Ch. 5 - Key Concept

Key Concept:
This chapter talks about the buying and selling between businesses online. It discusses the processes for managing the purchasing of materials, managing of inventory, creating and maintaining supplier relationships, and the production of end products. It also looks at how these areas are affected by the changes in technology and the growth of the internet.

Purchasing, logistics, and support activities
-Necessary characteristic of purchasing, logistics, and support activities is flexibility
Purchasing Activities
-Include identifying vendors, evaluating vendors, selecting specific products, placing orders, and resolving any issues (late deliveries, incorrect quantities, incorrect items, and defective items)
-Supply chain- all activities in the value chain to design, produce, promote, deliver, and support each component of a product
-Procurement includes all purchasing activities, plus the monitoring of all elements of purchase transactions-managing and developing relationship with key suppliers (supply management)
-Sourcing: identifying suppliers and determining the qualifications of those suppliers (e-sourcing) – specialized web purchasing sites
-Spend –the total dollar amount of the goods and services that a company buys during a year
-Direct materials are materials that become part of the finished product in a manufacturing process. Two types: Replenishment purchasing: (company negotiates long term contracts for most of the materials that it will need), spot market/spot purchasing (purchasing based excess demand)
-Indirect materials: are all other materials that the company purchases, including factory supplies such as sandpaper, hand tools, and replacement parts for manufacturing machinery.
-Logistics- objective to provide the right goods in the right quantities in the right place at the right time. The management of materials as they go from the raw materials through production to become finished goods is important to logistics.
-Knowledge management is the intentional collection, classification, and dissemination of info about a company, its products, and its processes. This type of knowledge is developed over time buy individuals working with a company (difficult to gather and distill).
E-Government-operate businesslike activities-employ people, buy supplies from vendors, and distribute benefit payments of many kinds. They also collect a variety of taxes and fees from their constituents
Network model of economic organization- shift from hierarchical structures towards network structures. More organizations are now giving their Procurement Departments new tools to negotiate with suppliers, including the possibility of forming strategic alliances. Supply web- networks are more flexible and can respond to changes in the economic environment more quickly

Electronic Data interchange
-Electronic data interchange is a computer to computer transfer of business info between two businesses that uses a standard format. -The business info exchanged is often transaction data but can include other info like price quotes and order status inquires.
-Emergence of large businesses in the late 1800s and early 1900s brought the need to create formal records of business transactions.
-1950s: companies began to use computers to store and process internal transaction records, but the info flow between businesses continued to be printed on paper
-1960s: exchanging transaction info on punched cards or magnetic tape.
-1960s and 1970s: Advances in data communications technology -trading partners to transfer data over telephone lines
-1968: freight and shipping companies joined together to form the Transportation Data Coordinating Committee which was charged with exploring ways to reduce paperwork. It created a standardized info set that included all the data elements commonly used.
-a set of cross industry standards for electronic components, mechanical equipment, and other widely used items was created- American National Standards Institute.
-1979: ANSI chartered a new committee to develop uniform EDI standards. This committee is called the Accredited Standards Committee X12 – the administrative body-Data Interchange Standards Association (DISA)
- mid 1980s-the United Nations Economic Commission and EDI experts worked on designing a common set of EDI standards
-1987: UN published its first standards under the title EDI for Administration, Commerce, and Transport

Value added networks
-Trading partners can implement the EDI network and EDI translation processes using one of two basic approaches:
-Direct connection EDI: requires each business in the network to operate its own on site EDI translator computer – connected directly to each other using modems and dial up telephone lines or dedicated leased lines – troublesome when located in different time zones and when transactions are time-sensitive or high in volume. The dedicated leased line option can become very expensive. -a company might decide to use the services of a value added network. A company that provides communications equipment, software, and skills needed to receive, store, and forward electronic messages that contain EDI transaction sets-a company must install EDI translator software that is compatible with the VAN. To send an EDI transaction set to a trading partner, the VAN customer connects to the VAN using a dedicated or dial up telephone line and then forwards the DEI formatted messages to the VAN. The VAN logs the message and delivers it to the trading partner’s mailbox on the VAN computer. The trading partner then dials in to the VAN and retrieves its EDI formatted messages from the mailbox-indirect connection EDI

EDI on the Internet
-The major roadblocks to conducting EDI over the internet were concerns about security and inability to provide audit logs and third party verification. As the TCP/IP structure of the internet was enhanced with secure protocols less worry of security issues.
-Nonrepudiation is the ability to establish that a particular transaction actually occurred
Open Architecture of the Internet
-Mid 1990s-a number of firms began providing EDI services on the internet. Companies that originally provided traditional VAN services now offer EDI on the internet
-Context Inspired Component Architecture –a set of standards for assembling business messages that provides a predictable structure for the content of those messages but that also provides more flexibility than EDI transaction sets.
Financial EDI
-The EDI transaction sets that provide instructions to a trading partner’s bank. When EFT’s involve two banks, they are executed using an automated clearing house system-which is a service that banks use to manage their accounts with each other. EDI capable banks are banks that are equipped to exchange payment and remittance data through VAN services for nonfinancial transactions-value added banks. Non bank VANs that can translate financial transaction sets into ACH formats and transmit them to banks that aren’t EDI capable are called financial VANS

Supply Chain Management using Internet technologies
-When companies integrate their supply management and logistics activities across multiple participants in a particular product’s supply chain, the job of managing that integration is called supply chain management
-Businesses establish long term relationships with a small number of very capable suppliers called tier one suppliers, in turn develop long term relationship with a large number of suppliers that provide components and raw materials to them. These tier two suppliers manage relationships with the next level of suppliers, tier three suppliers-that provide them with components and raw materials. The long term relationships à supply alliances
-Clear communications and quick responses to those communications are key elements of successful supply chain management. The only major disadvantage of using Internet technologies in supply chain management is the cost of the technologies.

Using Materials-tracking technologies with EDI and E-commerce
-Companies have been using optical scanners and bar codes to track the movement of materials
-Bar codes allow companies to scan materials as they are received and track them as they move
-Second wave of e-commerce-radio frequency identification devices -small chips that use radio transmissions to track inventory
-Main goals of supply chain management is to help each company in the chain focus on meeting the needs of the consumer at the end of the supply chain-ultimate consumer orientation
-The task of developing info exchange resources that can provide supplier performance summaries is one of the great challenges that B2B electronic commerce faces as it moves into its second wave

Electronic Marketplaces and portals
- info hubs for each major industry-would offer news, research reports, analyses of trends, and in depth reports on companies in the industry-offer marketplaces and auctions in which companies in the industry could contact each other and transact businesses, hubs would be vertically integrated called vertical portals/vortals-didn’t turn out to be exactly correct
Independent industry marketplaces
-The first company to launch hubs that followed the vertical portal model created trading exchanges that were focused on a particular industry- industry marketplaces (focused on a single industry, independent exchanges (not controlled by a company that was an established buyer or seller in the industry), public marketplaces (open to new buyers and sellers just entering the industry). Collectively à independent industry marketplaces
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 from them in supply chains.
-A private store has a password-protected entrances and offers negotiated price reductions on a limited selection of products-usually those that the customer has agreed to purchase in certain minimum quantities.
-Customer portal sites offer private stores along with services such as part number cross referencing, product usage guidelines, safety info, and other services that would be needlessly duplicated if the sellers were to participate in an industry marketplace.
Private company marketplaces
-E-procurement software allows a company to manage its purchasing function through a web interface. It automates many of the authorizations and other steps that are part of business procurement operations
-Include requests for quote posting areas, auctions, and integrated support for purchasing direct materials
-Companies that implement e-procurement software usually requires their suppliers to bid on their business
Industry consortia-sponsored marketplaces
-An industry consortia-sponsored marketplace is a marketplace formed by several large buyers in a particular industry
Five general forms of marketplaces that exist in B2B electronic commerce today:
-Private stores on sellers’ sites: one seller, many buyers, ex: Dell, few products, fixed pricing
-Customer portals: few sellers, many buyers, ex: Grainger, catalog based, fixed pricing
-Independent industry marketplaces: many sellers, many buyers, ex: ChemConnect, offer auctions, dynamic pricing
-Consortia sponsored marketplaces: few buyers, many sellers, Ex: Exostar, buyer control, fixed pricing
-Private company marketplaces: one buyer, many sellers, Ex: Harley Davidson, sellers bid on major buyers’ business

Application
Walmart at one time used a VAN intermediary to help manage the numerous suppliers the company has around the world. With the growth on the internet, Walmart moved online to internet EDI to help communicate with its suppliers, better manage its inventories, and increase its efficiency while reducing costs. In addition, Walmart deals with many small companies. These small companies can better afford the internet EDI system and compete with the many large companies supplying to Walmart.