Electronic Business 10 th Edition Chapter 6 Selling to Business Online Electronic Commerce, 10th Edition 1

2 Learning Objectives In this chapter, you will learn about: Strategies that businesses use to improve purchasing, logistics, and other support activities Electronic data interchange and how it works How businesses have moved some of their electronic data interchange operations to the Internet Supply chain management and how businesses are using Internet technologies to improve it Electronic marketplaces and portals that make purchase-sale negotiations easier and more efficient

Electronic Commerce, 10th Edition3 Purchasing, Logistics, and Support Activities Electronic commerce –Improves primary and support activities –Tremendous potential for: Cost reductions, business process improvements e-government –Collective set of electronic commerce activities Improving government support activities Supporting activities and serving stakeholders better Potential for synergies increase with Internet technologies use Necessary characteristic: flexibility

Purchasing Activities Supply chain –Part of industry value chain preceding a particular strategic business unit –Includes all activities undertaken by every predecessor in the value chain to: Design, produce, promote, market, deliver, support each individual component of a product or service Traditionally –Purchasing Department charged with buying components at lowest price possible –Process focused excessively on individual components’ cost: ignored total supply chain costs Electronic Commerce, 10th Edition4

5 Purchasing Activities (cont’d.) Procurement includes: –All purchasing activities –Monitoring all elements in purchase transactions Supply management –Describes procurement activities Procurement staff –Require product knowledge Identify and evaluate appropriate suppliers Sourcing –Procurement activity Identifying suppliers, determining qualifications

Electronic Commerce, 10th Edition6 Purchasing Activities (cont’d.) e-sourcing –Use of Internet technologies in sourcing activities Specialized Web-purchasing sites Steps –Typical business purchasing process steps Many steps and people involved

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8 Direct vs. Indirect Materials Purchasing Direct materials –Materials that become part of finished product Direct materials purchasing: two types –Replenishment purchasing (contract purchasing) Company negotiates long-term material contracts –Spot purchasing Purchases made in loosely organized market (spot market) Indirect materials –All other materials company purchases

Electronic Commerce, 10th Edition9 Direct vs. Indirect Materials Purchasing (cont’d.) Maintenance, repair, and operating (MRO) supplies –Indirect material products purchased on a recurring basis –Standard items (commodities) buyers usually select Price: main criterion Purchasing cards (p-cards) –Give individual managers ability to make multiple small purchases at their discretion –Provide cost-tracking information to procurement MRO suppliers: McMaster-Carr, W.W. Grainger

Logistics Activities Provide the right goods in the right quantities in the right place at the right time Important support activity for sales and purchasing –Inbound materials and supplies movements –Outbound finished goods and services movements Example: Schneider Track and Trace system –Real-time shipment information: customers’ browsers Third-party logistics (3PL) provider –Operates all (large portion) of customer’s materials movement activities Examples: Ryder and Whirlpool, FedEx, UPS Electronic Commerce, 10th Edition10

Electronic Commerce, 10th Edition11 Support Activities General categories –Finance and administration, human resources, technology development –Example: Allegiance and A.D.A.M. Web site Training –Common support activity Underlies multiple primary activities –Advantages: training materials on company intranet Distribute materials to many different sales offices Coordinate use of materials in corporate headquarters

Electronic Commerce, 10th Edition12 Support Activities (cont’d.) Examples: Ericson, BroadVision’s K-Net Knowledge management –Intentional collection, classification, dissemination of information About a company, its products, and its processes

Network Model of Economic Organization Trend in purchasing, logistics, and support activities –Shift from hierarchical structures Toward network structures –Procurement Departments’ new tools (technology) To negotiate with suppliers Including possibility of forming strategic alliances Network model of economic organization –Other firms perform various support activities Manage payroll, administer employee benefits plans, handle document storage needs –Web: enabling shift from hierarchical to network Electronic Commerce, 10th Edition13

Electronic Commerce, 10th Edition14 Electronic Data Interchange Trading partners –Two businesses exchanging information EDI compatible –Firms that exchange data in specific standard formats EDI importance –Most B2B electronic commerce An adaptation of EDI or based on EDI principles –Still the method used for most electronic B2B transactions

Electronic Commerce, 10th Edition15 How EDI Works Basic idea: straightforward Implementation: complicated Example: company to replace metal-cutting machine –Assume vendor uses its own vehicles instead to deliver purchased machine –Steps to purchase using paper-based system Figure 6-6 –Steps to purchase using EDI Figure 6-7

Electronic Commerce, 10th Edition16 How EDI Works (cont’d.) Paper-based purchasing process –Buyer and vendor Not using integrated software for business processes –Each information processing step results in paper document Must be delivered to department handling next step –Paper-based information transfer Mail, courier, or fax –Figure 6-7 Information flows

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Electronic Commerce, 10th Edition18 How EDI Works (cont’d.) EDI purchasing process –Mail service replaced with EDI network data communications –Flows of paper within the buyer’s and vendor’s organizations replaced with computers Running EDI translation software –Figure 6-7 Information flows

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Value-Added Networks EDI network key elements –EDI network, two EDI translator computers Direct connection EDI –Each business operates an on-site EDI translator computer Value-added network (VAN) –Receives, stores, forwards electronic messages containing EDI transaction sets Indirect connection EDI –Trading partners use VAN to retrieve EDI-formatted messages Electronic Commerce, 10th Edition20

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Electronic Commerce, 10th Edition23 Value-Added Networks (cont’d.) Advantages –Support one communications protocol (VAN) –VAN records message activity in audit log (independent record of transactions) –VAN provides translation between different transaction sets –VAN performs automatic compliance checking Disadvantages –Cost (fees) –Cumbersome, expensive (if using different VANs)

Electronic Commerce, 10th Edition24 EDI on the Internet Potential replacement of: –Expensive leased lines, dial-up connections Required to support direct and VAN-aided EDI Initial roadblock concerns –Security –Internet’s inability to provide audit logs and third-party verification of message transmission and delivery TCP/IP structure was enhanced with secure protocols and encryption schemes Lack of third-party verification concerns continued

Electronic Commerce, 10th Edition25 EDI on the Internet (cont’d.) Nonrepudiation –Ability to establish that a particular transaction actually occurred –Prevents either party from repudiating (denying) the transaction’s validity or existence –Previously provided by: VAN’s audit logs (indirect connection EDI) Comparison of trading partners’ message logs (direct connection EDI)

Open Architecture of the Internet Internet EDI (Web EDI) –EDI on the Internet –Also called open EDI Internet is an open architecture network –EDI offerings go beyond traditional EDI Allow more complex information interchanges –Growing rapidly Not replacing traditional EDI –Large companies have significant investments in traditional EDI computing infrastructure –Most VANs offer Internet EDI services, traditional EDI Electronic Commerce, 10th Edition26

Open Architecture of the Internet (cont’d.) Firms extending internal networks (intranets) to trading partners –Turns intranets into extranets –Virtual private networks (VPNs) provide security –Example: Nintendo USA EDI-based product registration system to prevent fraudulent returns Huge investment in EDI systems, trained personnel –Reluctant to change business processes, move to Internet EDI, approaches based on XML technologies Move away from EDI will gradually occur Electronic Commerce, 10th Edition27

Electronic Commerce, 10th Edition28 Supply Chain Management Using Internet Technologies Supply chain management –Job of managing integration of company supply management and logistics activities Across multiple participants in a particular product’s supply chain –Ultimate goal Achieve higher-quality or lower-cost product at the end of the chain

Electronic Commerce, 10th Edition29 Value Creation in the Supply Chain Firms engaging in supply chain management –Reaching beyond limits of their own organization’s hierarchical structure –Creating new network Form of organization among members of supply chain Originally a way to reduce costs Today, value added in the form of benefits to the ultimate consumer –Requires more holistic view of the entire supply chain

Electronic Commerce, 10th Edition30 Value Creation in the Supply Chain (cont’d.) Tier-one suppliers –Very capable suppliers, a small number of which a firm establishes long-term relationships with Tier-two suppliers –Larger number of suppliers that tier-one suppliers develop long-term relationships with Provide components and raw materials Tier-three suppliers –Next level of suppliers Trust is a key element

Electronic Commerce, 10th Edition31 Value Creation in the Supply Chain (cont’d.) Supply alliances –Long-term relationships among participants in the supply chain –Major barrier Level of information sharing Example:Dell Computer –Reduced supply chain costs by sharing information with suppliers Buyers expect annual price reductions, quality improvements

Electronic Commerce, 10th Edition32 Value Creation in the Supply Chain (cont’d.) Marshall Fisher 1997 Harvard Business Review article –Two types of organization goals Efficient process goals Market-responsive flexibility goals Successful supply chain management key elements –Clear communications –Quick responses to those communications Internet and Web technologies –Effective communications enhancers

Increasing Supply Chain Efficiencies Internet and Web technologies used to manage supply chains –Yield increases in efficiency throughout the chain –Increase process speed, reduce costs, increase manufacturing flexibility Respond to changes in quantity and nature of ultimate consumer demand Example: Boeing –Invested in new information systems Increase production efficiency –Launched spare parts Web site Electronic Commerce, 10th Edition33

Electronic Commerce, 10th Edition34 Increasing Supply Chain Efficiencies (cont’d.) Example: Dell Computer –Famous for use of Web to sell custom-configured computers –Also used technology-enabled supply chain management Give customers exactly what they want Reduced inventory amount (three weeks to two hours) –Top suppliers have access to secure Web site Know Dell’s customers and what they are buying Tier-one suppliers better plan their production

Electronic Commerce, 10th Edition35 Using Materials-Tracking Technologies with EDI and Electronic Commerce Troublesome task –Tracking materials as they move from one company to another Use optical scanners and bar codes –Integration of bar coding and EDI is prevalent Electronic commerce second wave –Integrating new types of tracking into Internet-based materials-tracking systems

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Electronic Commerce, 10th Edition37 Using Materials-Tracking Technologies with EDI and Electronic Commerce (cont’d.) Radio Frequency Identification Devices (RFIDs) –Small chips –Use radio transmissions to track inventory –Older RFID technology Each RFID required its own power supply –Important development: passive RFID tag Made cheaply and in very small sizes No power supply required RFIDs –Read much more quickly, with higher degree of accuracy

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Electronic Commerce, 10th Edition39 Using Materials-Tracking Technologies with EDI and Electronic Commerce (cont’d.) 2003 (Wal-Mart) –Tested use of RFID tags on merchandise for inventory tracking and control –Initiated plan to have all suppliers install RFID tags in goods they shipped –Reduced incidence of stockouts Retailer loses sales because it does not have specific goods on its shelves –Suppliers found RFID tags, readers, computer systems to be quite expensive Pushed for slowdown in Wal-Mart’s RFID initiative

Electronic Commerce, 10th Edition40 Building and Maintaining Trust in the Supply Chain Major issue in forming supply chain alliances –Developing trust –Key elements Continual communication and information sharing Internet and the Web –Provide excellent ways to communicate and share information –Provide opportunity to stay in contact with customers More easily and less expensively –Instant access to sales representatives, vendors Comprehensive information at a moment’s notice

Electronic Commerce, 10th Edition41 Electronic Market Places and Portals Vertical portals (vortal) –Information hubs for each major industry Offer news, research reports, trend analyses, in-depth reports on companies, marketplaces, and auctions Doorway (or portal) to the Internet for industry members Vertically integrated Predicted to change business forever –Not exactly correct

Independent Industry Marketplaces First industry hubs following vertical portal model –Trading exchanges focused on a particular industry Independent industry marketplaces –Industry marketplaces Focused on a single industry –Independent exchanges Not controlled by established buyer or seller in the industry –Public marketplaces Open to new buyers and sellers just entering the industry Electronic Commerce, 10th Edition42

Electronic Commerce, 10th Edition43 Independent Industry Marketplaces (cont’d.) Example: Ventro –1997: opened industry marketplace Chemdex Trade in bulk chemicals By mid-2000 –More than 2200 independent exchanges By 2008 –Fewer than 80 industry marketplaces still operating Other B2B marketplace models arose –Took business away from the independent marketplaces

Electronic Commerce, 10th Edition44 Private Stores and Customer Portals Large seller concern –Independent operators would take control of transactions in supply chains –Industry marketplaces would dilute power –Customer portal sites Cisco and Dell: private store with password-protected entrance Grainger: provide additional services for customers –Needlessly duplicated if sellers participated in industry marketplace

Electronic Commerce, 10th Edition45 Private Company Marketplaces Large companies purchasing from relatively small vendors –Exert power in purchasing negotiations e-procurement software –Company manages purchasing function through Web –Procurement software companies Ariba, CommerceOne –Automates authorizations, other steps –Marketplace functions

Electronic Commerce, 10th Edition46 Private Company Marketplaces (cont’d.) Companies implementing e-procurement software –Require suppliers bid on business Private company marketplace –Marketplace providing auctions, request for quote postings, other features For companies who want to operate their own marketplaces Example: United Technologies –Sells $35 billion of high-technology products, services

Electronic Commerce, 10th Edition47 Industry Consortia-Sponsored Marketplaces Companies with strong negotiating positions in their industry supply chains –Not enough power to force suppliers to deal with them Through a private company marketplace Industry consortia-sponsored marketplace –Marketplace formed several large buyers in a particular industry Example: Covisint (2000) –Consortium of DaimlerChrysler, Ford, General Motors

Electronic Commerce, 10th Edition48 Industry Consortia-Sponsored Marketplaces (cont’d.) Example: Agenda marketplace –Consortium formed by Marriott, Hyatt, three other major hotel chains Example: Exostar marketplace –Boeing led group of aerospace industry companies Example: Transora marketplace –Procter & Gamble joined with Sara Lee, Coca Cola, several other companies Consortiums have taken large part of market from the industry marketplaces

Electronic Commerce, 10th Edition49 Industry Consortia-Sponsored Marketplaces (cont’d.) Supplier concern –Ownership structure Independent operators for fair bargaining (Covisint) Including industry participants may be helpful (ChemConnect)

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Summary Using Internet and Web technologies improves purchasing and logistics primary activities Emerging network model of organization Governments extending reach of enterprise planning and control activities –Beyond legal definitions History of EDI and how it works –Conducting EDI: better than processing mountains of paper transactions –Internet providing inexpensive communications channel EDI lacked Electronic Commerce, 10th Edition51

Electronic Commerce, 10th Edition52 Summary (cont’d.) Supply chain management techniques –Fueled by increase in communications capabilities offered by the Internet and the Web Development of several different B2B electronic commerce models –Private stores –Customer portals –Private marketplaces –Industry consortia-sponsored marketplaces Most successful today