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 Electronic Commerce, Eighth Edition 2 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 Electronic Commerce, Eighth Edition 3 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 Electronic Commerce, Eighth Edition 4 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 Electronic Commerce, Eighth Edition 5 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 Electronic Commerce, Eighth Edition 6 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 Electronic Commerce, Eighth Edition 7 Electronic Commerce, Eighth Edition 8 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 Electronic Commerce, Eighth Edition 9 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 Electronic Commerce, Eighth Edition 10 Electronic Commerce, Eighth Edition 11 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 Electronic Commerce, Eighth Edition 12 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 Electronic Commerce, Eighth Edition 13 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 Electronic Commerce, Eighth Edition 14 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 Electronic Commerce, Eighth Edition 15 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) Electronic Commerce, Eighth Edition 16 Electronic Commerce, Eighth Edition 17 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 Electronic Commerce, Eighth Edition 18 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 Electronic Commerce, Eighth Edition 19 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 Electronic Commerce, Eighth Edition 20 Electronic Commerce, Eighth Edition 21 Electronic Commerce, Eighth Edition 22 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) Electronic Commerce, Eighth Edition 23 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 Electronic Commerce, Eighth Edition 24 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 Electronic Commerce, Eighth Edition 25 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) Electronic Commerce, Eighth Edition 26 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 Electronic Commerce, Eighth Edition 27 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 Electronic Commerce, Eighth Edition 28 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 Electronic Commerce, Eighth Edition 29 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 Electronic Commerce, Eighth Edition 30 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 Electronic Commerce, Eighth Edition 31 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 Electronic Commerce, Eighth Edition 32 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 Electronic Commerce, Eighth Edition 33 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 Electronic Commerce, Eighth Edition 34 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 Electronic Commerce, Eighth Edition 35 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 Electronic Commerce, Eighth Edition 36 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 Electronic Commerce, Eighth Edition 37 Industry Consortia-Sponsored Marketplaces (cont’d.) • Supplier concern – Ownership structure • Independent operators for fair bargaining (Covisint) • Including industry participants may be helpful (ChemConnect) Electronic Commerce, Eighth Edition 38 Electronic Commerce, Eighth Edition 39 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 Electronic Commerce, Eighth Edition 40 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 Electronic Commerce, Eighth Edition 41