Module/Week 6:

DESCRIPTIVE TITLE: Business to Business Activities: Improving Efficiency and Reducing Costs

Sub-topics:

1. Purchasing, Logistics, and Business Support Processes

a. Outsourcing and Offshoring
b. Purchasing Activities
c. Logistics Activities
d. Business Process Support Activities
e. E-Government
f. Network Model of Economic Organization in Purchasing Supply Webs
2. Electronic Data Interchange
a. Early Business Information Interchange Efforts
b. Emergence of Broader Standards: The Birth of EDI
c. How EDI Works
d. Value-Added Networks
e. EDI Payments
3. Supply Chain Management Using Internet Technologies
a. Value Creation in the Supply Chain
b. Increasing Supply Chain Efficiencies
c. Materials-Tracking Technologies
d. Creating an Ultimate Consumer Orientation in the Supply Chain
e. Building and Maintaining Trust in the Supply Chain
4. Electronic Marketplaces and Portals
a. Independent Industry Marketplaces
b. Private Stores and Customer Portals
c. Private Company Marketplaces
d. Industry Consortia-Sponsored Marketplaces

Learning Objectives:

In this chapter, you will learn about:

a. How businesses use the Internet to improve purchasing, logistics, and other business process activities
b. Electronic data interchange and how it works
c. How businesses have moved some of their electronic data interchange operations to the Internet
d. What supply chain management is and how businesses are using Internet technologies to improve it
e. About electronic marketplaces and portals that make purchase-sale negotiations easier and more
efficient

Discussion

Purchasing, Logistics, and Business Support Processes

• Potential value of cost reductions and business improvements in these areas is very great
Outsourcing and Offshoring
• Outsourcing - Using other organizations to perform specific activities. It is 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
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:
o Design, produce, promote, market, deliver, support each individual component of a product
or service
• Procurement includes:
- All purchasing activities, monitoring all purchase transaction elements, and managing and developing
supplier relationships
• Procurement is also called supply management
• Sourcing – is a part of procurement activity devoted to identifying suppliers and determining the
qualifications of those suppliers

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 • E-sourcing – is the use of Internet technologies in sourcing activities
• E-procurement – is the use of internet technologies in procurement activities
• Institute for Supply Management (ISM)
- Main organization for procurement professionals

FIGURE 5-1 Steps in a typical business

purchasing process

Direct vs. Indirect Materials Purchasing

• Direct materials
- Materials that become part of finished product in a manufacturing process.
• Direct materials purchasing: two types
- Replenishment purchasing (contract purchasing) – the company negotiates long-term material contracts
- Spot purchasing - purchases made in loosely organized (spot) market
• Indirect materials
- All other materials company purchases
• Maintenance, repair, and operating (MRO) supplies
- Indirect materials purchased on a recurring basis and the standard items (commodities) with price as
main criterion
• Purchasing cards (p-cards)
- Give the managers the ability to 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
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

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 • Web and the Internet
- Providing increasing number of opportunities to better manage activities
• Example: Schneider Track and Trace system
- Delivers real-time shipment information: customers’ browsers
• Third-party logistics (3PL) provider
- Operates all (large portion) of customer’s materials movement activities
o 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
•
Business Process Support Activities
• General categories
- Finance and administration, human resources, technology development

FIGURE 5-2 Categories of support activities

• Human resources, payroll functions, retirement plan servicing often outsourced by small/midsized
companies
• Common support activity: training
- Putting training materials on company intranet, insurance companies can distribute materials to many
different sales offices, and coordinate materials in corporate headquarters
• Knowledge management
- Intentional collection, classification and dissemination of information about a company and its products
and processes(Examples: Ericsson, KMWorld)
E-Government
• E-Government - Use of Internet technologies by governments and government agencies
o Enhances functions performed for stakeholders and businesslike activity operations
• U.S. government examples
- Financial Management Service (FMS): Pay.gov site
- Bureau of Public Debt: TreasuryDirect site
• Examples outside the U.S.
- United Kingdom’s Department for Work and Pensions Web site
- Singapore Government Online site

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
• Supply Web: term replacing “supply chain”
- Parallel lines interconnect to form a Web or network configuration

Electronic Data Interchange

• Computer-to-computer business information transfer
- Between two businesses using a standard format
• Trading partners – are the 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: exchanging information using punched cards or magnetic tape
• 1960s and 1970s
- Transferred data over telephone lines
• Efforts increased efficiency, reduced errors
• 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

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

FIGURE 5-4 Commonly used EDI transaction sets

How EDI Works

• Basic idea: straightforward; Implementation: complicated
• Example:
- Company replacing metal-cutting machine
o Steps to purchase using paper-based system and EDI.
• Paper-based purchasing process
- Buyer and vendor
o Not using integrated software for business processes
- Each information processing step results in paper document that must be delivered to department
handling next step
- Paper-based information transfer
o Can be delivered by mail, courier, fax

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 FIGURE 5-5 Information flows in a

paper-based purchasing process

• EDI purchasing process

- Mail service replaced with EDI network data communications
- Paper flows within buyer’s and vendor’s organizations replaced with computers with running EDI
translation software

FIGURE 5-6 Information flows in an EDI purchasing process

Value-Added Networks
• Direct connection EDI
- Businesses operate on-site EDI translator computers
o Connected directly to each other using leased telecommunication lines.
- Few companies use direct connection EDI because dedicated leased lines: expensive

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 FIGURE 5-7 Direct connection EDI

• 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

FIGURE 5-8 Indirect connection

EDI through a VAN

• 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
o Helps establish nonrepudiation: ability to establish that a particular transaction actually occurred
• Disadvantages: In the past, cost (monthly maintenance and transactions 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)
EDI Payments
• EDI transaction sets provide instructions to trading partner’s bank
o Negotiable instruments
o Electronic equivalent of checks
• Electronic funds transfers (EFTs)
- Movement of money from one bank account to another
- Automated clearing house (ACH) system
o Used by service banks to manage accounts with each other
o Operated by U.S. Federal Reserve Banks, private ACHs
Supply Chain Management Using Internet Technologies
• Supply chain management
- Job of managing integration of company supply management and logistics activities
Value Creation in the Supply Chain
• Firms engaging in supply chain management reach beyond limits of their own organization’s hierarchical
structure and create new network form of organization among members of supply chain
• Tier-one suppliers: establish long term relationships with a small number of very capable suppliers.
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 • Tier-two suppliers: larger number of suppliers that provide components and raw materials to one-tier
suppliers
• Tier-three suppliers: provides components and raw materials to tier-two suppliers.
• Supply alliances
- Long-term relationships among participants in the supply chain
• Example: Dell Computer
- Reduced supply chain costs by sharing information with suppliers
• Buyers expect annual price reductions, quality improvements from suppliers
• Supply chain council - Major purchasing group
• Production strategy
- Is the way a company achieves competitive advantage in its product creation activities

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

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
o 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
• Example: Dell Computer
- Famous for use of Web to sell custom-configured computers
- Also used technology-enabled supply chain management
o To give customers exactly what they want
o To reduce inventory amount (three weeks to two hours)
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

FIGURE 5-10 Shipping label with

bar-coded elements from EDI
transaction set 856, Advance
Shipping Notification

• Real-time location systems (RTLS)

- Bar code tracking system
• Radio Frequency Identification Devices (RFIDs)
- Small chips using radio transmissions to track inventory
Creating an Ultimate Consumer Orientation in the Supply Chain
• Ultimate consumer orientation
- Focus on meeting the needs of consumer
- Pioneered use of Internet technology to go beyond next step in its value chain
- 1995: launched online business initiative called BIB NET extranet
o Allowed dealer access to tire specifications, inventory status, and promotional information
Building and Maintaining Trust in the Supply Chain
• Major issue: developing trust
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 • Key elements
- Continual communication and information sharing
• Internet and the Web
- Provide excellent ways to communicate and share information and offer new avenues for building trust
o Maintain contact with their customers
o Afford buyers instant access to their sales representatives
o Provide comprehensive information quickly
Electronic Marketplaces and Portals
• Vertical portals (vortals)
- Industry-focused hubs
o Offer marketplaces and auctions for contact and business transactions
o Doorway (or portal) to the Internet for industry members
o Vertically integrated: each hub services just one industry
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
• B2B marketplace models gradually replaced independent marketplaces
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
Private Company Marketplaces
• Large companies purchasing from relatively small vendors
- Exert power in purchasing negotiations
- Using e-procurement software
o Allows companies to manage purchasing function through Web interface
o Automates authorizations, other steps
o Includes marketplace functions
• Larger companies
- Reluctant to abandon investments in e-procurement software
• Private company marketplace
- Marketplace providing auctions, request for quote postings, other features
o For companies that want to operate their own marketplaces
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

FIGURE 5-12 Characteristics of B2B marketplaces

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 Review Questions

1. In one or two paragraphs, explain the differences between an industry value chain and a strategic business unit’s
supply chain.
2. The business purchasing process is often more complex than most consumer purchasing processes. In about 100
words, outline the differences between a typical consumer purchase and a business purchase.
3. Briefly define the term spend as it is used in businesses purchasing. In a paragraph or two, explain how the
Internet has reduced the spend of many U.S. manufacturing companies.
4. In a paragraph or two, distinguish between direct materials and indirect materials and explain why companies
manage these costs in different ways.
5. Would the use of purchasing cards be more helpful in controlling direct materials costs or indirect materials
costs? In a paragraph or two, explain why.
6. In about 100 words, explain why smaller companies might outsource elements of their human resources,
payroll, or retirement plan management operations.
7. Briefly define ”knowledge management” and, in one or two paragraphs, explain how a company might use
Internet technologies to perform knowledge management.
8. In two paragraphs, explain how the challenges facing smaller companies that wanted to participate in electronic
data interchange (EDI) were changed by widespread use of the Internet.
9. In about 100 words, explain how using EDI can lead to supply chain efficiencies.
10. In one or two paragraphs, explain the differences between direct connection EDI and indirect connection EDI.
11. Write a paragraph that explains the advantages of using RFID technology instead of barcode scanning
technology in managing a business unit’s supply chain.
12. In a paragraph or two, explain how the Web helps build and maintain trust among participants in a specific
supply chain.
13. In one or two paragraphs, describe the key elements of an independent industry marketplace.

Exercises

1. Some business and political leaders argue that the offshoring is dangerous because it can move jobs from
developed countries to less-developed countries. Others argue that although offshoring might displace workers
in the short run, in the longer term, everyone benefits by having developing economies create new industries,
products, and markets for products and services that create high-level service and managerial jobs in the
developed world. In recent years, some economists have argued that offshoring today is having a negative
impact on service and professional employment in highly developed countries. Using resources in your library or
online, present two arguments against a U.S. company offshoring the management of its customer relationships
to technical and managerial personnel in a less developed country.
2. Using your library or your favorite search engine, identify the main reason a large transportation company might
want to use p-cards for its MRO spending. Summarize your findings in two or three paragraphs.
3. You have just started work as an intern in the purchasing department of Westridge Systems, a manufacturer of
electronic control systems for manufacturing assembly lines, you do not know much about electronic
equipment, but your supervisor has given you the task of identifying vendors who sell oscilloscopes that
interface with personal computers. Use the ThomasNet Web site to locate at least three vendors who offer such
a product. For each company, determine whether it offers products for sale on a Web site that discloses prices
and details about the products’ specifications. Summarize what you have learned from your research about how
each vendor sells its oscilloscopes online in a report of approximately 150 words.
4. Internet access from mobile devices (especially smartphones and tablets) has greatly improved the work
environment of long-distance truck drivers in recent years. Using your favorite search engine, identify at least
three apps that a trucker might use to do two or more of the following: obtain routing information, manage that
consumption, find truck stops or truck-friendly rest areas, record what they have hauled and where they have
hauled it, track required permits, locate Department of Transportation weigh stations, maintain electronic log
books, or find potential loads and place bids to carry them. For each app you identify, write a paragraph that
explains what the app does, how much it costs, and on what type of devices it runs.

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