Electronic Commerce
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
Internet
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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
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Purchasing, Logistics, and Support
Activities
• 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
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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
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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
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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
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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
market)
• Indirect materials
– All other materials company purchases
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Direct vs. Indirect Materials Purchasing
(cont’d.)
• Maintenance, repair, and operating (MRO)
supplies
– Indirect material products purchased on a recurring
basis
– 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
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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
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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
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Support Activities (cont’d.)
• Examples: Ericson, BroadVision’s K-Net
• Knowledge management
– Intentional collection, classification, dissemination of
information
• About a company, its products, and its processes
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E-Government
• 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)
• Pay.gov Web site
– Department of Homeland Security (DHS)
• Internet technology use initiatives
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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 (my.ca.gov)
– New York State Citizen Guide site
• Examples in local government
– Large cities: Minneapolis, New Orleans
– New York City (MyNYC.gov)
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Network Model of Economic
Organization
• 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
transactions
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Value-Added Networks
• EDI network key elements
– EDI network, two EDI translator computers
• Direct connection EDI
– Each business operates an on-site EDI translator
computer
• Value-added network (VAN)
– Receives, stores, forwards electronic messages
containing EDI transaction sets
• Indirect connection EDI
– Trading partners use VAN to retrieve EDI-formatted
messages
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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
another
• Automated clearing house (ACH) system
– Service banks use to manage accounts
• Operated by U.S. Federal Reserve Banks or private
ACHs
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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
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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)
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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
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Open Architecture of the Internet
(cont’d.)
• 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
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Open Architecture of the Internet
(cont’d.)
• 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
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Electronic Market Places and
Portals
• 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
members
• 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
industry
– Public marketplaces
• Open to new buyers and sellers just entering the
industry
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Independent Industry Marketplaces
(cont’d.)
• 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
marketplaces
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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
entrance
• Grainger: provide additional services for customers
– Needlessly duplicated if sellers participated in
industry marketplace
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Private Company Marketplaces
• Large companies purchasing from relatively small
vendors
– 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
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Private Company Marketplaces
(cont’d.)
• 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
marketplaces
• Example: United Technologies
– Sells $35 billion of high-technology products, services
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Industry Consortia-Sponsored
Marketplaces
• 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
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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
(ChemConnect)
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Summary
• 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
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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
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