Business-to-Business Strategies: From Electronic Data Interchange to Electronic Commerce

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Chapter 5

• Business-to-Business Strategies From Electronic
  Data Interchange to Electronic Commerce

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Learning Objectives

• In this lecture we will look at
• Strategies that businesses use to improve
  purchasing, logistics, and other support
  activities
• How businesses are moving electronic data
  interchange operations to the Internet
• Supply chain management and how businesses are
  using the Internet and Web technologies to
  improve it
• Electronic marketplaces and portals that make
  purchase-sale negotiations easier and more
  efficient

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Learning Objectives
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Purchasing, Logistics, and Support Activities

• Electronic commerce possesses the potential for
  cost reduction and business process improvement
  in purchasing, logistics, and support
  activities.
• An emerging characteristic of purchasing,
  logistics, and support activities is that they
  need to be flexible.

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Purchasing Activities

• Purchasing activities include
• Identifying vendors
• Evaluating vendors
• Selecting specific products
• Placing orders
• Resolving any issues that arise after receiving
  the ordered goods and services
• Procurement includes all purchasing activities,
  plus the monitoring of all elements of purchase
  transactions.
• By using a Web site to process orders, the
  vendors can save the cost of printing and
  shipping catalogs and the cost of handling
  telephone orders.

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Purchasing Activities

• Procurement includes all purchasing activities,
  plus the monitoring of all elements of purchase
  transactions.
• By using a Web site to process orders, the
  vendors in this market can save the cost of
  printing and shipping catalogs and the cost of
  handling telephone orders.

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Purchasing Activities

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Purchasing Activities

• Products that companies buy on a recurring basis
  are called maintenance, repair, and operating
  (MRO) supplies.
• Two of the largest MRO suppliers in the world are
  McMaster-Carr and W.W. Grainger.
• Office Depot and Staples are also examples in
  this area.

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Purchasing Activities

• Businesses make a distinction between direct and
  indirect materials.
• Direct materials are those materials that become
  part of the finished product.
• Indirect materials are all other materials that
  the company purchases.

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Logistic Activities

• The classic objective of logistics is to provide
  the right goods in the right quantities in the
  right place at the right time.
• Businesses have been increasing their use of
  information technology to achieve this
  objective.
• FedEx and UPS have freight tracking Web pages
  available to their customers.

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Support Activities

• Online Benefits is a firm that duplicates its
  clients human resource functions on a secure Web
  site that is accessible to clients employees.
• Support activities include
• Finance and administration
• Human resources
• Technology development

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Training and Knowledge Management

• One common activity that underlies multiple
  primary activities is training.
• Knowledge management is another support activity
  that intentionally collects, classifies, and
  disseminates information about a company, its
  products, and its processes.
• BroadVision has installed K-Net, or Knowledge
  Network, that organizes all the information
  sources that its employees use regularly in their
  jobs.

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E-Government

• Although governments do not typically sell
  products or services to customers, they do
  perform many functions for their stakeholders.
• Governments also perform business-like
  activities for example, they employ people, buy
  supplies from vendors, and distribute benefit
  payments of many kinds.
• The use of electronic commerce by governments and
  government agencies to perform these function is
  often called e-government.

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E-Government

• The U.S. governments Financial Management
  Service (FMS) opened its Web site, Pay.gov.
• FMS is responsible for receiving the governments
  tax, license, and other fee revenue.
• FMS is responsible for paying out Social Security
  benefits, veterans benefits, tax refunds, and
  other disbursements.
• State governments are also creating their own Web
  sites for conducting business and interacting
  with their stakeholders.

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E-Government
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Network Model of Economic Organization

• The trend in purchasing, logistics, and support
  activities is a shift away from hierarchical
  structures toward network structures.
• The Web is enabling this shift from hierarchical
  forms of economic organization to network forms.
• Highly specialized firms can now exist and trade
  services very efficiently on the Web.

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Network Model of Economic Organization

• The roots of Web technology for B2B transactions
  lie in electronic data interchange (EDI).
• These emerging networks of firms are more
  flexible and can respond to changes in the
  economic environment much more quickly than
  hierarchically structured businesses ever could.

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Electronic Data Interchange (EDI)

• EDI is a computer-to-computer transfer of
  business information between two businesses that
  uses a standard format.
• The two businesses that are exchanging
  information are called trading partners.
• Firms that exchange data in specific standard
  formats are said to be EDI-compatible.

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Electronic Data Interchange (EDI)

• The business information exchanged is usually
  transaction data however, it can include other
  information related to transactions, such as
  price quotes and order-status inquiries.
• Transaction data in B2B transactions includes the
  information usually on paper invoices, purchase
  orders, requests for quotations, bills of lading,
  and receiving reports.

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Early Business Information Interchange Efforts

• In the 1950s, information flows between
  businesses continued to be printed on paper.
• By the 1960s, businesses had begun exchanging
  transaction information on punched cards or
  magnetic tape.
• In 1968, a number of freight and shipping
  companies formed the Transportation Data
  Coordinating Committee (TDCC) to create the TDCC
  standard format.

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Emergence of Broader EDI Standards

• The American National Standards Institute (ANSI)
  has been the coordinating body for standards in
  the U.S. since 1918.
• In 1979, ANSI chartered a new committee to
  develop uniform EDI standards. This committee is
  called the Accredited Standards Committee X12
  (ASC X12).
• In 1987, the United Nations published its first
  standards under the title EDI for
  Administration, Commerce, and Transport (EDIFACT
  or UN/EDIFACT).

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Value-Added Networks

• EDI reduces paper flow and streamlines the
  interchange of information among departments
  within a company and between companies.
• Trading partners can implement the EDI network
  and EDI translation processes in several ways
  using either direct connection or indirect
  connection.

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Direct Connection Between Trading Partners

• Direct connection EDI requires each business in
  the network to operate its own on-site EDI
  translator computer.
• These EDI translator computers are then connected
  directly to each other using modems and dial-up
  phone lines or dedicated leased lines.

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Direct Connection Between Trading Partners

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Indirect Connection Between Trading Partners

• Instead of connecting directly to each of its
  trading partners, a company might decide to use
  the services of a value-added network.
• A value-added network (VAN) is a company that
  provides the communications equipment, software,
  and skills needed to receive, store, and forward
  electronic messages that contain EDI transaction
  sets.

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Indirect Connection Between Trading Partners

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VAN

• Companies that provide VAN services include
  General Electric Information Services, GPAS,
  Harbinger Corp., IBM Global Services, etc.
• Cost is an issue to VAN. Most VANs require an
  enrollment fee, a monthly maintenance fee, and a
  transaction fee.

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EDI on the Internet

• Trading partners who had been using EDI began to
  view the Internet as a potential replacement for
  the expensive leased lines.
• The major roadblock to conducting EDI over the
  Internet was security.
• As the TCP/IP was enhanced and SHTTP protocol was
  developed, businesses worried less about security
  issues.

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Open Architecture of the Internet

• A number of new firms, such as Commerce One and
  IPNet, have begun providing EDI services on the
  Internet.
• EDI on the Internet is also called open EDI
  because the Internet is an open architecture
  network.
• New tools, such as XML, are helping trading
  partners be even more flexible in exchanging
  detailed information.

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Financial EDI

• The EDI transaction sets that provide
  instructions to a trading partners bank are
  called financial EDI (FEDI).
• All banks have the ability to perform electronic
  funds transfers (EFTs).
• Most EFTs are handled through the Automated
  Clearing House (ACH).
• Security and reliability are issues of FEDI.

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Hybrid EDI Solutions

• Some firms are offering hybrid EDI solutions that
  use the Internet for part of the transaction.
• Bottomline Technologies payBase package is an
  example of hybrid EDI.
• Other hybrid solutions include EDI-HTML
  translation services.

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Supply Chain Management

• The part of an industry value chain that precedes
  a particular strategic business unit is often
  called a supply chain.
• A companys supply chain for a particular product
  or service includes all the activities undertaken
  by every predecessor in the value chain to
  design, produce, promote, market, deliver, and
  support each individual component.
• The purchasing department has traditionally been
  charged with buying all these components at the
  lowest price possible.

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Value Creation in the Supply Chain

• The process of taking an active role in working
  with suppliers to improve products and processes
  is called supply chain management (SCM).
• SCM was originally developed as a way to reduce
  costs.

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Value Creation in the Supply Chain

• Today, SCM is used to add value in the form of
  benefits to the ultimate consumer at the end of
  the supply chain.
• Supply chain members can reduce costs and
  increase the value of products or services to the
  ultimate customer.

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Internet Technologies in the Supply Chain

• Clear communications and quick responses to those
  communications are a key element of successful
  SCM.
• Technologies of the Internet and the Web can be
  very effective communication enhancers.
• Figure 5-11 lists the advantages of using
  Internet and Web technologies in SCM.

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Internet Technologies in the Supply Chain

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Increasing Efficiency in the Supply Chain

• Many companies are using Internet and Web
  technologies to manage supply chains in ways that
  yield increasing efficiency throughout the
  chain.
• In 1997, production and scheduling errors cost
  Boeing over 1.5 billion.
• Using EDI and Internet links, Boeing is working
  with suppliers so that they can provide the right
  part at the right time.
• Just in Time Delivery. Minimise stock
  inventories.

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Technology in the Supply Chain

• Dell Computer has also used technology-enabled
  SCM to give customers exactly what they want.
• Dell has been able to dramatically reduce the
  amount of inventory it must hold.
• Dell has also shared this information with
  members of its supply chain.

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Using Technology to Create an Ultimate Consumer
Orientation

• One of the main goals of supply chain management
  is to help each company in the chain focus on
  meeting the needs of the consumer who is at the
  end of the supply chain.
• Since Internet technologies are tools that
  improve communications at a very low cost, they
  are ideal aids for enhancing the creation of a
  highly coordinated and effective supply chain.

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Building and Maintaining Trust in the Supply
Chain

• The major issue that most companies must deal
  with in forming supply chain alliances is
  developing trust.
• Continual communication and information sharing
  are key elements in building trust.
• Vendors are finding that the Web gives them an
  opportunity to stay in contact with their
  customers more easily and less expensively.
• BUT Is there a down side?

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Electronic Marketplaces and Portals

• As the Web emerged in the mid-1990s, many
  business researchers and consultants believed
  that it would provide an opportunity for
  companies to establish information hubs for each
  major industry.
• These industry hubs would offer news, research
  reports, analyses of trends, and in-depth reports
  on companies in the industry.
• In addition to information, these hubs would
  offer marketplaces and auctions.

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Electronic Marketplaces and Portals

• Because these hubs would offer a doorway to the
  Internet for industry members and would be
  vertically integrated, these planned enterprises
  were called vertical portals or vortals.
• As with many electronic commerce predictions, the
  prediction that vertical portals would change
  business forever did not turn out to be exactly
  correct.

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Industry Marketplaces

• The first companies to launch industry hubs that
  followed the vertical portal model created
  trading exchanges that were focused on a
  particular industry.
• These vertical portals became known by various
  names including industry marketplaces,
  independent exchanges, or public marketplaces.

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Industry Marketplaces

• Ventro opened its first industry marketplace,
  Chemdex, in 1997 to trade bulk chemicals.
• Ventro also opened Promedix for specialty medical
  supplies, Amphire Solutions for food service,
  MarketMile for general business products and
  services, and a number of others.
• The home page of CheMatch.com, which competed
  directly with Ventro in the bulk chemicals
  market, appears in Figure 5-12.

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Industry Marketplaces
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Industry Marketplaces

• The number of new entrants into these businesses
  grew rapidly during the next two years.
• By mid-2000, there were more than 2200
  independent exchanges in a wide variety of
  industries.
• For example, there were 200 exchanges operating
  in the metals industry alone.

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Private Stores and Customer Portals

• As established companies in various industries
  watched new businesses open marketplaces, they
  became concerned that these independent operators
  would take control of transactions away from them
  in supply chains.
• Large companies that sell to many relatively
  small customers can exert great power in
  negotiating price, quality, and delivery terms
  with those customers.
• These sellers feared that industry marketplaces
  would dilute that power.

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Private Stores and Customer Portals

• Many of these large companies had already
  invested heavily in Web sites that they believed
  would better meet the needs of their major
  customers than any industry marketplace.
• For example, Cisco and Dell offer private stores
  for each of their major customers within their
  selling Web sites.
• Other companies, such as Grainger and Milacron,
  provide additional services for customers on
  their sites.

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Private Company Marketplaces

• Large companies that purchase from vendors that
  are relatively small can exert great power over
  those vendors in purchasing negotiations.
• These companies can invest in procurement
  software.
• Companies that implement e-procurement software
  usually require their suppliers to bid for their
  business.

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Private Company Marketplaces

• When industry marketplaces opened for business,
  these large companies were reluctant to abandon
  their investments in e-procurement software.
• These companies use their power in the supply
  chain to force suppliers to deal with them on
  their own terms rather than negotiate with
  suppliers in an industry marketplace.
• As marketplace software became more reliable,
  many of these companies developed private company
  marketplaces.

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Industry Consortia-Sponsored Marketplaces

• Some companies had relatively strong negotiating
  positions in their industry supply chain, but did
  not have enough power to force suppliers to deal
  with them through a private company marketplace.
• These companies began to form consortia to
  sponsor marketplaces.
• An industry consortia-sponsored marketplace is a
  marketplace formed by several large buyers in a
  particular industry. Such as automotive
  components.

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But is it all good news?http//www.covisint.com/
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Marketplaces
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Summary

• In this lecture we have looked at
• Strategies that businesses use to improve
  purchasing, logistics, and other support
  activities
• How businesses are moving electronic data
  interchange operations to the Internet
• Supply chain management and how businesses are
  using the Internet and Web technologies to
  improve it
• Electronic marketplaces and portals that make
  purchase-sale negotiations easier and more
  efficient