Chapter 9
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Strategies for Purchasing
and Support Activities
Electronic Commerce
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Objectives
 Improving
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purchasing, logistics, and other
support activities
 Creating network organizations that extend
beyond traditional limits
 EDI, how it works, and how it is moving to the
Internet
 Internet improvements to supply chain
management
 Software packages for business-to-business
e-commerce and supply chain management
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Purchasing, Logistics, and
Support Activities
 Purchasing
activities include:
Identifying and evaluating vendors
 Selecting specific products
 Placing orders
 Resolving issues after receiving the
ordered goods or services. These include:

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 late
deliveries, incorrect quantities shipped,
incorrect items shipped, and defective items.
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Electronic Data Interchange
 The
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computer-to-computer transfer of
business information between two
businesses that uses a standard format
 In the 1950s, companies began to use
computers to store and process internal data
and information
 By the 1960s, companies began exchanging
transaction information with each other on
punched cards or magnetic tape
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Electronic Data Interchange
 Eventually,
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trading partners transferred data
over telephone lines instead of shipping
punched cards or tapes to each other
 In 1968, the Transportation Data
Coordination Committee (TDCC) was
formed, and charged with exploring ways to
reduce the paperwork burden
 Note, since 1918, the American National
Standards Institute (ANSI) became the
coordinating body for standards in the United
States
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Electronic Data Interchange
 In
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1979, ANSI charted the Accredited
Standards Committee X12 (ASC X12) to
develop EDI standards
 The current ASC X12 standard includes
specifications for several hundred electronic
transaction sets (the names of the formats
for specific business data interchanges)
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Commonly Used ASC X12 Transaction Sets
Figure 9-3
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Electronic Data Interchange
 Although
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the ASC X12 standards were
quickly adopted by major U.S. firms,
businesses in other countries continued to
use their own standard.
 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.
 In 1987, the UN published its first standard
under the EDI for Administration, Commerce,
and Transport (EDIFACT, or UN/EDIFACT).
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Commonly Used UN/EDIFACT Transaction Sets
Figure 9-4
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How EDI Works
 Paper-Based
Purchasing Process:
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
 Paper-based transfers between buyer and
vendor can be delivered via mail, courier,
or fax

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The Paper-Based Purchasing Process
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How EDI Works
 EDI
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 In
Purchasing Process:
this process:
Traditional mail service is replaced with
the data communications of an EDI
network
 Flows of paper have been replaced with
computers running EDI translation
software
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The EDI Purchasing Process
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Value Added Networks

Three key elements in EDI purchasing process are:


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

the EDI network that connects the buyer and the seller
the buyer EDI translator computer that converts data from
internal format to standard EDI transaction set and vice
versa
the seller RDI translator computer that converts data from
internal format to standard EDI transaction set and vice
versa
Trading partners can implement the EDI network and
EDI translation process in several ways, each using
one of two basic approaches
 Direct connection
 Indirect connection
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Direct Connection Between
Trading Partners
 Requires
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each business in the network
to operate its own on-site EDI translator
computer
 EDI translator computers are
connected to each other using modems
or dedicated leased lines
 Trading partners using different
protocols can make direct connection
options difficult to implement
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Indirect Connection Between
Trading Partners
 Companies
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use the services of a valueadded network (VAN)
 The VAN provides communications
equipment, software, and skills needed to
receive, store, and forward electronic
messages containing EDI transaction sets
 The VAN often supplies the software needed
to connect to its services
 Examples include General Electric
Information Services and IBM Global
Services
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Direct Connection EDI vs. Indirect Connection EDI
through a VAN
Figure 9-7
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Advantages of Using a
Value Added Network
 Users
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support only one communications
protocol
 The VAN records activity in an audit log,
providing an independent record of
transactions
 The VAN can provide translation between
different transaction sets
 The VAN can perform automatic compliance
checks to ensure the transaction set is in the
specified EDI format
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Disadvantages of Using a
Value Added Network
 Most
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VANs require an enrollment fee, a
monthly maintenance fee, and a transaction
fee
 VANs can be cumbersome and expensive for
companies with trading partners using
different VANs
 Inter-VAN transfers do not always provide a
clear audit trail
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EDI on the Internet
 The
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Internet is viewed as a
replacement for expensive leased lines
and dial-up connections
 Small companies have the opportunity
of selling to large customers that
demanded EDI capabilities of their
suppliers
 Although, concerns about security and
lack of audit logs continue to be a major
roadblock
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Open Architecture
of the Internet

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
The open architecture of the Internet allows trading
partners virtually unlimited opportunities to
customize their information interchanges
A new ASC X12 Task Group has been charged with
several broad objectives:
 Converting the ASC X12 EDI data elements and
transaction set structures to XML, retaining oneto-one mapping
 Developing XML data element names consistent
with existing ASC X12 transaction sets
 Meeting the needs of application-to-application
and human-to-application interfaces
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Financial EDI


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
A trading partner’s bank is called a Financial EDI
(FEDI)
Many trading partners are reluctant to send FEDI
transfers for large sums of money over the Internet
Companies may opt to establish an indirect
connection through a VAN for the added security for
FEDI transaction
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Financial EDI


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



All banks have the ability to perform electronic funds transfers
(EFTs)
When EFTs involve two banks, they are executed using a
clearinghouse.
In the United States, most EFTs are handled through the
Automated Clearing House (ACH).
EDI-capable banks are those banks that are equipped to
exchange payment and remittance data through VANs.
Some banks also offer VAN services for nonfinancial
transactions. They are called value-added banks (VABs)
Nonbank VANs that can translate financial transaction sets into
ACH formats and transmit them to banks that are not EDIcapable are sometimes called financial VANs (FVANs).
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Hybrid EDI Solutions


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

Utilize the Internet for only part of an EDI transaction
PayBase package of Bottomline Technologies allows
hybrid EDI
NetTransact provides an interface for smaller
businesses connected to the Internet, but do not
have EDI capability.
NetTransact software can convert an HTMLdocument (used by a small company) into an ASC
X12 formatted document (used by a large EDI firm)
and vice versa.
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NetTransact EDI-HTML Conversion Service
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Supply Chain Management
Money can be saved and product quality can
be improved through active negotiations with
suppliers
 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
 For example, a car manufacturer would
include partners from engine manufacturers,
steel fabricators, glass manufacturers, tire
manufacturers, and so on.

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Supply Chain Management
 By
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working together, supply chain
members can reduce costs and
increase the value of the product or
service to the ultimate customer
 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
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Technology in
the Supply Chain
 The
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Internet and the Web can be very
effective communication enhancers
 Software can allow members to review
past performance, monitor current
performance, and predict future
production levels of products
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Advantages of Internet and Web Technologies in
Supply Chain Management
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Software for Purchasing,
Logistics, and Support Activities
 Enterprise
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resource planning (ERP)
software is designed to integrate
manufacturing, finance, distribution,
and other internal business functions
into one information system
 Major ERP vendors include Baan, J.D.
Edwards,Oracle, PeopleSoft, and SAP
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Business-to-Business
Commerce Software
 Designed
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to help companies build Web sites
that host catalog and other commercial sales
activities
 Major software packages include:



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Netscape’s SellerXpert
Open Market’s LiveCommerce-Transact
IBM’s Net.Commerce
Microsoft’s Site Server, and
Ariba, which provides a way for companies t
ostandardize purchase requisitions for office
supplies.
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Supply Chain
Management Software
 Includes
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demand forecasting tools and
planning capabilities to allow all supply
chain members to coordinate their
activities and adjust their production
levels
 Two major firms offer supply chain
management software
i2 Technologies RHYTHM
 Manugistics

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