1. 1 9 Chapter 9 Strategies for Purchasing and Support Activities Electronic Commerce

2. 2 9 Objectives u Improving purchasing, logistics, and other support activities u Creating network organizations that extend beyond traditional limits u EDI, how it works, and how it is moving to the Internet u Internet improvements to supply chain management u Software packages for business-to-business e-commerce and supply chain management

3. 3 9 Purchasing, Logistics, and Support Activities u Purchasing activities include: l Identifying and evaluating vendors l Selecting specific products l Placing orders l Resolving issues after receiving the ordered goods or services. These include: u late deliveries, incorrect quantities shipped, incorrect items shipped, and defective items.

4. 4 9 Electronic Data Interchange u The computer-to-computer transfer of business information between two businesses that uses a standard format u In the 1950s, companies began to use computers to store and process internal data and information u By the 1960s, companies began exchanging transaction information with each other on punched cards or magnetic tape

5. 5 9 Electronic Data Interchange u Eventually, trading partners transferred data over telephone lines instead of shipping punched cards or tapes to each other u In 1968, the Transportation Data Coordination Committee (TDCC) was formed, and charged with exploring ways to reduce the paperwork burden u Note, since 1918, the American National Standards Institute (ANSI) became the coordinating body for standards in the United States

6. 6 9 Electronic Data Interchange u In 1979, ANSI charted the Accredited Standards Committee X12 (ASC X12) to develop EDI standards u The current ASC X12 standard includes specifications for several hundred electronic transaction sets (the names of the formats for specific business data interchanges)

7. 7 9 Commonly Used ASC X12 Transaction Sets Figure 9-3

8. 8 9 Electronic Data Interchange u Although the ASC X12 standards were quickly adopted by major U.S. firms, businesses in other countries continued to use their own standard. u In the mid-1980s, the United Nations (UN) Economic Commission for Europe built a common set of EDI standards based on the U.S. model. u In 1987, the UN published its first standard under the EDI for Administration, Commerce, and Transport (EDIFACT, or UN/EDIFACT).

9. 9 9 Commonly Used UN/EDIFACT Transaction Sets Figure 9-4

10. 10 9 How EDI Works u Paper-Based Purchasing Process: l Paper-based purchasing process results in a paper document created at each information processing step (purchase order, shipping document, invoice, receiving, account payable) that must be delivered to the department handling the next step l Paper-based transfers between buyer and vendor can be delivered via mail, courier, or fax

11. 11 9 The Paper-Based Purchasing Process

12. 12 9 How EDI Works u EDI Purchasing Process: u In this process: l Traditional mail service is replaced with the data communications of an EDI network l Flows of paper have been replaced with computers running EDI translation software

13. 13 9 The EDI Purchasing Process

14. 14 9 Value Added Networks u Three key elements in EDI purchasing process are: l the EDI network that connects the buyer and the seller l the buyer EDI translator computer that converts data from internal format to standard EDI transaction set and vice versa l the seller RDI translator computer that converts data from internal format to standard EDI transaction set and vice versa u Trading partners can implement the EDI network and EDI translation process in several ways, each using one of two basic approaches l Direct connection l Indirect connection

15. 15 9 Direct Connection Between Trading Partners u Requires each business in the network to operate its own on-site EDI translator computer u EDI translator computers are connected to each other using modems or dedicated leased lines u Trading partners using different protocols can make direct connection options difficult to implement

16. 16 9 Indirect Connection Between Trading Partners u Companies use the services of a value- added network (VAN) u The VAN provides communications equipment, software, and skills needed to receive, store, and forward electronic messages containing EDI transaction sets u The VAN often supplies the software needed to connect to its services u Examples include General Electric Information Services and IBM Global Services

17. 17 9 Direct Connection EDI vs. Indirect Connection EDI through a VAN Figure 9-7

18. 18 9 Advantages of Using a Value Added Network u Users support only one communications protocol u The VAN records activity in an audit log, providing an independent record of transactions u The VAN can provide translation between different transaction sets u The VAN can perform automatic compliance checks to ensure the transaction set is in the specified EDI format

19. 19 9 Disadvantages of Using a Value Added Network u Most VANs require an enrollment fee, a monthly maintenance fee, and a transaction fee u VANs can be cumbersome and expensive for companies with trading partners using different VANs u Inter-VAN transfers do not always provide a clear audit trail

20. 20 9 EDI on the Internet u The Internet is viewed as a replacement for expensive leased lines and dial-up connections u Small companies have the opportunity of selling to large customers that demanded EDI capabilities of their suppliers u Although, concerns about security and lack of audit logs continue to be a major roadblock

21. 21 9 Open Architecture of the Internet u The open architecture of the Internet allows trading partners virtually unlimited opportunities to customize their information interchanges u A new ASC X12 Task Group has been charged with several broad objectives: l Converting the ASC X12 EDI data elements and transaction set structures to XML, retaining one- to-one mapping l Developing XML data element names consistent with existing ASC X12 transaction sets l Meeting the needs of application-to-application and human-to-application interfaces

22. 22 9 Financial EDI u A trading partner’s bank is called a Financial EDI (FEDI) u Many trading partners are reluctant to send FEDI transfers for large sums of money over the Internet u Companies may opt to establish an indirect connection through a VAN for the added security for FEDI transaction

23. 23 9 Financial EDI u All banks have the ability to perform electronic funds transfers (EFTs) u When EFTs involve two banks, they are executed using a clearinghouse. u In the United States, most EFTs are handled through the Automated Clearing House (ACH). u EDI-capable banks are those banks that are equipped to exchange payment and remittance data through VANs. u Some banks also offer VAN services for nonfinancial transactions. They are called value-added banks (VABs) u Nonbank VANs that can translate financial transaction sets into ACH formats and transmit them to banks that are not EDI- capable are sometimes called financial VANs (FVANs).

24. 24 9 Hybrid EDI Solutions u Utilize the Internet for only part of an EDI transaction u PayBase package of Bottomline Technologies allows hybrid EDI u NetTransact provides an interface for smaller businesses connected to the Internet, but do not have EDI capability. u NetTransact software can convert an HTML- document (used by a small company) into an ASC X12 formatted document (used by a large EDI firm) and vice versa.

25. 25 9 NetTransact EDI-HTML Conversion Service

26. 26 9 Supply Chain Management u Money can be saved and product quality can be improved through active negotiations with suppliers u Businesses that engage in supply chain management work to establish long-term relationships (supply alliances) with a small number of very capable suppliers are called tier one suppliers u For example, a car manufacturer would include partners from engine manufacturers, steel fabricators, glass manufacturers, tire manufacturers, and so on.

27. 27 9 Supply Chain Management u By working together, supply chain members can reduce costs and increase the value of the product or service to the ultimate customer u With clear communication along the supply chain, each participant can know the demands of the ultimate customer and plot a strategy to meet those demands

28. 28 9 Technology in the Supply Chain u The Internet and the Web can be very effective communication enhancers u Software can allow members to review past performance, monitor current performance, and predict future production levels of products

29. 29 9 Advantages of Internet and Web Technologies in Supply Chain Management

30. 30 9 Software for Purchasing, Logistics, and Support Activities u Enterprise resource planning (ERP) software is designed to integrate manufacturing, finance, distribution, and other internal business functions into one information system u Major ERP vendors include Baan, J.D. Edwards,Oracle, PeopleSoft, and SAP

31. 31 9 Business-to-Business Commerce Software u Designed to help companies build Web sites that host catalog and other commercial sales activities u Major software packages include: l Netscape’s SellerXpert l Open Market’s LiveCommerce-Transact l IBM’s Net.Commerce l Microsoft’s Site Server, and l Ariba, which provides a way for companies t ostandardize purchase requisitions for office supplies.

32. 32 9 Supply Chain Management Software u Includes demand forecasting tools and planning capabilities to allow all supply chain members to coordinate their activities and adjust their production levels u Two major firms offer supply chain management software l i2 Technologies RHYTHM l Manugistics