E-Commerce in action

1. E-Commerce in action Business to Business (B2B)

2. Before the Internet B2B transactions were simply called ‘trade’ or the ‘procurement process’. • B2B commerce is all computer-assisted inter-firm trade. • B2B e-commerce is that portion which uses the Internet to assist in buying and selling. • The Internet is just the latest digital technology support for firms. • Many entrepreneurs and venture capitalists failed to understand this. • The evolution of B2B trade causing thousands of dot.coms to fail. • B2B trade in the USA was forecast to reach >$20 trillion in 2010.

3. B2B – brief history • 1970s – automated order entry systems were developed which • generated digital orders to suppliers from firms’ inventory database. • 1980s – EDI (Electronic Data Interchange) was a communications standard for procurement (invoices, purchase orders, shipping bills, settlement information, etc.). • 1990s – electronic storefronts appeared which made online catalogues available to the general public. • Late 1990s – net market places bringing 100s of suppliers with electronic catalogues together with potentially 1000s of buyers. • Late 1990s again – private industrial networks as natural extensions of EDI systems and the existing close relationships between firms and suppliers.

4. The procurement process This process is the sequence of connected transactions involved in buying and selling. Typically there are seven stages :- • searching for suppliers for specific products; • qualifying the sellers and their products; • negotiating prices, payment terms, quality requirements etc. and scheduling delivery; • issuing purchase orders; • shipping the product; • sending invoices; • payment – verify goods and prices and then pay.

5. B2B potential benefits • lower admin costs; • lower search costs for buyers; • reduce inventory costs by increasing competition; • price transparency; • lower transaction costs by automating part of the process and some paperwork; • increase production flexibility by “just in time” systems.

6. Potential benefits (cont) • improve quality of products by increasing cooperation between buyers and sellers; • decrease product cycle time by sharing designs and production schedules; • increase opportunities for collaborating; • create greater price transparency, i.e. the ability to see the actual buy and sell prices.

7. B2B Different industries move at different speeds. The following is a ballpark % of trade done on the Internet 60% - computer and telecomms 50% - aerospace and defence 42% - motor vehicles and parts 35% - metals and mining 32% - chemicals.

8. B2B – legacy systems • mainframe and minicomputersystems used to manage key business processes i.e. manufacturing, logistics, financial and human resources. • MRP – Material Requirements Planning: to predict, track and manage all the constituent parts of complex manufactured goods; • a BOM (bill of materials) is generated plus a production schedule, both of which are used to produce purchase orders; • ERP – Enterprise Resource Planning – systems are more sophisticated MRP systems, including human resource and financial components, but were not designed to coordinate the flow of information among a large set of supplier firms.

9. EDI (i) • EDI = Electronic Data Interchange • B2B has its roots in EDI in the 1980s • a broadly defined communications protocol for exchanging documents among computers; • developed to reduce costs and errors inherent in manual document exchange; • involved purchase orders, shipping documents, price lists, payments and customer data . • these early implementations replaced the postal system and gained in speed (same day) and the reduction of errors . • key participants were linked by point-to-point links or private networks.

10. EDI (ii) • EDI evolution was driven largely by the automation of industrial processes and introduction of just-in-time production. • EDI became a system to eliminate documents. • Suppliers received production schedules and were expected to deliver accordingly. • Adjustments of inventory and payments were made at the end of each month. • Heavy investment was made in what was viewed as a general enabling technology.

11. EDI (iii) The mid 1990s :- • introduced the concept of continuous replenishment; • oil and chemical industries had invested heavily in ERP systems which required the standardisation of business processes; • suppliers had online access to selected parts of a firm’s production and delivery schedule e.g. Walmart and ToysRus provide their suppliers with access to their store inventories; • suppliers are expected to keep the shelves stocked – within certain targets.

12. EDI: shortcomings • EDI’s strength is that it supports direct commercial transactions among firms. • This is not suited to electronic marketplaces where thousands of buyers and suppliers meet in a digital arena to negotiate prices. • It does not allow multilateral and dynamic relationships. • It does not provide for price transparency among many and allow easy entrance to newcomers. • It is a batch processing environment as opposed to real time. • It does not have a rich communications environment that shares email, graphic documents, network meetings etc. • It is expensive. • However it is still heavily used and particularly important in the development of B2B e-commerce.

13. B2B – main types Two generic types of Internet based B2B :- • Net Marketplaces – also called exchanges or hubs: • bring together potential buyers and sellers in a single digital marketplace; • are transaction based and support many-to-many as well as one-to-one relationships; • Private Industrial Networks – are relationship based: • support many-to-one or many-to-few relationships; • are estimated to take a 65% share of B2B e-commerce in 2004.

14. Horizontal and vertical markets A horizontal market is a market for a single product or service (or a small range) that extends across many industries. Examples: payroll and accounting software, company cars. A vertical market is a market for a large number of products or services in a particular industry sector. Examples: medical equipment, equipment for the catering industry.

15. Net Marketplaces There are four main types of pure net marketplace:- E-distributors are independently owned and operate in a horizontal market serving many industries with products from many suppliers- spot purchases of indirect or MRO goods . E-procurement – independently owned and again in horizontal markets but in which long term contracts are used to buy indirect goods . Exchanges – independently owned and serving vertical markets for direct goods. Industry consortia – industry-owned in vertical markets – long term contracts for direct markets with a limited set of participants. Have a common network and computing platforms.

16. B2B - net marketplace evolution • thousands of independent exchanges during first generation e-commerce; • most failed; • they failed to attract enough players to achieve liquidity – the volume and size of transactions was too low; • industry consortia started (1999 – 2000) in reaction to the independents; • industry consortia charge subscription and transaction fees; • rationalisation of the procurement process and closer relationships with vendors are the major benefits.

17. Covisint • Formed in 1999 as the largest Internet based marketplace for B2B E-commerce. • The founders were DaimlerChrysler, General Motors, Ford, Nissan/Renault and PSA Peugeot Citroen. • Initial investment was $200 million. • Went live in October 2000 and by mid 2001 there was over $129 billion in transactions. • Ford alone saved some $70 million in 2001. • But serious integration problems with 2nd tier suppliers severely constrained the exchange. • The auction services were sold to Freemarkets (a leading B2B exchange) in late 2003 - since acquired by Ariba. • In 2004 Compuware effectively acquired the remaining assets of Covisint. • Now trading successfully with very good growth

18. Private Industrial Networks PINS • PINS are direct descendents of existing EDI networks; • web-enabled (i.e. use web protocols such as HTTP) for collaborative commerce; • specific objectives include:- • develop efficient purchase and selling processes industry-wide; • develop industry-wide resource planning; • increase supply chain visibility – know the inventory levels of buyers and suppliers. • closer buyer/supplier relationships, including demand forecasting, communications, conflict resolution; • operate on a global scale; • reduce industry risk, i.e. prevent imbalances, develop financial derivatives, insurance and futures markets.

19. PINS (cont) PINS and net marketplaces have different goals:- • net marketplaces are primarily transaction oriented; • PINS do not just handle supply chain management but coordinate business processes among companies; • they include product design, sourcing, demand forecasting, asset management, sales and marketing; • a PIN is usually owned by a single ‘sponsor’ company that sets the rules.

20. PINS: Proctor and Gamble P & G has created an efficient customer response system: • a demand pull production model; • customer sales are captured at the retailers’ checkout desks then information flows back to :- • distributors • manufacturers, i.e. P & G • suppliers • the system calculates the exact level of demand for thousands of products; • it initiates production, supply, transport and replenishment.

21. Supply Chain Management The delicate balance of producing, making, manufacturing, storing and shipping: • finding raw materials or components for the product or service; • making that product or providing that service; • delivering it to customers. The five basic elements are: • plan, • source, • make, • deliver, • return.

22. Supply Chain Management • Plan • create the strategy of managing resources so they meet customer demand; • establish criteria to monitor its efficiency so that it delivers high quality and value and costs less than the competition. • Source • choose suppliers you need to create your product or service • develop pricing, delivery, and payment processes; • develop processes for managing inventory, shipping, quality control, payments etc.

23. Supply Chain Management 3 Make – the manufacturing or production step • production control • process control • testing • quality control • packaging, etc. These activities are highly measurable. • Deliver – the logistics coordinate orders, warehousing, carriers, invoicing. 5 Return – the problems bit • receiving back defective or excess goods • support customers who have problems with the products or services that they have received.

24. Supply Chain Management Software • arguably the most fractured group of software applications on the planet; • each step contains dozens of specific tasks each with its own specific software; • integration can be a nightmare; • the best way to consider it is to separate it into two areas: • SCP supply chain planning • SCE supply chain execution.

25. SCP and SCE SCP • uses clever algorithms to improve flow and efficiency and to reduce inventory; • it is entirely dependent on good information for its accuracy (ERP), e.g. customer orders from retailers, sales data from retailers & manufacturing and delivery capacity; • demand planning is highly complex but most rewarding. SCE • automates the different steps in the supply chain e.g. electronically routing orders from plants to suppliers.

26. SCM software • Prior to the Internet, SCM software improved the ability • to predict demand from customers and then handle it. • Companies developed their own supply chains and made • them run smoothly. • Now a company can connect its supply chain to the supply • chains of suppliers and customers so as to optimise cost and • opportunities – this the major reason for B2B explosion. • most progress has been made by – • consumer packaged goods • high –tech industry • automobile industry • now the buzz word is VISIBILITY • previously the word was MISTRUST

27. SCM collaboration Cisco Systems is famous for its SC collaboration. It has created an extranet of :- • component suppliers • distributors • contract manufacturers • customers which forms a virtual just-in-time supply chain.

28. Cisco Systems Makes equipment for the internet. For example, a customer orders a router, then • the order triggers messages to circuit board makers and to distributors to supply generic components . • contract manufacturers, who make sub-assemblies etc. know about the order because they’re linked into Cisco’s own manufacturing system. • Cisco now pokes around the contractor’s assembly line to make sure it’s O.K. • assemblers put on bar code and plug in cables to simulate the corporate network. • Cisco’s automated testing kicks in and matches everything with the customer order. • Cisco then releases shipping information so subcontractor can deliver.

29. Cisco Systems (cont) • no warehouses; • no inventory; • no paper invoices; • a very nosy software programme that monitors Cisco’s supply • chain everywhere – simultaneously. • only when something goes wrong does a human being intervene, i.e. management by exception; • the downturn in 2000 /2001 caused big problems; • the supply chain planning system was great in a growth environment but awful in decline and had to be rewritten!

30. Supply chain checklist Automating the supply chain is probably the most difficult software project a company will ever do: • get it right and a company will save lots of money; • get it wrong and it could even break it ! Some pointers to improving the chances of getting it right. 1 make the sale to suppliers • SC is uniquely difficult because its complexity is beyond your company’s walls; • suppliers will have to change the way they work; • in particular, software systems which will have to be made compatible and integrated – a big job!

31. Supply chain checklist (cont) 2 Wean your employees off phone and fax: • operations people who work with phones etc. need convincing that the software is up to it; • ERP at least erases the old ways of working by blotting out legacy software systems; • however, SC software is not as militant and could be sidelined. 3 Prepare for bad information – at first! • new S C systems process data as programmed but technology cannot absorb a company’s history and processes immediately; • staff need to understand that the first bits of information will need tweaking by the forecasters and planners; • staff need to warned of the system’s initial naiveté.

32. Supply chain checklist (cont) 4 Fix the Supply Chain connection to ERP. • the natural step after doing ERP is Supply Chain; • ERP captures all the product, sales, financial and inventory information that SC applications need to predict demand and optimise flow through the chain; • SCE is important but SCP is vital; • interfacing a new SC system with ERP is very difficult. 5 Defuse functional warfare. • a supply chain software project will create internal conflict between the IT staff and the people who run the supply chain; • logistics, procurement or whatever has always been derided as a 2nd class function and considered as mundane back office territory everywhere – except the retail area.