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.
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.
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)
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.
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