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  • 1. Electronic Commerce Eighth Edition Chapter 5 Business-To-Business Online Strategies
  • 2. Learning Objectives
    • In this chapter, you will learn about:
    • Strategies that businesses use to improve purchasing, logistics, and other support activities
    • Electronic data interchange and how it works
    • How businesses have moved some of their electronic data interchange operations to the Internet
    Electronic Commerce, Eighth Edition
  • 3. Learning Objectives (cont’d.)
    • Supply chain management and how businesses are using Internet technologies to improve it
    • Electronic marketplaces and portals that make purchase-sale negotiations easier and more efficient
    Electronic Commerce, Eighth Edition
  • 4. Purchasing, Logistics, and Support Activities
    • Electronic commerce
      • Improves primary and support activities
      • Tremendous potential for:
        • Cost reductions, business process improvements
    • e-government
      • Collective set of electronic commerce activities
        • Improving government support activities
        • Supporting activities and serving stakeholders better
    • Potential for synergies increase with Internet technologies use
    • Necessary characteristic: flexibility
    Electronic Commerce, Eighth Edition
  • 5. Purchasing Activities
    • Supply chain
      • Part of industry value chain preceding a particular strategic business unit
      • Includes all activities undertaken by every predecessor in the value chain to:
        • Design, produce, promote, market, deliver, support each individual component of a product or service
    • Traditionally
      • Purchasing Department charged with buying components at lowest price possible
      • Process focused excessively on individual components’ cost: ignored total supply chain costs
    Electronic Commerce, Eighth Edition
  • 6. Purchasing Activities (cont’d.)
    • Procurement includes:
      • All purchasing activities
      • Monitoring all elements in purchase transactions
    • Supply management
      • Describes procurement activities
    • Procurement staff
      • Require product knowledge
        • Identify and evaluate appropriate suppliers
    • Sourcing
      • Procurement activity
        • Identifying suppliers, determining qualifications
    Electronic Commerce, Eighth Edition
  • 7. Purchasing Activities (cont’d.)
    • e-sourcing
      • Use of Internet technologies in sourcing activities
        • Specialized Web-purchasing sites
    • Figure 5-1
      • Typical business purchasing process steps
        • Many steps and people involved
      • Spend
        • Total goods and services dollar amount company buys during a year
    • Institute for Supply Management (ISM)
      • Main organization for procurement professionals
    Electronic Commerce, Eighth Edition
  • 8. Electronic Commerce, Eighth Edition
  • 9. Direct vs. Indirect Materials Purchasing
    • Direct materials
      • Materials that become part of finished product
    • Direct materials purchasing: two types
      • Replenishment purchasing ( contract purchasing )
        • Company negotiates long-term material contracts
      • Spot purchasing
        • Purchases made in loosely organized market ( spot market )
    • Indirect materials
      • All other materials company purchases
    Electronic Commerce, Eighth Edition
  • 10. Direct vs. Indirect Materials Purchasing (cont’d.)
    • Maintenance, repair, and operating ( MRO ) supplies
      • Indirect material products purchased on a recurring basis
      • Standard items (commodities) buyers usually select
        • Price: main criterion
    • Purchasing cards ( p-cards )
      • Give individual managers ability to make multiple small purchases at their discretion
      • Provide cost-tracking information to procurement
    • MRO suppliers: McMaster-Carr, W.W. Grainger
    Electronic Commerce, Eighth Edition
  • 11. Electronic Commerce, Eighth Edition
  • 12. Logistics Activities
    • Provide the right goods in the right quantities in the right place at the right time
    • Important support activity for sales and purchasing
      • Inbound materials and supplies movements
      • Outbound finished goods and services movements
    • Example: Schneider Track and Trace system
      • Real-time shipment information: customers’ browsers
    • Third-party logistics (3PL) provider
      • Operates all (large portion) of customer’s materials movement activities
        • Examples: Ryder and Whirlpool, FedEx, UPS
    Electronic Commerce, Eighth Edition
  • 13. Support Activities
    • General categories
      • Finance and administration, human resources, technology development
      • Example: Allegiance and A.D.A.M. Web site
    • Training
      • Common support activity
        • Underlies multiple primary activities
      • Advantages: training materials on company intranet
        • Distribute materials to many different sales offices
        • Coordinate use of materials in corporate headquarters
    Electronic Commerce, Eighth Edition
  • 14. Support Activities (cont’d.)
    • Examples: Ericson, BroadVision’s K-Net
    • Knowledge management
      • Intentional collection, classification, dissemination of information
        • About a company, its products, and its processes
    Electronic Commerce, Eighth Edition
  • 15. E-Government
    • e-government
      • Use of electronic commerce by governments and government agencies
        • Perform functions for stakeholders
        • Operate businesslike activities
    • Examples in U.S. government
      • Financial Management Service (FMS)
        • Web site
      • Department of Homeland Security (DHS)
        • Internet technology use initiatives
    Electronic Commerce, Eighth Edition
  • 16. E-Government (cont’d.)
    • Examples in other countries
      • United Kingdom
        • Department for Work and Pensions Web site
      • Singapore’s SINGOV site
    • Examples in state government
      • California’s one-stop portal site ( )
      • New York State Citizen Guide site
    • Examples in local government
      • Large cities: Minneapolis, New Orleans
      • New York City (
    Electronic Commerce, Eighth Edition
  • 17. Electronic Commerce, Eighth Edition
  • 18. Network Model of Economic Organization
    • Trend in purchasing, logistics, and support activities
      • Shift from hierarchical structures
        • Toward network structures
      • Procurement Departments’ new tools (technology)
        • To negotiate with suppliers
        • Including possibility of forming strategic alliances
    • Network model of economic organization
      • Other firms perform various support activities
        • Manage payroll, administer employee benefits plans, handle document storage needs
      • Web: enabling shift from hierarchical to network
    Electronic Commerce, Eighth Edition
  • 19. Electronic Data Interchange
    • Trading partners
      • Two businesses exchanging information
    • EDI compatible
      • Firms that exchange data in specific standard formats
    • EDI importance
      • Most B2B electronic commerce
        • An adaptation of EDI or based on EDI principles
      • Still the method used for most electronic B2B transactions
    Electronic Commerce, Eighth Edition
  • 20. Early Business Information Interchange Efforts
    • 1800s and early 1900s
      • Need to create formal business transactions records
    • 1950s
      • Computers store, process internal transaction records
      • Information flows printed on paper
    • 1960s: large volume transactions
      • Exchanged on punched cards or magnetic tape
    • 1960s and 1970s
      • Transferred data over telephone lines
    • All efforts increased efficiency and reduced errors
    Electronic Commerce, Eighth Edition
  • 21. Early Business Information Interchange Efforts (cont’d.)
    • These information transfer agreements were not the ideal solution
      • Data translation programs incompatible
    • 1968: freight, shipping companies joined together
      • Transportation Data Coordinating Committee (TDCC)
        • Created standardized information set
        • Allowed electronic computer file transmission to any freight company adopting TDCC format
    • Benefits limited to members of industries that created standard-setting groups
      • Full realization of EDI
        • Required standards used by companies in all industries
    Electronic Commerce, Eighth Edition
  • 22. Emergence of Broader EDI Standards
    • The American National Standards Institute (ANSI)
      • United States coordinating body for standards
    • 1979
      • Accredited Standards Committee X12 (ASC X12)
        • Develop and maintain EDI standards
      • Data Interchange Standards Association (DISA)
        • Administrative body coordinating ASC X12 activities
    • 1987: International standards
      • Administration, Commerce, and Transport (EDIFACT, UN/EDIFACT)
    Electronic Commerce, Eighth Edition
  • 23. Electronic Commerce, Eighth Edition
  • 24. Electronic Commerce, Eighth Edition
  • 25. How EDI Works
    • Basic idea: straightforward
    • Implementation: complicated
    • Example: company to replace metal-cutting machine
      • Assume vendor uses its own vehicles instead to deliver purchased machine
      • Steps to purchase using paper-based system
        • Figure 5-6
      • Steps to purchase using EDI
        • Figure 5-7
    Electronic Commerce, Eighth Edition
  • 26. How EDI Works (cont’d.)
    • Paper-based purchasing process
      • Buyer and vendor
        • Not using integrated software for business processes
      • Each information processing step results in paper document
        • Must be delivered to department handling next step
      • Paper-based information transfer
        • Mail, courier, or fax
      • Figure 5-6
        • Information flows
    Electronic Commerce, Eighth Edition
  • 27. Electronic Commerce, Eighth Edition
  • 28. How EDI Works (cont’d.)
    • EDI purchasing process
      • Mail service replaced with EDI network data communications
      • Flows of paper within the buyer’s and vendor’s organizations replaced with computers
        • Running EDI translation software
      • Figure 5-7
        • Information flows
    Electronic Commerce, Eighth Edition
  • 29. Electronic Commerce, Eighth Edition
  • 30. Value-Added Networks
    • EDI network key elements
      • EDI network, two EDI translator computers
    • Direct connection EDI
      • Each business operates an on-site EDI translator computer
    • Value-added network (VAN)
      • Receives, stores, forwards electronic messages containing EDI transaction sets
    • Indirect connection EDI
      • Trading partners use VAN to retrieve EDI-formatted messages
    Electronic Commerce, Eighth Edition
  • 31. Electronic Commerce, Eighth Edition
  • 32. Electronic Commerce, Eighth Edition
  • 33. Value-Added Networks (cont’d.)
    • Advantages
      • Support one communications protocol (VAN)
      • VAN records message activity in audit log (independent record of transactions)
      • VAN provides translation between different transaction sets
      • VAN performs automatic compliance checking
    • Disadvantages
      • Cost (fees)
      • Cumbersome, expensive (if using different VANs)
    Electronic Commerce, Eighth Edition
  • 34. EDI Payments
    • Transaction sets provide instructions to trading partner’s bank
      • Negotiable instruments
        • Electronic equivalent of checks
    • Electronic funds transfers (EFTs)
      • Movement of money from one bank account to another
    • Automated clearing house (ACH) system
      • Service banks use to manage accounts
        • Operated by U.S. Federal Reserve Banks or private ACHs
    Electronic Commerce, Eighth Edition
  • 35. EDI on the Internet
    • Potential replacement of:
      • Expensive leased lines, dial-up connections
        • Required to support direct and VAN-aided EDI
    • Initial roadblock concerns
      • Security
      • Internet’s inability to provide audit logs and third-party verification of message transmission and delivery
    • TCP/IP structure was enhanced with secure protocols and encryption schemes
    • Lack of third-party verification concerns continued
    Electronic Commerce, Eighth Edition
  • 36. EDI on the Internet (cont’d.)
    • Nonrepudiation
      • Ability to establish that a particular transaction actually occurred
      • Prevents either party from repudiating (denying) the transaction’s validity or existence
      • Previously provided by:
        • VAN’s audit logs (indirect connection EDI)
        • Comparison of trading partners’ message logs (direct connection EDI)
    Electronic Commerce, Eighth Edition
  • 37. Open Architecture of the Internet
    • Internet EDI (Web EDI)
      • EDI on the Internet
      • Also called open EDI
        • Internet is an open architecture network
      • EDI offerings go beyond traditional EDI
        • Allow more complex information interchanges
      • Growing rapidly
        • Not replacing traditional EDI
      • Large companies have significant investments in traditional EDI computing infrastructure
      • Most VANs offer Internet EDI services, traditional EDI
    Electronic Commerce, Eighth Edition
  • 38. Open Architecture of the Internet (cont’d.)
    • More flexible exchange of information
      • Accomplished with new tools (XML)
      • ASC X12 task group
        • Convert ASC X12 EDI data elements and transaction set structures to XML
    • Context Inspired Component Architecture (CICA)
      • Set of standards for assembling business messages
      • Provides predictable structure for message content
      • Provides more flexibility than EDI transaction sets
      • Basis for future development of electronic business message standards using XML
    Electronic Commerce, Eighth Edition
  • 39. Open Architecture of the Internet (cont’d.)
    • Firms extending internal networks (intranets) to trading partners
      • Turns intranets into extranets
      • Virtual private networks (VPNs) provide security
      • Example: Nintendo USA
        • EDI-based product registration system to prevent fraudulent returns
    • Huge investment in EDI systems, trained personnel
      • Reluctant to change business processes, move to Internet EDI, approaches based on XML technologies
    • Move away from EDI will gradually occur
    Electronic Commerce, Eighth Edition
  • 40. Supply Chain Management Using Internet Technologies
    • Supply chain management
      • Job of managing integration of company supply management and logistics activities
        • Across multiple participants in a particular product’s supply chain
      • Ultimate goal
        • Achieve higher-quality or lower-cost product at the end of the chain
    Electronic Commerce, Eighth Edition
  • 41. Value Creation in the Supply Chain
    • Firms engaging in supply chain management
      • Reaching beyond limits of their own organization’s hierarchical structure
      • Creating new network
        • Form of organization among members of supply chain
    • Originally a way to reduce costs
    • Today, value added in the form of benefits to the ultimate consumer
      • Requires more holistic view of the entire supply chain
    Electronic Commerce, Eighth Edition
  • 42. Value Creation in the Supply Chain (cont’d.)
    • Tier-one suppliers
      • Very capable suppliers, a small number of which a firm establishes long-term relationships with
    • Tier-two suppliers
      • Larger number of suppliers that tier-one suppliers develop long-term relationships with
        • Provide components and raw materials
    • Tier-three suppliers
      • Next level of suppliers
    • Trust is a key element
    Electronic Commerce, Eighth Edition
  • 43. Value Creation in the Supply Chain (cont’d.)
    • Supply alliances
      • Long-term relationships among participants in the supply chain
      • Major barrier
        • Level of information sharing
    • Example: Dell Computer
      • Reduced supply chain costs by sharing information with suppliers
    • Buyers expect annual price reductions, quality improvements
    Electronic Commerce, Eighth Edition
  • 44. Value Creation in the Supply Chain (cont’d.)
    • Marshall Fisher 1997 Harvard Business Review article
      • Two types of organization goals
        • Efficient process goals
        • Market-responsive flexibility goals
    • Successful supply chain management key elements
      • Clear communications
      • Quick responses to those communications
    • Internet and Web technologies
      • Effective communications enhancers
    Electronic Commerce, Eighth Edition
  • 45. Electronic Commerce, Eighth Edition
  • 46. Increasing Supply Chain Efficiencies
    • Internet and Web technologies used to manage supply chains
      • Yield increases in efficiency throughout the chain
      • Increase process speed, reduce costs, increase manufacturing flexibility
        • Respond to changes in quantity and nature of ultimate consumer demand
    • Example: Boeing
      • Invested in new information systems
        • Increase production efficiency
      • Launched spare parts Web site
    Electronic Commerce, Eighth Edition
  • 47. Increasing Supply Chain Efficiencies (cont’d.)
    • Example: Dell Computer
      • Famous for use of Web to sell custom-configured computers
      • Also used technology-enabled supply chain management
        • Give customers exactly what they want
        • Reduced inventory amount (three weeks to two hours)
      • Top suppliers have access to secure Web site
        • Know Dell’s customers and what they are buying
        • Tier-one suppliers better plan their production
    Electronic Commerce, Eighth Edition
  • 48. Using Materials-Tracking Technologies with EDI and Electronic Commerce
    • Troublesome task
      • Tracking materials as they move from one company to another
    • Use optical scanners and bar codes
      • Integration of bar coding and EDI is prevalent
      • Figure 5-11
    • Electronic commerce second wave
      • Integrating new types of tracking into Internet-based materials-tracking systems
    Electronic Commerce, Eighth Edition
  • 49. Electronic Commerce, Eighth Edition
  • 50. Using Materials-Tracking Technologies with EDI and Electronic Commerce (cont’d.)
    • Radio Frequency Identification Devices (RFIDs)
      • Small chips
      • Use radio transmissions to track inventory
      • Older RFID technology
        • Each RFID required its own power supply
      • Important development: passive RFID tag
        • Made cheaply and in very small sizes
        • No power supply required
    • RFIDs
      • Read much more quickly, with higher degree of accuracy
    Electronic Commerce, Eighth Edition
  • 51. Electronic Commerce, Eighth Edition
  • 52. Using Materials-Tracking Technologies with EDI and Electronic Commerce (cont’d.)
    • 2003 (Wal-Mart)
      • Tested use of RFID tags on merchandise for inventory tracking and control
      • Initiated plan to have all suppliers install RFID tags in goods they shipped
      • Reduced incidence of stockouts
        • Retailer loses sales because it does not have specific goods on its shelves
      • Suppliers found RFID tags, readers, computer systems to be quite expensive
        • Pushed for slowdown in Wal-Mart’s RFID initiative
    Electronic Commerce, Eighth Edition
  • 53. Creating an Ultimate Consumer Orientation in the Supply Chain
    • Ultimate consumer orientation
      • Customer focus
        • Difficult to maintain
    • Michelin North America
      • Pioneered use of Internet technology
        • To go beyond next step in its value chain
      • 1995: launched electronic commerce initiative
        • BIB NET extranet
      • Allowed dealer access to tire specifications, inventory status, and promotional information
        • Through simple-to-use Web browser interface
    Electronic Commerce, Eighth Edition
  • 54. Building and Maintaining Trust in the Supply Chain
    • Major issue in forming supply chain alliances
      • Developing trust
      • Key elements
        • Continual communication and information sharing
    • Internet and the Web
      • Provide excellent ways to communicate and share information
      • Provide opportunity to stay in contact with customers
        • More easily and less expensively
      • Instant access to sales representatives, vendors
        • Comprehensive information at a moment’s notice
    Electronic Commerce, Eighth Edition
  • 55. Electronic Market Places and Portals
    • Vertical portals (vortal)
      • Information hubs for each major industry
        • Offer news, research reports, trend analyses, in-depth reports on companies, marketplaces, and auctions
        • Doorway (or portal) to the Internet for industry members
        • Vertically integrated
    • Predicted to change business forever
      • Not exactly correct
    Electronic Commerce, Eighth Edition
  • 56. Independent Industry Marketplaces
    • First industry hubs following vertical portal model
      • Trading exchanges focused on a particular industry
    • Independent industry marketplaces
      • Industry marketplaces
        • Focused on a single industry
      • Independent exchanges
        • Not controlled by established buyer or seller in the industry
      • Public marketplaces
        • Open to new buyers and sellers just entering the industry
    Electronic Commerce, Eighth Edition
  • 57. Independent Industry Marketplaces (cont’d.)
    • Example: Ventro
      • 1997: opened industry marketplace Chemdex
        • Trade in bulk chemicals
    • By mid-2000
      • More than 2200 independent exchanges
    • By 2008
      • Fewer than 80 industry marketplaces still operating
    • Other B2B marketplace models arose
      • Took business away from the independent marketplaces
    Electronic Commerce, Eighth Edition
  • 58. Private Stores and Customer Portals
    • Large seller concern
      • Independent operators would take control of transactions in supply chains
      • Industry marketplaces would dilute power
      • Customer portal sites
        • Cisco and Dell: private store with password-protected entrance
        • Grainger: provide additional services for customers
      • Needlessly duplicated if sellers participated in industry marketplace
    Electronic Commerce, Eighth Edition
  • 59. Private Company Marketplaces
    • Large companies purchasing from relatively small vendors
      • Exert power in purchasing negotiations
    • e-procurement software
      • Company manages purchasing function through Web
      • Procurement software companies
        • Ariba, CommerceOne
      • Automates authorizations, other steps
      • Marketplace functions
    Electronic Commerce, Eighth Edition
  • 60. Private Company Marketplaces (cont’d.)
    • Companies implementing e-procurement software
      • Require suppliers bid on business
    • Private company marketplace
      • Marketplace providing auctions, request for quote postings, other features
        • For companies who want to operate their own marketplaces
    • Example: United Technologies
      • Sells $35 billion of high-technology products, services
    Electronic Commerce, Eighth Edition
  • 61. Industry Consortia-Sponsored Marketplaces
    • Companies with strong negotiating positions in their industry supply chains
      • Not enough power to force suppliers to deal with them
        • Through a private company marketplace
    • Industry consortia-sponsored marketplace
      • Marketplace formed several large buyers in a particular industry
    • Example: Covisint (2000)
      • Consortium of DaimlerChrysler, Ford, General Motors
    Electronic Commerce, Eighth Edition
  • 62. Industry Consortia-Sponsored Marketplaces (cont’d.)
    • Example: Agenda marketplace
      • Consortium formed by Marriott, Hyatt, three other major hotel chains
    • Example: Exostar marketplace
      • Boeing led group of aerospace industry companies
    • Example: Transora marketplace
      • Procter & Gamble joined with Sara Lee, Coca Cola, several other companies
    • Consortiums have taken large part of market from the industry marketplaces
    Electronic Commerce, Eighth Edition
  • 63. Industry Consortia-Sponsored Marketplaces (cont’d.)
    • Supplier concern
      • Ownership structure
        • Independent operators for fair bargaining (Covisint)
        • Including industry participants may be helpful (ChemConnect)
    Electronic Commerce, Eighth Edition
  • 64. Electronic Commerce, Eighth Edition
  • 65. Summary
    • Using Internet and Web technologies improves purchasing and logistics primary activities
    • Emerging network model of organization
    • Governments extending reach of enterprise planning and control activities
      • Beyond legal definitions
    • History of EDI and how it works
      • Conducting EDI: better than processing mountains of paper transactions
      • Internet providing inexpensive communications channel EDI lacked
    Electronic Commerce, Eighth Edition
  • 66. Summary (cont’d.)
    • Supply chain management techniques
      • Fueled by increase in communications capabilities offered by the Internet and the Web
    • Development of several different B2B electronic commerce models
      • Private stores
      • Customer portals
      • Private marketplaces
      • Industry consortia-sponsored marketplaces
        • Most successful today
    Electronic Commerce, Eighth Edition