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Business-to-Business Activities: Improving Efficiency and Reducing Costs

CHAPTER 5

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Learning Objectives

In this chapter, you will learn:

How businesses use the Internet to improve purchasing, logistics, and other support activities

How the Internet facilitates implementation of outsourcing and offshoring business strategies

How electronic data interchange works and how it has evolved using Internet technologies

Learning Objectives (cont’d.)

What supply chain management is and how businesses are using Internet technologies to improve it

How the various types of online business marketplaces operate to make B2B transactions easier and more efficient

Introduction

After a year of working in Ghana teaching English, Leila Janah started Samasource in 2008

Links workers in developing countries with companies who need work done

Has lifted more than 6,500 African, Asian and Haitian workers above the poverty line

Cost-effective for businesses

Builds worker knowledge and skills in less developed countries and gives low-income workers in developed countries similar opportunities

Use of the Internet to do good around the world

Outsourcing and Offshoring

Outsourcing is using other organizations to perform specific activities

Typically used for manufacturing

Offshoring is outsourcing done by organizations in other countries

Business process offshoring includes purchasing, research and development, record keeping, information management

Impact sourcing (smart sourcing) is offshoring done by or through not-for-profit organizations

Purchasing Activities

Identify and evaluate vendors, select specific products, place orders, resolve any issues after receipt of goods or services

Supply chain is the 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 buys components at lowest price possible via bidding

Procurement includes all purchasing activities, monitoring all purchase transaction elements and managing and developing supplier relationships

Also called supply chain management

Procurement staff have high product knowledge to identify and evaluate appropriate suppliers

Sourcing is identifying suppliers and determining qualifications

e-sourcing is the use of Internet technologies in sourcing activities

Purchasing Activities (cont’d.)

Business purchasing process is more complex than most consumer purchasing processes

Spend is the total yearly dollar amount for goods and services purchased

Managing spend is an important function and can be a key component in overall profitability

Institute for Supply Management (ISM) is the main organization for procurement professionals

Purchasing Activities (cont’d.)

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

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 are all other materials company purchases

Includes factory supplies and replacement parts for machinery

Direct vs. Indirect Materials Purchasing (cont’d.)

Maintenance, repair, and operating (MRO) supplies are indirect materials purchased on a recurring basis

Standard items (commodities) with price as main criterion

Purchasing cards (p-cards) allow managers to make multiple small purchases with cost-tracking information sent to procurement

Leading suppliers

MRO: McMaster-Carr, W.W. Grainger,

Office Depot, Staples, Digi-Key, Newark.com

Logistics Activities

Classic objective is to provide the right goods in the right quantities in the right place at the right time

Managing materials, supplies and finished goods

Web and the Internet providing increasing number of opportunities to better manage activities

Third-party logistics (3PL) provider operates a customer’s materials movement activities

Marriage of GPS and portable computing with the Internet is an example of second-wave e-commerce

Third-wave e-commerce supported by smart phones

Finance and administration, human resources (HR), technology development

Human resources, payroll, retirement plan servicing often outsourced by small/midsized companies

Common support activity is training

May be handled by HR or individual departments

Knowledge management is the intentional collection and classification; dissemination of information about a company and its products and processes

Business Process Support Activities

FIGURE 5-2 Categories of support activities

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E-Government

Use of Internet technologies by governments and government agencies

Enhances functions performed for stakeholders and businesslike activity operations

U.S. government Financial Management Service (FMS) uses Pay.gov to handle activity

Bureau of Public Debt: TreasuryDirect site

Also used in other countries

U.S. states and cities usually have sites

Information about laws and regulations, licenses, jobs, tourism and more

FIGURE 5-3 State of California portal site

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Network Model of Economic Organization in Purchasing: Supply Webs

Trend in purchasing, logistics, and support activities is the shift from hierarchical structures toward network structures

Procurement departments being given new tools to negotiate and possibly form strategic alliances

Supply Web is replacing the term “supply chain”

Parallel lines interconnect to form a Web or network configuration

Roots of Web technology for B2B transactions lie in a hierarchically structured approach to inter-firm information transfer: electronic data exchange

Electronic Data Interchange

Computer-to-computer business information transfer using a standard format

Businesses exchanging info are trading partners

EDI compatible firms exchange data in specific standard formats

Often transaction data but can include other information related to transactions

Most B2B e-commerce adapted from EDI or based on EDI principles

Dominant technology for electronic B2B transactions

Early Business Information Interchange Efforts

The need to create formal business transaction records began in the late 1800s and early 1900s

Companies were using computers for recording internal transactions by the 1950s

Information flows between companies on paper which was slow, inefficient, redundant and unreliable

In the 1960s businesses with volume transactions exchanged info on punched cards or magnetic tape

In the 1960s and 1970s technologies improved and intercompany information could be transferred over telephone lines

Early Business Information Interchange Efforts (cont’d.)

Information transfer agreements between trading partners increased efficiency but not ideal

Incompatible data translation limited participation

Freight and shipping companies joined together in 1968 to create a 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

Emergence of Broader Standards: The Birth of EDI

American National Standards Institute (ANSI) is the coordinating body for standards in the U.S.

Accredited Standards Committee X12 (ASC X12) develops and maintains EDI standards

Data Interchange Standards Association (DISA) is the administrative body coordinating ASC X12 activities

Transaction sets are names of the formats for specific business data interchanges

EDI for Administration, Commerce, and Transport (EDIFACT, or UN/EDIFACT)

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

Paper-Based Purchasing Process

Buyer and vendor not using integrated software for business processes so 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

FIGURE 5-5 Information flows in a paper-based purchasing process

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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

EDI Purchasing Process

FIGURE 5-6 Information flows in an EDI purchasing process

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Value-Added Networks

Trading partners can implement the EDI network and EDI translation processes in several ways

Each way uses one of two basic approaches

Direct connection EDI requires each business to operate its own on-site EDI translator computer

Connected directly to each other using leased lines

Few companies use direct connection EDI because dedicated leased lines are expensive

FIGURE 5-7 Direct connection EDI

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Company may use a value-added network (VAN)

Receives, stores, forwards electronic messages containing EDI transaction sets

With indirect connection EDI trading partners use VAN to retrieve EDI-formatted messages

Must install compatible EDI translator software

Trading partners pass messages through the VAN instead of directly connecting computers

Value-Added Networks (cont’d.)

FIGURE 5-8 Indirect connection EDI through a VAN

Advantages of a VAN

Need to support one communications protocol and the VAN provides translation between different transaction sets

VAN performs automatic compliance checking and records message activity in an audit log

Helps establish nonrepudiation: ability to establish that a particular transaction actually occurred

Cost used to be a disadvantage, now much lower

Internet presents low-cost communications medium used by VAN services

Value-Added Networks (cont’d.)

EDI on the Internet called Internet EDI, Web EDI, or open EDI

Internet is open architect network

EDIINT (Electronic Data Interchange-Internet Integration, EDI-INT) is the 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 which helps establish repudiation

Value-Added Networks (cont’d.)

EDI Payments

EDI transaction sets provide instructions to trading partner’s bank

Negotiable instruments, the electronic equivalent of checks

Electronic funds transfers (EFTs) is the movement of money from one bank account to another

Executed using an Automated clearing house (ACH) system which is used by service banks to manage accounts with each other

Operated by U.S. Federal Reserve Banks, private ACHs

Supply Chain Management Using Internet Technologies

Supply chain management is the job of managing integration of company supply management and logistics activities

Across multiple participants in a particular product’s supply chain

Ultimate goal is to achieve higher-quality or lower-cost product at the end of the chain

Value Creation in the Supply Chain

Engaging suppliers in cooperative relationships can lead to better, faster, cheaper service to customers

Company goes beyond its limits and creates a new network form among members of the supply chain

Use of technology to improve operational efficiency is supply chain competition

Can help implement management techniques

Just-in-time reduces inventory and lean production focus on eliminating waste and unnecessary processes

Originally developed as a way to reduce cost

Now adds benefits to the ultimate consumer

Requires establishment of long-term relationship with a small number of capable tier-one suppliers

Tier-one suppliers develop relationships with tier-two suppliers who provide components and raw materials

Tier-three suppliers provide components and raw materials to tier-two suppliers

Key element is trust among the supply alliance

Buyers expect annual price reductions, quality improvements from suppliers at each stage

Ideally each level of supplier can share the benefits of reduced cost and more efficient operations

Value Creation in the Supply Chain (cont’d.)

Key coordination effort is a consistent production strategy adopted by all supply chain participants

How competitive advantage is achieved, such as efficient processing or market-responsive flexibility

Clear communications and quick response are key elements of successful supply chain management

Adaptive supply chain exists when company uses technology to quick respond to change in market demand and supplier conditions

Leads to higher efficiency, lower costs and greater profits

Value Creation in the Supply Chain (cont’d.)

FIGURE 5-9 Advantages of using Internet technologies in supply chain management

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Increasing Supply Chain Efficiency and Cooperation

Using Internet and Web technologies to manage supply chains can yield increases in efficiency and cooperation throughout the chain

Increase process speed, reduce costs, coordinate design effort and increase manufacturing flexibility

Allows response to changes in quantity and nature of ultimate consumer demand

Using Internet technologies, as Boeing and other firms do, to integrate the design, development, construction, testing, and refinement of products is called collaborative commerce

Materials-Tracking Technologies

Challenging task to track materials as they move from one company to another or within a company

Optical scanners and bar codes track movement of materials and integration with EDI is now prevalent

Manages inventory flows and forecasts materials needs across the supply chain

Real-time location systems (RTLS) are bar code tracking system used by fulfillment centers

Second wave of electronic commerce includes new types of tracking integrated with Internet-based materials-tracking systems

© © 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

FIGURE 5-10 Shipping label with bar-coded elements from EDI transaction set 856, Advance Ship Notification

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Radio Frequency Identification Devices (RFIDs)

Small chips using radio transmissions track inventory quicker and more accurately than bar codes

Active RFIDs have their own power supply

Passive RFID tags are inexpensive and small and do not need a power source

Goal is to help reduce lost sales from stockouts

Industry observers believe RFID tagging in retail will become widespread starting in 2017 when many retailers plans to have them in all locations

Materials-Tracking Technologies (cont’d.)

FIGURE 5-11 Passive RFID Tag

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FIGURE 5-12 Key features of bar code, passive RFID, and active RFID technologies

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Creating an Ultimate Consumer Orientation in the Supply Chain

One main goal of supply chain management is to help each company focus on meeting needs of consumer at the end of the supply chain

Ultimate consumer orientation 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

Allowed dealer access to tire specifications, inventory status, and promotional information

Saved money for Michelin and gave dealers better service making them more likely to recommend tires

Building and Maintaining Trust in the Supply Chain

Major issue in forming supply chain alliances is developing trust

Key elements are continual communication and information sharing

Internet and the Web provide excellent ways to communicate and share information and offer new avenues for building trust

Provides easy, inexpensive contact with customers

Gives buyers instant access to sales representatives

Provides comprehensive information quickly

Online Business Marketplaces and Portals

Vertical portals are 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

Independent Industry Marketplaces

First vertical portals were 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

Independent Industry Marketplaces (cont’d.)

By mid-2000s, more than 2200 independent exchanges

Today fewer than 100 industry marketplaces still operating due to lack of profitability

By 2010, various forms of B2B marketplace models gradually replaced independent marketplaces

In 2012 Amazon.com launched AmazonSupply that is now part of Amazon Business Marketplace

Google followed with Google Shopping for Suppliers, which was later folded into its Google Shopping site

Private Stores and Customer Portals

Large established sellers feared industry marketplaces would dilute their negotiating power

Many had already invested heavily in Web sites they believed would meet customer needs better

Password protected private stores for major customers with price reductions on some products

Customer portal sites offer private stores along with other services that would be needlessly duplicated in sellers participated in industry marketplaces

Private Company Marketplaces

Large companies purchasing from relatively small vendors exert power in purchasing negotiations

E-procurement software allows companies to manage purchasing function through Web interface

Automates authorizations, other steps and usually includes marketplace functions

When industry marketplaces opened for business, these large companies were reluctant to abandon their e-procurement software investment

Force suppliers to deal with them on their terms rather than negotiate with industry marketplace

Private Company Marketplaces (cont’d.)

Private company marketplace is a marketplace providing auctions, request for quote postings, other features similar to those of e-procurement software

Many have expanded to include functions allowing supply chain participants to manage multiple functions

Manufacturing, tier-one and tier-two suppliers, distribution centers, transportation, orders, invoicing and payment

Expanded arrangements are called private industrial networks or private trading exchanges

Industry Consortia-Sponsored Marketplaces

Some companies have strong negotiating positions but not enough power to force suppliers to deal with them through a private company marketplace

Industry consortia-sponsored marketplace is a marketplace formed by several large buyers in a particular industry

Characteristics of five general marketplace forms in B2B electronic commerce today

Shown in Figure 5-13

FIGURE 5-13 Characteristics of B2B marketplaces

Adapted from: Raisch, W. 2001. The eMarketplce, p. 225

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