CIPS Knowledge Works · CIPS appreciates that there is a great deal of hype and also nervousness...

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CIPSKnowledgeWorks

Electronic Commerce

and e-business

Contents1. Introduction pg3

2. Definitions and Explanations pg3

3. CIPS Position on e-commerce pg4

4. Attractions of e-commerce for Buyers and Suppliers pg7

5. Current Benefits of e-purchasing pg8

6. Collaborative e-commerce and How It Benefits Partnerships pg8

7. Implementation/Hints and Tips pg9

8. The Penetration of e-commerce in the UK pg9

9. Case Studies pg10

10.Key Issues pg11

11.Contractual Issues pg12

12.Structure of the B2B World pg13

13.Summary pg15

2 Tel +44(0)1780 756777 Fax +44(0)1780 751610 Email [email protected] Web www.cips.org

ElectronicCommerce ande-business

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1. INTRODUCTIONThe purpose of this Practice Guide is to help readersgain an understanding of:• e-commerce and e-business in general• the benefits• collaborative e-commerce• penetration of e-commerce in the UK• case studies relating to e-commerce• key issues - e-commerce• contractual issues• trading models The generally accepted method of electronicallyexchanging structured documents between tradingpartners used to be via Electronic Data Interchange(EDI),but this has now been largely supplementedby a more comprehensive term - ‘electroniccommerce’ - and EDI now just forms part of theoverall picture. This change of emphasis wasconfirmed and endorsed by the decision of the EDIAssociation in January 1996 to change its name tothe Electronic Commerce Association. The ECAsubsequently merged with the Article NumberAssociation to form E Centre,which has now beenrenamed to GS1 - a collaborative partner of CIPS(contact details given at the end of this PracticeGuide).

Technological exchange in this area is helping toensure supply integration as it cascades globally. Theeffect that it will have on the business andprocurement will be discussed throughout thisdocument.

2. DEFINITIONS AND EXPLANATIONSNumerous definitions of e-commerce (EC) havebeen put forward. However, in general, it may bedescribed as the use of computers linked bynetworks to carry out any,or all of, the following:• access data about products (goods and services)• find and qualify suppliers• advertise needs and wants• issue invitations to tender• let contracts• issue call-off orders• monitor performance• receive invoices• make paymentThis list falls naturally into two categories - e-sourcing and e-procurement

e-sourcingThere is confusion about what is covered by e-sourcingand how this differs from e-procurement.The CIPSdefinition of e-sourcing is:

“e-sourcing is using the internet to make decisionsand form strategies regarding how and where servicesor products are obtained.”

It covers the key elements in the buying process,which are at the discretion of the specialist buyers;these include knowledge, specification, request forquotation/e-tender/e-auction,evaluation/negotiationthrough to contract.

If e-sourcing is to be implemented, a good e-sourcingpractice is ESSENTIAL in making e-procurement work. Ifthe correct STRATEGIC DECISIONS are made goodoperational process will probably result. e-sourcing ande-procurement are both aspects of the e-purchasingcycle.

e-sourcing provides a platform for deliveringpromises of social responsibility - it providesaccountability and visibility of why a company makes adecision to source products from their chosensuppliers.

e-sourcing systems should enable the sourcingteam to:• effortlessly analyse and model complex decisions in

real time• automate the contract lifecycle management

including awards, rejections, amendments andrenewals

• collaborate with the supplier - using a central systemfacilitates the collaboration process

e-sourcing should deliver the following visible benefits:• real-time information - the sourcing team gets

visibility on contracts and spending patterns.Anyplanned improvement must ensure reliable up-to-date information for the purpose of analysis.Asystem can provide pre-qualified information aboutsuppliers.

• integrated process automation - taking the drudgeryand time out of the sourcing process by reducingthe amount of paper involved. Typically suchsystems can distribute all requirements electronicallyvia the web,email or disk format.

The generally accepted method of electronically exchangingstructured documents between trading partners used to bevia Electronic Data Interchange (EDI), but this has now beenlargely supplemented by a more comprehensive term -‘electronic commerce’...


e-procurementThe CIPS definition of e-procurement is:

‘…..using the internet to operate the transactionalaspects of requisitioning, authorising,ordering,receipting and payment processes for the requiredservices or products.”

e-procurement may be seen as the focus of localbusiness administrators with one of the key goals beingto devolve the buying process to local users, coveringthe requisition against contract, authorisation,order,receipt and payment.

Both e-sourcing and e-procurement are integral tothe purchasing cycle,which may be illustrateddiagrammatically as follows:

e-commerce includes e-purchasing and e-sales. Itwould also encompass the use of the internet to buildmore collaborative ways of working between thecustomer and supplier and within companiesthemselves. An example of this would be if a customerhas the ability to send through real time sales data totheir suppliers, the supplier could vendor - manage thecustomer’s inventory,obviating the need for thecustomer to raise orders.

EDI,which is generally viewed now as one elementwithin the overall e-commerce picture,did not achievethe impact on the supply chain which was originallyexpected for a number of reasons,notably the high set-up costs and the plethora of standards and versions ofstandards which were introduced.

Any business conducted over the internet typically,e-commerce between businesses is often referred to ase-business.

3. CIPS POSITION ON E-COMMERCECIPS Practice Guides are designed to provide awarenessand a level of understanding to the reader on selectedtopics, in this case on e-commerce and e-business.Theyare written for use by those with an interest in businessissues in general, and purchasing and supplymanagement (P&SM) issues in particular.This willinclude full and part time P&SM professionals as well asindividuals interacting with P&SM activities.

The Practice Guides will also include information onthe contextual background to the issues, and will give abalanced opinion on issues that the reader may wish toconsider.There will also be references to other sourcesof information.

Most Practice Guides will contain CIPS positionstatements, that is,CIPS’ view(s) on the Practice Guide’ssubject matter.The CIPS views are arrived at via anextensive consultation with P&SM practitioners andpeople with expertise relevant to the subject, includingworking knowledge groups and the CIPS PolicyAdvisory Network (PAN).Following the consultationprocess the CIPS Council’s Key Practice StatementsGroup finalise the statements

The growth of e-commerce does not affect the CIPSmission. It does however facilitate significant newopportunities in P&SM,and also creates substantialthreats,due to the rapidity of the change and because ofe-commerce’s challenge to traditional P&SM functions.In accordance with its overall mission CIPS:• supports its members, and other P&SM

professionals, in taking full advantage of theopportunities arising from e-commerce

• leads the P&SM profession in developinge-commerce (specifically with regards toe-purchasing aspects) expertise to meet futurechallenges.

CIPS appreciates that there is a great deal of hype andalso nervousness about e-purchasing (which, as notedabove,consists of both e-sourcing and e-procurement).This can lead to uncertainty and engenders self-preservation.e-purchasing should not be driven bytechnology but by the need for process improvementto meet the objectives of an organisation and itscustomers.P&SM professionals should view it as apositive opportunity to increase their value-add, ratherthan as a threat.


E-p

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E-s

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Payment Knowledge

SpecificationReceive

RFQ/TenderOrder

Negotiation& Evaluation

Authorise

ContractSelect & Requisition

Business caseLegal

Security


e-purchasing facilitates:• evaluation of end-to-end trading cycles, eg evaluation

and possible re-engineering of trading cycles leadingto reduced cycle times

• improved work flow of the internal procurementprocess enabling end-user self service and de-centralisation with centralised control throughcompany-specific catalogues

• new functionality such as online bidding in e-auctions and e-requests for Quotations (RFQs)

• use of more efficient and cheaper connectivitymethods such as the internet and XML (a computerlanguage for coding content and delivery).XML isnot however a requirement for e-procurement asmany solutions do not utilise it

• connectivity to external sources of information egportals; e-hubs; e-marketplaces

• connectivity to external supply chains eg Extranets,EDI;E-hubs; e-marketplaces – allowing shared realtime information such as suppliers accessing realtime sales

• sourcing,eg identifying new sources via the internet;use of intelligent search engines

• content management, eg private catalogues,publiccatalogues, internal inventory management,maintenance management

• connectivity to internal systems and sources ofinformation such as inventory management,maintenance management,MRP systems

• payment systems,eg purchasing cards• multimedia (although e-procurement does not

necessarily contain multi-media elements)• improvements in localised supply chain mechanisms

and consortia etc. leading to mutual benefite-purchasing does,however, require an appropriateinfrastructure such as: internet; intranet and extranet;e-hubs; information access and exchange.

The view of CIPS is that the adoption andimplementation of e-purchasing may be summarised asfollows: (It will be noted that these views - the benefitsto suppliers for instance - are endorsed elsewhere inthis Practice Guide):

Strategy Organisations should consider incorporating e-commerce - e-sourcing and/or e-procurement - withintheir corporate strategies.Correctly chosen e-purchasingoptions can be a relatively low risk e-strategy offeringsignificant benefits.

CIPS strongly recommends that organisations have awell-defined P&SM strategy and use appropriatee-purchasing methods as a facilitator to achieve this.Aprogressive P&SM strategy will deliver significantbusiness benefits by maximising value for money.Ane-purchasing solution should never be implemented inthe absence of such a strategy.An organisation’se-purchasing strategy should also support its e-businessstrategy including the e-commerce strategy (whichincludes e-selling) and vice versa.

e-commerce ProgrammesPurchasing professionals should, ideally, lead and drivethe procurement part of any e-commerce projectrelating specifically to e-purchasing initiatives and workcross-functionally with colleagues.Where this is notpracticable, a P&SM professional must ensure he or sheis consulted by the e-commerce project team, involvedin decision-making and kept abreast of developments.New technology is not a substitute for goodprofessional knowledge and abilities.

Processes and SystemsOrganisations should not simply automate existingprocurement processes and systems but shouldconsider improving ways of working and re-engineeringbusiness processes prior to the implementation of e-purchasing.P&SM professionals should challengeestablished procurement practices to test whetherthese have evolved around a paper-based system suchcan be replaced.CIPS strongly recommends that,wherever possible,processes should be re-engineeredprior to implementing e-commerce.

e-purchasing is not a discrete systems applicationbut rather an ongoing programme,which should becontinually developed as technology and P&SMexpertise evolves within an organisation.


Changes and BenefitsMany of the benefits predicted, for e-purchasingespecially,have been over-optimistic as they includeprocurement benefits which many organisations willhave realised without introducing e-purchasing.Theyhave often been based on organisations in which thebenefits of professional P&SM strategies have not yetbeing realised,or where P&SM solutions have beenimplemented and the outcomes are being incorrectlyattributed to an aspect of e-purchasing.Feworganisations have implemented e-sourcing ore-procurement for long enough to have realised tangiblebusiness benefits.

e-purchasing will change the dynamics of the P&SMprofession as there will be a greater emphasis onknowledge management. It is suggested that e-commerce will change the culture of P&SM in anorganisation and may lead to a greater emphasis on costand prices. e-commerce will also facilitate purchasingfrom global sources.

Such changes will present P&SM professionals withenhanced career opportunities. e-purchasing will releasetime to be spent on more value-add aspects ofpurchasing such as the development of end users’purchasing competencies and the development ofsuppliers. It is an opportunity to deploy competenciesto the greatest effect.

e-purchasing can enhance transactional purchasingby providing end users with quick and easy-to-useelectronic systems such as electronic catalogues forselecting and purchasing their requirement frompreferred suppliers.This should reduce transactionalcosts by improving speed and efficiency and providegreater commitment to contracts by the reduction of“maverick purchasing”, ie purchases made outside anorganisation’s contractual arrangements.CIPS believesthat e-purchasing will continue to develop with newtechnologies becoming available for the moresophisticated aspects of P&SM.

e-commerce has the potential to facilitatecommunication between purchasers, their customers,suppliers and employees. It can encourage suppliers tobecome more efficient and more focused on meetingthe organisation’s needs.

e-purchasing specifically will also provide addedvalue to the procurement function (and will improveprocurement strategy. It will, for example:)• generate accurate and detailed management

information which should enable strategic insightinto organisation’s buying patterns

• enable improved sourcing, supplier management,improved scheduling, reduced stock holding,demand management and supplier performances

To optimise these and other benefits, companies shouldfocus on overall supply chain e-commerce solutions.


CIPS suggests the most significant benefits gained (asopposed to predicted or expected) from e-purchasinginitiatives to date are improved managementinformation, reduced cycle times and reducedtransaction costs.

In order to reap the benefits of e-commerce,P&SMprofessionals should ensure that they undertakeappropriate training and ensure their skills, knowledgeand competencies are continuously developed. Suchskills relating to e-commerce include widermanagement skills such as those involved with changemanagement.

Benefits to SuppliersEngaging in the e-purchasing process also bringspotential benefits to suppliers.These include:• time savings in re-inputting orders • reduction in errors, eg from re-inputting returns,

deliveries• reduced transaction costs and cycle times• holding less stock as a result of more efficient

communications with customers, ie real time salesdata, information for use in forecasting

• improved supplier performance by sharing suppliermeasurement information

• faster payment• improved management information

Among the resulting benefits to buyers are:• the ability to effortlessly analyse and model complex

decisions in real time• automate the contract lifecycle management

including awards, rejections, amendments andrenewals

• enhanced level of collaboration with the supplier • reduced transaction costs and cycle times• possibility of developing Vendor Managed Inventory• improvements in Just in Time deliveries• more accurate deliveries due to reduced input order

errors by suppliers• shared performance measurement data which

encourages improved supplier performance• potential for reduced need for expediting by the

buyer as the supplier acknowledges orders byexception which automatically updates the buyer’ssystem

• reduced stock due to shared sales/forecastinformation


Implementation IssuesThere are also issues to overcome when implementinge-commerce including:• ensuring that,by deploying e-commerce,

organisations are not simply passing costs or processinefficiencies on to another part of the organisationor on to suppliers

• competition issues, eg in exchanges usingcollaborative purchasing

• possible negative perception from suppliers, eg theirmargins reduced further from e-auctions

• web site and information control lost to exchangeadministrators

• negotiated procurement benefits may be sharedwith other exchange users who may be competitors

• creation of catalogues can be a long process andcostly to suppliers

• catalogue management can be costly• product coding and classification can also be costly• the cost of changing suppliers once they have

invested in catalogue production may inhibitcompetition and lead to inertia

• culture profile within organisations, eg resistance tochange

FutureCIPS encourages the ongoing development oftechnology-based solutions for more complexprocurements. It encourages P&SM professionals tolearn about e-commerce and then provide leadershipon all facets of e-purchasing projects in theirorganisations in order to, for example:• identify all the procurement needs for direct and

indirect materials and services prior to developingan appropriate e-purchasing solution

• carry out due diligence on potential suppliers• persuade suppliers to join the market• suggest improvements to business processes

SummaryCIPS encourages organisations to fully understand howe-commerce can be of benefit to their business. Itsuggests that P&SM professionals ensure theirorganisations have a comprehensive e-purchasingstrategy.P&SM professionals should evaluatee-commerce options in order to ascertain the mostappropriate solutions for their own organisation.CIPSbelieves that there is nothing unethical orunprofessional about, for example, the use of IT tofacilitate e-auctions.

The ability of the procurement function to effectchange will depend on the company, the industrysector and the maturity of P&SM within anorganisation, its resources, culture,nature of businessand markets within which it operates. e-purchasing willimpact on people,processes, and procedures as well ason financial performance.CIPS strongly encourages andsupports P&SM professionals in their pursuit of thee-purchasing/e-commerce challenge.

4. ATTRACTIONS OF E-COMMERCE FOR BUYERSAND SUPPLIERS

e-commerce impacts upon the supply chain by offeringbuyers a number of important advantages. As anillustration, a paper by E Scheuing ‘Cyber Sourcing inthe US’ suggests that e-commerce is shifting the balanceof power to buyers. Key benefits identified by theauthor are:• competition is just a click away• price comparisons can be done quickly• geographic distance largely loses its importance

Products will, to an increasing extent,be availablethrough standard web browsers and virtual shoppingcentres on the web will enable buyers to make quickand accurate comparisons between suppliers’offerings.Another development is that, to reduce theconsiderable cost of establishing a fully electronicprocurement facility,buyers may well wish to jointogether in the sharing of catalogues and e-commerceservices in general to create a relevant market place, ie,COVISINT (a market place set up for the buyer andsuppliers of Universal car parts).

Another important consideration is that by havingcatalogues available on line, conventional hard copyversions will no longer be necessary. This, it has beensuggested,will bring about considerable reductions inordering time.

There are also benefits for the supplier,notably:• reduced level of returns as a result of enhanced

order accuracy• reduction in the number of enquiries from buyers

regarding stock availability• generation of new marketing opportunities• changes to product specifications and promotional

literature can be carried out quickly and efficientlywithout the need to approach printers or publishers

The ability of the procurement function to effect change willdepend on the company, the industry sector and the maturityof P&SM within an organisation, its resources, culture, natureof business and markets within which it operates.


5. CURRENT BENEFITS OF E-PURCHASINGWith many market places struggling to establishthemselves, there are significant benefits to be realisedfrom using e-commerce. It is the ‘e’,which is no morethan a tool to be used to automate and simplify theordering process in the quest to reduce purchasingcosts.

The Commodity Strategy below highlights theappropriate uses for e-purchasing solutions for variouscategories of good:

The sale of goods over the internet allows acompany to have a shop window to the world.Operational and efficiency savings are achievedespecially if orders are integrated into front-end ordersystems. Sales sites can be customised in order toenhance and add value to the buyer/supplierrelationship.

The potential benefits to a company can besummarised as follows:• greater market penetration• increased responsiveness to customers• more flexibility with lower costs• access to new markets• cost savings on marketing and promotion• improved customer service• longer lasting and more profitable customer/supplier

relationships

6. COLLABORATIVE E-COMMERCE AND HOW ITBENEFITS PARTNERSHIPS

The main e-commerce medium,which enablescollaborative links between a customer and hissuppliers,would be the transaction of messages over anextranet solution. This would be a closed environmentthat has direct links between the hub company (thecustomer) and its suppliers.

Not only would an extranet allow a customer tosend out standard transactions such as purchase ordersand invoices, the potential list for relevant informationwhich could be sent between the customer andsuppliers is endless and can be company-specific.Examples include:• delivery forecasts• general information,eg, packaging specifications• supplier measurement scores• real times sales data• stock levels of suppliers • confirmation by exception• delivery of goods booking in diary• requests for new product information• supplier forums• cost price maintenance• requests for quotation• order tracking

The potential benefits of collaborative purchasing to thecustomer include;• faster delivery of purchase orders• audited document trail• lead time reduction• fewer errors on deliveries• fewer queries and expediting• improved supplier performance• increased service levels and stock turns• reduction in stationary and post costs• reduced errors on Invoicing

The potential benefits to the supplier are as follows;• simplified orders• faster guaranteed delivery of purchase orders• potential to integrate orders• reduced stock holding due to more accessible

forecasting• reduced errors• improved planning and performance• more accessible information for reporting analysis


Capital Purchases/Projects Trade and direct goods

Electronic tenders EDIExtranet Market PlacesAuctions (commodities)

One off purchases MRO/Indirect type goods

1 stop shop Public/Private sectorElectronic catalogues Market places

Customised Supplier sitesAuctions


7. IMPLEMENTATION/HINTS AND TIPSAs with any new technology, it is important to adoptthe right approach to be sure of reaping the benefits.GS1 has suggested the following:• set up a team with representatives from all

departments within the organisation to assumeresponsibility for setting up and maintaining thenew system

• ensure that the system selected has the ability notonly to meet existing business objectives but alsocreate new ones

• identify as accurately as possible the range of data tofeature in the new system

• select, in consultation with suppliers and customers,an appropriate system, taking professional advice ifnecessary

• arrange and implement employee training and oncethis has been done operate the system on a trialbasis before going live

• once the system is operational introduce suitablemonitoring routines

Another list (the so-called ‘Twelve Commandments’) hasbeen drawn up by The Ecademy (‘The Education Portalfor eCommerce’) which says ‘they can… if appliedproperly, guide the way through the chaos andwilderness of the Net into clarity and what some mightconsider the Promised Land….’

The Commandments cover a range of topicsincluding:• strategies for identifying and addressing international

differences in sale of goods legislation andaccountancy procedures

• ensuring that any e-commerce strategy adopted issufficiently flexible to react to changingcircumstances even on a day-to-day basis

• how a company can most effectively direct potentialbuyers to its site by way of search engines andsearch engine technology

• security considerations • payment procedures• personalising electronic relationships – the fact that

e-commerce transactions are conducted at a distancedoes not mean that buyers and sellers should notcultivate a good working relationship to the benefitof both

Whilst it is not possible to say that adopting the aboveapproach is a cast-iron guarantee of success, it certainlymakes that success more likely.

Properly implemented, an e-commerce strategyenables a business to manage its entire purchasingprocess electronically right across the supply chainfrom identification of the need to purchase, throughsourcing, tendering, supplier appraisal, bid evaluationand contract award. Once suppliers have been

approved and appointed their product offerings, alongwith prices and terms and conditions, can be accessedelectronically, selecting from virtual warehouses andhaving goods delivered to different locations byelectronic communication with the supplier. Paymentwill be made electronically, generating considerablesavings as the time-consuming manual process ofreceiving, authorising and arranging payment againstinvoices will become redundant. CIPS has estimatedthat the cost of placing a purchase order and theassociated paperwork may be conservatively placed at£50. Electronic purchasing can reduce this to less than£10. To illustrate, for a business raising say 80,000orders pa, this can lead to potential savings ofapproximately £3.2 million. However,CIPSrecommends that you place a cost on each step of thepurchase-to-pay process as it is currently to obtain acompany-specific cost of raising an order. This can thenbe used in a cost benefits analysis to evaluate ife-procurement (looking at the transactional aspects ofe-commerce) is a worthwhile solution.

An established way of achieving cost savings is tonegotiate reduced prices from suppliers. e-commercefacilitates consortium /group purchasing,enablingbuyers to exert greater leverage on these suppliers,making it easier for these savings to be achieved. It isimportant to note that,unlike incremental revenuegains, these savings have a direct and positive effect onprofit levels. When making the business case fore-commerce to senior management,purchasingmanagers should place emphasis on this distinction.

8. THE PENETRATION OF E-COMMERCE IN THE UKThe value of internet sales by businesses rose to £71.1billion in 2004, an increase of 81 per cent on the 2003figure of £39.3 billion. Small businesses are a keyelement of the UK’s move up the internationale-commerce league, according to the annualgovernment benchmarking survey published 11November 2004).

The UK has jumped four places to third,behind onlySweden and Ireland for ‘IT sophistication’, says thesurvey conducted by Booz Allen Hamilton (BAH) onbehalf of the Department of Trade and Industry (DTI).

The largest growth area is amongst micro and smallbusinesses, says the report. Larger businesses are still themost likely to trade online,but the gap is closing and ITadoption amongst small businesses has increased by anextra 7 percentage points.The proportion of micro andsmall businesses with a website has gone up by 16percentage points, the number of micro businessestrading online has almost doubled to 30 per cent andthe number of smaller businesses trading online hasgone up from 22 per cent to 31 per cent.


Online sales and procurement is also a key area forthe UK.The proportion of goods procured online roseto 24 per cent, and of businesses receiving ordersonline the channel accounts for an average of 19 percent of their sales.

There are still challenges, says the report.Only 37per cent of business allow customer to order online,significantly below the level in other leading nations.And the average proportion of sales online, as well asonline orders, also trails international rivals.

(Ref:http://www.computing.co.uk/computing/news/2071251/small-businesses-drive-uk-ecommerce-advance)

9. CASE STUDIES

i) Electronic Commerce in the Retail Sector

TescoTesco was the first to introduce the superstore conceptsuccessfully and since then has been responsible for anumber of innovations in superstore marketing,becoming the first major UK retailer to offer a homeshopping service to customers via the internet.The firsthome delivery website became operational at thecompany’s Osterley (West London) store in November1996;ultimately the intention is for this facility to beavailable at all Tesco stores in the M25 ring.

Customers at the internet superstore have on anygiven day over 20,000 products to choose from; this listis updated regularly from Tesco’s mainframe.Theprocedure is simplicity itself; once a shopper hasdecided which items are required,he or she confirmsdelivery and payment details.These particulars are thentransferred from the web server and printed out at therelevant store where staff collect the relevant goodsfrom the shelves ready for delivery the following day.

DixonsDixons’website offers over 2000 products from whichthe customer can make a selection,with delivery on thenext working day.The server was developed usingMicrosoft Merchant Server; this is an advanced ECsoftware package for the internet and includes a built-inorder-processing component to handle all aspects ofthe transaction.Product data is downloaded fromDixons’mainframe to a Microsoft SQL Server databasefeeding the internet application.

Any new technology will bring in its train a numberof threats,disadvantages or limitations. In the case of theuse of the internet within the retail sector it has beensuggested these are as follows:• direct links could be established between

manufacturer and consumer so cutting out theretailer

• foreign retailers have access to the UK domesticmarket

• there can be a dramatic lapse in customer service ifthere is a breakdown in the technology

• security problems (payment security is discussed atgreater length below),unethical trading by sellers,viruses and unauthorised access

• negative customer perceptions such as reluctance togive credit card details over the internet.

Whilst there have been numerous papers focusing onthe various aspects of the purchase of goods over theweb by consumers, relatively little attention has beengiven to how these goods are actually delivered to thebuyer.To illustrate the size of the problem UPS (UnitedParcels Service) in the USA has found thatapproximately 30% of goods have to be re-deliveredsince the owner is not at home on the first occasion.

Various delivery profiles may be distinguished,including:• attended delivery (someone at home to accept the

goods)• the so-called ‘milk float scenario’with goods left on

the doorstep to await the houseowner’s return• the ‘collect’option whereby goods are picked up by

the buyer from, for example, a post office or a localpetrol station

It is clear that, if electronic shopping is to be successfulfrom the consumer’s point of view, this issue needsaddressing without delay.One option favoured inSweden is the use of a secure post box in a prominentposition outside the house where items can be left.

ii) DistributionDistribution companies will also benefit from e-commerce; there are well known success storieswithin this sector;

RS ComponentsRS Components, a UK-based supplier of non strategicMRO (maintenance, repair and operation) products,haspioneered new ways of working with customers overthe internet since 1997.

The company’s overall goal has been to reducetransaction costs for the low-value orders which are themainstay of its business. RS sells 270,000 productsworldwide and 125,000 in the UK, there are nominimum order quantities. On average, the companytakes an order every ten seconds from one of its onemillion worldwide customers. Its annual turnover is£760 million, about 6% of which is currently generatedthrough e-commerce activities.

Tesco was the first to introduce the superstore conceptsuccessfully and since then has been responsible for a numberof innovations in superstore marketing, becoming the firstmajor UK retailer to offer a home shopping service tocustomers via the internet.



RS has created a website,backed by a search engine,that is integrated with its ERP system. Customers canlog on to the site and access 25,000 technical datasheets for the products. In addition RS allows itscustomers to define purchasing controls; they can limitthe number of people who are authorised to purchasegoods and the amount they are allowed to spend. Italso offers electronic order history information,detailingall their purchases and consolidated monthly invoices.

Watford ElectronicsWatford Electronics is a UK-based company selling PCs,hardware, software, and peripherals mostly through mailorders to individuals, smaller companies, andeducational and government institutions.The companylaunched it’s firstweb site in 1997 at a cost of £35,000.A year later it wanted a more flexible, true e-commercesite.

Watford decided to develop its own website andcarry out its own integration. The site went live in 1999and has continually improved since then. Totalinvestment to date is £1.5 million.

Today the company gets over 5 million hits a month.About 46% of orders (in volume) are received over theweb, a figure that is expected to increase to 70% in thenext 12 months. Average order value in the last 12months has increased from £55 to £130.

iii)Financial ServicesThis sector would appear to be a natural choice for e-commerce,concerned as it largely is with intangiblessuch as insurance.However, in Europe at least, the take-up to date has been relatively slow,unlike the US whereinternet banking has been a feature of life for manyyears.However, according to the consultants and marketanalysts Datamonitor, this is all set to change,with aforecast of an annual 75% increase in online bankingcustomers in Western Europe reaching a figure of8million by the end of 2001.

The CERA Bank in Belgium provides an illustrationof the benefits of online banking. In a typical two-month period the bank has recorded over 5000 newusers of the online facility.The system,which usessophisticated IBM encryption technology for security,began simply enough with, for example,mortgagepayments for customers,but now incorporates up todate concepts such as integrated smart cards.

A recent (1997) IMRG study on the take-up ofelectronic commerce has shown that clients perceivethe following to be the main benefits of online bankingservices:• time savings (49%)• convenience (removes the need to visit the local

branch) (28%)• 24-hour availability (11%)

A survey carried out by Manning Salvage and Lee inbehalf of the UK banking industry has found that, in theUK, industry could be saving up to £8 billion pa bychanging the way payments are made.The preferredmethod highlighted in the report is Direct Credit,whereby funds are transferred electronically.Not onlydoes Direct Credit offer considerable savings in terms oftime and administration, it is also safer since funds aretransferred directly from one bank to another.Thereport says that Direct Credit can be used for a widerange of business payments and may also be used bymembers of the public, eg for pension or child benefitpayments.

The report suggests that the reason Direct Credit isnot more widely used is simply lack of awareness,which is particularly regrettable in light of the oneresearch finding that 96% of UK businesses wouldhappily accept payments by electronic means.Presumably those companies in the survey wereunaware of the existence, still less the benefits, of DirectCredit.

10. KEY ISSUESAmongst security issues which need to be borne inmind by anyone organisations or private individualsengaged in e-commerce-based transactions, are thefollowing;

Security of PaymentAs indicated above, fears that payments will go astrayhas been one of the main factors limiting the take-up ofe-commerce,certainly as far as private individuals areconcerned.To combat this, SET (Secure ElectronicTransactions) has been conceived. SET,briefly discussedabove,may be defined as an ‘open standard multi-partyprotocol for collecting secure bank card payments overthe internet’. Its key features are:• privacy of payment data and confidentiality of order• provides for easy authentication of card-holder’s

signature• digital signatures (see below) ensure integrity of

payment data• non-repudiation:put simply this means that once

payment has been made the buyer cannot cancelthe contract; this is an obvious advantage for thesupplier


These issues are now considered in more detail.

AuthenticationIn e-commerce transactions,both parties must be ableto authenticate their identities.The main methodsemployed are passwords, electronic signatures anddigital certificates.

Electronic signatures are a method of ‘signing’ anelectronic document to show the legitimacy of thesignatory.The security of such signatures may beensured either through public-key cryptography (digitalsignatures) or by using biometric tools such as ‘PenOps’which record and match the sender’s signature.

AuthorisationThis refers to the frequent need for transactions to belimited to a specific individual or group.Typically thismay be achieved through a combination of passwordsor digital certificates.One way of achieving this is forusers to be entered on an ACL (Access Control List) andrequire them to provide their password to establishtheir identity.

ConfidentialityThis is an obvious requirement, and ensures thatconfidential data such as credit card numbers are notavailable to unauthorised parties. Encryption is thetechnique commonly employed.Two approaches maybe distinguished:a) Symmetric encryption – uses a shared key (code) for

both encryption (scrambling) by the sender anddecryption (unscrambling) by the recipient.

b) Public key cryptography – uses a private and apublic key. Information encrypted with anindividual’s public key can only be decrypted by thecorresponding private key,which is known only tothe individual; the public key is known only to thosewith whom he/she communicates.

Domain NamesA domain name may be defined as ‘an address incyberspace’where each computer linked up to theinternet may be contacted.Originally computers wereidentified simply by numbers;however this proved tobe not very user friendly so the domain name conceptemerged.For ease of identification such names showthe type of organisation concerned.Thus:com commercial and industrial organisationsac academic institutionsgov UK governmentmod UK armed forcesorg non-profit/research organisations

11. CONTRACTUAL ISSUESWhen buying over the internet it is, of course,notpossible to handle or inspect the goods.Under suchcircumstances the maker’s reputation,often supportedby a recognised trademark,will be enough to enable thebuyer to go ahead with his intended purchase.However, it is easy to encounter problems in thetransaction arising from the absence of contractualdocumentation.These problems may be particularlyacute in cases where international trading is concerned(see below).

Electronic ‘Documentation’Conventional hard copy documentation is relativelyeasy to monitor and control; signature verification andauthorisation is also a relatively straightforward process.In the case of electronic communications,on the otherhand, such processes are often far less clear, eventhough the importance of an electronic message or‘document’ can easily be as great as its hard copycounterpart.Moreover, it is often the case that anelectronic document is open to wider scrutiny than thepaper equivalent. It follows from this that there are anumber of key issues and considerations which applywhen entering into an e-commerce based transactionover and above those which apply in conventionalpaper-based transactions.

By an electronic signature people mean nothing likea signature at all, it is of course, simply an electronicmeans of verifying a sender’s identity. There is norequirement for a signature, electronic or otherwise onpurchase orders. Electronic signatures,however,perform a validation function, and given the scope forabuse, in particular for impersonating other people inemail and web-based communications, that isparticularly useful.

When Does a Contract Come into Force?This is clearly a key issue for both buyer and seller.Traditionally the rule is that the contract comes intoforce when the offeree (the buyer) communicates tothe offeror (the seller) that his offer has been accepted.However, there are exceptions,notably the postal rulewhereby acceptance is deemed to have taken place assoon as the letter of acceptance is posted, and notwhen it is received by the offeror.

In cases where the method used to transmitacceptance (or indeed non-acceptance) isinstantaneous, as is the case of course with e-commerce, it is considered that the contract is bindingas soon as the party making the offer receivesacceptance.



In practice, the probability (and at the moment it isno more than that) is that it will be sufficient to showthat the email/order has entered the recipient’scomputer system,whether or not it actually appears onthe screen of the addressee’s PC. What can be said withcertainty is that the only absolutely watertight evidenceis an email back from the recipient confirming receiptof the initial email/order and verifying that it has beenreceived uncorrupted and entire.

How is an Offer Accepted?At present there are no universal rules regardingacceptance; an offer on a website may be accepted byemail, fax,post, telephone or even in some instances byword of mouth.Obviously the seller would be wise toindicate which is the preferred method of acceptance; arecommended approach is for the buyer to fill out anelectronic order form which is actually part of the webpage.

This procedure should be reasonably straightforwardwhen both buyer and seller come under the same legaljurisdiction.However, if parties are in differentcountries,problems can arise all too easily, since it is notalways clear which law governs the contract. Legalexperts in the UK have suggested that if a foreign buyeraccepts the offer then the laws applying in theircountry should govern the transaction.However, evenwhen it is the UK website owner who accepts theoffer, the laws of a foreign jurisdiction may well apply ifthe Website is stored on a server located in anothercountry.

To avoid any such disputes, it is wise to state on thewebsite whose terms and conditions will apply in anygiven set of circumstances.

Implied and Express TermsA contract between buyer and seller will be performedon the basis of implied and express terms.The formerbeing the statutory law such as in the UK the Sale ofGoods Act 1979; the latter spell out the terms andconditions as they relate to the circumstances of aspecific contract.

a) Implied TermsMention has already been made of the Sale of GoodsAct 1979.Other pieces of statutory legislation of whichthose buying and selling by electronic means need tobe aware include the Supply of Goods and Services Act1982, the Sale and Supply of Goods Act 1999, the UnfairContract terms Act 1977, the Unfair terms in ConsumerContracts regulation 1994 and the Trades descriptionsAct 1968.

Those selling goods over the web will in additionneed to be aware of specific consumer legislation suchas the legislation mentioned in Section 14. It is, ofcourse, important to be aware that other legaljurisdictions will have comparable legislation,whichmay well lead to conflict or dispute.

b) Express TermsEach of the parties will, of course,have their own setsof terms and conditions. If these are to be binding for atransaction performed electronically, it is important foreach to be given as much notice of them as possible.Atthis point it is perhaps worth mentioning that there is apotential conflict here between making sure one is safein the legal sense, and possibly discouraging potentialcustomers through excessive legalese.An approachrecommended by some lawyers is to design the websiteso that the introductory pages have an advertisingfocus, and the intending buyer is only ‘drawn in’ to theterms and conditions when they have indicated thatthey wish to make a purchase.

12. STRUCTURE OF THE B2B WORLDThe B2B market place may be broadly split into twostructures – vertical markets and horizontal markets.The former are industry-specific, serving thecommercial needs of buyers and suppliers in thoseindustries. Once successful in generating a critical massof buyers and suppliers and establishing a liquid market,these vertical traders will initially generate theirrevenues from advertising,but in due course will derivebenefit from transaction revenues.

In contrast to vertical markets,horizontal marketsspan multiple sectors due to the fact that the goods andservices concerned are common to many industries.Examples include facilities management services,logistics,MRO,office equipment, etc.

To a large degree the products and services boughtwithin these market places are of a standardised natureand it is this very fact which allows the horizontalplayers to sell to a range of different industries. In sodoing they can create aggregated demand and achievesubstantial economies of scale. Much of the value thatis added in these marketplaces is concerned with theimprovement and automation of the workflowprocesses.


Trading ModelsBroadly speaking there are four types of modeloperating within the vertical and horizontalmarketplace, although it should be stressed that thesefour categories are not distinct but in practice tend tomerge or amalgamate:• catalogues• auctions• exchanges• vertical communities

Online cataloguesProbably the best-known sector of the marketplace. Aswell as these horizontal organisations there are verticalmarket organisations like Chemdex. Such organisationstake the hard copy catalogues of suppliers,digitise theproduct information and provide buyers with aninternet-based one-stop shop. The fact that in mostcases these organisations embed themselves in thebusiness processes and IT infrastructure of buying andselling organisations, reduce process and inventorycosts and improve customer access to markets,meansthat the value add they create is substantially more thanjust the availability of a digitised catalogue.Amongst thetypes of online catalogues are:

Supplier-Managed CataloguesThe buying organisation allows its employees toconnect to supplier catalogues on an individual basisand buy goods directly. Individuals are given their ownspend limit which they are not normally allowed toexceed.

Buyer-managed CataloguesWith this arrangement it is the buyer who develops thesystem and instructs the supplier(s) accordingly. It isonly suitable for cases where the buyer is able to exertsignificant leverage. If the buying company has its ownprivate internal market place site, it may be possible to‘punch out’ to the supplier site, in which case thecatalogue will still be updated by the supplier.

Catalogues managed by the electronicmarketplaceHere buyers can link up to an MRO marketplace wherea third party has responsibility for the provision andmaintenance of catalogues of individual suppliers.

AuctionsAuctions provide a convenient venue for the sale andpurchase of unique items such as surplus inventory,engineered components and capital equipment. Areverse auction for manufactured goods,which alsooffers the capability to support supplier selection andvalidation on behalf of the client, and Tradeout auctionsfor asset procurement. There are also vertical playerswithin this market one example being Paper Exchangefor buyers and sellers in the pulp and paper market.Auction pricing is dynamic. In a traditional auction thecompetitive bidding process results in an upward pricemovement,whereas in a reverse auction the sellerscompete for a buyer’s offer of purchase which results indownward price pressure. Revenue from onlineauctions is derived from a combination of transactionfees as well as product listing and supplier advertising.

ExchangesExchanges provide a spot market for commodities withhigh price volatility. These exchanges allow buyers andsellers to trade anonymously – this anonymity is of keyimportance since otherwise their competitive stancecould easily be compromised and skewed prices mayalso result. Revenue from these exchanges comes notso much through transactions,but rather throughmembership level.

Vertical CommunitiesPotential buyers and sellers are brought togetherthrough websites with industry-specific content.Information posted to these sites typically includesindustry news,bulletin boards,market information andtrends, etc. Currently most of the players within thismarket generate revenue through advertising on theirsites due to the volume of traffic.A development whichno doubt will generate further revenue is theanticipated linking of transaction engines to these sites.

PortalsA portal may be defined as a single gateway to a rangeof products and services on the web that are usuallyprovided by a number of different vendors with theobject of enabling several suppliers to talk to severalbuyers through one connection.

It may also be described as a website that acts aseither a gateway to the web for new users,or as a focusfor users with specific interests.



Most portals include directories of sites of interest totheir users,providing links to sites run by otherorganisations. Portals often include services such assearch facilities,news and price data. For niche sitesdirectories can be closely defined as being of directrelevance to users and providing clear predeterminedroutes in response to actual or anticipated demand forinformation.

Other elements within a portal would also normallyinclude statistics,web search facilities, internet accessand free services to users, such as web pages.Increasingly there is freedom for users to select thoseservices of particular interest or relevance to and returnto them regularly.

13. SUMMARYThere are few technologies that have the potential torevolutionise business in general, and supply chainnetworks than e-commerce.Businesses may havereservations about the use of the internet for securityand legal reasons,but the biggest problem to address inmost organisations is the cultural change and the buy-infrom employees.

The balance of stakeholder and organisationalrequirements must come from putting a programmeteam together – cross functional and process-wideteams are probably best for achieving a successfulchange management programme.

The ultimate key to success, as with any changeproject, is the organisation’s ability to understand,motivate,use and train the right people. It isimperative, therefore, to get project sponsorship fromthe highest level within the company. A programmemanager with day-to-day support from a board membershould be appointed to oversee the programmeactivities. A decision to put together a programme teamcan then be made.

Implementation of an e-commerce initiative within abusiness requires an ongoing maintenance programmeto make sure it remains refreshed,distinctive andrelevant. The original business case should be revisitedwith rigour, checking that your strategic and operationaldeliverables were achieved. The reasons should beestablished, if not already known,and for any that werenot met you should conduct a full ‘lessons learnt’investigation for your maintenance team to use in thefuture.

SOURCES OF ADVICE AND ASSISTANCEGS110 Maltravers StreetLondonWC2R 3BXtel 0207 655 9000http://www.gs1uk.org

European Electronic Messaging Association (EEMA)Alexander HouseHigh StreetInkberrowWorcs WR7 4DTtel 0207 793028http://www.eema.org

DTI151 Buckingham Palace RoadSW1W 9SStel 0171 215 1435http://www.dti.gov.uk/CII/elec/elec_com.html

The Annual e-business events that take place at Olympiaand the NEC are a further useful source of up-to-dateinformation on offerings from commercial providers ofe-commerce solutions for the supply chain. Suppliers ofe-commerce software can also be found at the annualSoftworld (Software for the Supply Chain) event at theNEC in March.

FURTHER READING produced by CIPS (fromwww.cips.org,documents for download)e-sourcing Practice GuideSuccessful e-tenderingSuccessful e-auctionsI-Save Research

CIPS publications sold through the bookshope-procurement PathfinderLegal Aspects of e-commerceFinding the right solution:A Professional guide to e-sourcing

CIPS Knowledge Works · CIPS appreciates that there is a great deal of hype and also nervousness...

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