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Chapter 5B2B Strategies

From Electronic Data Interchange to Electronic Commerce

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:– 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