Chapter 5 - SaigonTech

Eighth Edition
Chapter 5
Business-To-Business Online Strategies
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
E-Business, Eighth Edition
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
E-Business, Eighth Edition
Purchasing, Logistics, and Support
• 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
E-Business, Eighth Edition
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
E-Business, Eighth Edition
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
E-Business, Eighth Edition
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
E-Business, Eighth Edition
E-Business, Eighth Edition
Direct vs. Indirect Materials Purchasing
• Direct materials
– Materials that become part of finished product
• Direct materials purchasing: two types
– Replenishment purchasing (contract purchasing)
• Company negotiates long-term material contracts
– Spot purchasing
• Purchases made in loosely organized market (spot
• Indirect materials
– All other materials company purchases
E-Business, Eighth Edition
Direct vs. Indirect Materials Purchasing
• Maintenance, repair, and operating (MRO)
– Indirect material products purchased on a recurring
– 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
E-Business, Eighth Edition
E-Business, Eighth Edition
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
E-Business, Eighth Edition
Support Activities
• General categories
– Finance and administration, human resources,
technology development
– Example: Allegiance and A.D.A.M. Web site
• Training
– Common support activity
• Underlies multiple primary activities
– Advantages: training materials on company intranet
• Distribute materials to many different sales offices
• Coordinate use of materials in corporate headquarters
E-Business, Eighth Edition
Support Activities (cont’d.)
• Examples: Ericson, BroadVision’s K-Net
• Knowledge management
– Intentional collection, classification, dissemination of
• About a company, its products, and its processes
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• e-government
– Use of electronic commerce by governments and
government agencies
• Perform functions for stakeholders
• Operate businesslike activities
• Examples in U.S. government
– Financial Management Service (FMS)
• Web site
– Department of Homeland Security (DHS)
• Internet technology use initiatives
E-Business, Eighth Edition
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 (
– New York State Citizen Guide site
• Examples in local government
– Large cities: Minneapolis, New Orleans
– New York City (
E-Business, Eighth Edition
E-Business, Eighth Edition
Network Model of Economic
• 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
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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
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Early Business Information Interchange
• 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
E-Business, Eighth Edition
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
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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,
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E-Business, Eighth Edition
E-Business, Eighth Edition
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
E-Business, Eighth Edition
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
• Must be delivered to department handling next step
– Paper-based information transfer
• Mail, courier, or fax
– Figure 5-6
• Information flows
E-Business, Eighth Edition
E-Business, Eighth Edition
How EDI Works (cont’d.)
• EDI purchasing process
– Mail service replaced with EDI network data
– Flows of paper within the buyer’s and vendor’s
organizations replaced with computers
• Running EDI translation software
– Figure 5-7
• Information flows
E-Business, Eighth Edition
E-Business, Eighth Edition
Value-Added Networks
• EDI network key elements
– EDI network, two EDI translator computers
• Direct connection EDI
– Each business operates an on-site EDI translator
• Value-added network (VAN)
– Receives, stores, forwards electronic messages
containing EDI transaction sets
• Indirect connection EDI
– Trading partners use VAN to retrieve EDI-formatted
E-Business, Eighth Edition
E-Business, Eighth Edition
E-Business, Eighth Edition
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)
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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
• Automated clearing house (ACH) system
– Service banks use to manage accounts
• Operated by U.S. Federal Reserve Banks or private
E-Business, Eighth Edition
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
E-Business, Eighth Edition
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)
E-Business, Eighth Edition
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
E-Business, Eighth Edition
Open Architecture of the Internet
• 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
E-Business, Eighth Edition
Open Architecture of the Internet
• 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
E-Business, Eighth Edition
Supply Chain Management Using
Internet Technologies
• Supply chain management
– 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
E-Business, Eighth Edition
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
E-Business, Eighth Edition
Value Creation in the Supply Chain
• 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
E-Business, Eighth Edition
Value Creation in the Supply Chain
• 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
E-Business, Eighth Edition
Value Creation in the Supply Chain
• Marshall Fisher 1997 Harvard Business Review
– 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
E-Business, Eighth Edition
E-Business, Eighth Edition
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
E-Business, Eighth Edition
Increasing Supply Chain Efficiencies
• Example: Dell Computer
– Famous for use of Web to sell custom-configured
– Also used technology-enabled supply chain
• 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
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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
E-Business, Eighth Edition
E-Business, Eighth Edition
Using Materials-Tracking Technologies
with EDI and Electronic Commerce
• 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
– Read much more quickly, with higher degree of
E-Business, Eighth Edition
E-Business, Eighth Edition
Using Materials-Tracking Technologies
with EDI and Electronic Commerce
• 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
E-Business, Eighth Edition
Creating an Ultimate Consumer
Orientation in the Supply Chain
• Ultimate consumer orientation
– 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
E-Business, Eighth Edition
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
– 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
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Electronic Market Places and
• 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
• Vertically integrated
• Predicted to change business forever
– Not exactly correct
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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
– Public marketplaces
• Open to new buyers and sellers just entering the
E-Business, Eighth Edition
Independent Industry Marketplaces
• 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
E-Business, Eighth Edition
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
• Grainger: provide additional services for customers
– Needlessly duplicated if sellers participated in
industry marketplace
E-Business, Eighth Edition
Private Company Marketplaces
• Large companies purchasing from relatively small
– 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
E-Business, Eighth Edition
Private Company Marketplaces
• 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
• Example: United Technologies
– Sells $35 billion of high-technology products, services
E-Business, Eighth Edition
Industry Consortia-Sponsored
• 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
E-Business, Eighth Edition
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
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Industry Consortia-Sponsored
Marketplaces (cont’d.)
• Supplier concern
– Ownership structure
• Independent operators for fair bargaining (Covisint)
• Including industry participants may be helpful
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E-Business, Eighth Edition
• 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
E-Business, Eighth Edition
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
E-Business, Eighth Edition