IS 4402: Electronic Commerce
Dr. Frederic Adam
Department of Accounting, Finance and
Information Systems
University College Cork
Ireland
© Frederic Adam, 2000
Information systems for interacting
with the environment
• Primary aspect of the phenomenon of E Commerce
• Attempts to change the nature of the linkage with
suppliers / customers / competitors
• SABRE
• American Hospital Supply Corporation
• Japanese and American car making and retail
industry in the 70s
• Concept of Just In Time (JIT)
© Frederic Adam, 2000
Link with customers:
• American Hospital Supply Corporation (AHSC):
system whereby customers can directly re-order
their supplies from terminals located in their
hospitals
• Successful because it enabled AHSC’s customers
to cut their costs of administration
• originally meant as an INTERNAL systems by
AHSC and extended to one main customer
© Frederic Adam, 2000
Links with customers and
competitors
• SABRE (American Airlines): first effective
electronic reservation systems in the US
• simple one-line database application
• available in any travel agent
• rented to other airlines
• competitive value of system still felt today
• in 1988 AA were making more money out of
SABRE than out of flying air planes
© Frederic Adam, 2000
Specific Features of InterOrganisational Systems
• Require co-operation
• also some legal implications - e.g. prevention of
computer crimes
• nature of the agreement extends beyond the
system itself - e.g. AHSC started from the
relationship between a store manager and a
customer
© Frederic Adam, 2000
Level of Integration between
trading partners
• Exchanges of information between partners can be
more or less structured:
–
–
–
–
–
–
purchase orders
invoices
cheques
…………….
phone inquiries (not totally reliable)
face-to-face meetings between staff (time consuming)
• Traditionally, structured exchanges were paper
based => slow turnaround time
© Frederic Adam, 2000
Electronic Commerce suggests
new methods
• Invoice => Electronic Data Interchange instead of
postal service
• Payments => Electronic Fund Transfer instead of
cheque
• Short messages => Electronic Mail instead of Phone
• Group discussions => Electronic Bulletin Boards or
computer conferencing instead of meetings
• Promotion => WWW instead of paper brochure
• Customer product query => on-line database instead
of paper catalogue
© Frederic Adam, 2000
Framework of generic forms of
Electronic Commerce
Permanent
Ad Hoc
EDI
IOS data retrieval systems
Electronic meeting rooms
computer conferencing
Electronic catalogues
WWW home pages
Electronic Mail
Electronic file transfer
Structured
Unstructured
© Frederic Adam, 2000
Electronic Data Interchange
(EDI)
• Creation of inter-organisation networks involving
at least 2 organisations
• can be extended to a very large number of
organisations (virtual trading community)
• Often use an intermediary - e.g a Value Added
Network (VAN) Service provider
© Frederic Adam, 2000
Electronic Data Interchange:
A Formal Definition:
“EDI is the transfer of structured data by agreed
message standards from computer to computer
by electronic means”
© Frederic Adam, 2000
Important Points about EDI
The definition points our three important issues:
• EDI uses structured data
• EDI uses agreed standards
• EDI uses electronic links
© Frederic Adam, 2000
EDI uses structured data
• EDI messages are processed by a computer not by
an operator
• it is very different from simple E-Mail
• the information received is not displayed to
anyone, but directly used by a program in a
computer
• messages are coded
© Frederic Adam, 2000
an EDI message:
• Messages are made up of STANDARD
LOCATION SEGMENTS (LOC):
TYPE OF
DATA
TYPE OF PLACE
LOC+
POD+
CODE
USNYC 01:
CODE LIST
DECODED TEXT
NEW YORK, NY
© Frederic Adam, 2000
EDI uses agreed standards
• Link between commercial partners who agree
to do business in a certain way
• preliminary agreement on what data is being
transferred and in what order
• Adherence to standards means Open
Environment at both ends
• it also requires an universally agreed message
structure to operate.
© Frederic Adam, 2000
EDI uses electronic links
• in the beginning: EDI used computer tapes
– slow
– vulnerable
– low level of integration across companies
• then EDI used telecommunications
– scheduling
– cost
– compatibility
© Frederic Adam, 2000
BILATERAL LINK:
© Frederic Adam, 2000
Multilateral Links:
© Frederic Adam, 2000
A modern solution for EDI
• Join an EDI network run by a VALUE ADDED
NETWORK SERVICE (VANS) supplier
• similar to a postal service
• all messages are sent through a delivery service
• messages are delivered into people’s post boxes
© Frederic Adam, 2000
EDI using a VAN
MAIL BOX
POSTBOX
© Frederic Adam, 2000
Advantages of VANS:
• They enables ASYNCHRONOUS
COMMUNICATION
• there is no need for DIRECT COMPUTER TO
COMPUTER COMPATIBILITY
• PROTOCOL CONVERSION is straight forward
• control and security of the messages are easier to
enforce
• error handling is done by the carrier
© Frederic Adam, 2000
Spread of EDI
• EDI was originally limited to the automotive and
retail industries
• now involves virtually every sector of business:
– shipping
– insurance
– banking
– government
– customs
© Frederic Adam, 2000
EDI - a Business Perspective
“The main benefits of EDI stems from receiving
orders as quickly as possible after the buying
decision has been made. That speed of
movement of information means that it is
possible to get the right stock in the right place;
to deliver quickly; to make sure you have
captured the market opportunity and to
minimise the working capitals”
PURCHASING DIRECTOR OF A
MULTINATIONAL
© Frederic Adam, 2000
EDI - a Business Perspective
“I see EDI as reducing the efforts required in
entering invoices, with less transcription efforts.
We will be able to use the people we have to far
greater benefit to the company”
CHAIRMAN OF A LARGE FOOD SUPPLYING
COMPANY.
© Frederic Adam, 2000
Benefits
• Cost savings - reduction in data entry errors smaller staff
• reduced lead time for orders
• speed up communication
• creates stronger ties between partners
• improved customer service
© Frederic Adam, 2000
Problems
• Set up difficulties:
– integration with existing systems
– selection of EDI standard
• loss of flexibility resulting from initial choices
• requires high levels of commitment from partners
• substantial benefits only come with high volumes
of data exchanges
© Frederic Adam, 2000
What is wrong without EDI:
• Companies use computers to process
transactions and produce paper
• Computers produce paper faster than humans
can process it => strain
Result is that processes:
• are Inefficient
• are open to errors
• are often delayed
• generate extra transaction
costs
© Frederic Adam, 2000
What is wrong without EDI:
• companies are using a combination of the most
modern and efficient with the most archaic methods
• postal link or faxes are the wrong media
• re-keying of data at the reception is a waste of time
• these create bottlenecks in the communication of
organisations
© Frederic Adam, 2000
With EDI
• Processes can be integrated and computerised
fully from end to end
• Data entry error is considerably reduced
• Data transfer can be extended to give immediate
feed-back:
– order correctly received
– goods not available
– substitution good suggested
• Other on-line services can be added:
– mail distribution list for new products / price changes
– special offers
© Frederic Adam, 2000
Introduction of EDI:
EDI can be introduced in two ways
• pro-active way: company sets out to create a link
with its suppliers / customers
• reactive way: company is asked (forced??) to switch
to EDI by one of its customer / supplier
• benefits can only be maximised if EDI is introduced
in a pro-active way (otherwise, standards are dictated
by an organisation’s partners)
• companies need to formulate an EDI strategy - much
like BPR (re-design processes to fully exploit EDI)
© Frederic Adam, 2000
EDI in Ireland
• Largest VAN in Ireland is called EIRTRADE
managed by Eircom
• proposes a variety of services:
– EDI trading service
– E-Mail between customers
• more than 250 companies use the service in
Ireland and the UK
• Linked to other VANs in the world (GEIS,
CFM...)
© Frederic Adam, 2000
Example of EDI adoption:
• Before Northern Telecom joined Eirtrade
more than 5 days from ordering to delivery
© Frederic Adam, 2000
Example of EDI adoption:
• After Northern Telecom joined Eirtrade
Other suppliers
EIRTRADE VAN
Northern
Telecom
Other customers
Same day delivery
© Frederic Adam, 2000
Another example: Hickey and Co.
• Irish clothing company - about 75000 garments a
week
• formal request to implement EDI from large customer
• only superficial at first then integrated with
manufacturing
• reduced stock levels, faster turnaround of orders,
more attractive to other customers, easier to audit
paper trail
• But too small to convince other customers to use EDI
© Frederic Adam, 2000
The Internet
• Most of the business to business transactions
(including EDI) are carried out on the Net
• Most of the business to customer are carried out
on the Web
• Future of E-commerce is based entirely on the
development of this vast network
© Frederic Adam, 2000
Origins of the Internet
Phenomenon
• 30 years in existence - 1969
• Communication network for the US Military!
• Dormant for many years
• Then confined to basic applications, such as
FTP and Telnet, by the platforms used
© Frederic Adam, 2000
The Explosion of the Internet
• Huge growth in the number of machines on
the NET
• Widespread coverage in the media - eg:
buzzword “Information Superhighway”
• Recognition of new business opportunities
provided by the NET
• Role of the WWW is and will be increasingly
important
“The best business opportunity that most
people are likely to find in a life time”
(Hammond, 1996)
© Frederic Adam, 2000
Number of Computers
Connected to the Internet
© Frederic Adam, 2000
Some recent statistics
•
•
•
•
•
400,000 companies have a web site
90,000,000 people access the net regularly
Sales over the Net reached $5.1 billions
business to business accounts for 78%
travel is one of the most common type of
transactions
© Frederic Adam, 2000
Internet Opportunities
• Like the gold rush of 1849
• A shop in 0.5 m2
• Interactive advertising
• A lot of very optimistic predictions
© Frederic Adam, 2000
Internet Threats
• Dangers inherent in a wait and see approach
• Companies can be international competitors on
the WWW with little resources
• Industries are radically changed by the WWW
• WWW is becoming a crucial battleground
The Internet is like a set of cross roads where
petrol stations fight a tough price war; except
with the Internet, all companies are at the
same cross roads
© Frederic Adam, 2000
The Internet in Ireland
• Computer industry very important
– 13 % of all Irish exports are software
– International head-quarters for EMC, Digital, Apple
etc....
• Internet’s significance is recognised
– more than 1000 significant WWW server sites
– 65,000 corporate users
– one of the top 10 countries for WWW development
in the world
– Number of Internet Service Providers very high
© Frederic Adam, 2000
Finger on the Pulse!!
•
•
•
•
•
•
•
•
•
Number of Sessions per Month
Number of Unique Sites Visited
Time Spent per Site
Time Spent per Month
Time Spent During Surfing Session
Duration of a Page viewed
Active Internet Universe
Current Internet Universe Estimate
but double figure growth is over
16
11
42: 11
7: 30: 51
28: 18
01: 05
64,953,584
109,993,829
– redistribution towards vertical sites
– traffic congestion
© Frederic Adam, 2000
Case Study of Web Fortune
• Blue Mountain Arts (.com) - on-line postcard
service
• One of the most highly trafficked sites on the
Internet (16th, but 3rd E-Com site)
• 9.2 millions visitors per month
• Etoys inc. ready to pay £1 billion for it
• but quick response of competitors may spoil deal
• AOL, Yahoo and Amazon developed their own
• service may be extended to include flower, candy
or fruit delivery!
© Frederic Adam, 2000
How trivial can you get?
You have just received an animated greeting card from XXX
You'll see the personal greeting by using the following
Web location.
http://www1.bluemountain.com/cards/box6958r/ufe4vyeufagkw
y.htm
(Your greeting card will be available for the next 90
days)
There is no charge for this service! :) HAVE a good day
and have fun!
© Frederic Adam, 2000
Electronic Commerce
• As indicated by spread of EDI, phenomenon not
recent (gradual increase over 25 years)
• Interest growing rapidly
• Definition: automation of commercial transactions
using computer and communications technologies
• commercial = transactions that involve the
exchange of goods, funds or obligations...
© Frederic Adam, 2000
Precursors of E-Com
• More than 2000 initiatives introduced over last 20
years
• most successful (still exist besides the Web) was
France’s Minitel (1980)
– infrastructure made available to companies to sell
services through telephone lines
– France Telecom equipped entire user population within
2 years
– hundreds of thousands of local and national services
• Most other attempts failed (e.g. Minitel in Ireland)
© Frederic Adam, 2000
Key points in the current success
• International, borderless initiative
• Technology is mainstream and affordable (e.g
GUI)
• Flexibility is ensured through the existence of
thousands of existing / developing local networks
• Global markets set free from the shackles of 9 to 5
constraints
• goes hand in hand with internal re-engineering
carried out in many organisations ...
© Frederic Adam, 2000
Fortune 500 E-Com
• All have Web sites
• Only 10% conduct transactions
• Mostly public relations, customer service and
technical assistance (70% of sites)
• marketing and sales (30% of sites)
• Illustrates that E-Com is not a silver bullet
© Frederic Adam, 2000
Limitations of current sites
• Only 3% of sites for direct sale (9% equipped for
on-line transactions)
• more than 50% of users went on-line to make a
purchasing decision...
• only 15% bought because sites did not (easily)
allowed them to do it on-line
• 2/3 of customers put goods in their trolleys and
then fail to complete transaction!
© Frederic Adam, 2000
But...
• Internet has potential to enable / impose radical
changes:
• at first, e-mail is a replication of normal mail, just
faster
• then, it take additional dimensions
• i.e. effects that go beyond its technical features
(virtual communities)
groups are those social aggregates that involve mutual awareness
and potential mutual interaction (McGrath, 1984)
• E-Mail has the power to change the key
parameters in this definition
© Frederic Adam, 2000
For example:
• Instigation of electronic exchanges with emerging
nations / markets
• simpler structure
• less tradition bound
• attracted to novel and efficient ways
• little costs in competing in most distant of markets
• Other experimentation include letting customers
deciding the price
Internet does create opportunities that could not be exploited otherwise
© Frederic Adam, 2000
Types of e-commerce
• Business to business:
– EDI
– largest in money terms (as in real world)
• business to consumers:
– WWW retailing and brokerage services
• consumer to consumer:
– free ads services / discussion groups
• attempt to implement single point of entry and limit
errors and speed up process
• Also, higher degree of customisation of customer
services (e.g. auction markets)
© Frederic Adam, 2000
Where does the money go?
•
•
•
•
Internet retailing grows 200% per year
top 10 retailers account for 50%
mix retailers (e.g. Dell) account for 60%
portal sites only pocket 30% of E-revenues
© Frederic Adam, 2000
E-Commerce Challenges:
• Speed = service is never too fast
• Convenient = better integration along the supply
chain (end to end value stream)
• Personalised = service is never too personalised
• Price = products and services are never too cheap
• = View the world from a customer perspective
(visionary?)
© Frederic Adam, 2000
Constructing a E-Commerce
design
• All about offering new ways to service customer
• acquiring the capability to implement these new
ways
• e.g. DELL’s BTO model for selling PCs
• company does not manufacture a PC before an
order is received
• $10 million sales on-line per day! (soon 50% of all
DELL sales) - Jan 97: $1 million.
• Never been easier to buy a PC
© Frederic Adam, 2000
Step One: Self-diagnosis
• Diagnose the company and its markets
–
–
–
–
current / recent innovations?
Evolving customer expectations
any way to question industry assumptions
any way to lower costs
• innovator / market leader - early adopter /
visionary - silent majority - ...
© Frederic Adam, 2000
Step two: reversing the value
chain
• Linking emerging technology to new business
designs
• More difficult than merely adapting new to current
• traditional break down into product and service
not helpful => creating better offering
• outside-in approach (better attention to market
changes)
• effectively and competitively presenting good
products no longer sufficient
© Frederic Adam, 2000
Step three: choosing a narrow
focus
•
•
•
•
Technology can be enabling, but also distracting
concentration on a key area is required
service excellence (knowing customers better)
operational excellence (having better internal
processes)
• continuous innovation excellence (having leading
edge products)
• not compete on every aspect / feature of product
service
© Frederic Adam, 2000
Example: Dell
• Narrow focus on Supply chain innovation
• “quickly manufacturing and delivering inexpensive
top quality PCs”
• the three plants are located close to their suppliers
and operate in JIT
• Orders follow machines across the floor
• Automated customer requests mean operators are
shown by flashing colours what components to use
(i.e. what type of PC to assemble)
© Frederic Adam, 2000
Critical Success Factors
• Back end systems enable extremely quick
transmission of orders to factories
• CIM systems are then used to schedule production
• integration of operations with upstream design
activities mean shorter time to market for new pdts
• no finished goods inventory
(cost, obsolescence)
• outsourcing of non-critical components (e.g. screen)
• acceleration of payment cycle (goods paid for before
they are built!)
© Frederic Adam, 2000
Lessons from the Dell case
• Companies should try to:
• increase their ability to respond to the ever
increasing and ever changing needs of customers
• requires very flexible business design
• based on solid technical foundation
• Even though E-Com is an extra-organisational
mode of communication it has crucial implications
for internal systems
© Frederic Adam, 2000
Managing customer relationship
• E-com presents specific challenge because contact
is over the web
• personal relations are excluded
• only end of process is (sometimes) done with
human operators
• searching for new customers / selling new services
to old ones is difficult if you do not know who to
talk to
© Frederic Adam, 2000
E.g. Charles Schwab Ltd.
• Brokerage service for DIY investors
• $200 billions assets
• all contacts through phone => little visibility on
transactions
• sales reps + service people do not know enough
• Customer relationship management (CRM):
integrating all activities involving customers
• All needs addressed together
Sales
Service
marketing
CRM
© Frederic Adam, 2000
Many other such examples of
integration
• Enterprise resource planning (Nestle)
• Supply chain (Ford Motors comp)
• Selling chain management (Whirlpool)
– pricing system was paper based
– spreadsheet with 180,000 cells - many customer types / pricing
strategies
– 15 days lead time to print booklets
– integrated systems takes into account all parameters
• The e-commerce strategy is then constructed
around these core systems
© Frederic Adam, 2000
Planning for integration
• Ensure proper knowledge about the end-to-end
demand planning function - variations and
seasonality
• carry out data consistency and accuracy checks
• creating better relationship with partners upstream and downstream
• envisage structural changes required (e.g. zero
inventories)
• Plan for additional skills / re-training (e.g. MRP)
© Frederic Adam, 2000
Prepare systems for integration
• Enable information sharing - more robust
communication
• create joint performance measurement systems
and collaborative planning processes
• exchange / re-distribute responsibilities
• redesign products and processes so work is easier
and more efficient (BPR)
© Frederic Adam, 2000
Business Process Re-Engineering:
• 90’s buzzword in management
• Redesign the whole organisation to make it
more effective rather than efficient
• Based on extensive studies of all processes
• Create new ways to do things that minimise
- time spent
- number of employee required
- costs incurred
• and maximise:
– Customer satisfaction
– speed of service
– profit margin
© Frederic Adam, 2000
Process versus Functions
Marketing
Manufacturing
Other functions
Production and Sales of Product A
Production and Sales of Product B
Other Vital Process - e.g. dealing with customers
© Frederic Adam, 2000
BPR versus Process
Rationalisation
• Up to now, emphasis on increasing efficiency
• But “there is nothing more useless than doing
efficiently what should not be done at all”
Drucker, 1986
• Dramatic improvements require revolutionary
moves
• Everything must be questioned
© Frederic Adam, 2000
Information Systems to support
the e-business strategy
•
•
•
•
Customer relationship management (CRM)
Selling chain management
Enterprise Resource Planning (ERP)
Supply chain management (SCM)
© Frederic Adam, 2000
Customer Relationship
Management
• Cost of selling to a new customer is six times as
high as to existing customer
• Each dissatisfied customer tells 8 to 10 people
• 1 extra % of customer retention can boost turnover
by as much as 15%
• Odds of selling to a new customer = 1/7 to an
existing customer = 1/2
• 70% of dissatisfied customers will do business
again if they feel their complains are handled well
• 90% of companies may not have the customer
support required for e-business
© Frederic Adam, 2000
Why CRM?
• Customers don’t care about their suppliers’
internal difficulties
• They want to be able to access product and
services at the least cost
• They want a single point of entry
• Existing loyalty programmes don’t go far enough
© Frederic Adam, 2000
The 3 phases of CRM
• Acquiring new customers
– by promotion
– leading edge product backed by superior service
• Enhancing profitability of existing customers
– cross-selling and up-selling (one stop shopping)
– additional services
• Retaining most profitable customers
– best customer list
– customer profitability analysis
– make best offer to best customer
© Frederic Adam, 2000
Acquiring new customers
• Creating a bit of magic!
• E.g. IBM’s new product site
• Market research indicates that sales are more
secured in the two or three minutes after the
inquiry was made!
• Create a sound relationship from the start may no
be so expensive
© Frederic Adam, 2000
Enhancing existing relationships
• Listening to customer complains is a key aspect of
CRM (better to know)
• e.g. Best Buys (electronic retailer): 3000 calls /
day!(average 15 minutes)
• Many different types of inquiries must be dealt
with at the same point (call centre)
• Operators must have broad knowledge + access to
specific info (e.g. TNT)
© Frederic Adam, 2000
Retaining the best Customers
• Selecting best customers (on rigorous basis)
– e.g. State Farm insurance offers best products to people
without claims over last five years
– already in place in many industries - e.g. car insurance
• Holding on to them using some positive
discrimination
• Listening to them should tell you how
• provide incentive to salesreps to boost retention
– some companies reward more highly to retain existing
customers than for getting new ones
© Frederic Adam, 2000
Novelty of the CRM Approach
• Complete and integrated solution - breaks down
the walls of conventional functional areas
• Most companies are good at one of the 3 activities
- CRM concentrates on all 3
• Overall corporate objective of providing customer
satisfaction
– systems in place to collect, store, exploit CRM info
– active distribution of information about customers
• Not as easy as it looks
© Frederic Adam, 2000
Supporting CRM
•
•
•
•
Integration of customer content
integration of customer contact
integration of end-to-end business processes
integration of the extended enterprise
© Frederic Adam, 2000
Customer contact point
• Move from traditional phone + mail towards Web
enabled contact:
– how will this affect the content of the communication?
– will it be cheaper or more expensive?
• Call centre (70% of all contact points) evolving
into a selling channel
• Goals of the contact point
– Listening to the customer
– creating higher levels of loyalty (HD)
– providing a better experience
© Frederic Adam, 2000
Selling Chain Management
• Sales information is not always available (e.g.
self-service environments)
• sales people sometimes have too much admin to
do
• Fragmented order support means multiple contact
points
• Legacy systems not integrated
© Frederic Adam, 2000
Definition
• An integrated order acquisition strategy
• Systems to streamline the set of activities the
business performs to acquire and fulfil orders
• see figure attached
© Frederic Adam, 2000
Goals of SCM
• Focus on the most appropriate and profitable
opportunities
• shorten sales cycles
• increase repeat sales
• improve visibility on orders
• better information / forecasting
© Frederic Adam, 2000
Why SCM?
• Increase of self-service ordering (limited choice
and interaction - e.g. second hand cars)
• excessive cost of pre-sales technical support
• Increasing cost and volume of errors in ordering
cycle
• increasing diversity of channels for selling
• increasing complexity of products
• increasing complexity of markets (deregulation,
mergers etc…)
© Frederic Adam, 2000
CISCO and SCM
• CISCO’s customers are resellers who sell networking
products
• before: reps would go around visiting shops and fill
orders or orders would arrive directly by fax at Cisco’s
• Orders were then re-keyed in the SOP systems
• After: automation of the process (see figure attached)
© Frederic Adam, 2000
Enterprise Resource Planning
(ERP)
• Large application geared towards integrating the
essential internal processes of an organisation
• e.g. SAP R/3, MFG/PRO, Baan, JD Edwards
• Support the transactional backbone of the
organisation
• 70% of fortune 500 companies have or are
implementing ERP systems
• SAP has become the second largest software
producer in the world
© Frederic Adam, 2000
Example: Colgate Palmolive
• Large corporation with many products:
– streamlining the business while offering increasing
flexibility to customers
• SAP R/3 to address manufacturing / logistical
complexity
• 1996 - 2001 to equip the whole corporation
Before:
After:
75 data centres
/
2 centres with 40 staff
1 to 5 days for order acquisition + 1 or 2 days to process it
……… / combined acquisition and processing in 4 hours!
on-time deliveries = 91.5% /
97.5%
Also accounts payable and HRM were consolidated in one
location
© Frederic Adam, 2000
Content of ERP systems
• ERPs are not single systems: series of modules
supporting specific areas
–
–
–
–
admin functions
HR
manufacturing / MRP
order processing etc…
• single point of entry for all data: sits on top of a
single database of shared data
• data is released from one module into the relevant
modules once it has been checked
• ERPs have the potential to solve the back end
headaches of e-commerce solutions
© Frederic Adam, 2000
Reasons for ERP systems
• Search for operational excellence
• cost cutting / rationalisation
• standardisation / compatibility of disparate IT
infrastructures (e.g. mergers)
• e.g. Ericsson reported following improvements:
–
–
–
–
SOP 1 hour to 10 minutes
PO 4 hours to 5 minutes
production scheduling: 18 hours to 30 minutes
98% of orders delivered on time
© Frederic Adam, 2000
Benefits of ERP
• Understanding the implications of changes in
production schedule (by de-expediting parts)
• Keeping inventory low (25% decreases reported)
while removing risk of stock-outs
• Better planning leading to:
– reduction in lead times
– better use of capacity
– lowered risk of obsolete production (e.g. engineering firms)
• Early warning system: earliest delivery dates are
known before promises are made
© Frederic Adam, 2000
Different Applications of ERP
• Increased flexibility in design / production in
order to serve niche markets (focus on small
output) - more Europe
• Better organisation of mass production - more
Japan
• Better utilisation of the capacity, optimisation of
performance - more US
© Frederic Adam, 2000
How to get an ERP
• Build or buy decision
• try to minimise the high levels of risk:
– Foxmeyer ($5 billion pharmaceutical comp.) went
bankrupt in 1996
– sued SAP’s US subsidiary and Andersen Consult. for a
combined $1 billion
– 3 years of implementation destroyed the company
– bought by McKesson Drugs - 1997
• Try to get best fit between ERP functionalities and
business model
© Frederic Adam, 2000
Critical issues in ERP
implementation
• High cost and high stakes
• Misguided belief that there is an ERP that “does it
all”
• difficulty in making a transition from an old model
to an ERP model
• overestimation of the pace of change of some
stakeholders (technical change is not sufficient)
• difficulty in obtaining any direct ROI
© Frederic Adam, 2000
Buying ERPs
• Many suppliers: SAP / Baan / JD Edwards / QAD
• always implemented through a distributor
• advantages are numerous (as against building)
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integrate best practice
insurance against obsolescence
cheaper !!??
Software development is not core competency for most
• selection process is difficult at best:
– site visits
– presentation
– discussion groups...
© Frederic Adam, 2000
The ASP model
• Over the last two years - Pressure from Y2K?
• "An ASP manages and delivers application
capabilities to multiple entities from a data centre
across a wide area network.”
• different types of ASP:
– horizontal: enterprise / volume or regional ASP
– vertical model: task-specific or industry-specific ASP
• solution offered through a Best-of-breed or Onestop-shopping model
© Frederic Adam, 2000
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The current leaders in the ASP market include:
Bull allied with Baan worldwide from June 1999 onwards
British Telecom with SAP in the UK from May 1999
Catalyst Solution with JD Edwards in the UK from May 1999
Oracle by themselves in the States and the UK from May 1999
Compaq with SAP in the States and the UK from May 1999
Prologue Software by themselves in France from June 1999
Corio with Peoplesoft and Siebel in the States and the UK from August 1999
IBM with Oracle in Denmark from September 1999
IBM with SAP in Brasil from September 1999
IBM with JD Edwards in North America from September 1999
Symix by themselves worlwide from May 1998 with their Syteweb product which
enables integration with customers and suppliers over the web. This service was
later extended to reach full ERP specification over the following 12 months.
Groupe Galeries Lafayette with IBM in France (using their own in-house
developed software not available otherwise!) under the name LASER from July
1999
Interpath and Sun for SAP from June 1999
Oracle and HP for SAP from June 1999
Bold indicates primary consortium partner.
© Frederic Adam, 2000
ERP and ASP
• As with all ecom systems, service has two parts:
– interface (web) or client
– back end functionality on a server
• opportunity to differentiate service for ASP + offer
additional software in the package
• opportunity for customer to pay far less and to
implement far quicker (c.f. SMEs)
• Also, traditional ERP market is contracting
• expertise is in short supply
© Frederic Adam, 2000
Mechanics of ERP / ASP Services
• 24 to 36 months contracts
• 400-500 euros per workstation per month +
subscription fee at start
• service includes: technical setup / implementation
+ software licences + on-going support + upgrade
• some ASPs offer differentiated services for
different industries
• others develop interfaces that allow some degree
of customisation without touching the software
• SAP claim the same margins can be obtain
© Frederic Adam, 2000
Future trends
• A bit of a jungle - needs for standards
• Risk element is great for all partners involves especially customers
• Application Service Provider Industry Consortium
created end of 1999
• Code of good practice ready in January 2000
• creation of a certification that guarantees service
and gives protection to customer (Ernst / Young
and Deloite / Touche)
© Frederic Adam, 2000
ERP Capabilities - SAP
• Accounting / finance:
– Asset management, cash management, product cost
accounting, A/R and A/P…
• Production planning and materials planning
– purchasing, inventory management, MRP, production
planning
• HR management
– travel expenses, payroll, personnel planning
• sales and distribution
– sales planning, order management, quality management
• e.g. Microsoft spent 10 months and $25 ms
replacing 33 different systems in 26 sites with SAP
© Frederic Adam, 2000
Critical Success Factors in ASP
model
• Security of the data and application
• performance and reliability of application
– at least 98% uptime
• flexibility of the service offered
• adaptation of the software
• relationship between supplier and customer / user
© Frederic Adam, 2000
Potential partners
• Pure play ASPs - 100% new
• ISP and Telecom companies - own the
infrastructure
• Software vendors - own the licences
• Hardware vendors - own the platform
• Distributors - own the customers
• No one has all the required competence
© Frederic Adam, 2000
Nest steps on this market
• All ERPs will include CRM modules
• Platform provider for ASP solutions
– e.g. Prologue + Microsoft: biz@large
• HP willing to enter into the capital of any venture
if they provide the hardware
• Business Process Outsourcing (BPO)
• eXtended Resource Planning (XRP) - support
decision making as well
© Frederic Adam, 2000
Conclusion on ERP
• Whether traditional or ASP - matching the
business processes to the functionality
• obtain agreement from all actors
• be ready for fundamental change
• don’t lose sight of the specificities of the firm
• try an incremental implementation rather than a
culture shock
• leave the door open for change after the ERP
implementation
© Frederic Adam, 2000
ERP capability - MFG/PRO
• meant to deal with requirements throughout the
entire product supply chain
• multi-location / multi-factory / multi-products etc…
• Includes Inventory control Distribution /
Manufacturing / Financial / Field services support /
Planning
• Based on a large Progress® relational database and
developed in 4th GL
© Frederic Adam, 2000
Case Study of SAP implementation
• Vandelay Industries Inc. (95 - 97)
• SAP R/3 ERP
• Goals:
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end the fragmentation of systems
allow process standardisation
give more visibility on data across entire corporation
give competitive advantage
• much enthusiasm especially amongst plant managers
• high expectations / low level of understanding what
ERPs are
© Frederic Adam, 2000
Company background
• Manufacture and distribute industrial process
equipment
• $8 billion turnover
• rapid expansion from 1945 to 1985 by opening
new sites and buying smaller firms
• 30,000 staff on four continents
• find themselves too expensive and too slow
• three plant closures and 10,000 staff lost
• return to profitability but fear that it may not be
enough
© Frederic Adam, 2000
Information Systems
• Each plant had own systems (MRP, planning,
scheduling…)
• corporate finance IS only integrated one
• problems resulting:
– integration often impossible
– scheduling incompatible => no end-to-end vision of
processes as soon as more than 1 plant involved
– no overall planning
– order acquisition entirely manual (faxes and phones)
– no integration of key functions - e.g. HR
– also, processes complex on factory floors
© Frederic Adam, 2000
The Team and the Project
• SAP - market leader at the time (6000 sites 400,000 users
in 1996)
• Deloitte and Touche / ICS subsidiary - favourite SAP
implementer
– general management consultants
– SAP specialists
• 18 months planned with 50 f/t staff
• budget $20 million
• 50/50 split: designing “to be” processes / implementing SAP
• target sites:
– 8 manufacturing
– 4 order entry
– headquarters
© Frederic Adam, 2000
Key issues in the project
• Steering committee made up of high level, highly
committed managers - monthly meetings
• Pluridisciplinary project team - IS + key
functional areas - full time
• centralisation vs autonomy (involvement of users)
• standardisation of practices (e.g. part numbers)
• Suitability of SAP
– change business to match SAP
– interface SAP with other system
– extent SAP system to match current practices
• Persuasion of key change agents
© Frederic Adam, 2000
Supply Chain Management
• Increasingly common type of application
• e.g. Bergen Brunswig (pharmaceutical medical
product distributor):
– no longer see themselves as a distribution company but as
managing the medical supply channel on behalf of others
– not merely moving products but also managing information and
the ultimate efficiency of the channel
• e.g. Dell
• anti e.g.: Boeing wrote off $2.6 billion in Oct.
1997:
– raw material and internal assembly shortages
– unhappy customers
© Frederic Adam, 2000
Definition
Complex network of relationships that organisations
maintain with trading partners to source,
manufacture and deliver its products
• includes material, information and financial flows
as shown below
Information Flows
Product
Supplier Flow
Product
Manufacturing Flow
Product
Distribution Flow
Payment Flows
Product
Retailer Flow
Consumer
© Frederic Adam, 2000
Goal of SCM
Delivering the best value proposition: what the
customer want, how and when it’s wanted, at the
lowest possible price
• to achieve this companies need rapid, cost effective
and flawless demand fulfilment
• Involves taking responsibility for what happens
outside the walls of the organisation
• linkage with suppliers
• minimising the cost of order delivery process by
trading off cost of inventory, transport, handling etc...
© Frederic Adam, 2000
Obstacles to good SCM
• No player has enough info to synchronise the
entire channel
• most SCc contain more than double the required
inventory
• products are handled too many times (5/6 average)
• Physical carriers struggle to maintain costly
equipment on slim margins
© Frederic Adam, 2000
Novelty in SCM - eSCM
• Better techniques and software: e.g. SAP’s
Advanced Planning and Optimisation
• Supply Chain planning => for the entire channel
• Web-based applications shared by all partners
involved including consumers help both planning
and execution + provide greater visibility
• e.g. complex product with fragmented supply in
many different countries
© Frederic Adam, 2000
Supply Chain Trends
• Increased worldwide dispersion of manufacturing
and distribution facilities
• increased channel unpredictability
• responsiveness before efficiency: need to be quick
and flexible disrupts existing paradigms
• Market share before profit margin (.com)
© Frederic Adam, 2000
Key Areas of Investment in SCM
• Inter-enterprise co-ordination of design,
manufacturing and business process
• Effective distribution and channel partnership
• customer responsiveness and accountability
© Frederic Adam, 2000
Different stages in SCM
• Enterprise focus - traditional model
– figure 1
– characterised by fragmentation
– sometimes semi-conflict between links in the chain
• Partner focus - modern vision
– figure 2
– characterised by collaborative idea
• Direct focus (e.g. Dell) - emerging vision
– figure 3
– characterised by customer-direct capability
– near zero inventories
© Frederic Adam, 2000
Service through SCM integration
Inferior integration of SCM results in:
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erratic level of service
no vision of future demand
bad/inefficient production planning and scheduling
rising inventory costs
• Good SCM leads to:
– Responsive SC (quick and accurate)
– Enterprising SC (adaptable)
– Intelligent SC (dynamic and visionary)
© Frederic Adam, 2000
Elements of SCM
Two key elements are
• planning
– forecast of demand,
– inventory simulation
– manufacturing planning...
• Execution
– procurement
– manufacturing
– distribution...
• Specific software exist to enable those
© Frederic Adam, 2000
SC Planning
• Two types of software:
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Order commitment (available-to-promise)
Advanced scheduling and manufacturing planning
Demand planning
Distribution planning
Transportation planning
• Understanding the impact of taking additional
orders / changing current orders
• Integration with ERP required
© Frederic Adam, 2000
SC Execution
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Key differentiator in today’s markets
Planning can help to cut costs, be more efficient
Execution is what truly satisfies customers’ needs
key stages:
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order acquisition
production / purchase of goods
replenishment
distribution
reverse logistics (dealing with returns - up to 14%)
© Frederic Adam, 2000
Problems with SC
• Lack of knowledge of the end-to-end demand
function
• inconsistent / out-of-date data about SC (poor
decision making)
• lack of process integration with partners
• need for fundamental structural changes
© Frederic Adam, 2000
Solutions
• Enable information sharing
– robust communication process
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create joint performance measurement systems
create joint collaborative planning processes
exchange responsibilities / redesign across firms
redesign products and services to facilitate work
and satisfaction of customers
• All these are stages of the total solution
© Frederic Adam, 2000
Key Questions in sorting out the
SCM
• SCM is a business design issue
What is the right e-chain structure?
Does the chain enable us to differentiate ourselves?
Does it facilitate effective order fulfilment?
Is it matched by proper infrastructure / internal
processes?
© Frederic Adam, 2000
Types of SCM
• Integrated Make-to-stock
– smoothing demand in mass production industries
– linked to postponement in distribution channel
• Continuous replenishment
– customer-demand pull system across firms
– ECR, QR
• Build-to-order
– efficient SCM allows return to BTO model
– inventory substituted with information (Dell)
© Frederic Adam, 2000
Example: CVS-McKesson SCM
• McKesson occupied key position
– 35000 customers / 60000 orders (1.6 m lines) daily
– all orders in electronic forms
– target: become the world leader
• CVS has acquired many prime locations on the market
– US drug wholesalers down from 180 to 45
– top 5 = 57% of market and growing
• Market evolution
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market is growing
wholesalers are best distribution channel
manufacturers can concentrate on R&D
wholesalers are transforming their offering into information-based services
• Moves to greater integration between CVS & McKesson
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McKesson takes over responsibility for stock levels
measures consumption / plan for demand
replenishes stocks to meet agreed upon levels
High level of inter-firm integration
© Frederic Adam, 2000
Continuous replenishment
Moving into E-Business
• Ecom value proposition
– what is the customer looking for?
– Strategy of the firm
• e-business foundation
– blueprint for value creation
• capacity evaluation
– current business and capabilities
• e-business design
– how the value is packaged into product, services and
sites?
• Execution and monitoring
© Frederic Adam, 2000
Value proposition
• Knowledge building
– much to learn on customers and their perception of value
– Why are doing things the way we are?
• Specific questions:
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who are my customers? (profile / categories)
What are their priorities?
How can I create value for them?
How does my product reach them?
Who are (will be) my real competitors?
How can we use technology to change these parameters?
© Frederic Adam, 2000
Capability evaluation
• What can we do now?
– Organisation specific assets
– staff
• what do we urgently need?
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Staff development / new hiring
investments
plans for acquisition
plans for linkages across functions
© Frederic Adam, 2000
E-Business design
• Category killer (first mover)
• Channel reconfiguration (change access to
customers, suppliers etc..)
• transaction intermediary (internet for operational
support)
• Infomediary (reduction of search cost)
• self-service innovator (total service to customer)
• Supply Chain innovator (integration of SCM agents)
• Channel Mastery
CVS
© Frederic Adam, 2000
Case Study: E Trade
• Self service innovator
• invented on-line trading
• strong web presence offering self-directed traders
the best prices
• Also, real time access to quality information
• New entrant philosophy = clean slate approach
and quick decision making
• opposed to current players - e.g. Merril Lynch who
have brand, customers etc...
© Frederic Adam, 2000
Traditional versus startup
planning
• Analyse trends and compare firm to best practice
Phase 1 VS: develop a plan that solves a critical customer
pb
• design fundamental change plan VS: design an
Phase 2
ebusiness that matches the business model
developed + find suitable partners (BOB)
Phase 3• Implement change VS: deploy electronic
architecture to attack new segments. Spend!
© Frederic Adam, 2000
E-trade: key to success
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24 hour service
lower price because of lower transaction costs
instantaneous access to selected sources of info
remove barriers to offer transparency / remove
inefficiency in brokering business
• No precedent / no given way to do business
© Frederic Adam, 2000
E-trade statistics
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New breed of customers - very active
25% of customers on-line every day!
Customer trade 25 times / year on average
customer retention rate 96%
create a situation where customer perceives high
switching costs
• copy cat: 30 on-line traders (x2 in 1 year)
• e.g. eSchwab has 1m on-line customers
• traditional agents face challenge of diversification
© Frederic Adam, 2000
Etrade: maintaining success
• Maintain momentum + holding on to customers
• customer acquisition costs increase as competition
intensifies
• first mover advantage
• massive advertising
• develop partnerships (e.g. franchise in Canada and
Australia)
© Frederic Adam, 2000
Etrade - the future
• Quick progression by forging alliances to give
additional depth to product range
• Resulting lack of integration of services
• no cross selling
• need a change of structure to take advantage
• has already become a traditional business?
© Frederic Adam, 2000
Seminar from M.Fahy - NUI
Galway
• Financial markets will not be re-opened so easily
• barriers to entry as still strong
• markets still highly regulated within geographical
areas
• big players have decided to wait, but not for long
• At current stage, the kids are playing Ecom!
• there may be a big shake-up where large resources
will be needed to survive
© Frederic Adam, 2000
Key factors in surviving
• Robust back end: the Ecom iceberg
• After the novelty has faded, only companies with
a sound business model with succeed
• The underlying / support systems and technology
that are truly useful will make the difference:
– ERP
– c.f. SABRE and AIMS
• ATM model: simple but robust
• very moral conclusion that only companies who
know what they are doing will survive
• Also current financial madness will not last as
shareholders demand traditional rewards (£££)
© Frederic Adam, 2000
Selection of customers
• Ecom breaks barrier to entry for customer as well
as supplier
• In a garage, only customers with cars, on the web...
• Little info available about customers
• how to detect the most profitable ones?
• Can companies really turn anyone down?
© Frederic Adam, 2000
Adoption of technology
Guru claim
Productivity
Actual
development
Managers’
interest
Time
© Frederic Adam, 2000
Organisational stages
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Stage 1: rudimentary offering
Stage 2: basic internet banking
Stage 3: clear growth strategy
what stage are we at?
© Frederic Adam, 2000
Clive Holtham’ s (City
University London) seminar
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Internet growth nothing special
definition of Ecommerce and Ebusiness
fact that non-E Business will virtually disappear
ICDT Model of Ebusiness (Angehrn, 1997)
Point about the crazy market valuations
– disruptive technologies
– madness of crowds
• rise and fall of Ecom => post-net society will
settle again
© Frederic Adam, 2000
EBusiness
• Conducting any kind of business via an electronic
channel
Electronic Commerce
Web
Commerce
Electronic
Business
Internet
Commerce
© Frederic Adam, 2000
ICDT Model:
Most Ecom Strategies will include
one or more of these aspects
Virtual
Virtual
Information
Communication
Space
Space
Virtual
Virtual
Transaction
Distribution
Space
Space
© Frederic Adam, 2000
Current Ecom hype
Rate of change / Value
Time
© Frederic Adam, 2000
Rise and Fall of Ecom
Visibility
today
Time
© Frederic Adam, 2000