procurement activities. • Customized exceptional alerts

• Smart search engine• Online negotiation/discussion service

System Administration Module• Provides tools that enable the company to control • Company master data organizer

procurement activities. • Product group builder• Workflow designer• Authorization matrix• Look and feel designer• User/department profile organizer

Source: Compiled from e-jing.net (accessed November 2006). Used with permission.

The following are some of the major implementation issues that companies must consider when planning e-procurementinitiatives:

◗ Fitting e-procurement into the company’s EC strategy. For example, suppose the strategy is outsourcing. In thiscase, e-procurement can be done in an exchange, or the customer can buy at the sellers’ Web sites.

◗ Reviewing and changing the procurement process itself. E-procurement may affect the number of purchasing agents,where they are located, and how purchases are approved. The degree of purchasing centralization also may be affected.

(continued)


◗ Providing interfaces between e-procurement and integrated enterprise wide information systems, such as ERP orsupply chain management. If the company does not have such systems, it may be necessary to do some restructuringbefore moving to e-procurement.

◗ Coordinating the buyer’s information system with that of the sellers. Sellers have many potential buyers. For this reason,some major suppliers, such as SKF (a Swedish automotive parts maker; see skf.com), developed an integration-orientedprocurement system for its buyers. The SKF information system is designed to make it easier for the procurement systems ofothers (notably the distributors in other countries) that buy the company’s bearings and seals to interface with the SKFsystem. The SKF system allows distributors and large buyers to gain real-time technical information on the products, as well asdetails on product availability, delivery times, and commercial terms and conditions.

◗ Consolidating the number of regular suppliers and integrating with their information systems and, if possible, withtheir business processes. Having fewer suppliers minimizes the number of connectivity issues that need to be resolvedand will lower expenses. Also, with fewer suppliers, the company will buy more from each supplier, allowing the companyto get a quantity discount. Collaboration with each supplier also will be enhanced.

When implementing e-procurement, companies also should evaluate e-sourcing, theprocesses and tools that electronically enable any activity in the procurement process, such asquotation/tender requests and responses, e-auctions, online negotiations, and spending analyses(see ariba.com/solutions/sourcing_enterprise.cfm and Johnson and Klassen 2005). E-sourcing is theautomation of strategic sourcing.

Strategic sourcing is the process of identifying opportunities, evaluating potential sources,negotiating contracts, and managing supplier relationships to achieve corporate goals, such ascost reductions and increased quality and service. In an e-sourcing study by AMR (Murphree2003), the companies surveyed reported savings of 10 to 15 percent in the cost of direct goodsand 20 to 25 percent in the cost of indirect goods and services. Companies also reported reduc-tions in sourcing cycle times.

Strategic sourcing requires a holistic process that automates the entire sourcing process,including order planning, RFQ creation, bid evaluation, negotiation, settlement, and orderexecution. The promise of strategic sourcing is in reducing total acquisition costs while increasing value. A fundamentalshortcoming of sourcing tools today is their inability to allow the creation of complex RFQs that allow for a variety ofbid structures that exploit complementarities and economies of scale in suppliers’ cost structures.

E-sourcing attempts to improve strategic sourcing by making it more effective and efficient. For example, MoaiTechnologies (moai.com) provides the following e-sourcing solutions:

◗ Just-in-Time Sourcing (JITS). Moai’s JITS integrates strategic consulting services with licensed software products. Thesoftware directs customers through the e-sourcing process, including negotiating with vendors and securing reliablesuppliers, thereby lowering sourcing costs. According to Moai (2006), CompleteSource provides customized low-costsolutions at a flat fee. Those who are ready to take complete control of their sourcing process will benefit most from:● High ROI—fixed subscription cost with huge savings● Maximum customization—can be installed into unique workflows, applications, and processes● Maximum control—“Behind the firewall” solution provides flexibility and control in administering, scheduling, branding,

and process integration◗ Strategic Consulting Services. RapidSource, Moai’s strategic consulting program, promotes testing and validation of

e-sourcing to those new to the concept. With this guidance, users are guaranteed a return on investment in the program.◗ Hosted Sourcing Software. Delays, IT complexities, and costs associated with in-house deployments are eliminated with

Moai’s hosted services.


e-sourcingThe process and toolsthat electronicallyenable any activity inthe sourcing process,such as quotation/tender submittance andresponse, e-auctions,online negotiations,and spending analyses.


KEY TERMe-sourcing 14

REFERENCES FOR ONLINE FILE W5.7e-jing. “E-Procurement,” e-jing.net/en/solutions/

e-procurement.htm (no longer available online).Johnson, P. F., and R. D. Klassen. “E-Procurement.”

MIT Sloan Management Review (Winter 2005).Moai. “Solutions Overview.” moai.com/solutions/

solutions_overview.asp (accessed January 2008).Murphree, J. “Global Enabled Supply and Demand

Chain Series: Sourcing.” SDCExec.com, February–

March 2003. sdcexec.com/publication/article.jsp?pubId=1&id=4410 (accessed January 2008).

Podlogar, M. “Simplifying the Procurement Process byUsing E-Commerce.” International Journal ofInternet and Enterprise Management 4, no. 2 (2006).

Zhao, F. Maximize Business Profits through E-Partnership.Hershey, PA: Idea Group Inc., 2006.

The Pre-Internet Tendering System Process The Web-Based Reverse Auction Process

The buyer prepares a paper-based description of the product (project) that needs to be acquired. The description includes specifications, blueprints, quality standards, delivery date, and required payment method.

The buyer gathers product information automatically from online sources and posts it on its secured corporate portal.

The buyer announces the RFQ via newspaper ads, direct mail, fax, or telephone.

The buyer sends e-mail alerts to selected vendors, inviting them to view the projects available for bid. Many suppliers constantly monitor buyers’ sites or aggregator’s sites.

Bidders (suppliers) that express interest receive detailed information (sometimes for a fee), usually by postal mail or a courier.

The buyer identifies potential suppliers from among those who responded to the online RFQ and invites suppliers to bid on the project. Bidders download the project information from the Web.

Bidders prepare proposals. They may call the company for additional information. Sometimes changes in the specs (specifications) are made, which must be disseminated to all interested bidders.

Bidders conduct real-time or delayed reverse auctions. Requests for more information can be made online. Changes in specs can be disseminated electronically.

Bidders submit paper proposals, usually several copies of the same documents, by a preestablished deadline.

Bidders submit proposals in electronic format.

Proposals are evaluated, usually by several departments, sequentially, at the buyer’s organization. Communication and clarification may take place via letters or phone/fax.

The buyer evaluates the suppliers’ bids (by several departments, simultaneously). Communications, clarifications, and negotiations to achieve the “best deal” take place electronically.

Buyer awards a contract to the bidder(s) that best meets its requirements. Notification is usually done via postal mail.

Buyer awards a contract to the bidder(s) that best meets its requirements. Notification is done online.

ONLINE FILE W5.8 Comparison of Pre-Internet and Web-BasedReverse Auction Processes


General Electric’s material costs increased 16 percent between 1982 and 1992 (gxs.com 1999). During those same years,GE’s product prices remained flat or for some products even declined. In response to the cost increases, GE began anall-out effort to improve its purchasing system. The company analyzed its procurement process and discovered that itspurchasing was inefficient, involved too many transactions, and did not leverage GE’s large volumes to get the best prices.In addition, more than one-quarter of its 1.25 million invoices per year had to be reworked because the purchase orders,receipts, and invoices did not match.

TPN at GE’s Lighting DivisionOf a number of steps GE took to improve its procurement, one of the most innovative was the introduction of an electronictendering system that started in GE’s Lighting Division.

Factories at GE Lighting used to send hundreds of RFQs to the corporate sourcing department each day, many forlow-value machine parts. For each requisitions, the accompanying blueprints had to be requested from storage, retrievedfrom the vault, transported to the processing site, photocopied, folded, attached to paper requisition forms with quotesheets, stuffed into envelopes, and mailed out to bidders. This process took at least 7 days and was so complex and timeconsuming that the sourcing department normally sent out bid packages for each part to only two or three suppliers.

In 1996, GE Lighting piloted the company’s first e-procurement system, called the Trading Process Network (TPN)Post. With this online system, the sourcing department received the requisitions electronically from its internal customersand sent off a bid package to suppliers around the world via the Internet. The system automatically pulled the correctdrawings and attached them to the electronic requisition forms. Within 2 hours from the time the corporate sourcingdepartment started the process, suppliers were notified of incoming RFQs by e-mail, fax, or EDI. They were given 7 days toprepare a bid and return it electronically to GE Lighting. Then the bid was transferred internally, over the corporateintranet, to the appropriate evaluators, and a contract could be awarded that same day.

Benefits of TPNAs a result of implementing TPN, GE realized a number of benefits:

◗ Administrative labor involved in the procurement process declined by 30 percent. At the same time, material costsdeclined 5 to 50 percent due to the procurement department’s ability to reach a wider base of competing suppliers online.

◗ GE was able to cut by 50 percent the number of staff involved in the procurement process and redeploy the unnecessaryworkers into other jobs. As a result, the sourcing department had at least 6 to 8 free days a month to concentrate on strategicactivities rather than on paperwork, photocopying, and envelope stuffing.

◗ It used to take 18 to 23 days to identify suppliers, prepare a request for bid, negotiate a price, and award the contract toa supplier. After implementation of the TPN, it took 9 to 11 days.

◗ With the transaction handled electronically from beginning to end, invoices could be automatically reconciled with purchaseorders, reflecting any modifications that happened along the way.

◗ GE procurement departments around the world were able to share information about their best suppliers. In February1997 alone, GE Lighting found seven new suppliers through the Internet, including one that charged 20 percent lessthan the second-lowest bid.

By 2001, 12 of GE’s divisions were purchasing their nonproduction and MRO materials over the Internet for an annualtotal of $6 billion (35 percent of their total procurement). General Electric estimates that streamlining these purchasesalone has saved the company $500 to $700 million annually.

The Inception of GXSDue to the success of TPN, GE expanded the system, making it a public posting place for other buyers. In 2001, TPN wasacquired by GXS Express Marketplaces, which was operated by GE Global Exchange Services (gxs.com). GXS now operates asa public marketplace on which many other companies place RFQs. GXS has over 100,000 trading partners in 58 countries,and in 2004 it processed over 1.2 billion transactions valued at over $1 trillion. It is one of the most profitable dot-comcompanies. In June 2002, it was sold to Francisco Partners under whose control it continues to operate under the nameGXS (gxs.com). GXS also assumed the EDI services of GE Information Services.

Online File W5.9 The Procurement Revolution at General Electric

(continued)


Benefits of GXSSuppliers in the GXS system can gain instant access to global buyers (including GE) with billions of dollars in purchasingpower. In addition, they may dramatically improve the productivity of their own bidding and sales activities. Other benefitsare increased sales volume, expanded market reach and ability to find new buyers, lower administration costs for sales andmarketing activities, shorter requisition cycle time, improved sales staff productivity, and a streamlined bidding process.

General Electric reports that the benefits of GXS extend beyond its own walls. As an example, computer resellerHartford Computer Group reports that since joining GXS, it has increased its exposure to different GE business units sothat its business with GE has grown by over 250 percent. In addition, GXS has introduced Hartford Computer Group toother potential customers.

More generally, the benefits of GXS to purchasing departments include the following: streamlining sourcing processeswith current business partners; finding and building partnerships with new suppliers worldwide; rapidly distributing infor-mation, specifications, and electronic drawings to multiple suppliers simultaneously; and cutting sourcing cycle times andreducing costs for sourced goods.

Deployment Strategies and ChallengesThe GE case demonstrates two deployment strategies for EC initiatives. The first is to start EC in one division (GE started inits Lighting Division) and slowly go to all divisions. The second is to also use the site as a public bidding marketplace togenerate commission income.

Even though GE was successful with its e-procurement system, it could not reach its original plan of 100 percent e-procurement due to connectivity difficulties with SMEs. By 2001, of its 30,000 suppliers, roughly 25 percent (7,500 suppliers)were performing the critical procurement missions on the Web. Another 7,500 or so were connected to GE using the dated EDInetworks. That left another 15,000 suppliers that relied mainly on manual processes to conduct business with GE (Moozakis2001). (Connecting with SMEs is a common challenge in B2B implementation.)


REFERENCES FOR ONLINE FILE W5.9gxs.com (accessed January 2008).Moozakis, C. “GE Scales Back.” Internet Week, May 10,

2001. orafaq.com/maillist/oracle-l/2001/05/11/1056.htm (accessed January 2008).

Trading Process Network. “Extending the Enterprise:TPN Post Case Study—GE Lighting.” TradingProcess Network, 1999. tpn.geis.com/tpn/resource_center/casestud.html (no longer available online).


ONLINE FILE W5.10

iMARKETKOREAiMarketKorea (iMK) is Korea’s largest e-marketplacespecializing in MRO items for the construction industry.Since its inception in 2000, the company has grownrapidly. From a market for Samsung’s 45 affiliatedcompanies, iMK grew to serve about 500 companies in2007. Of these new companies, some are outside Koreaand most are not Samsung affiliates. The exchange e-catalog includes over 400,000 MRO items.

Initially, iMK concentrated on acting as a procurementagent to the Samsung companies. By 2007, however, thecompany shifted its vision to become a B2B procurementservice provider, providing end-to-end procurement services.

Among its most popular services are payments, deliver-ies, purchasing and budget management, internal approvalprocess and inventory management, storage, and more (allfor buyers). In addition, it helps to smooth its customers’supply chains (e.g., process improvement and workflow

management). iMK also supports connectivity to enterprisesystems (e.g., ERP, legacy systems). The system architectureand the major participants are shown in Exhibit W5.10.1.

One of the major services provided by iMK is the SRMorientation. This includes features such as:

◗ The ability to calculate “total cost of ownership” (forpurchasing).

◗ Strategic sourcing processes.◗ Formal evaluation of suppliers (assessment,

selection, monitoring) through a formalscorecard grading system.

◗ Knowledge sharing about best practices of procurement.◗ B2B auctions (forward and reverse, either as supporting

the entire process or in helping customers take chargeof the major activities, helping only with proceduralmatters during the auction).

(continued)

HR, Accounting System

Used Budget Records

PO, GR, (RFQ)

PO Records, GR RecordsInvoice Records

Financial SystemAccountDetails GR

RecordsAR/APDetails

SMS

Carriage Request

Order TrackingTPL System (carriage)

PO, DO, GR

Supplier SystemiMarketkorea Financial System

iMarketkorea Marketplace

SupplierBuyer

ERP (SAP, Oracle…)Legacy Purchasing System

User, Department,Budget

Single Sign OnUser Login

Local PC GroupWare Workflow

Network/ASP businesses

ApprovalRequest

ApprovalStatus

®

EXHIBIT W5.10.1 iMK System Architecture

Source: iMarketKorea, “Purchasing Innovation: Value Proposition.” 2006. imarketkorea.co.kr/en_HD/DC9553ED_IMK_homepage_en_200408.pdf (accessed December 2006).


ONLINE FILE W5.10 (Continued)

◗ Spend management analysis and control.◗ Provision of collaborative e-sourcing tools.◗ Decision support and optimization models for buyers.◗ Contract management.◗ Integrating suppliers by selecting those who are

reliable and sound and who are able to provide value(price matters, too, of course), leading to long-termstrategic relationships (win-win situation).

◗ Risk assessment and management.◗ Item standardization for inventory and cost reduction at

the suppliers’ level. This enables better cataloging andfaster and easier search (e.g., simultaneous search ofmany items).

◗ Analyzing replies to RFQs quickly, consideringlarge amount of computerized information andknowledge.

◗ Joint process improvement, attempting to reducesupplier’s TCO (providing suppliers with a comprehensiveprogram of how to do it).

The following are some recent iMK initiatives:

◗ Alliance with the Japanese Sumitomo Corp. (a top onlinetrading company), kicking off global business expansion.iMK is already exporting MROs to 12 countries.

◗ iMK exported over $1 billion of MROs in 2005, plus $1.2in raw materials (an over 30 percent increase over 2004).

◗ Collaborating with Woori Bank, iMK opened a B2C andB2B2C channel for selling gifts over the Internet to thebank’s employees.

The results speak for themselves: on-time deliveryincreased from 72 percent to 93.7 percent; average lead-time was reduced from 5.3 days to 2.8 days; catalog searchspeed has increased 40 percent; 12 to 18 percent savingsin purchase prices; 30 to 50 percent savings in processcosts; 5 to 15 percent savings in inventory managementcosts; and 40 to 60 percent savings in reduced inventory.All these savings have contributed to the success andgrowth of iMK. The site offers Korean, English, andJapanese options to registered users.

Questions1. How do the support services benefit the exchange?

2. Relate this case to desktop purchasing (Chapter 5).

3. Summarize the benefits of the exchange to buyers.

4. Summarize the benefits of the exchange to sellers.

5. Compare iMK to Alibaba.com. What are thesimilarities and the differences?

6. Much of iMK’s success is attributed to theunderstanding of the Korean culture and businessenvironment. Given that iMK wants to expandinternationally, what could be some of itsstumbling blocks?

7. Check the recent news and press releases (last6 months) at imarketkorea.com. Identify expansionpatterns.

REFERENCES FOR ONLINE FILE W5.10iMarketKorea. “iMarketKorea Enters into Strategic

Business Cooperation Agreement with SumitomoCorporation Japan.” January 25, 2006. imarketkorea.com/en_HD/menu_05001–19view.jsp (accessedJanuary 2008).

iMarketKorea. “iMarketKorea Opens Woori Bank e-Shop.” December 19, 2005. imarketkorea.com/

en_HD/menu_05001–17view.jsp (accessed January2008).

Lee, Z., and D. S. Lee. “Transition from a Buyer’sAgent to a Procurement Service Provider in B2BiMarketKorea.” In Lee, J. K., et al., Premiere-Business Cases from Asia, Singapore: Prentice Halland Pearson Education South Asia, 2007.


ONLINE FILE W5.11

THE RISE AND FALL OF COVISINTThere are only several major automakers, but they buyparts, materials, and supplies from thousands of suppliers,who frequently buy parts and materials from thousands ofsubsuppliers. At times, the procurement process is slow,costly, and ineffective.

On February 25, 2000, General Motors Corporation,Ford Motor Company, and DaimlerChrysler launched a B2Bintegrated buy-side marketplace called Covisint. The goalwas to eliminate redundancies from suppliers through inte-gration and collaboration, with promises of lower costs,easier business practices, and marked increases in efficien-cies for the entire industry.

The name Covisint (pronounced KO-vis-int) is a com-bination of the primary concepts of why the exchange wasformed: The letters “Co” represent connectivity, collabora-tion, and communication; “vis” represents the visibilitythat the Internet provides and the vision of the future ofsupply chain management; and “int” represents theintegrated solutions the venture offers as well as theinternational scope of the exchange.

The purpose of the marketplace’s connectivity was tointegrate buyers and sellers into a single network. Visibilitywas intended to provide real-time information presented ina way that speeds decision making and enables communi-cation through every level of a company’s supply chain,anywhere in the world. By using the Web, a manufacturer’sproduction schedule and any subsequent changes were ableto be sent simultaneously and instantly throughout itsentire supply chain. The result was less need for costlyinventory at all levels of the supply chain and an increasedability to respond quickly to market changes.

Typically, an automaker would buy parts from onesupplier, who in turn would buy from its suppliers(subsuppliers), who would then buy from other suppliers(sub-sub-suppliers). In this traditional linear supply chain,the automaker communicates only with its top-tier (tier 1)suppliers.

Imagine that the auto manufacturer has hundreds ofsimilar supply chains, one for each supplier, and that many ofthe suppliers, in all tiers, produce for several manufacturers.The flow of information will be very complex. This complexityintroduces inefficiencies in communication as well as difficul-ties for the suppliers in planning their production schedulesto meet demand, resulting in supply chain problems.

The Covisint process greatly changed supply chaincommunication in the automobile industry. Rather thanbeing at the top point of a pyramid, as in the industry’s traditional supply chain, the auto manufacturers were at thecenter of a spoke-and-wheel arrangement. By 2004, Covisintserved 19 automakers. The Covisint trading hub enables theautomakers and their various suppliers and subsuppliers to

communicate directly with anyone else. Instead of an arrayof unorganized communication lines, it is all organized inone place.

One of the major objectives of the exchange was tofacilitate product design. Covisint offered its customersbest-of-breed functionality; customers took the bestaspects from multiple technical providers. The ability tointegrate providers across the supply chain creates aunique environment for collaborative design and develop-ment (collaborative commerce), enables e-procurement,and provides a broad marketplace of buyers and suppliers.It makes accessible a wealth of supply chain expertiseand experience, ranging from procurement to productdevelopment. Covisint’s potential membership wasabout 30,000 suppliers.

Because of its large size, the exchange has beendeveloping slowly. Nevertheless, Cleary (2001) reports thaton May 8, 2001, DaimlerChrysler used Covisint to success-fully conduct a $3 billion reverse auction for auto partsthat lasted 4 days. However, in July 2002 the founders ofCovisint ceased to provide funding. They remain sharehold-ers, but Covisint is now controlled by an independent boardand an advisory council made up of 21 of the largest sup-pliers and OEMs (Original Equipment Manufacturers) to theautomotive industry. By early 2003, a new CEO was tryingto accelerate Covisint’s progress. In summer 2004, Covisintwas acquired by Compuware Corp. By September 2004, theexchange was still struggling financially, even though itprovides services to 20,000 companies in 96 countries.

By 2006, Covisint had changed direction, providingglobal trading services. A major area of Covisint’s focus ispartner collaboration and integration. It provides completesolutions for safely sharing internal applications withexternal users, automating external partner user life cyclemanagement and administration, and providing reliabledata messaging (including EDI) between partnerapplications and systems.

Covisint now provides access to a global community of100,000 users, representing 45,000 companies in 96 countries.

Questions1. Describe the concepts upon which Covisint is

structured.

2. Describe how Covisint changed the supply chain inthe automobile industry.

3. Investigate the current ownership and managementof Covisint.

4. Enter covisint.com/about. How does the newcompany differ from the old one?


REFERENCES FOR ONLINE FILE W5.11Cleary, M. “Covisint Talks Trash.” Interactive Week,

May 21, 2001.covisint.com (accessed January 2008).Covisint. “Mercator Software Selected by Covisint to

Integrate Best-of-Breed Applications.” Covisintpress release, February 7, 2001a. thefreelibrary.com/

Mercator+Software+Selected+By+Covisint+to+Integrate+Best-Of-Breed...-a071130604 (accessedJanuary 2008).

Covisint. “Supply Chain Management: Supplyconnect.”2001. covisint.com/downloads/print/supplier_conn.pdf (no longer available online).

ONLINE FILE W5.12

GLOBAL TRANSPORTATION NETWORK OCEAN PORTALAlthough much publicity is given to public exchanges thatdeal with materials and products, such as ChemConnect,several service-oriented exchanges have been created, andsome of them are growing rapidly. One such exchange is aglobal transportation exchange for ocean transportationnamed Global Transportation Network (GTN).

GTN was formed in 2001 by a consortium of 13 oceancarriers (lines) that collectively represent more than40 percent of worldwide capacity, and a software company,GT Nexus (gtnexus.com) that specializes in global logisticsand supply chain products.

The objective of the exchange, which is primarilya portal type, is to serve the ocean-shipping industry.The industry is composed of carriers, shippers (such as Wal-Mart and others who import many goods from abroad),and service providers (such as banks, insurance brokers,freight forwarders, and logistics providers). The mission ofthe exchange is to fundamentally change the process ofgetting goods around the world by using the Internet toprovide superior service that maintains complete securityfor customers and the carriers. GT Nexus and its CEO arethe exchange managers.

To develop the portal, the management team workedwith many customers to identify customer needs anddetermine how the portal could help meet them.Customers wanted a multi-EC model that could meet theirdiversified needs in a unified way. Existing B2B softwareproducts were too narrow; a custom portal had to be built.

The GTN e-commerce platform is much more than aportal. It supports core transactional capabilities such asbooking, invoicing, payment, tracking and tracing, ratenegotiation, container management, and scheduling. GTNoffers standardized booking, documentation, and trackingsystems and provides better and more efficient customersupport. In addition, it provides customized capabilities

tailored for specific customers and carriers, including rateand contract management, cargo forecasting, andresource allocation. The benefits of the system to theocean-shipping industry include:

◗ Significant efficiencies and cost savings. A 2002 studyconducted by Accenture estimated that cost savings fromthese process improvements and efficiencies aloneresulted in savings of 5 to 10 percent for carriers andcustomers across a range of industries (Coia 2002).GTN frees individual carriers from the huge capital costsassociated with the advanced technologies and resourcesrequired to create proprietary technology methods.

◗ Standardization and ease of use. GTN automatescore transactions and makes it easier for customers toconduct business with multiple providers using commonstandards.

◗ Secure and confidential access. GTN provides a secureand confidential environment for customers and carriersto conduct business over the Internet.

Industry experts have observed various improvementsfor the participants of the exchange (Goodman 2002). A sin-gle carrier cannot afford to offer as many EC applications asthe exchange offers; therefore, the exchange has greatlyexpanded the number of applications available to carriers.The system also has enabled customers to do business elec-tronically throughout every process in the shipment cycle.For example, contract negotiation, a very time-consumingprocess, has been speeded up by the exchange. In addition,because carriers now have access to many more shippersthan they could have found on their own, the number ofelectronic transactions for carriers has doubled, even in thefirst year of operation in the exchange. Carriers have alsobeen able to improve customer service, one of the majormotivators for using the exchange.

(continued)


ONLINE FILE W5.12 (continued)

The shipping industry is deregulated and verycompetitive. However, lots of cooperation, such as vesselsharing, still goes on. The GTN system helps to facilitatesuch collaboration. Several alliances among carriers alsoexist, and they are supported by the system. Informationsharing via open standards and Web-enabled systems is aprimary objective of the portal.

The technology of the exchange has contributed toits effectiveness. Data fit the internal IT systems of allusers. Standardized processes allow carriers to presenttheir services to shippers in the same way. Clients areable to use one interface to retrieve any information,regardless of the carrier with which the booking wasmade. The system uses a secured Internet connection(with a VPN) and has an optional EDI for sometransactions. It also allows for competitive tenderingthrough reverse auctions. The exchange was recognizedby InfoWorld Magazine (Sanborn 2002) as one of the topthree technology projects.

For the 2006 bid season, GT Nexus tallied thefollowing results:

◗ Over 2.6 million TEUs procured and managed over theportal (one TEU is a 20-foot cargo container or itsequivalent)

◗ More than $3.5 billion in transportation servicescontracted with carriers

◗ Participation of ocean carriers who together controlmore than 90 percent of global TEU capacity

These numbers are up 150 percent from 2005 andrepresent over 20 percent of all container volume movingin and out of North America. This demonstrates twothings. First, the concept of going online to handle amultimillion-dollar, strategic-transportation activity hasbecome common for big shippers. And second, GT Nexushas become the industry standard and market leader forglobal transportation management.

Questions1. Identify the critical success factors of this exchange.

2. Is a consortium the best type of ownership for thiskind of exchange?

3. Although there are thousands of shippers, some ofthem are very large (e.g., Wal-Mart), does it makesense to have them create a shippers’ exchange?Why or why not?

4. What motivates a carrier to participate in theexchange?

5. What motivates a shipper to participate in theexchange?

6. How was customer service improved by theexchange?

7. Research GT Nexus’ on-demand model and list itscapabilities.

REFERENCES FOR ONLINE FILE W5.12Angwin, J. “Top Online Chemical Exchange Is an

Unlikely Success Story.” Wall Street Journal Online,January 8, 2004. webreprints.djreprints.com/90766007 2246.html (accessed January 2008).

Coia, A. “Evolving Transportation Exchanges.” WorldTrade, July 2002.

Goodman, R. “Going Online Brought Smooth Sailingto World of Ocean Shipping.” Supplychainbrain.com,June 2002. glscs.com/archives/6.02.ocean.htm?adcode=90 (accessed January 2008).

GT Nexus. “GT Nexus Names Jeff Lynch VicePresident of Sales.” GT Nexus press release, October2002. findarticles.com/p/articles/mi_pwwi/is_200303/ai_mark02051787 (accessed January 2008).

Sanborn, S. “Sailing Online.” Infoworld Magazine,October 18, 2002. infoworld.com/articles/fe/xml/02/11/04/021104fegtn.html (accessed January2008).


One of the major categories of PRM is supplier relationship management (SRM), in which thepartners are the suppliers. For many companies (e.g., retailers and manufacturers), the abilityto work properly with suppliers is a major critical success factor. PeopleSoft, Inc., (an Oraclecompany) developed a model for managing relationships with suppliers in real time.

PeopleSoft’s cyclical SRM model (see Schecterle 2003) is generic and could be considered byany large company. It includes 13 steps, illustrated in Exhibit W5.13.1. The details of the stepsare shown in Exhibit W5.13.2. The core idea of this model is that an e-supply chain is based onintegration and collaboration. The supply chain processes are connected, decisions are madecollectively, performance metrics are based on common understanding, information flows in realtime (whenever possible), and the only thing a new partner needs in order to join the SRMsystem is a Web browser.

Implementing PRM and SRM is different from implementing CRM with individual customers. For example, behavioraland psychological aspects of the relationships are less important in PRM than in CRM. However, trust, commitment, qualityof services, and continuity are more important in PRM. For details, see McNichols and Brennan (2006) and Markus (2006).

Online File W5.13 Supplier Relationship Management

12 Pay

11 Resolve 9 Deliver

13Analyze1 Access

4 Negotiate5 Contract 6 Connect

7 Engage

8 Transact

2 IdentifySuppliers

3 Assess SupplierPerformance

Start

$

$

!

Forecasts

Inventory

Orders

Quality

Performance

Market Sites

Services

Direct

Indirect

XML

Browser

! 10 Receive

0.0

0.5

1.0

1.5

2.0

2.5

3.0

EDI

Browser

EXHIBIT W5.13.1 SRM from PeopleSoft

Source: Based on Schecterle, B. “Management and Extending Supplier Relationships,” People Talk, April–June 2003.

supplier relationshipmanagement (SRM)A comprehensiveapproach to managingan enterprise’s interac-tions with the organi-zations that supply thegoods and services ituses.

(continued)


EXHIBIT W5.13.2 Managing SRM in Real TimeStep Description1. Access Identify all the resources required to meet the product or service needs of the enterprise.2. Identify suppliers The availability of a large pool of approved suppliers improves options down the road.3. Access supplier Check past performance, testimonials, and stated capabilities.

performance4. Negotiate Prices and other relevant terms count only when combined.5. Contract Identify and register trading partners. Award contracts to the appropriate suppliers.6. Connect Bridge the enterprise and suppliers through procurement procedures everyone involved

can see. Facilitate collaboration.7. Engage and share Enable interactions between the enterprise and suppliers. Show suppliers your forecasted

needs and their performance ratings. Look at their inventory and projections.8. Transact Collect orders from across the enterprise. Create purchase orders and check them against

budgets. Transmit purchase orders using tendering and RFQ.9. Deliver As goods are pulled from the supplier’s stock, wireless barcode readers update inventory

levels. Shipping invoices are generated, and the goods are delivered.10. Receive Wireless devices can help in determining whether everything ordered arrives as planned, in

good condition, and in the right quantities11. Resolve Resolve any disputes and pay only if satisfied. Explain why payment is withheld.12. Pay Settle up with suppliers and check the actual cost against the projected cost. Set an ERS

(Electronic Receipt Settlement).

Source: Compiled from Schecterle, B., “Managing and Extending Supplier Relationships,” People Talk (April–June 2003). © 2005 Oracle.All rights reserved.

KEY TERMSupplier relationship

management (SRM) 23

REFERENCES FOR ONLINE FILE W5.13Markus, L. “The Golden Rule.” CIO Insight, July

2006.McNichols, T., and L. Brennan. “Evaluating Partner

Suitability for Collaborative Supply Networks.”

International Journal of Networking and VirtualOrganisations 3, no. 2 (2006).

Schecterle, B. “Managing and Extending SupplierRelationships.” People Talk, April–June 2003.


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