1. Electronic Commerce Eighth Edition
Chapter 5 Business-To-Business Online Strategies 1 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
Electronic Commerce, Eighth Edition 2

3. 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 Edition 3

4. 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
Electronic Commerce, Eighth Edition

5. 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 Edition

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 Edition

7. 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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8. Electronic Commerce, Eighth Edition

9. Direct vs. Indirect Materials Purchasing
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 Edition

10. 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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12. 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 Edition

13. Support Activities General categories Training
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 Edition

14. 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 Edition

15. E-Government e-government Examples in U.S. 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 Edition

16. 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)
Electronic Commerce, Eighth Edition

17. Electronic Commerce, Eighth Edition

18. 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 Edition

19. 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, Eighth Edition

20. Early Business Information Interchange Efforts
1800s and early 1900s
Need to create formal business transactions records
1950s
Computers store, process internal transaction records
Information flows printed on paper
1960s: large volume transactions
Exchanged on punched cards or magnetic tape
1960s and 1970s
Transferred data over telephone lines
All efforts increased efficiency and reduced errors
Electronic Commerce, Eighth Edition

21. Early Business Information Interchange Efforts (cont’d.)
These information transfer agreements were not the ideal solution
Data translation programs incompatible
1968: freight, shipping companies joined together
Transportation Data Coordinating Committee (TDCC)
Created standardized information set
Allowed electronic computer file transmission to any freight company adopting TDCC format
Benefits limited to members of industries that created standard-setting groups
Full realization of EDI
Required standards used by companies in all industries
Electronic Commerce, Eighth Edition

22. Emergence of Broader EDI Standards
The American National Standards Institute (ANSI)
United States coordinating body for standards
1979
Accredited Standards Committee X12 (ASC X12)
Develop and maintain EDI standards
Data Interchange Standards Association (DISA)
Administrative body coordinating ASC X12 activities
1987: International standards
Administration, Commerce, and Transport (EDIFACT, UN/EDIFACT)
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25. How EDI Works Basic idea: straightforward Implementation: complicated
Example: company to replace metal-cutting machine
Assume vendor uses its own vehicles instead to deliver purchased machine
Steps to purchase using paper-based system
Figure 5-6
Steps to purchase using EDI
Figure 5-7
Electronic Commerce, Eighth Edition

26. How EDI Works (cont’d.) Paper-based purchasing process
Buyer and vendor
Not using integrated software for business processes
Each information processing step results in paper document
Must be delivered to department handling next step
Paper-based information transfer
Mail, courier, or fax
Figure 5-6
Information flows
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28. How EDI Works (cont’d.) EDI purchasing process
Mail service replaced with EDI network data communications
Flows of paper within the buyer’s and vendor’s organizations replaced with computers
Running EDI translation software
Figure 5-7
Information flows
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30. Value-Added Networks EDI network key elements Direct connection EDI
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
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33. 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 Edition

34. 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 Edition

35. 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 Edition

36. 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)
Electronic Commerce, Eighth Edition

37. 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 Edition

38. 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 Edition

39. 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 Edition

40. Supply Chain Management Using Internet Technologies
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, Eighth Edition

41. 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, Eighth Edition

42. 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, Eighth Edition

43. 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, Eighth Edition

44. 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
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46. 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, Eighth Edition

47. 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, Eighth Edition

48. Using Materials-Tracking Technologies with EDI and Electronic Commerce
Troublesome task
Tracking materials as they move from one company to another
Use optical scanners and bar codes
Integration of bar coding and EDI is prevalent
Figure 5-11
Electronic commerce second wave
Integrating new types of tracking into Internet-based materials-tracking systems
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50. 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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52. 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, Eighth Edition

53. Creating an Ultimate Consumer Orientation in the Supply Chain
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
Electronic Commerce, Eighth Edition

54. 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, Eighth Edition

55. 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
Electronic Commerce, Eighth Edition

56. 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 Edition

57. 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 Edition

58. 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 Edition

59. 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 Edition

60. 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 Edition

61. 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 Edition

62. 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 Edition

63. 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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65. 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 Edition

66. 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
Electronic Commerce, Eighth Edition