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Using Management Information Systems

David KroenkeE-commerce and Supply Chain Systems

Chapter 8

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Learning Objectives

Define e-commerce and important e-commerce terms.

Understand the effect of e-commerce on market efficiency.

Learn technology for supporting e-commerce.

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Learning Objectives (Continued)

Understand the structure, profitability, and dynamics of supply chains as a means for understanding why e-commerce is a good thing.

Discuss various supply chain electronic communication alternatives. HTML EDI XML

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E-Commerce

E-commerce is the buying and selling of goods and services over public and private computer networks.

The U.S. Census Bureau, which publishes statistics on e-commerce activity, defines merchant companies as those that take title to the goods they sell. They buy goods and resell them.

The U.S. Census Bureau defines nonmerchant companies as those that arrange for the purchase and sale of goods without ever owning or taking title to those goods.

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Figure 8-2 E-Commerce Categories

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Figure 8-3 Example of Use of B2B, B2G, and B2C

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E-Commerce Merchant Companies

There are two types of merchant companies: those that sell directly to consumers and those that sell to companies.

Each uses slightly different information systems in the course of doing business.

B2C, or business-to-consumer, e-commerce concerns sales between a supplier and a retail customer (the consumer).

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E-Commerce Merchant Companies (Continued)

A typical information system for B2C provides a Web-based application or Web storefront by which customers enter and manage their orders. Amazon.com, REI.com, and LLBean.com are examples

of companies that use B2C information systems.

The term B2B, or business-to-business, e-commerce refers to sales between companies. Raw materials suppliers use B2B systems to sell to

manufacturers, manufacturers use B2B to sell to distributors, and distributors uses B2B systems to sell to retailers.

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E-Commerce Merchant Companies (Continued)

B2G, or business-to-government, refers to sales between companies and government organizations. A manufacturer that uses an e-commerce site to sell

computer hardware to the U.S. Department of State is engaging in B2G commerce.

Suppliers, distributors, and retailers can sell to the government as well.

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Nonmerchant E-commerce

The most common nonmerchant e-commerce companies are auctions and clearing houses.

E-commerce auctions match buyers and sellers by using an e-commerce version of a standard auction. This e-commerce application enables the auction

company to offer goods for sale and to support a competitive bidding process.

The best-known auction company is eBay, but many other auction companies exist; many serve particular industries.

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Nonmerchant E-commerce (Continued)

Clearinghouses provide goods and services at a stated price, and they arrange for the delivery of the goods but they never take title. As a clearinghouse, Amazon matches the seller and the

buyer and then takes payment from the buyer and transfers the payment to the seller, minus commission.

Other examples of clearinghouse are electronic exchanges that match buyers and sellers; the business process is similar to that of a stock exchange.

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Figure 8-5 E-Commerce Market Consequences

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E-Commerce Improves Market EfficiencyE-commerce leads to disintermediation, which is the elimination of middle layers in the supply chain. You can buy a flat-screen LCD HDTV from a typical electronic

store or you can use e-commerce to buy it from the manufacturer. If you take the later route, you eliminate at least one distributor, the

retailer, and possibly more.

E-commerce also improves the flow of price information. As a consumer, you can go to any number of Web sites that offer

product price comparisons. The improved distribution of information about price and terms

enables you to pay the lowest possible cost and serves ultimately to remove inefficient vendors.

The market as a whole becomes more efficient.

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E-Commerce Improves Market Efficiency (Continued)

From the seller’s side, e-commerce produces information about price elasticity that has not been available before. Price elasticity measures the amount that demand rises

or falls with changes in price. Using an auction, a company can learn not just what the

top price for an item is, but also learn the second, third, and other prices from the losing bids.

Managing prices by direct interaction with customers yields better information than managing prices by watching competitors’ pricing.

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E-Commerce Economics

Companies need to consider the following economic factors: Channel conflict – value of direct sales vs. loss of

value in losing a retailer or distributor Price conflict – lower sales by manufacturer may not

be desirable for retailer Logistics expense – cost of processing orders in small

quantities Customer service expense – cost of having to deal

with the customer directly

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E-Commerce and the World Wide Web

Most B2C commerce conducted over the World Wide Web (WWW) uses Web storefronts supported by commerce servers.

A commerce server is a computer that operates Web-based programs that display products, support online ordering, record and process payments, and interface with inventory-management applications.

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Figure 8-6 Internet Protocols and Users

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Web Pages and Hypertext Markup Language

HTTP is used to exchange Web pages over the Internet. Such pages are documents encoded in a language

called HTML, or Hypertext Markup Language. This language defines the structure and layout of Web

pages. An HTML tag is a notation used to define a data

element for display or other purposes.

Web pages include hyperlinks, which are pointers to other Web pages. A hyperlink contains the URL (Uniform Resource

Locator) of the Web page to obtain when the user clicks the hyperlink.

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Figure 8-7a Sample HTML Document

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Figure 8-7b HTML Document on Page 236 in Figure 8-7a, rendered using Internet Explorer

Source: Microsoft product screen shot reprinted with permission from Microsoft Corporation.

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Web Pages and Hypertext Markup Language (Continued)

The two most popular Web server programs are Apache, commonly used on Linux, and IIS (Internet Information Server), a component of Windows XP Professional and other Windows products.

A browser is a program that processes the HTTP protocol; receives, displays, and processes HTML documents; and transmits responses. Common browsers are Internet Explorer, Netscape

Navigator, and Mozilla’s FireFox.

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Figure 8-8 Three-Tier Architecture

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Three-Tier Architecture

Most commerce server applications use what is called three-tier architecture.

The tiers refer to three different classes of computers.

The user tier consists of computers that have browsers that request and process Web pages.

The server tier consists of computers that run Web servers and in the process generate Web pages in response to requests from browsers.

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Three-Tier Architecture (Continued) Web servers also process application programs.

To ensure acceptable performance, commercial Web sites usually are supported by several or even many Web server computers.

A facility that runs multiple Web servers is sometimes called a Web farm. Work is distributed among computers in a Web farm so as to

minimize customer delays.

The third tier is the database tier.

The computers at this tier receives and processes SQL requests to retrieve and store data.

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Supply Chain ManagementA supply chain is a network of organizations and facilities that transforms raw materials into products delivered to customers.

Customers order from retailers, who in turn order from distributors, who in turn order from manufacturers, who in turn order from suppliers.

The supply chain also includes transportation companies, warehouses, and inventories and some means for transmitting messages and information among the organizations involved.

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Supply Chain Management (Continued)Because of disintermediation, not every supply chain has all of these organizations. Dell, for example, sells directly to the customer.

Both the distributor and retailer organizations are omitted from its supply chain.

In other supply chains, manufacturers sell directly to retailers and omit the distribution level.

Chain implies that each organization is connected to just one company up (toward the supplier) and down (toward the customer) the chain. Instead, at each level, an organization can work with

many organizations both up and down the supply chain. Thus, a supply chain is a network.

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Figure 8-11 Supply Chain Example

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Figure 8-12 Drivers of Supply Chain Performance

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Drivers of Supply Chain Performance

Four major factors, or drivers, affect supply chain performance: Facilities concern the location, size and operations

methodology of the places where products are fabricated, assembled or stored.

Inventory includes all of the materials in the supply chain, including raw materials, in-process work, and finished goods.

Transportation concerns the movement of materials in the supply chain.

Information influences supply chain performance by affecting the ways that organizations in the supply chain request, respond, and inform one another.

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Supply Chain Profitability Versus Organizational Profitability

Supply chain profitability is the difference between the sum of the revenue generated by the supply chain and the sum of the costs that all organizations in the supply chain incur.

In general, the maximum profit to the supply chain will not occur if each organization in the supply chain maximizes its own profits in isolation. Usually, the profitability of the supply chain increases if

one or more of the organizations operates at less than its own maximum profitability.

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The Bullwhip EffectThe bullwhip effect is a phenomenon in which the variability in the size and timing of orders increase at each stage up the supply chain, from customer to supplier.

The bullwhip effect is a natural dynamic that occurs because of the multistage nature of the supply chain. It is not related to erratic consumer demand.

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Figure 8-13 The Bullwhip Effect

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The Bullwhip Effect (Continued)The large fluctuations of the bullwhip effect distributors, manufacturers, and suppliers to carry larger inventories than should be necessary to meet the real consumer demand. Thus, the bullwhip effect reduces the overall profitability

of the supply chain.

One way to eliminate the bullwhip effect is to give all participants in the supply chain access to consumer-demand information from the retailer. Each organization can thus plan its inventory or

manufacturing based on true demand and not on the observed demand from the next organization up in the supply chain.

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Supplier Relationship Management

Supplier relationship management (SRM) is a business process for managing all contracts between an organizational and its suppliers.

Supplier in SRM is used generically: It refers to any organization that sells something to the organization that has the SRM application.For example: A manufacturer is a supplier to a

distributor.

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Figure 8-14 B2B One Section of the Supply Chain

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Figure 8-15 Summary of SRM Processes

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Supplier Relationship Management (Continued)SRM applications support three basic processes: source, purchase, and settle.

Source Organizations need to find possible vendors of needed

supplies, materials, or services: Assess the vendors that it does findNegotiate terms and conditionsFormalize those terms and conditions in a

procurement contract

Some SRM applications have features to search for product sources and to find evaluations of vendors and products.

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Supplier Relationship Management (Continued)Purchase

SRM applications request information, quotations, and proposals from would-be suppliers.

Companies can use SRM to manage the approval workflow in order to approve purchases and issue orders.

Settle The accounting department reconciles the receipt of the

goods and services against documents and schedules the vendor payments.

The payment portion of the SRM typically connects to the cash management subsystem in the financial management application.

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Supplier Relationship Management (Continued) Settle (continued)

Some SRM packages include features to support procurement auctions.

Generally companies use auctions to obtain large amounts of materials, energy, or other consumables.

Organizational auctions can attract a large number of vendors and often result in substantial cost savings.

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Integrating SRM with CRM

Supplier’s CRM application interfaces with the purchaser’s SRM application.

Both the supplier and the customer want to perform the ordering process as cheaply and efficiently as possible.

SRM examines inventory, determines that items are required, and automatically creates the order via its connection to the supplier’s CRM.

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Information Technology for Data ExchangeWeb commerce-server applications are useful for B2C, but they are not sufficient for B2B needs.

In general, organizations need to exchange data and messages in more general and flexible ways than they can do with commerce servers.

There are several alternatives for exchanging data and messages (Basic Technology): The most basic are telephone calls and documents

exchanged via fax or postal mail. Another alternative is to exchange messages and

documents via email.

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Information Technology for Data Exchange (Continued)

There are alternatives that involve additional technology Electronic Data Interchange (EDI) is a standard for

exchanging documents from machine to machine, electronically.

eXtensible Markup Language (XML), is a standard that offers advantages over EDI and that most believe will eventually replace EDI.

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Figure 8-17 Alternatives for Inter organizational Message and Data Exchange

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Electronic Data Interchange

Electronic Data Interchange (EDI) is a standard of formats for common business documents.

Because the transmissions are electronic, the distributors and manufacturers must agree on a format for the orders. This format includes:

How many data fields will be sent. In what order they will be sent. How many characters will be sent in each data field,

and so forth.

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The EDI X12 Standard

In the United States, the X12 Committee of the American National Standards Institute (ANSI) manages EDI standards. Today, the EDI X12 standard includes hundreds of

documents.

They have standard names like EDI 850 (purchase order), EDI 856 (advance ship notices), EDI 810 (electronic invoice).

AN EDI document definition consists of a set of segments, each of which has a defined set of fields.

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Figure 8-18 Portion of EDI 850 (Purchase Order) Standard

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Other EDI Standards

EDIFACT standard is used internationally.

HIPAA standard is used for medical records.

Because of the existence of multiple standards, when two organizations today wish to exchange documents electronically, they must first agree on which standard they will use.

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eXtensible Markup Language

Organizations have used HTML to share documents.

There are three problems with HTML: HTML tags have no consistent meaning. HTML has a fixed number of tags. HTML mixes format, content, and structure. In other words, HTML sucks!

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Importance of XML

To overcome the problems in HTML, the computer industry designed a new markup language called the eXtensible Markup Language (XML).

XML is the product of a committee that worked under the auspices of the World Wide Web Consortium (W3C), a body that sponsors the development and dissemination of Web standards.

XML solves the problems mentioned for HTML, and has become a significant standard for computer processing.

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Figure 8-19 XML Industry Standards

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Application Interaction in the Supply Chain

EDI and XML are used to exchange documents. What if organizations want their computer applications to interact??

The process of a program on one computer accessing programs on a second computer is called remote computing or distributed computing.

Several different techniques are used: Two important ones are the use of proprietary designs and

Web services

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Distributed Computing Using Proprietary DesignsOne way to develop distributed computer programs is to develop proprietary distributed applications. Proprietary means that the solution is unique to and is

owned by the organizations that develop and pay for the distributed systems.

To develop a proprietary design, teams of developers from the involved companies work together using a development process.

The joint development team designs this application to use a particular communications capability, particular operating systems, and particular distributed computing techniques.

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Distributed Computing Using Proprietary Designs (Continued)

An alternative proprietary method is for one company to develop all necessary programs itself and then install some of its programs on another company’s computers.

Proprietary solutions are difficult and expensive to develop and operate.

If they provide sufficient business value, however, the return on investment can make them worthwhile.

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XML Web services

XML Web services are a set of standards that facilitate distributed computing using Internet technology.

Web services are the latest and greatest tool for application interaction.

Most every major software vendor has products that support Web services: Microsoft provides .Net development tools IBM provides J2EE development tools

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Fundamental Web Services Concepts

The goal of Web services is to provide a standard way for programs to access one another remotely, without the need to develop proprietary solutions.

A number of important standards have been defined to make Web services possible. In general these standards enable programs on one

computer to obtain a service description that details what programs exist on another computer and how to communicate with those programs.

Once the service user has the service description, it uses the information it contains to invoke the service.

All Web service data are transmitted in XML documents.

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Web Services and the Supply Chain

Web services have the potential to simplify the automation of supply chain interactions.

Any organization in the supply chain can develop Web services and publish those services to other organizations in the supply chain.

Developers in those organizations can access the service description and write programs that call the Web services.

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Figure 8-20 Example of Web Services for Sharing Sales Data

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SummaryOrganizations should address four economic factors when considering e-commerce activity: channel conflict, price conflict, logistics expense, and customer service expense.

Most B2C commerce is conducted using commerce servers.

A supply chain is a network of organizations and facilities that transforms raw materials into finished goods for customers.

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Summary (Continued)

Most supply chains have suppliers, manufactures, distributors, and retailers.

Supply chains also include transportation companies, warehouses, inventories, and some means of transmitting messages and information.

In general, the maximum profits to the supply chain will not occur if each independent organization within it maximizes its own profit in isolation.

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Summary (Continued)

The bullwhip effect is a phenomenon in which the variability in the size and timing of orders increases at each stage up the supply chain.

Three fundamental supply chain information systems are: supplier relationship management (SRM), inventory systems, and CRM.

Organizations can exchange documents and data between programs using various alternatives (see Fig. 8-17).

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Summary (Continued)EDI is a standard of formats for common business documents.

XML is a markup language like HTML, but it improves upon HTML by requiring standard use of XML elements by allowing users to extend the elements, and by clearly separating document structure, content, and format.

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Key Terms and ConceptsAuctionsBrowserBullwhip effectBusiness-to-business (B2B) e-

commerceBusiness-to-consumer (B2C) e-

commerceBusiness-to-government (B2G)

e-commerceClearinghousesCommerce server

Database tierDisintermediationDistributed computingE-commerceEDI X12 standardEDIFACT standardElectronic Data Interchange

(EDI)eXtensible markup language

(XML)HIPAA standardHyperlinkHypertext Markup Language

(HTML)

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Key Terms and Concepts (Continued)

Merchant companiesNonmerchant companiesPrice elasticityRemote computingServer tierService description

Supplier relationship management (SRM)

Supply chainSupply chain profitabilitySustainable (advantage)TagThree-tier architecture

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The Bullwhip Effect (or Whiplash Effect) is an observed phenomenon in forecast-driven distribution channels. The concept has its roots in J Forrester's Industrial Dynamics (1961). Because customer demand is rarely perfectly stable, businesses must forecast demand in order to properly position inventory and other resources. Forecasts are based on statistics, and they are rarely perfectly accurate. Because forecast errors are a given, companies often carry an inventory buffer called "safety stock". Moving up the supply chain from end-consumer to raw materials supplier, each supply chain participant has greater observed variation in demand and thus greater need for safety stock. In periods of rising demand, down-stream participants will increase their orders. In periods of falling demand, orders will fall or stop in order to reduce inventory. The effect is that variations are amplified as one moves upstream in the supply chain (further from the customer).

Bullwhip effect is also attributed to the separate ownership of different stages of the supply chain. Each stage in such a structured supply chain tries to amplify the profit of the respective stages, thereby decreasing the overall profitability of the supply chain.

Supply chain experts have recognized that the Bullwhip Effect is a problem in forecast-driven supply chains, and careful management of the effect is an important goal for Supply Chain Managers. The alternative is to establish a demand-driven supply chain which reacts to actual customer orders. In manufacturing, this concept is called Kanban. This model has been most successfully implemented in Wal-Mart's distribution system. Individual Wal-Mart stores transmit point-of-sale (POS) data from the cash register back to corporate headquarters several times a day. This demand information is used to queue shipments from the Wal-Mart distribution center to the store and from the supplier to the Wal-Mart distribution center. The result is near-perfect visibility of customer demand and inventory movement throughout the supply chain. Better information leads to better inventory positioning and lower costs throughout the supply chain. Barriers to implementing a demand-driven supply chain include investments in information technology and creating a corporate culture of flexibility and focus on customer demand.