Electronic Commerce Eighth Edition Chapter 5 Business-To-Business Online Strategies

Electronic Commerce, Eighth Edition2 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

Electronic Commerce, Eighth Edition3 Learning Objectives (cont’d.) Supply chain management and how businesses are using Internet technologies to improve it Electronic marketplaces and portals that make purchase-sale negotiations easier and more efficient

Electronic Commerce, Eighth Edition4 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, Eighth Edition5

6 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, Eighth Edition7 Purchasing Activities (cont’d.) e-sourcing –Use of Internet technologies in sourcing activities Specialized Web-purchasing sites Figure 5-1 –Typical business purchasing process steps Many steps and people involved –Spend Total goods and services dollar amount company buys during a year Institute for Supply Management (ISM) –Main organization for procurement professionals

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9 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, Eighth Edition10 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

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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, Eighth Edition12

Electronic Commerce, Eighth Edition13 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, Eighth Edition14 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

Electronic Commerce, Eighth Edition15 E-Government e-government –Use of electronic commerce by governments and government agencies Perform functions for stakeholders Operate businesslike activities Examples in U.S. government –Financial Management Service (FMS) Pay.gov Web site –Department of Homeland Security (DHS) Internet technology use initiatives

Electronic Commerce, Eighth Edition16 E-Government (cont’d.) Examples in other countries –United Kingdom Department for Work and Pensions Web site –Singapore’s SINGOV site Examples in state government –California’s one-stop portal site (my.ca.gov) –New York State Citizen Guide site Examples in local government –Large cities: Minneapolis, New Orleans –New York City (MyNYC.gov)

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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, Eighth Edition18

Electronic Commerce, Eighth Edition19 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

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, Eighth Edition20

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Electronic Commerce, Eighth 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, Eighth Edition24 EDI Payments Transaction sets provide instructions to trading partner’s bank –Negotiable instruments Electronic equivalent of checks Electronic funds transfers (EFTs) –Movement of money from one bank account to another Automated clearing house (ACH) system –Service banks use to manage accounts Operated by U.S. Federal Reserve Banks or private ACHs

Electronic Commerce, Eighth Edition25 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, Eighth Edition26 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, Eighth Edition27

Open Architecture of the Internet (cont’d.) More flexible exchange of information –Accomplished with new tools (XML) –ASC X12 task group Convert ASC X12 EDI data elements and transaction set structures to XML Context Inspired Component Architecture (CICA) –Set of standards for assembling business messages –Provides predictable structure for message content –Provides more flexibility than EDI transaction sets –Basis for future development of electronic business message standards using XML Electronic Commerce, Eighth Edition28

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, Eighth Edition29

Electronic Commerce, Eighth Edition30 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, Eighth Edition31

Electronic Commerce, Eighth Edition32 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, Eighth Edition33 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, Eighth Edition34 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, Eighth Edition35 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, Eighth Edition36 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, Eighth Edition37 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, Eighth Edition38 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, Eighth Edition40

Electronic Commerce, Eighth Edition41 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