ELEVENTH EDITION

ELECTRONIC
COMMERCE
GARY P. SCHNEIDER

Chapter 5

Business-to-Business Activities:
Improving Efficiency and
Reducing Costs
© Cengage Learning 2015
 Learning Objectives

In this chapter, you will learn:

• How businesses use the Internet to improve
purchasing, logistics, and other support activities
• About electronic data interchange and how it works
• How businesses have moved some of their
electronic data interchange operations to the
Internet

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 Learning Objectives (cont’d.)

• What supply chain management is and how

businesses are using Internet technologies to
improve it
• About electronic marketplaces and portals that make
purchase-sale negotiations easier and more efficient

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 Introduction

• Case study: Samasource

– Begun in 2008 by Leila Janah
• After a year of working in Ghana teaching English
– Links workers in developing countries with companies
who need work done
• Computer-based manual work
– Has lifted workers above the poverty line
• Haiti, Africa, and Asia
– Cost-effective for businesses in developed world
– Builds worker knowledge and skills

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 Purchasing, Logistics, and
Business Support Processes
• Potential value of cost reductions and business
improvements in these areas is very great

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 Outsourcing and Offshoring

• Outsourcing
– Using other organizations to perform specific activities
• Typically used for manufacturing
• Offshoring
– Outsourcing done by organizations in other countries
• Business process offshoring
– Purchasing, research and development, record
keeping, information management
• Impact sourcing (smart sourcing)
– Offshoring done by or through not-for-profit
organizations
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 Purchasing Activities

• Identify and evaluate vendors, select specific

products, place orders, resolve any issues after
receipt of goods or services
• 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

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 Purchasing Activities (cont’d.)

• Traditionally
– Purchasing department buys components at lowest
price possible
– Bidding process focus: individual component cost
• Procurement includes:
– All purchasing activities
– Monitoring all purchase transaction elements
– Managing and developing supplier relationships

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 Purchasing Activities (cont’d.)

• Procurement is also called supply management

• Procurement staff have high product knowledge
– Identify and evaluate appropriate suppliers
• Sourcing procurement activity
– Identifying suppliers; determining qualifications
• e-sourcing
– Using Internet technologies in sourcing activities

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 Purchasing Activities (cont’d.)

• Business purchasing process

– More complex than most consumer purchasing
processes
• Spend
– Total yearly dollar amount for goods and services
purchased
• Institute for Supply Management (ISM)
– Main organization for procurement professionals

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 FIGURE 5-1 Steps in a typical
business purchasing process
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 Direct vs. Indirect Materials Purchasing

• Direct materials
– 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 (spot) market
• If demand exceeds contract purchasing estimates
• Indirect materials
– All other materials company purchases

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 Direct vs. Indirect Materials Purchasing
(cont’d.)
• Maintenance, repair, and operating (MRO) supplies
– Indirect materials purchased on a recurring basis
– Standard items (commodities) with price as main
criterion
• Purchasing cards (p-cards)
– Managers can make multiple small purchases
– Cost-tracking information sent to procurement
• Leading suppliers
– MRO: McMaster-Carr, W.W. Grainger,
– Office Depot, Staples, Digi-Key, Newark.com

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 Logistics Activities

• Classic objective
– Provide the right goods in the right quantities in the
right place at the right time
• Important support activity for sales and purchasing
• Includes managing the movements of:
– Inbound materials and supplies
– Outbound finished goods and services
• Web and the Internet
– Providing increasing number of opportunities to better
manage activities

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 Logistics Activities (cont’d.)

• 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
• Excellent example of second-wave e-commerce
– Marriage of GPS and portable computing
technologies with the Internet (Examples: Fed Ex and
UPS)
• Third-wave e-commerce supported by smart phones
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 Business Process Support Activities

• General categories
– Finance and administration, human resources,
technology development

FIGURE 5-2 Categories of support activities

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 Business Process
Support Activities (cont’d.)
• Human resources, payroll functions, retirement plan
servicing often outsourced by small/midsized
companies
• Common support activity: training
– Putting training materials on company intranet
– Distribute materials to many different sales offices
– Coordinate materials in corporate headquarters
• Knowledge management
– Intentional collection and classification; dissemination
of information about a company and its products and
processes (Examples: Ericsson, KMWorld)
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 E-Government

• E-Government
– Use of Internet technologies by governments and
government agencies
• Enhances functions performed for stakeholders
• Enhances businesslike activity operations
• U.S. government examples
– Financial Management Service (FMS): Pay.gov site
– Bureau of Public Debt: TreasuryDirect site

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 E-Government (cont’d.)

• Examples outside the U.S.

– United Kingdom’s Department for Work and Pensions
Web site
– Singapore Government Online site
• State government sites
– California’s one-stop portal site: CA.GOV
– Similar sites for most other states
• Examples in local government
– Large cities: Minneapolis, New Orleans sites
– Small cities: Cheviot, Ohio Web site

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Network Model of Economic Organization
in Purchasing: Supply Webs
• Trend in purchasing, logistics, and support activities
– Shift from hierarchical structures
• Toward network structures
– Procurement departments’ new tools (technology)
• To negotiate with suppliers and form strategic alliances
• Network model of economic organization
– Other firms perform various support activities
• Supply Web: term replacing “supply chain”
– Parallel lines interconnect to form a Web or network
configuration

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 Electronic Data Interchange

• Computer-to-computer business information transfer

– Between two businesses using a standard format
• Trading partners
– Two businesses exchanging information
• EDI compatible
– Firms exchanging data in specific standard formats
• Reasons to be familiar with EDI
– Most B2B e-commerce adapted from EDI or based on
EDI principles
– Dominant technology for electronic B2B transactions

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 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
• Efforts increased efficiency, reduced errors
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 Early Business Information
Interchange Efforts (cont’d.)
• Issue: incompatible data translation programs
• 1968: freight, shipping companies joined together
– Created standardized information set
– Used a computer file
• Transmittable to any freight company adopting the
standard
• Benefits limited to members of industries that
created standard-setting groups
• Full realization of EDI economies and efficiencies
– Required standards for all companies in all industries

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 Emergence of Broader Standards:
The Birth of EDI
• American National Standards Institute (ANSI)
– United States coordinating body for standards
– Accredited Standards Committee X12 (ASC X12)
• Develops and maintains EDI standards
– Data Interchange Standards Association (DISA)
• Administrative body coordinating ASC X12 activities
– Transaction sets: names of the formats for specific
business data interchanges
• EDI for Administration, Commerce, and Transport
(EDIFACT, or UN/EDIFACT)

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 FIGURE 5-4 Commonly used EDI transaction sets
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 How EDI Works

• Basic idea: straightforward

• Implementation: complicated
• Example:
– Company replacing metal-cutting machine
• Steps to purchase using paper-based system
• Steps to purchase using EDI

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 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, fax
– Information flows shown in Figure 5-5

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 FIGURE 5-5 Information flows in a paper-based purchasing
process
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 How EDI Works (cont’d.)

• EDI purchasing process

– Mail service replaced with EDI network data
communications
– Paper flows within buyer’s and vendor’s organizations
replaced with computers
• Running EDI translation software
– Information flows shown in Figure 5-6

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 FIGURE 5-6 Information flows in an EDI purchasing process
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 Value-Added Networks

• EDI network key elements

– EDI network, two EDI translator computers
• Direct connection EDI
– Businesses operate on-site EDI translator computers
• Connected directly to each
– Few companies use direct connection EDI
• Dedicated leased lines: expensive

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 FIGURE 5-7 Direct connection EDI
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 Value-Added Networks (cont’d.)

• 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
• Companies providing VAN services
– CovalentWorks, OpenText, Kleinschmidt, and
Promethean Software Services

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 FIGURE 5-8 Indirect connection EDI through a VAN
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 Value-Added Networks (cont’d.)

• Advantages
– Support one communications protocol (VAN)
– VAN provides translation between different
transaction sets
– VAN performs automatic compliance checking
– VAN records message activity in audit log
• Helps establish nonrepudiation: ability to establish that
a particular transaction actually occurred

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 Value-Added Networks (cont’d.)

• Disadvantages: In the past, cost (fees)

• Today, affordable even for small companies
– Internet presents low-cost communications medium
used by VAN services
• EDI on the Internet: Internet EDI, Web EDI, open
EDI (Internet is open architect network)

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 Value-Added Networks (cont’d.)

• EDIINT (Electronic Data Interchange-Internet

Integration, EDI-INT)
– Most common protocol for Internet EDI transaction
sets
• EDI exchanges encoded using AS2 (Applicability
Statement 2) or AS3 (Applicability Statement 3)
– Secure electronic receipts returned to senders for
every transaction
– Helps establish repudiation

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 EDI Payments

• EDI 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
• Used by service banks to manage accounts with each
other
• Operated by U.S. Federal Reserve Banks, private
ACHs
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 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

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 Value Creation in the Supply Chain

• Firms engaging in supply chain management

– Reach beyond limits of their own organization’s
hierarchical structure
– Create new network form of organization among
members of supply chain
• Originally developed to reduce costs
• Today: value added in the form of benefits to the
ultimate consumer
– Requires more holistic view of the entire supply chain

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 Value Creation in the Supply Chain
(cont’d.)
• Tier-one suppliers
– Small number of very capable suppliers
– Original business establishes a long-term relationship
• Tier-two suppliers
– Larger number of suppliers who tier-one suppliers
develop long-term relationships with for components,
raw materials
• Tier-three suppliers
– Next level of suppliers
• Key element: trust

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 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 from suppliers

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 Value Creation in the Supply Chain
(cont’d.)
• Supply chain council
– Major purchasing group
• Production strategies
– Efficient processing
– Market-responsive flexibility
• Successful supply chain management key elements
– Clear communications
– Quick responses to those communications
• Internet and Web technologies
– Effective communications enhancers
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 FIGURE 5-9 Advantages of using Internet technologies in supply chain
management
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 Increasing Supply Chain Efficiencies

• Internet and Web technologies managing supply

chains can:
– Yield increases in efficiency throughout the chain
– Increase process speed, reduce costs, increase
manufacturing flexibility
• Allows response to changes in quantity and nature of
ultimate consumer demand
• Example: Boeing
– Invested in new information systems increasing
production efficiency of the supply chain

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 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
• To give customers exactly what they want
• To reduce inventory amount (three weeks to two hours)
– Top suppliers have access to secure Web site
• Tier-one suppliers can better plan their production
– Dell accesses suppliers’ information

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 Materials-Tracking Technologies

• Troublesome task
– Tracking materials as they move from one company
to another
• Optical scanners and bar codes
– Help track movement of materials
• Integration of bar coding and EDI: prevalent
• Second wave of electronic commerce
– Integration of new types of tracking into
Internet-based materials-tracking systems

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 FIGURE 5-10 Shipping label with bar-coded elements from EDI
transaction set 856, Advance Ship Notification
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 Materials-Tracking
Technologies (cont’d.)
• Real-time location systems (RTLS)
– Bar code tracking system
– Used by fulfillment centers
• Radio Frequency Identification Devices (RFIDs)
– Small chips using radio transmissions to track
inventory
– RFIDs read much more quickly, higher degree of
accuracy than bar codes
– Important development: passive RFID tag
• Made cheaply and in very small sizes
• No power supply required
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 Materials-Tracking
Technologies (cont’d.)
• Example: 2003 (Wal-Mart)
– Tested RFID tag use on merchandise for inventory
tracking and control
– Initiated plan to have all suppliers install RFID tags in
shipped goods
– Reduced incidence of stockouts
• Retailer loses sales because it does not have specific
goods on its shelves
• Prediction: RFID tagging will not occur in most
industries until 2016 or later
– Costs continue to drop
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 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 online business initiative
• BIB NET extranet
• Allowed dealer access to tire specifications, inventory
status, and promotional information
• Simple-to-use Web browser interface
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 Building and Maintaining Trust in
the Supply Chain
• Major issue: developing trust
• Key elements
– Continual communication and information sharing
• Internet and the Web
– Provide excellent ways to communicate and share
information
– Offer new avenues for building trust
• Maintain contact with their customers
• Afford buyers instant access to their sales
representatives
• Provide comprehensive information quickly
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 Electronic Marketplaces and
Portals
• Vertical portals (vortals)
– Industry-focused hubs
• Offer marketplaces and auctions for contact and
business transactions
• Doorway (or portal) to the Internet for industry
members
• Vertically integrated: each hub services just one
industry

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 Independent Industry Marketplaces

• First vertical portals

– 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
• Ventro opened industry marketplace Chemdex
– Trade in bulk chemicals

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 Independent Industry Marketplaces
(cont’d.)
• By mid-2000: more than 2200 independent
exchanges
• By 2010: fewer than 100 industry marketplaces still
operating
– Due to lack of profitability
• Recent marketplace launches
– AmazonSupply, Google Shopping for Supplies
• B2B marketplace models gradually replaced
independent marketplaces

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 Private Stores and Customer Portals

• Large established sellers feared industry

marketplaces diluting power
• Large sellers have customer portal B2B sites
– Offer private stores along with services
– B2B private store has password-protected entrance
• Offers negotiated price reductions on limited product
selection
• If large established sellers participated in industry
marketplaces
– Services would have been needlessly duplicated

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 Private Company Marketplaces

• Large companies purchasing from relatively small

vendors
– Exert power in purchasing negotiations
– Using e-procurement software
• Allows companies to manage purchasing function
through Web interface
• Automates authorizations, other steps
• Includes marketplace functions

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 Private Company Marketplaces
(cont’d.)
• Larger companies
– Reluctant to abandon investments in e-procurement
software
– Make software work with industry marketplaces’
software
• Private company marketplace
– Marketplace providing auctions, request for quote
postings, other features
• For companies that want to operate their own
marketplaces

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 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 by several large buyers in a
particular industry
• Characteristics of five general marketplace forms in
B2B electronic commerce today
– Shown in Figure 5-12

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 FIGURE 5-12 Characteristics of B2B marketplaces
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