Chapter 5
B2B Strategies
From Electronic Data Interchange to
Electronic Commerce
2-6-06
Purchasing, Logistics & Support Activities
• The potential for cost reductions & business
process improvements in these areas are
tremendous.
• Increase of synergies, which form the basis for
2nd-wave e-commerce opportunities.
• An emerging characteristic of these activities is
their flexibility.
Purchasing Activities
• These activities include:
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Identifying vendors
Evaluating vendors
Selecting specific products
Placing orders
Resolving issues
• In most companies, charged with buying all
components at lowest possible price.
• Usually more complex than consumer
purchasing process.
Typical Business Purchasing Process
Purchasing Activities (Cont.)
• Requires a large number of people to complete
the process.
• Spend: The total amount of the goods &
services that a company buys in a year.
• In 2002, Motorola implemented a set of Internet
technologies in the procurement operation.
– Spend = $48 Billion
– Estimate savings of $2.5 Billion by using technologies
to accomplish tasks more efficiently & at a lower
cost.
Direct vs. Indirect Materials Purchasing
• Direct Materials
– Those materials that become part of the finished product in a
manufacturing process
– Large Manufacturing Companies have 2 types of direct
materials purchasing:
• Replenishment/Contract purchasing: The company negotiates
long-term contracts for most of the needed materials.
• Spot purchasing: The company buys direct materials in a spot
market, which is a loosely organized market within a specific
industry.
• Indirect Materials
– Materials & supplies purchases by the company in support of
manufacturing an item, but not directly used in production of
product.
– Often called maintenance, repair, & operating (MRO) supplies
Logistics Activities
• Classic objective has been to provide the right goods in
the right quantities in the right place at the right time.
• These activities include:
– Managing the inbound movements of materials & supplies
– Managing the outbound movements of finished goods &
services.
• The Internet is providing an increasing number of
opportunities to manage these activities better by
lowering transaction costs & providing constant
connectivity between firms engaged in logistics
management.
– J. B. Hunt
– FedEx
Support Activities
• These activities include:
– Finance & administration
– Human resources
– Technology departments
• Training is another common support activity
– By putting training materials on the companies
intranet, companies can distribute these materials
to many different offices, but continue to be
centrally located.
• Knowledge management is also being collected
using the Internet
E-Government
• Governments do not typically sell products or services,
but they perform many functions for their stakeholders.
• Operate businesslike activities:
– Employ people
– Buy supplies from vendors
– Distribute benefit payments
• In 2000, U.S. government’s Financial Management
Service opened its Pay.gov web site.
– Allows site visitors pay taxes & fees using various forms of
electronic transfer.
• State & local governments are also have web sites that
offer services to its citizens.
Network Model of Economic Organization
• Trend is the shift away from hierarchical
structure toward network structures.
• Procurement departments are being given new
tools to negotiate with suppliers.
– The result is alliances & outsourcing contracts.
• Highly specialized firms can exist & trade
services efficiently using the web.
– The network of firms are more flexible & can
respond to changes in the economic environment
more quickly that hierarchical structured businesses.
Electronic Data Interchange
• Computer-to-computer transfer of business
information between 2 businesses that uses a
standard format of some kind.
– Information is usually:
• Transaction data
• Price quotes
• Order status inquiries
• EDI was first form of e-commerce to be widely
used in business.
Early Business Information
Interchange Efforts
• 1950s:
Companies began to use computers to store
& process internal transaction records, but info flow
between businesses used paper
– This process was slow, inefficient, expensive, redundant, &
unreliable.
• 1960s:
Businesses began to transfer info on punched
cards or magnetic tape
– Advances during the ’60s & 70s allowed transfer to occur over
telephone lines
• 1968:
The Transportation Data Coordinating
Committee was established.
– Explored new ways to reduce the paperwork burden that
shippers & carriers faces.
– Savings from the reduction of paperwork were significant.
Emergence of Broader EDI Standards
• American National Standards Institute (ANSI)
– Created a set of procedures for the development of national
standards & accredit committees that follow those procedures.
• 1979:
Accredited Standards Committee X12 (ASC
X12) established, meets 3 times/year to develop &
maintain EDI standards.
– Includes standards for specifications for several hundred
transaction sets (names of the formats for specific data
interchanges)
• 1987:
United Nations established the EDI for
Administration, Commerce, & Transport (UN/EDIFACT)
– Designed a common set of standards to be used internationally
• 2000:
The ASC X12 & UN/EDIFACT agreed to
develop one common set, but no date for
implementation has been set.
Common ASC X12 Transaction Sets
Common UN/EDIFACT Transaction Sets
How EDI Works
• Paper-Based Purchasing Process
– No integrated software for internal business processes.
– Each step results in production of a paper document, which is
delivered by mail, courier or fax to the next department.
How EDI Works
• EDI Purchasing Process
– Mail service replaced by EDI data communication
– Paper flows replaced by computers running EDI translation
software
Value-Added Networks
• Trading partners can implement the EDI
network & EDI translation process in several
ways, but every way uses one of two
approaches.
• Direct connection EDI:
– EDI translator computers at each company are linked
directly to each other through modems & dial-up
phone lines or leased lines
• Indirect connection EDI:
– Each company transmits & receives EDI messages
through a value-added network (VAN)
Direct Connection EDI
Indirect Connection EDI through a VAN
EDI on the Internet
• Trading partners began to view the Internet as
a potential replacement for expensive leased
lines & slow dial-up connections required for
direct & VAN-aided EDI.
• Major concerns:
– Internet security
– Inability to provide audit logs & 3rd party verification
Open Architecture of the Internet
• Mid-1990s:
Many firms began providing EDI
services on the Internet (Internet EDI, Web EDI,
or open EDI)
• Allows trading partners virtually unlimited
opportunities for customization of their info
interchanges.
• Some firms are extending their internal
networks to their trading partners, turning
intranets into extranets.
– Virtual Private Networks (VPN) provides the security
that makes this process attractive.
Financial EDI
• These are EDI transactions that provide
instructions to a trading partner’s bank.
– EDI-capable banks: those that are equipped to
exchange payment & remittance data through VANs.
– Value-added banks: those that offer VAN services
for non-financial transactions.
– Financial VANs: These are not banks but can
translate financial transaction sets into ACH formats
& transmit them to banks that are not EDI capable.
• Reluctant because of perceived low security of
Internet
Supply Chain Management Using
Internet Technologies
• Supply chain management:
– The process of taking an active role in working with
suppliers & other participants in the supply chain to
improve products & processes.
• Ultimate Goal
– To achieve a higher-quality or lower-cost product at
the end of the chain
Value Creation in the Supply Chain
• Business work to establish long-term
relationships with a small number of capable
suppliers
– Known as supply alliances
– Key element is trust between the parties
• Buyers expect annual price reductions & quality
improvements from suppliers at each stage.
• Clear communication & quick responses are
essential to successful SCM.
– Technologies can be very effective communication
enhancers.
Advantages of Using Internet Technologies
• Only disadvantage is the cost of the technologies, but in most
cases the advantages provide a greater value that the cost of
implementing & maintaining the technologies.
Increasing Supply Chain Efficiencies
• Many companies are using the Internet and web
technologies to manage supply chains in ways
that yield increases in efficiency throughout the
chain.
– Boeing
– Dell
• Use of technologies result in:
– Increased process speed
– Reduced costs
– Increased flexibility
Using Materials-Tracking with
EDI & E-Commerce
• Integration of use of bar codes & EDI has
become prevalent.
– Allow companies to scan materials as the are
received & to track them as they move from the
warehouse to production.
• Radio frequency identification devices (RFIDs)
– Small chips that include radio transponders
– Can be used to track inventory as it moves through
an industry value chain
– Passive RFID tag: made cheaply, very small, no need
for a power source
Creating an Ultimate Consumer Orientation
in the Supply Chain
• A focus on the needs of the consumer who is at
the end of an industry value chain.
– Companies with long supply chains have problems
remembering this focus.
• Internet technologies are tools that improve
communication at a very low cost.
– Ideal aids for enhancing the creation of a highly
coordinated & effective supply chain.
Building & Maintaining Trust in the
Supply Chain
• Major issue in building supply chain alliances
– Continual communication & information sharing are
key elements.
• Internet offers new avenues for building trust
• Vendors are finding the web provides an
opportunity to stay connected with customers
more easily & less expensively.
• Task of developing info exchange resources that
provide supplier performance summaries is a
challenge that B2B e-commerce faces.
Electronic Marketplaces & Portals
• Many business researchers & consultants
believed that the Internet would provide an
opportunity for companies to establish info
hubs for each major industry.
• These hubs would be in the form of vertical
portals.
• Prediction of the success of vertical portals was
not completely correct.
Independent Industry Marketplaces
• These are vertical portals that are focused on a specific
industry.
• First to open was Chemdex in early 1997 to trade in
bulk chemicals.
• By mid-2000, more than 2200 independent exchanges
were open.
– Venture capital funding became scarce & many closed.
• By mid 2002, there were fewer than 100 industry
marketplaces in operation.
• 4 other B2B models arose to take the place of these
New B2B Marketplaces
• Private Stores
– A password protected area of a web site that offers
individual customers negotiated price reductions on
a limited selection of products & other customized
features.
• Customer Portals
– A corporate web site designed to meet the needs of
customers by offering additional services such as
private stores, part number cross-referencing,
product-use guidelines & safety info.
New B2B Marketplaces (Cont.)
• Private Company Marketplaces
– A marketplace that provides auctions, requests for
quotes postings, & other features to companies that
want to operate their own marketplace.
• Industry Consortia-Sponsored Marketplaces
– A marketplace formed by several large buyers in a
particular industry.
Characteristics of B2B Marketplaces