Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ١

QM 351-Chapter 10Payments and Order Fulfillment

Prepared by Dr Kamel ROUIBAH / Dept. QM & IS

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٢

Learning Objectives

• Understand the crucial factors determining the success of e-payment methods

• Describe the key elements in securing an e-payment• Discuss the players and processes involved in using

credit cards online• Describe the uses and benefits of purchase cards• Describe different categories and potential uses of smart

cards• Discuss various online alternatives to credit card

payments and identify under what circumstances they are best used

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٣

Learning Objectives (cont.)

• Describe the processes and parties involved in e-checking

• Describe the role of order fulfillment and back-office operations in EC

• Describe the EC order fulfillment process.• Describe the major problems of EC order fulfillment• Describe various solutions to EC order fulfillment

problems

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٤

Electronic Payments

Paying with credit cards online• Until recently consumers were extremely reluctant to

use their credit card numbers on the Web• 83% of online merchant surveyed said online fraud is a

serious problem (Turban & King 2003, p. 412)• Only 13% of internet users willing to use their credit

cards cashU (July 2008) (www.cashU.com) • This is changing because in 2001, 85% of the

transactions that occur on the Web are B2B rather than B2C (credit cards are rarely used in B2B transactions)

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٥

Electronic Payments (cont.)

Four parties involved in any e-payments method• Issuer• Customer/payer/buyer who purchase goods/services• Merchant/payee/seller • Regulator

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٦

Key issues of trust that must be addressed by any e-payment, known as “PAIN”

• Privacy– Ensure customer’ privacy

• Authentication and authorization– Is the ability of each party in a transaction to ascertain the identity of the

other party.– Process to provide assurance for the claimed identity of a user

• Message integrity– Is the ability to ascertain that a transmitted message has not been copied or

altered – Protect against improper modifications to message

• Non repudiation– You can not deny a message you received from a certain person

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٧

Electronic Payments (cont.)/ Characteristics of successful e-payment methods

• Independence:• Interoperability and portability: • Security:• Anonymity:• Divisibility:• Ease of use:• Transaction fees:

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٨

Security for E-Payments

Public key infrastructure (PKI)• Scheme for securing e-payments using public key

encryption and various technical components

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٩

Security for E-Payments

Public key encryption• Encryption (cryptography)—the process of scrambling

(encrypting) a message in such a way that it is difficult, expensive, or time consuming for an unauthorized person to unscramble (decrypt) it.

All encryption has four basic parts:• Plaintext—an unencrypted message in human-readable form• Ciphertext—a plaintext message after it has been encrypted into

unreadable form• Encryption algorithm—the mathematical formula used to

encrypt the plaintext into cipher text and vice versa• Key—the secret code used to encrypt and decrypt a message

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ١٠

Security for E-Payments (cont.)

Two major classes of encryption systems:• Symmetric (private key)

– Used to encrypt and decrypt plain text– Shared by sender and receiver of text

• Asymmetric (public key)– Uses a pair of keys– Public key to encrypt the message– Private key to decrypt the message==>The most used method

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ١١

Private Key Encryption

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ١٢

Security for E-Payments (cont.)

• Public key encryption– Method of encryption that uses a pair of keys—a public key to

encrypt a message and a private key (kept only by its owner) to decrypt it, or vice versa

– The two keys are mathematically related

• Private key– Secret encryption code held only by its owner

• Public key– Secret encryption code that is publicly available to anyone

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ١٣

Key Sizes & Time to Try All Possible Keys

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ١٤

Security for E-Payments (cont.)

Digital signatures• An identifying code that can be used to authenticate the

identity of the sender of a message or documentIt is used to:• Authenticate the identity of the sender of a message or

document• Ensure the original content of the electronic message or

document is unchanged• It hold the same legal status as the ink or paper signature

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ١٥

How digital Signature works

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ١٦

Security for E-Payments (cont.) / Digital certificate

Digital certificate• Is an attachment to an electronic message to verify the

identity of the sender and to provide the receiver with the means to encode a reply

• The user identity is validated by a third party called “certificate authority” –CA

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ١٧

Digital certificate: How it is issued and used during transactions?

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ١٨

Standards for E-Payments

Secure Socket Layer (SSL)• Originally created by Netscape to secure transactions between

clients/ servers• Become the standard for browsers and servers (Microsoft and

Netscape)• Is a protocol that utilizes standard certificates for authentication

and data encryption to ensure privacy or confidentiality • E.g. secure credit card sent from a customer to a merchant)Transport Layer Security (TLS)• In 1996 it was renamed Transport Layer Security (TLS) Socket

Layer protocol

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ١٩

Standards for E-Payments (cont’)

TLS was not designed to handle the following:• The credit card number must be checked for validity• The consumer’s bank must authorize the card• The purchase must be proceedSecure Electronic Transaction (SET)• Is a protocol designed to provide secure online credit

card transactions for both consumers and merchants; developed jointly by Netscape, Visa, MasterCard, and others

• Is designed to handle a complete online transaction

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٢٠

Electronic Cards and Smart Cards

Definition• Electronic cards that contain information that can be used for

payment purposesThree types• Credit cards (e.g. Visa and MasterCard): provides holder with

credit to make purchases up to a limit fixed by the card issuer• Charge cards (e.g. internet card, PetroNet)—balance on a

charge card that can refilled based on customer request• Debit card (e.g. Knet)—cost of a purchase drawn directly from

holder’s checking account (demand-deposit account)

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٢١

Electronic Cards and Smart Cards (cont.) / The Players

• Cardholder• Merchant (seller)• Issuer (your bank)• Acquirer (merchant’s financial institution, acquires the

sales slips)• Card association (VISA, MasterCard)• Third-party processors (outsourcers performing same

duties formerly provided by issuers, etc.)

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٢٢

Electronic Cards and Smart Cards (cont.)

Credit card gateway• An online connection that ties a merchant’s systems to

the back-end processing systems of the credit card issuer (a a customer)

• Objective speed-up the online transactionVirtual credit card• An e-payment system in which a credit card issuer

gives a special transaction number that can be used online in place of regular credit card numbers

• E.g. CashU

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٢٣

Electronic Cards and Smart Cards (cont.)

Electronic wallets (e-wallets)• A software component in which a user stores credit card

numbers and other personal information• When shopping online the user simply clicks the e-

wallet to automatically fill in information needed to make a purchase

Benefits of e-wallets• One-click shopping—saving your order information on

retailer’s Web server• Speed up the transaction process

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٢٤

Smart Cards

• Smart card—an electronic card containing an embedded microchip that enables predefined operations or the addition, deletion, or manipulation of information on the card

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٢٥

Smart Cards (cont.) / Categories of smart cards

• Contact card– A smart card containing a small gold plate on the face that when inserted in

a smart-card reader makes contact and so passes data to and from the embedded microchip

• Contactless (proximity) card– A smart card with an embedded antenna, by means of which data and

applications are passed to and from a card reader unit or other device

• Securing smart cards– Theoretically, it is possible to “hack” into a smart card

• Most cards can now store the information in encrypted form• Same cards can also encrypt and decrypt data that is downloaded or

read from the card– Cost to the attacker of doing so far exceeds the benefits

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٢٦

Smart Cards (cont.)

Important applications of smart card use:• Loyalty• Financial• Information technology• Health and social welfare• Transportation• Identification

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٢٧

E-Cash and Innovative Payment Methods

E-cash• The digital equivalent of paper currency and coins, which enables secure and

anonymous purchase of low-priced itemsMicro-payments• Small payments, usually under $10• E.g. purchase a news articleWireless payments• Vodafone “m-pay bill” system that enables wireless subscribers to use their

mobile phones to make micro-paymentsQpass (qpass.com)• Charges to qpass account, are charged to a specified credit card on a monthly

basis• Avoid some of e-cash problem (see more in www.qpass.com) E-Coin.net• See next

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٢٨

Stored-Value Cards

• Stores cash downloaded from bank or credit card account

• Visa cash—a stored-value card designed to handle small purchases or micropayments; sponsored by Visa

• Mondex—a stored-value card designed to handle small purchases or micropayments; sponsored by Mondex, a subsidiary of MasterCard

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٢٩

Person-to-Person Payments (P2P)

P2P payments• E-payment schemes (such as paypal.com) that enable

the transfer of funds between two individuals• Repaying money borrowed• Paying for an item purchased at online auction• Sending money to students at college• Sending a gift to a family member

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٣٠

Example of PayPal

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٣١

Global B2B Payments

Letters of credit (LC)• Is a written agreement by a bank to pay the beneficiary

(the seller), on account of the applicant (the buyer), a sum of money upon presentation of certain documents

• It was used by Muslims between Spain (west) and Iraq (east) in the middle ages

• Find a good picture that summarizes the ideaMany financial institution offer LC online • Anz.com.au; royalbank.com

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٣٢

Letter of credit

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٣٣

Electronic Letters of Credit (LC)

Benefits to sellers• Credit risk is reduced• Payment is highly assured• Political/country risk is

reduced

Benefits to the buyer• Allows buyer to negotiate for

a lower purchase price• Buyer can expand its source

of supply• Funds withdrawn from

buyer’s account only after the documents have been inspected by the issuing bank

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٣٤

TradeCard Payments

TradeCard (tradecard.com)• Innovative e-payment method that uses a payment card and check that involved

parties have not been involved in money laundering activities• Allows businesses to effectively and efficiently complete B2B transactions

whether large or small, domestic or cross-border, or in multiple currencies• Buyers and sellers interact with each other via the TradeCard systemBenefits• Checks purchase orders for both parties• Awaits confirmation from a logistics company that deliveries have been made

and received• Authorizes payment completing financial transaction between the buyer and

seller• Check involved parties have not been involved in money laundering activities

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٣٥

E-Checking

• The electronic version or representation of a paper check

• Eliminate need for expensive process reengineering and takes advantage of the competency of the banking industry

• eCheck Secure (from vantaguard.com) and checkfree.com provide software that enables the purchase of goods and services with e-checks

• Used mainly in B2B• E.g. Western MoneyZap

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٣٦

Digital checking (cont’)

• Once the payment is authorized, a receipt displays your Western Union MoneyZap payment.

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٣٧

Order Fulfillment: Overview

Order fulfillment• All the activities needed to provide customers with

ordered goods and services, including related customer services

• Order fulfillment is part of Back-office operations and Front-office operations

• Back-office operations—the activities that support fulfillment of sales, such as accounting and logistics

• Front-office operations—the business processes, such as sales and advertising, that are visible to customers

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٣٨

Overview of Logistics

Logistics• The operations involved in the efficient and effective

flow and storage of goods, services, and related information from point of origin to point of consumption

• Logistic includes also order fulfillment• Key aspect of order fulfillment is the delivery of

materials or services– In the right time– To the right place– At the right cost

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٣٩

The Procurement Process

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٤٠

EC Order Fulfillment Process

• 1. Payment clearance• 2. In-stock availability • 3. Arranging shipments• 4. Insurance • 5. Production (planning,

execution• 6. Plant services

• 7. Purchasing and warehousing• 8. Customer contacts • 9. Manage returns• 10. Demand forecast • 11. Accounting, billing.

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٤١

Order Fulfillment and the Supply Chain

• Order fulfillment and order taking are integral parts of the supply chain.

• Flows of orders, payments, and materials and parts need to be coordinated among– Company’s internal participants– External partners

• The principles of supply chain management must be considered in planning and managing the order fulfillment process

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٤٢

Problems in Order Fulfillment

• Manufacturers, warehouses, and distribution channels were not in synchronization with the e-tailers

• High inventory costs• Quality problems exist due to misunderstandings• Shipments of wrong products, materials, and parts• High cost to expedite operations or shipments• Uncertainties of demands

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٤٣

Problems in Order Fulfillment (cont.) / factors that influence uncertainties

• Major source of uncertainty is demand forecast• Demand is influenced by

– Consumer behavior– Economic conditions– Competition– Prices– Weather conditions– Technological developments– Customers’ confidence

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٤٤

Order Fulfillment in B2B

• Using e-marketplaces and exchanges to ease order fulfillment problems

• Both public and private marketplaces– E-procurement system controlled by one large buyer, suppliers

adjust their activities and IS to fit the IS of the buyer– Company-centric marketplace can solve several supply chain

problems– Use an extranet– Use a vertical exchange

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٤٥

Order Fulfillment in B2B (cont.)

Players in B2B fulfillment (may require alliance or outsourcing)• Shippers (sellers)• Receivers (buyers)• Carriers• Third-party logistics providers• Warehouse companies• Vertical e-marketplaces • Transportation • e-marketplaces • Logistics software application vendors

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٤٦

Handling Returns

• Necessary for maintaining customer trust and loyalty using:– Return item to place it was purchased– Separate logistics of returns from logistics of delivery– Completely outsource returns– Allow customer to physically drop returned items at collection

stations

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٤٧

Managerial Issues

• What B2C payment methods should we use?• What B2B payment methods should we use?• Should we use an in-house payment mechanism or

outsource it?• How secure are e-payments?• Have we planned for order fulfillment?• How should we handle returns?• Do we want alliances in order fulfillment?• What EC logistics applications would be useful?

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٤٨

Summary of QM 351Implementing Web-Based E-Commerce

Dr K. ROUIBAH Chapter 10 (351) / dept QM & IS ٤٩

End chapter 10