Strategies for Purchasing

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Chapter 9

• Strategies for Purchasing
• and Support Activities

Electronic Commerce
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Objectives

• Improving purchasing, logistics, and other
  support activities
• Creating network organizations that extend beyond
  traditional limits
• EDI, how it works, and how it is moving to the
  Internet
• Internet improvements to supply chain management
• Software packages for business-to-business
  e-commerce and supply chain management

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Purchasing, Logistics, andSupport Activities

• Purchasing activities
• Identifying and evaluating vendors
• Selecting specific products
• Placing orders
• Resolving issues after receiving the ordered
  goods or services
• Specialized Web sites exist that offer high
  levels of product knowledge

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Neoforma Product Sourcing Web Site Figure 9-1
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Logistic Activities

• Providing the right goods in the right quantities
  in the right place at the right time
• Managing the inbound movements of materials and
  supplies and the outbound movements of finished
  goods and services

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Support Activities

• Includes the general categories of
• Finance and administration
• Making payments, processing customer payments,
  budgeting and planning
• Human resources
• Hiring, training, evaluating employees, benefits
  administration
• Technology development
• Networking, published research, connecting
  outside sources of RD services

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DigitalWork Small Business Support Activities
Page Figure 9-2
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Electronic Data Interchange

• The computer-to-computer transfer of business
  information between two businesses that uses a
  standard format
• In the 1950s, companies began to use computers to
  store and process internal data and information
• By the 1960s, companies began exchanging
  transaction information with each other on
  punched cards or magnetic tape

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Electronic Data Interchange

• Eventually, trading partners transferred data
  over telephone lines instead of shipping punched
  cards or tapes to each other
• In 1968, the Transportation Data Coordination
  Committee was formed, charged with exploring ways
  to reduce the paperwork burden
• Since 1918, the American National Standards
  Institute (ANSI) became the coordinating body for
  standards in the United States

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Electronic Data Interchange

• In 1979, ANSI charted the Accredited Standards
  Committee X12 (ASC X12) to develop EDI standards
• The current ASC X12 standard includes
  specifications for several hundred transaction
  sets (the names of the formats for specific
  business data interchanges)

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Commonly Used ASC X12 Transaction Sets Figure 9-3
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Electronic Data Interchange

• In the mid-1980s, the United Nations Economic
  Commission for Europe built a common set of EDI
  standards based on the American model
• In 1987, the EDI for Administration, Commerce,
  and Transport (EDIFACT, or UN/EDIFACT) was
  developed

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Commonly Used UN/EDIFACT Transaction Sets Figure
9-4
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Paper-Based Purchasing Process

• Paper-based purchasing process results in a paper
  document created at each information processing
  step that must be delivered to the department
  handling the next step
• Paper-based transfers between buyer and vendor
  can be delivered via mail, courier, or fax

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The Paper-Based Purchasing Process Figure 9-5
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EDI Purchasing Process

• Mail service is replaced with the data
  communications of an EDI network
• Flows of paper have been replaced with computers
  running EDI translation software

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The EDI Purchasing Process Figure 9-6
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Value Added Networks

• Trading partners can implement the EDI network
  and EDI translation process in several ways, each
  using one of two basic approaches
• Direct connection
• Indirect connection

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Direct Connection BetweenTrading Partners

• Requires each business in the network to operate
  its own on-site EDI translator computer
• EDI translator computers are connected to each
  other using modems or dedicated leased lines
• Trading partners using different protocols can
  make direct connection options difficult to
  implement

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Indirect Connection BetweenTrading Partners

• Companies use the services of a value-added
  network (VAN)
• The VAN provides communications equipment,
  software, and skills needed to receive, store,
  and forward electronic messages containing EDI
  transaction sets
• The VAN often supplies the software needed to
  connect to its services

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Direct Connection EDI vs. Indirect Connection
EDI through a VAN Figure 9-7
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Advantages of Using aValue Added Network

• Users support only one communications protocol
• The VAN records activity in an audit log,
  providing an independent record of transactions
• The VAN can provide translation between different
  transaction sets
• The VAN can perform automatic compliance checks
  to ensure the transaction set is in the specified
  EDI format

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Disadvantages of Using aValue Added Network

• Most VANs require an enrollment fee, a monthly
  maintenance fee, and a transaction fee
• VANs can be cumbersome and expensive for
  companies with trading partners using different
  VANs
• Inter-VAN transfers do not always provide a clear
  audit trail

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EDI on the Internet

• Viewed as a replacement for expensive leased
  lines and dial-up connections
• Small companies can get back in the game of
  selling to large customers the demanded EDI
  capabilities of their suppliers
• Concerns about security and lack of audit logs
  continue to be a major roadblock

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Open Architecture of the Internet

• The open architecture of the Internet allows
  trading partners virtually unlimited
  opportunities to customize their information
  interchanges

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Open Architecture of the Internet

• A new ASC X12 Task Group has been charged with
  several broad objectives
• Converting the ASC X12 EDI data elements and
  transaction set structures to XML, retaining
  one-to-one mapping
• Developing XML data element names consistent with
  existing ASC X12 transaction sets
• Meeting the needs of app-to-app and human-to-app
  interfaces

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Financial EDI

• A trading partners bank is called a Financial
  EDI (FEDI)
• Many trading partners are reluctant to send FEDI
  transfers for large sums of money over the
  Internet
• Companies may opt to establish an indirect
  connection through a VAN for the added security
  for FEDI transaction

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Hybrid EDI Solutions

• Utilize the Internet for only part of an EDI
  transaction, ones where the transactions are not
  considered a negotiable instrument
• Bottomline Technologies PayBase package allows
  hybrid EDI
• NetTransact provides an interface for smaller
  businesses connected to the Internet, but do not
  have EDI capability

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NetTransact EDI-HTML Conversion Service Figure 9-8
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Supply Chain Management

• Money can be saved and product quality can be
  improved through active negotiations with
  suppliers
• Supply chain management is used to establish
  long-term relationships (supply alliances) with a
  small number of very capable suppliers (tier one
  suppliers)

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Supply Chain Management

• By working together, supply chain members can
  reduce costs and increase the value of the
  product or service to the ultimate customer
• With clear communication along the supply chain,
  each participant can know the demands of the
  ultimate customer and plot a strategy to meet
  those demands

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Technology in the Supply Chain

• The Internet and the Web can be very effective
  communication enhancers
• Software can allow members to review past
  performance, monitor current performance, and
  predict future production levels of products

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Advantages of Internet and Web Technologies in
Supply Chain Management Figure 9-9
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Software for Purchasing, Logistics, and Support
Activities

• Enterprise resource planning (ERP) software is
  designed to integrate manufacturing, finance,
  distribution, and other internal business
  functions into one information system
• Major ERP vendors include Baan, J.D.
  Edwards,Oracle, PeopleSoft, and SAP

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Business-to-BusinessCommerce Software

• Designed to help companies build Web sites that
  host catalog and other commercial sales
  activities
• Major software packages include SellerXpert,
  ECXpert, LiveCommerce-Transact, Net.Commerce,
  Site Server, and Ariba

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Supply Chain Management Software

• Includes demand forecasting tools and planning
  capabilities to allow all supply chain members to
  coordinate their activities and adjust their
  production levels
• Two major firms offer supply chain management
  software
• i2 Technologies RHYTHM
• Manugistics