Electronic Commerce Ninth Edition

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

Learning Objectives
In this chapter, you will learn about: How businesses use the Internet to improve purchasing, logistics, and other support activities Electronic data interchange and how it works How businesses have moved some of their electronic data interchange operations to the Internet Supply chain management and how businesses are using Internet technologies to improve it
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Learning Objectives (contd.)

Electronic marketplaces and portals that make purchase-sale negotiations easier and more efficient 58 page - 67

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Purchasing, Logistics, and Support Activities

Recap
Strategy issues arise when informing potential customers Value chain model primary activities
Identify customers, market and sell, and deliver

Many business models for selling on the Web

Used in B2B e-commerce Apply to B2C e-commerce

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Purchasing, Logistics, and Support Activities (contd.)

Companies use electronic commerce to:
Improve purchasing and logistics Improve all support activities Provide potential cost reductions, business process improvements

e-government
Collective set of government e-commerce activities

Potential for synergy increases

As Internet technology use becomes commonplace

Necessary characteristic: flexibility

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Purchasing Activities
Supply chain
Part of industry value chain preceding a particular strategic business unit Includes all activities undertaken by every predecessor in the value chain to:
Design, produce, promote, market, deliver, support each individual component of a product or service

Traditionally
Purchasing department buys components at lowest price possible Bidding process focus: individual component cost
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Purchasing Activities (contd.)

Procurement includes:
All purchasing activities Monitoring all purchase transaction elements Managing and developing supplier relationships

Procurement also called supply management Procurement staff have high product knowledge
Identify and evaluate appropriate suppliers

Sourcing procurement activity

Identifying suppliers, determining qualifications
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Purchasing Activities (contd.)

e-sourcing
Using Internet technologies in sourcing activities

Business purchasing process

More complex than most consumer purchasing processes Spend
Total yearly dollar amount for goods and services purchased

Institute for Supply Management (ISM)

Main organization for procurement professionals
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FIGURE 5-1 Steps in a typical business purchasing process

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Direct vs. Indirect Materials Purchasing

Direct materials
Become part of finished product

Direct materials purchasing: two types

Replenishment purchasing (contract purchasing)
Company negotiates long-term material contracts

Spot purchasing
Purchases made in loosely organized market (spot market)

Indirect materials
All other materials company purchases
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Direct vs. Indirect Materials Purchasing (contd.)

Maintenance, repair, and operating (MRO) supplies
Indirect material purchased on a recurring basis Standard items (commodities) with price as main criterion

Purchasing cards (p-cards) provide:

Managers an ability to make multiple small purchases Cost-tracking information to procurement

Examples: McMaster-Carr, W.W. Grainger, Office Depot, Staples, Digi-Key, Newark.com

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FIGURE 5-2 Grainger.com Web store

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Logistics Activities
Classic objective
Provide the right goods in the right quantities in the right place at the right time

Important support activity for sales and purchasing Includes managing the movements of:
Inbound materials and supplies Outbound finished goods and services

Web and the Internet

Providing increasing number of opportunities to better manage activities
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Logistics Activities (contd.)

Example: Schneider Track and Trace system
Real-time shipment information: customers browsers

Third-party logistics (3PL) provider

Operates all (large portion) of customers materials movement activities
Examples: Ryder and Whirlpool, FedEx, UPS

Excellent example of second-wave e-commerce

Marriage of GPS and portable computing technologies with the Internet

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Support Activities
General categories
Finance and administration, human resources, technology development Example: Allegiance and A.D.A.M. Web site

FIGURE 5-3 Categories of support activities

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Support Activities (contd.)

Common support activity: training
Underlies multiple primary activities Putting training materials on company intranet
Can distribute materials to many different sales offices Can coordinate materials in corporate headquarters

Knowledge management
Intentional collection, classification, dissemination of information
About a company, its products, and its processes

Examples: Ericson, BroadVisions K-Net

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E-Government
e-government
Use of electronic commerce by governments and government agencies
Enhances functions performed for stakeholders Enhances businesslike activity operations

U.S. government examples

Financial Management Service (FMS): Pay.gov site Bureau of Public Debt: TreasuryDirect site Department of Homeland Security (DHS)
Internet technology use initiatives
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E-Government (contd.)
Examples in other countries
United Kingdom
Department for Work and Pensions Web site

Singapore Government Online site

Examples in state government

Californias one-stop portal site: my.ca.gov New York State Citizen Guide site

Examples in local government

Large cities: Minneapolis, New Orleans sites Small cities: Cheviot, Ohio Web site
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FIGURE 5-4 State of California portal site my.ca.gov

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Network Model of Economic Organization in Purchasing

Trend in purchasing, logistics, and support activities
Shift from hierarchical structures
Toward network structures

Procurement departments new tools (technology)

To negotiate with suppliers and form strategic alliances

Network model of economic organization

Other firms perform various support activities Supply Web: term replacing supply chain
Due to parallel lines interconnected in a Web or network configuration
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Electronic Data Interchange

Computer-to-computer business information transfer
Between two businesses using a standard format

Trading partners
Two businesses exchanging information

EDI compatible
Firms exchanging data in specific standard formats

Reasons to be familiar with EDI:

Most B2B e-commerce adapted from EDI or based on EDI principles Current method for most electronic B2B transactions
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Early Business Information Interchange Efforts

1800s and early 1900s
Need to create formal business transactions records

1950s
Computers store, process internal transaction records Information flows: printed on paper

1960s: large volume transactions

Exchanged on punched cards or magnetic tape

1960s and 1970s

Transferred data over telephone lines

Efforts increased efficiency, reduced errors

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Early Business Information Interchange Efforts (contd.)

Issue: incompatible data translation programs 1968: freight, shipping companies joined together
Created standardized information set Used a computer file
Transmittable to any freight company adopting the standard

Benefits limited to members of industries that created standard-setting groups Full realization of EDI economies and efficiencies
Required standards for all companies in all industries
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Emergence of Broader EDI Standards

American National Standards Institute (ANSI)
United States coordinating body for standards Accredited Standards Committee X12 (ASC X12)
Develops and maintains EDI standards

Data Interchange Standards Association (DISA)

Administrative body coordinating ASC X12 activities

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

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

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FIGURE 5-5 Commonly used ASC X12 transaction sets

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FIGURE 5-6 Commonly used UN/EDIFACT transaction sets

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How EDI Works

Basic idea: straightforward Implementation: complicated Example:
Company replacing metal-cutting machine
Steps to purchase using paper-based system Steps to purchase using EDI

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How EDI Works (contd.)

Paper-based purchasing process
Buyer and vendor
Not using integrated software for business processes

Each information processing step results in paper document

Must be delivered to department handling next step

Paper-based information transfer

Mail, courier, fax

Information flows shown in Figure 5-7

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FIGURE 5-7 Information flows in a paper-based purchasing process

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How EDI Works (contd.)

EDI purchasing process
Mail service replaced with EDI network data communications Paper flows within buyers and vendors organizations replaced with computers
Running EDI translation software

Information flows shown in Figure 5-8

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FIGURE 5-8 Information flows in an EDI purchasing process

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Value-Added Networks
EDI network key elements
EDI network, two EDI translator computers

Direct connection EDI

Businesses operate on-site EDI translator computers
Connected directly to each

Few companies use direct connection EDI

Dedicated leased lines: expensive Modems and dial-up telephone lines: slow, unreliable

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FIGURE 5-9 Direct connection EDI

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Value-Added Networks (contd.)

Value-added network (VAN)
Receives, stores, forwards electronic messages containing EDI transaction sets

Indirect connection EDI

Trading partners use VAN to retrieve EDI-formatted messages

Companies providing VAN services

Advanced Data Exchange, Behr Technologies, GXS, Inovis, Kleinschmidt, Promethean Software Services, SPS Commerce, and Sterling Commerce
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FIGURE 5-10 Indirect connection EDI through a VAN

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Value-Added Networks (contd.)

Advantages:
Support one communications protocol (VAN) VAN records message activity in audit log
Becomes independent transactions record

VAN provides translation between different transaction sets VAN performs automatic compliance checking

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Value-Added Networks (contd.)

Disadvantages:
Cost (fees)
Internet provides a low-cost communications medium

Cumbersome, expensive (if using different VANs) Inter-VAN transfers do not always provide a clear audit trail
May affect dispute resolution

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EDI Payments
EDI transaction sets
Provide instructions to trading partners bank
Negotiable instruments Electronic equivalent of checks

Electronic funds transfers (EFTs)

Movement of money from one account to another Automated clearing house (ACH) system
Service banks use to manage accounts Operated by U.S. Federal Reserve Banks, private ACHs
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EDI on the Internet

Potential replacement of expensive leased lines, dial-up connections
Required to support direct and VAN-aided EDI

Initial roadblock concerns

Security Inability to provide audit logs and third-party verification of message transmission and delivery

TCP/IP structure relieved security issues Issue of nonrepudiation continued

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EDI on the Internet (contd.)

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

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EDI on the Internet (contd.)

Internet EDI or Web EDI (open EDI)
EDI on the Internet

Electronic Data Interchange-Internet Integration (EDIINT)

Also abbreviated EDI-INT Protocol set for exchanging data (EDI, XML, and other formats) over the Internet

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EDI on the Internet (contd.)

EDIINT exchanges today
Most encoded using Applicability Statement 2 (AS2) specification
Example: Wal-Mart

Some companies using Applicability Statement 3 (AS3)

EDIINT using AS2 or AS3 provides secure transmission

Resolves issue of nonrepudiation Allows companies to preserve their EDI investments
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Supply Chain Management Using Internet Technologies

Supply chain management
Job of managing integration of company supply management and logistics activities
Across multiple participants in a particular products supply chain

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

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Value Creation in the Supply Chain

Firms engaging in supply chain management
Reaching beyond limits of their own organizations hierarchical structure Creating new network form of organization among members of supply chain

Originally developed to reduce costs Today: value added in the form of benefits to the ultimate consumer
Requires more holistic view of the entire supply chain

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Value Creation in the Supply Chain (contd.)

Tier-one suppliers
Small number of very capable suppliers Original business establishes a long-term relationship

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

Tier-three suppliers
Next level of suppliers

Key element: trust

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Value Creation in the Supply Chain (contd.)

Supply alliances
Long-term relationships among participants in the supply chain Major barrier
Level of information sharing

Example: Dell Computer

Reduced supply chain costs by sharing information with suppliers

Buyers expect annual price reductions, quality improvements from suppliers

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Value Creation in the Supply Chain (contd.)

Marshall Fisher 1997 Harvard Business Review article
Described two types of organization goals
Efficient process goals Market-responsive flexibility goals

Successful supply chain management key elements

Clear communications Quick responses to those communications

Internet and Web technologies

Effective communications enhancers
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FIGURE 5-11 Advantages of using Internet technologies in supply chain management

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Increasing Supply Chain Efficiencies

Internet and Web technologies managing supply chains can:
Yield increases in efficiency throughout the chain Increase process speed, reduce costs, increase manufacturing flexibility
Allows response to changes in quantity and nature of ultimate consumer demand

Example: Boeing
Invested in new information systems increasing production efficiency of the supply chain Also launched spare parts Web site
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Increasing Supply Chain Efficiencies (contd.)

Example: Dell Computer
Famous for use of Web to sell custom-configured computers Also used technology-enabled supply chain management
Give customers exactly what they want Reduced inventory amount (three weeks to two hours)

Top suppliers have access to secure Web site

Tier-one suppliers better can plan their production

Dell accesses suppliers information

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Using Materials-Tracking Technologies with EDI and Electronic Commerce

Troublesome task
Tracking materials as they move from one company to another

Optical scanners and bar codes

Help track movement of materials

Integration of bar coding and EDI: prevalent Second wave of electronic commerce
Integration of new types of tracking into Internetbased materials-tracking systems

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FIGURE 5-12 Shipping label with bar-coded elements from EDI transaction set 856, Advance Ship Notification
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Using Materials-Tracking Technologies with EDI and Electronic Commerce (contd.)

Radio Frequency Identification Devices (RFIDs)
Small chips using radio transmissions to track inventory Older RFID technology
Each RFID required its own power supply

RFIDs read much more quickly, with higher degree of accuracy than bar codes Important development: passive RFID tag
Made cheaply and in very small sizes No power supply required
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Using Materials-Tracking Technologies with EDI and Electronic Commerce (contd.)

Example: 2003 (Wal-Mart)
Tested RFID tag use on merchandise for inventory tracking and control Initiated plan to have all suppliers install RFID tags in goods they shipped Reduced incidence of stockouts
Retailer loses sales because it does not have specific goods on its shelves

General acceptance of RFID tagging will not occur in most industries until 2014
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FIGURE 5-13 Passive RFID tag

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Creating an Ultimate Consumer Orientation in the Supply Chain

Ultimate consumer orientation
Customer focus difficult to maintain

Michelin North America

Pioneered use of Internet technology
To go beyond next step in its value chain

1995: launched electronic commerce initiative

BIB NET extranet

Allowed dealer access to tire specifications, inventory status, and promotional information
Through simple-to-use Web browser interface
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Building and Maintaining Trust in the Supply Chain

Major issue: developing trust Key elements
Continual communication and information sharing

Internet and the Web

Provide excellent ways to communicate and share information Offer new avenues for building trust
Stay in contact with their customers Buyers get instant access to their sales representatives Can provide comprehensive information quickly
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Electronic Market Places and Portals

Vertical portals (vortal)
Industry-focused hubs
Offer marketplaces and auctions for contact and business transactions Doorway (or portal) to the Internet for industry members Vertically integrated

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Independent Industry Marketplaces

First vertical portals
Trading exchanges focused on a particular industry

Independent industry marketplaces

Industry marketplaces: focused on a single industry Independent exchanges: not controlled by established buyer or seller in the industry Public marketplaces: open to new buyers and sellers just entering the industry

Ventro opened industry marketplace Chemdex

Trade in bulk chemicals
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Independent Industry Marketplaces (contd.)

SciQuest founded industry marketplace in life science chemicals By mid-2000: more than 2200 independent exchanges By 2010: fewer than 70 industry marketplaces still operating
Due to lack of venture capital and profits

B2B marketplace models gradually replaced independent marketplaces

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Private Stores and Customer Portals

Large established sellers feared industry marketplaces diluting power Large sellers have customer portal B2B sites
Offer private stores along with services B2B private store has password-protected entrance
Offers negotiated price reductions on limited product selection

If large established sellers participated in industry marketplaces

Services would have been needlessly duplicated
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Private Company Marketplaces

Large companies purchasing from relatively small vendors
Exert power in purchasing negotiations Using e-procurement software:
Offered from companies: Ariba and CommerceOne Allows companies to manage purchasing function through Web interface Automates authorizations, other steps Includes marketplace functions

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Private Company Marketplaces (contd.)

Larger companies:
Reluctant to abandon investments in e-procurement software Make software work with industry marketplaces software

Private company marketplace

Marketplace providing auctions, request for quote postings, other features
For companies who want to operate their own marketplaces
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Industry Consortia-Sponsored Marketplaces

Companies with strong negotiating positions in their industry supply chains
Not enough power to force suppliers to deal with them through a private company marketplace

Industry consortia-sponsored marketplace

Marketplace formed several large buyers in a particular industry

Covisint (2000)
Consortium of DaimlerChrysler, Ford, General Motors

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Industry Consortia-Sponsored Marketplaces (contd.)

Avendra marketplace
Consortium formed by Marriott, Hyatt, three other major hotel chains

Exostar marketplace
Boeing led group of aerospace industry companies

Large part of market taken from industry marketplaces by:

Consortia-based marketplaces Private company marketplaces Private Web stores, customer portals
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Industry Consortia-Sponsored Marketplaces (contd.)

Supplier concern when using an industry marketplace
Ownership structure
Independent operators for fair bargaining (Covisint) Including industry participants may be helpful (ChemConnect)

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FIGURE 5-14 Characteristics of B2B marketplaces

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Summary
Using Internet and Web technologies
Improves purchasing and logistics primary activities Improves support activities

Governments extending reach of enterprise planning and control activities

Beyond organizations legal definitions

Emerging network model of organization

Describes growth in interorganizational communications and coordination

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Summary (contd.)
History of EDI and how it works
Freight companies first introduced e-commerce Spread of EDI to virtually all large companies
Requires smaller businesses to seek an affordable way to participate in EDI

Internet providing inexpensive communications channel EDI lacked

Important force driving supply chain management technique adoption

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Summary (contd.)
Supply chain management
Incorporates several elements
Implemented, enhanced through Internet and Web use

Industry electronic marketplaces led to B2B electronic commerce models

Private stores Customer portals Private marketplaces Industry consortia-sponsored marketplace

Models coexist with industry marketplace model

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