Using Management Information Systems

E-commerce and Supply Chain
Chapter 8
Learning Objectives
Define e-commerce and important e-commerce terms.
Understand the effect of e-commerce on market efficiency.
Learn technology for supporting commerce servers.
Understand the structure, profitability, and dynamics of supply
 Know the purpose, concepts, advantages, and disadvantages of EDI.
 Know the purpose, concepts, advantages, and disadvantages of
 E-commerce is the buying and selling of goods and services over
public and private computer networks.
The U.S. Census Bureau, which publishes statistics on e-commerce
activity, defines merchant companies as those that take title to the
goods they sell.
They buy goods and resell them.
The U.S. Census Bureau defines nonmerchant companies as those
that arrange for the purchase and sale of goods without ever owning or
taking title to those goods.
E-commerce categories:
E-Commerce Merchant Companies
 There are two types of merchant companies: those that sell directly to
consumers and those that sell to companies.
Each uses slightly different information systems in the course of doing
B2C, or business-to-consumer, e-commerce concerns sales between a
supplier and a retail customer (the consumer).
A typical information system for B2C provides a Web-based application
or Web storefront by which customers enter and manage their orders
The term B2B, or business-to-business, e-commerce refers to sales
between companies (raw materials suppliers use B2B systems to sell to
manufacturers, manufacturers use B2B to sell to distributors, and
distributors uses B2B systems to sell to retailers).
B2G, or business-to-government, refers to sales between companies and
government organizations.
Nonmerchant E-commerce
 The most common nonmerchant e-commerce companies are auctions
and clearing houses.
 E-commerce auctions match buyers and sellers by using an ecommerce version of a standard auction.
– This e-commerce application enables the auction company to offer goods
for sale and to support a competitive bidding process.
– The best-known auction company is eBay, but many other auction
companies exist; many serve particular industries.
 Clearinghouses provide goods and services at a stated price, and they
arrange for the delivery of the goods but they never take title.
 As a clearinghouse, Amazon matches the seller and the buyer and
then takes payment from the buyer and transfers the payment to the
seller, minus commission.
 Other examples of clearinghouse are electronic exchanges that match
buyers and sellers; the business process is similar to that of a stock
Why Use E-Commerce?
 Reduce transaction cost
 Speed the flow of goods and services
 Improve level of customer service
 Enable close coordination among manufacturers, suppliers,
and customers
 Reach worldwide markets
 For example, when Cisco Systems placed its procurement
operation on-line in 1998, the company saved $350 million
E-Commerce Improves Market Efficiency
 E-commerce leads to disintermediation, which is the elimination of
middle layers in the supply chain.
– You can buy a flat-screen LCD HDTV from a typical electronic store or
you can use e-commerce to buy it from the manufacturer.
– If you take the later route, you eliminate at least one distributor, the retailer,
and possibly more.
 E-commerce also improves the flow of price information.
– As a consumer, you can go to any number of Web sites that offer product
price comparisons. The improved distribution of information about price
and terms enables you to pay the lowest possible cost and serves ultimately
to remove inefficient vendors.
– The market as a whole becomes more efficient.
 From the seller’s side, e-commerce produces information about price
elasticity that has not been available before.
– Using an auction, a company can learn not just what the top price for an
item is, but also learn the second, third, and other prices from the losing
– Managing prices by direct interaction with customers yields better
information than managing prices by watching competitors’ pricing.
Basic Components of a Successful ECommerce Model
E-Commerce Economics
 Companies need to consider the following economic factors:
– Channel conflict
– Price conflict
– Logistics expense
– Customer service expense
E-Commerce and the World Wide Web
 Most B2C commerce conducted over the World Wide Web (WWW)
uses Web storefronts supported by commerce servers.
 A commerce server is a computer that operates Web-based programs
that display products, support online ordering, record and process
payments, and interface with inventory-management applications.
Web Pages and Hypertext Markup Language
 HTTP is used to exchange Web pages over the Internet.
– Such pages are documents encoded in a language called HTML, or
Hypertext Markup Language.
– This language defines the structure and layout of Web pages.
– An HTML tag is a notation used to define a data element for display or
other purposes.
 Web pages include hyperlinks, which are pointers to other Web
– A hyperlink contains the URL (Uniform Resource Locator) of the Web
page to obtain when the user clicks the hyperlink.
– The two most popular Web server programs are Apache, commonly used
on Linux, and IIS (Internet Information Server), a component of
Windows XP Professional and other Windows products.
 A browser is a program that processes the HTTP protocol; receives,
displays, and processes HTML documents; and transmits responses.
– Common browsers are Internet Explorer, Netscape Navigator, and
Mozilla’s FireFox.
Why is Web 2.0 important to business?
 Software as a Service, part of the Web 2.0 movement,
changes traditional thinking about how software is created,
provided to users, and used to create value for the company
that owns it. Some of its characteristics include the
– It uses thin-client programs in browsers.
– The bulk of processing occurs on servers throughout the Internet.
– Companies that provide it rely on advertising or revenue other than license
– It’s perpetually labeled as beta software because its features and functions
are constantly changing.
– Companies who provide it clash with traditional software vendors who rely
on traditional software programs to provide the bulk of their revenue.
– It relies on viral marketing. That is, users spread the word about its virtues
rather than the company that provides it. .
 Mashups are output from two or more Web sites
combined into a single user experience. Users create
their own mashups based on some portion of software
that’s provided by a Web 2.0 service and another
portion of software. An example is using Google Maps
to create a new service that pinpoints motocross trails.
Three-Tier Architecture
 Most commerce server applications use what is called three-tier
architecture (the tiers refer to three different classes of computers)
– The user tier consists of computers that have browsers that request and
process Web pages.
– The server tier consists of computers that run Web servers and in the
process generate Web pages in response to requests from browsers
– Web servers also process application programs.
• To ensure acceptable performance, commercial Web sites usually
are supported by several or even many Web server computers.
• A facility that runs multiple Web servers is sometimes called a Web
• Work is distributed among computers in a Web farm so as to
minimize customer delays.
– The third tier is the database tier.
• The computers at this tier receives and processes SQL requests to
retrieve and store data.
Three-Tier Architecture Graphic
Discussion: Trust and BBB Seals
 There is no privacy legislation governing the Internet.
However, independent, nonprofit groups exist that seek to
further e-commerce by helping consumers trust on-line
merchants. For example, TRUSTe provides its seal to
websites honoring specific privacy codes.
 The Better Business Bureau Online Privacy seal also
identifies sites that honor specific privacy principles.
Discussion: How to Protect Your Privacy Online
Discussion: Security Guide–A Trojan Horse?
 Suppose you work for a distributor that manages its inventory very closely.
 One of your major manufacturers says that it can dramatically shorten the lead
time on most of its products if your purchasing personnel order directly from
the manufacturer's CRM.
 To make that possible, the manufacturer needs to install some of its programs
on the computers in your purchasing department.
 You agree to allow the installation.
 The chief information officer (CIO) gets wind of this project and refuses to
allow the programs to be installed on the computers in purchasing.
– He also directs building security personnel not to allow anyone from the
manufacturer into your company’s building.
– The two of you have a meeting, and he is furious with you.
– “Well” you counter, “I see your point and I’m sorry we didn’t contact you sooner”.
– “But what can we do now?”
– “Using their system could mean huge cost savings to us”.
Supply Chain Management
 A supply chain is a network of organizations and facilities that
transforms raw materials into products delivered to customers.
 Customers order from retailers, who in turn order from distributors,
who in turn order from manufacturers, who in turn order from
 The supply chain also includes transportation companies, warehouses,
and inventories and some means for transmitting messages and
information among the organizations involved
 Because of disintermediation, not every supply chain has all of these
– Dell, for example, sells directly to the customer.
– In other supply chains, manufacturers sell directly to retailers and omit
the distribution level.
 Chain implies that each organization is connected to just one company up
(toward the supplier) and down (toward the customer) the chain.
– Instead, at each level, an organization can work with many organizations
both up and down the supply chain.
– Thus, a supply chain is a network.
Drivers of Supply Chain Performance
 Facilities concern the location, size and operations methodology of the
places where products are fabricated, assembled or stored.
 Inventory includes all of the materials in the supply chain, including raw
materials, in-process work, and finished goods.
 Transportation concerns the movement of materials in the supply chain.
 Information influences supply chain performance by affecting the ways
that organizations in the supply chain request, respond, and inform one
The Bullwhip Effect
 The bullwhip effect is a phenomenon in which the variability in the size
and timing of orders increase at each stage up the supply chain, from
customer to supplier.
 The large fluctuations of the bullwhip effect distributors, manufacturers,
and suppliers to carry larger inventories than should be necessary to meet
the real consumer demand.
 One way to eliminate the bullwhip effect is to give all participants in the
supply chain access to consumer-demand information from the retailer.
 Each organization can thus plan its inventory or manufacturing based on
true demand and not on the observed demand from the next organization
up in the supply chain.
Supplier Relationship Management
 Supplier relationship management (SRM) is a business process
for managing all contracts between an organizational and its
 SRM Processes:
Integrating SRM with CRM
 Supplier’s CRM application interfaces with the purchaser’s SRM
 Both the supplier and the customer want to perform the ordering
process as cheaply and efficiently as possible.
 SRM examines inventory, determines that items are required, and
automatically creates the order via its connection to the supplier’s
Information Technology for Data Exchange
 Web commerce-server applications are useful for B2C, but they are not
sufficient for B2B needs.
 In general, organizations need to exchange data and messages in more
general and flexible ways than they can do with commerce servers.
 There are several alternatives for exchanging data and messages (Basic
– The most basic are telephone calls and documents exchanged via fax or
postal mail.
– Another alternative is to exchange messages and documents via email.
 There are alternatives that involve additional technology
– Electronic Data Interchange (EDI) is a standard for exchanging documents
from machine to machine, electronically.
– In the past, EDI was used over point-to-point or value-added networks.
– Recently, EDI systems have been developed that use the Internet as well.
– eXtensible Markup Language (XML), is a standard that offers advantages
over EDI and that most believe will eventually replace EDI
Electronic Data Interchange
 Electronic Data Interchange (EDI) is a standard of formats for
common business documents.
 Because the transmissions are electronic, the distributors and
manufacturers must agree on a format for the orders. This format
– How many data fields will be sent.
– In what order they will be sent.
– How many characters will be sent in each data field, and so forth.
 In the United States, the X12 Committee of the American National
Standards Institute (ANSI) manages EDI standards.
– Today, the EDI X12 standard includes hundreds of documents.
 They have standard names like EDI 850 (purchase order), EDI 856
(advance ship notices), EDI 810 (electronic invoice).
 EDIFACT standard is used internationally.
 HIPAA standard is used for medical records.
 Because of the existence of multiple standards, when two organizations
today wish to exchange documents electronically, they must first agree
on which standard they will use.
eXtensible Markup Language
 Organizations have used HTML to share documents.
 There are three problems with HTML:
– HTML tags have no consistent meaning.
– HTML has a fixed number of tags.
– HTML mixes format, content, and structure.
 To overcome the problems in HTML, the computer industry designed a
new markup language called the eXtensible Markup Language (XML).
 XML is the product of a committee that worked under the auspices of the
World Wide Web Consortium (W3C), a body that sponsors the
development and dissemination of Web standards.
 XML provides a superior means for organizations to exchange
 XML solves the problems mentioned for HTML, and has become a
significant standard for computer processing.
Application Interaction in the Supply Chain
 The process of a program on one computer accessing programs on a
second computer is called remote computing or distributed
 Several different techniques are used:
– Two important ones are the use of proprietary designs and Web services
Distributed Computing Using Proprietary
 One way to develop distributed computer programs is to develop
proprietary distributed applications.
– Proprietary means that the solution is unique to and is owned by the
organizations that develop and pay for the distributed systems.
 To develop a proprietary design, teams of developers from the involved
companies work together using a development process.
The joint development team designs this application to use a particular
communications capability, particular operating systems, and particular
distributed computing techniques.
An alternative proprietary method is for one company to develop all
necessary programs itself and then install some of its programs on
another company’s computers.
Proprietary solutions are difficult and expensive to develop and operate.
If they provide sufficient business value, however, the return on
investment can make them worthwhile.
XML Web services
 XML Web services, sometimes called simply Web services, are a set
of standards that facilitate distributed computing using Internet
 Web services are the latest and greatest tool for application interaction.
 Every major software vendor has products that support Web services:
– Microsoft provides .Net development tools
– IBM provides J2EE development tools
Fundamental Web Services Concepts
 The goal of Web services is to provide a standard way for programs to
access one another remotely, without the need to develop proprietary
 A number of important standards have been defined to make Web
services possible.
– In general these standards enable programs on one computer to obtain a
service description that details what programs exist on another computer
and how to communicate with those programs.
– Once the service user has the service description, it uses the information it
contains to invoke the service.
– All Web service data are transmitted in XML documents.
Web Services and the Supply Chain
 Web services have the potential to simplify the automation of supply
chain interactions.
 Any organization in the supply chain can develop Web services and
publish those services to other organizations in the supply chain.
 Developers in those organizations can access the service description and
write programs that call the Web services.
 Organizations should address four economic factors when
considering e-commerce activity: channel conflict, price conflict,
logistics expense, and customer service expense.
Most B2C commerce is conducted using commerce servers.
A supply chain is a network of organizations and facilities that
transforms raw materials into finished goods for customers.
The bullwhip effect is a phenomenon in which the variability in the
size and timing of orders increases at each stage up the supply chain.
Three fundamental supply chain information systems are: supplier
relationship management (SRM), inventory, and CRM.
Organizations can exchange documents and data between programs
using various alternatives.
EDI is a standard of formats for common business documents.
XML is a markup language like HTML, but it improves upon HTML
by requiring standard use of XML elements by allowing users to
extend the elements, and by clearly separating document structure,
content, and format.
Discussion: Ethics Guide–The Ethics of Supply
Chain Information Sharing
Suppose that you work for a distributor that has developed information systems to read
inventory data both up and down the supply chain.
Situation A
You notice that the store inventories of all retailers are running low on items in a particular product
Because you believe you have the only supply of those items, you increase their price by 15
When the retailers ask why, you claim extra transportation costs.
In fact, all of the increase is going straight to your bottom line.
Situation B
Unknown to you, one of your competitors has also accumulated a large inventory of those same
Your competitor does not increase prices on those items, and consequently you sell none at your
increased price.
You have no direct way to read your competitor’s inventories, but you can infer their inventories
by watching the decrease of inventory levels on the manufacturer side and comparing that decrease
to the sales on the retail side.
Using this process, you now can estimate your competitor’s inventories.
Situation C
Assume the agreement you have with the retailers is that you are able to query all of their current
inventory levels but only for the orders they have with you.
You are not supposed to be able to query orders they have with your competitors.
However, the information system contains a flaw, and by mistake you are able to query everyone’s
orders-your own as well as those of your competitors.
Discussion: Reflection Guide–XML and the Future
of Computing
Once upon a time, computers were used solely for computing. They were valued for their
ability to perform arithmetic and complex calculations. Today, few computers are valued
primarily as computational tools. Today, they are valued because they communicate.
What’s the primary purpose of an IS in the supply chain?
It is to communicate orders, invoices, or other documents or send and receive data among
Communications cannot occur without common standards.
Computers must share standards to communicate.
Bill Gates called XML the “lingua franca of the Internet”.
If XML is not yet the language of the Internet, it is likely to be that within the next 5
Today orders may arrive via postal mail, fax, as attachments to emails, or through
information systems. Without XML, everyone of those orders must be manually validated.
A starting possible consequence of the growth of XML on future computing relates to
Databases store tables not XML documents.
Why not store the XML documents in databases? Before this can happen, significant
problems must be overcome:
– How to efficiently query stores of XML documents
– How to process duplicated data
– How to make XML data available to table-oriented programs like Excel
I’m willing to bet that by the end of your career, relational databases will be the thing of
the past.
It will be XML storage all the way!