reverse auction in procurement
TRANSCRIPT
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1Prentice Hall, 2002
Company-Centric B2B
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Learning Objectives
Describe the B2B field
Describe the major types of B2B models
Describe the characteristics of the sell-sidemarketplace
Describe the sell-side intermediariesmodels
Describe the characteristics of the buy-side marketplace and e-procurement
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Explain how forward and backward auctionswork in B2B
Describe B2B aggregation and grouppurchasing models
Describe collaborative e-commerce
Understand issues concerning theimplementation of company-centric B2B
Distinguish Internet-based EDI fromtraditional EDI
Learning Objectives (cont.)
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General Motors’ B2B Initiatives
EC initiatives —build-to-order project to be inplace by 2005 reducing inventory of finished
carsSelling capital assets
TradeXchange online auctions of items likeused machines for manufacturing
Significantly decreases time for sales
Increases dollar amount of the sales
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General Motors’ B2B Initiatives
EC initiatives at TradeXchangeBuying commodity products--$1 billion annual
expenditure for direct and indirect productsTraditional process
Length of time measured in weeks
Cost prohibited the number of bids
Reverse auction —automated process
Internet “open bid”—many suppliers takepart
Job is awarded quickly
Price to GM significantly lower
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Concepts and Characteristics of B2B EC
B2B EC defined
Transaction conducted electronically betweenbusiness over the networks
Internet
Extranets
IntranetsPrivate networks (e.g., EDI)
Automated trading improves the process
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Concepts and Characteristics
of B2B EC (cont.)
Market size and content
Expected to grow from $1.1 trillion in 2003to $10 trillion by 2005
Percentage of Internet-based B2B from2.1% in 2000 to 10% in 2005
Private and public e-marketplacePrivate —one-to-many mode
Public —many-to-many mode
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Concepts and Characteristics
of B2B EC (cont.)
How is B2B conducted?
Directly between buyer and seller
Via an online intermediary Along the supply chain
With or without intermediaries
Types of transactions
Spot buying —determined by dynamic supplyand demand
Strategic sourcing —long term contracts
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Figure 6-1
B2B Supply Chain
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Concepts and Characteristics
of B2B EC (cont.)
Supply chain relationshipsInterrelated subprocesses and roles
Acquisition of materialsProcessing products and services
Moving to distributors
Purchase by consumer
Traditional process managed through papertransactions
B2B applications offer competitive advantagesfor supply chain management (SCM)
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Concepts and Characteristics
of B2B EC (cont.)
Entities of B2B ECSelling company —marketing managementperspective
Buying company —procurementmanagement perspective
Electronic intermediaries —optional thirdparty directory service provider (scope of
service may be extended to orderfulfillment)
Trading platforms —pricing and negotiationprotocol (auctions, reverse auctions)
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Concepts and Characteristics
of B2B EC (cont.)
Entities of B2B EC (cont.) Payment services —mechanism fortransferring money to sellers
Logistics providers —logistics to completetransaction (packaging, storage, delivery)
Network platforms —Internet, VAN, intranet,extranet
Protocols of communication —EDI or XML
Back-end integration —connecting to ERPsystems, databases, functional applications
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Concepts and Characteristics
of B2B EC (cont.)
ProductCustomer
Supplier
Product process
Transportation
InventorySupply chain
Competitor
Sales and marketing
Supply chain processand performance
Information processed in B2B
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Concepts and Characteristics
of B2B EC (cont.)
Electronic intermediaries in B2BConsumers and business may share intermediaries
Businesses may use different intermediaries with
different suppliers
Benefits of B2B modelsEliminate paper-based systems
Expedite cycle time
Reduce errorsIncrease employee productivity
Reduce costs
Increase customer service and partnershipmanagement
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B2B Models
Company-centric models
Sell-side marketplace (one-to-many)
Buy-side marketplace (many-to-one)
Many-to-many marketplaces —the exchange
Buyers and sellers meet to trade
Trading communitiesTrading exchanges
Exchanges
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B2B Models (cont.)
Other B2B models and servicesFor the purpose of selling
For the purpose of buying
Value chain integrators
Value chain service providers
Information brokers
Vertical vs. horizontal marketplaces Vertical —one industry or industry section
Horizontal —service or product used in severaltypes of industries
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B2B Models (cont.)
Virtual service industries in B2B
Travel and tourism services
Real estate
Electronic payments
Online stock trading
Online financingOther online services
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Figure 6-2
Sell-Side Marketplace Architecture
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Sell-Side Marketplaces:One-to-Many
Virtual sellers —Bigboxx.com.hk of Hong Kong
B2B office supply retailer services
Large corporate clients
Medium corporate clients
Small offices
Goal —sell products in various SE Asian countriesOffers more than 10,000 items
Uses more than 300 suppliers
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Sell-Side Marketplaces:
One-to-Many (cont.)
Virtual sellers —Bigboxx.com.hk of Hong Kong(cont.)
Company portal attractive, easy to useBrowse online catalogs
Use search engines
Payments
Cash or check upon delivery Automatic payments
Credit card
Purchasing card
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Sell-Side Marketplaces:
One-to-Many (cont.)
Virtual sellers —Bigboxx.com.hk of HongKong (cont.)
Delivery
Owns trucks and warehouses
Delivery scheduled online
Same day (within an hour)
Specifically scheduled time
Ordering system integrated with SAP-basedback-office system
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Sell-Side Marketplaces:
One-to-Many (cont.)
Virtual sellers —Bigboxx.com.hk of HongKong (cont.)
Value-added services
Track status of order
Check stock availability
Promotions
Customized prices
Group accounts and central approval —forbusinesses with multiple branches
Standing orders automatically activated
Large number of reports and data available
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Sell-Side Marketplaces:
One-to-Many (cont.)
Customer serviceGeneral Electric
20 million calls/year about appliances
Reduced cost of each call from $5 to $0.20
Milacron, Inc.
Site contains 55,000 products
Easy to use
Securely handles selection, purchase,application
Technical service —expanded to provide ahigher level of service than previously available
at the site
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Sell-Side Marketplaces:
One-to-Many (cont.)
Dell
Intel
IBM
Cisco
Direct sales from catalogs
Configuration and customization
Efficient customization for direct salesBusiness customers
Customize products
Receive price quote
Submit order
Successful cases
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Sell-Side Marketplaces:
One-to-Many (cont.)
Direct sales from catalogs
BenefitsReduces costs (to buyers and sellers) anderrors during the process
Speeds up order cycle
Ability to customize productsOffer different prices to different customers
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Sell-Side Marketplaces:
One-to-Many (cont.)
Direct sales from catalogs (cont.)
LimitationsChannel conflicts with distributionsystems
High cost when traditional EDI used
Large number of business partners isneeded to justify system
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Selling Side: Auctions and Other Models
Forward auctions —quick disposal of itemsRevenue generation
Increased page views
Member acquisition and retention —biddingtransactions result in additional registeredmembers
Selling from own site when:Large companies that conduct auctions frequentlydon’t benefit from using intermediaries
E-marketplace already in use, cost of addingauction not too high
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Selling Side:
Auctions and Other Models (cont.)
Using intermediaries when:No resources required
Own and control auction informationFast time to market
Searching and reportingSearch and report all auction activities
Standard reports available
Additional analysis of complex information
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Selling Side:
Auctions and Other Models (cont.)
Billing and collection
Automatic calculation of shipping weights andcharges
Payment —encrypted credit card data
Billing information —easily downloaded intoexisting systems
Successful if:Sufficient number of loyal customers
Products well known
Price not major purchasing criteria
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Sell-Side Case:
CISCO Connection Online (CCO)
Benefits —saves the company $363 million
per year in:Technical support
Human resources
Software distribution
Marketing material
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Cisco Connection Online (CCO) (cont.)
Customer service —Cisco Connection online
Online ordering —Internet Product Center
builds virtually all products to order
Order status —customer tools for finding
answers to order status inquiries
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Cisco Connection Online (CCO) (cont.)
Benefits to Cisco
Reduced operating costs for order taking
Enhanced technical support and customerservice
Reduced technical support staff cost
Reduced software distribution costsLead times reduced fro 4-10 days to 2-3 days
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Cisco Connection Online (CCO) (cont.)
Benefits to customers
Quick order configurationImmediate cost determination
Collaboration with Cisco staff
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Sell-Side Intermediaries
Marshall Industries —(a subsidiary of AvnetMarshall) multinational distributor of electronic components known for its innovative usesof IT and the Web
Products and servicesMarshallNet
Marshall on the Internet (portal)
Strategic European InternetElectronic Design Center
PartnerNet
NetSeminar
Education and News Portal
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Sell-Side Intermediaries (cont.)
Marshall Industries —a subsidiary or
AvnetMarshall (cont.) Survival strategy
Continuous improvement programs andinnovations
Team-based organization, flat hierarchy,decentralized decision making
Profit sharing compensation for salespeople
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Sell-Side Intermediaries (cont.)
Marshall Industries —a subsidiary of AvnetMarshall (cont.)
Survival strategyCRM highly promoted
Web-based services create value betweensuppliers and customers
EC initiatives supported by:Changing internal organization
Changing internal procedures
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Sell-Side Intermediaries (cont.)
Boeing’s PART Acts as an intermediary between the airlines
and parts’ suppliers Provides a single point of online accessthrough which airlines and parts’ providers canaccess the data needed
Goal: provide its customers with one-stopshopping for online parts and maintenanceinformation and ordering capability
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Boeing’s PART
Spare parts business using traditional EDI
Mechanic tells purchasing department parts are needed,purchase is approved, purchase is made
Large airlines connect to Boeing's VAN
Boeing finds part and delivers
Debut of PART on the InternetEncourages customers to order parts electronically —cheap, easy, fast
50% of customers using Internet within first year
Sell-Side Intermediaries (cont.)
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Boeing’s PART
Benefits of PART onlineImproved customer service
Significant operating savings
New sales opportunities
Customer service online reducedPhone calls (purchasing, order status etc.)
Data entry
Sell-Side Intermediaries (cont.)
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Sell-Side Intermediaries (cont.)
Boeing’s PART Portable access to technical drawings/support
Boeing On Line Data (BOLD) providesavailability to:
Engineering drawings
Manuals
CatalogsOther technical information
Portable Maintenance Aid (PMA) —solvesmaintenance problems
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Sell-Side Intermediaries (cont.)
Boeing’s PART
Benefits to Boeing’s customers Increased productivity —less time searchingfor information
Reduced costs —delays at gate reduced
because all information is availableIncreased revenues —faster service providestime savings
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Buy Side: One-from-Many,
E-Procurement
Purchasing agents (buyers)Direct purchasing
Use of material is scheduledNot a shelf item
Indirect purchasing
MROs
Nonproduction materialsInefficiencies in procurement managementof indirect materials
Fi 6 3
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Figure 6-3
A Traditional Purchasing Process Flow
Source: ariba.com, February 2001.
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Buy Side: One-from-Many,
E-Procurement (cont.)
Innovative procurement managementInnovative purchasing as strategic approach to
increase profit marginsWeb facilitation includes:
Electronic tendering
Volume purchasing
Aggregating supplier catalogs at buyer’ssite
Group purchasing
Others
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Buy Side: One-from-Many,
E-Procurement (cont.)
Goals of procurement reengineering
Increase purchasing agent productivity
Lower purchasing prices of items
Improve information flow and management
Minimize maverick (unplanned) buying
Improve payment processStreamline purchasing process to make it:
Simple
Fast
B Sid O f M
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Buy Side: One-from-Many,
E-Procurement (cont.)
Goals of procurement reengineering (cont.)
Reduce administrative processing cost per order
Find new suppliers and vendors to providefaster/cheaper goods and services
Integrate procurement process with budgetary
control in an efficient and effective wayMinimize human errors in buying or shippingprocess
Figure 6 4
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Figure 6-4
Buy-Side B2BMarketplace Architecture
B Sid O f M
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Buy Side: One-from-Many,
E-Procurement (cont.)
Direct vs. indirect sourcingTools to automate purchasing goods
Direct or mission critical80% of manufacturer’s expenditure
Long-term relationship with vendor of known quality goods
Tight integration with suppliers alongsupply chain
Indirect —use of public exchanges forindirect sourcing
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Buy Side: Reverse Auctions
Pre-Internet Reverse auction processPrepare description of product to be produced
Announce project via ads, mail, telephone
Send detailed information to interested vendors Vendors prepare proposals
Bidders submit document proposals
Proposals evaluated
Problems:Laws
Expensive
Errors
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Buy Side: Reverse Auctions (cont.)
Web-based reverse auction processBuyers prepare bidding project information
Buyers post project on portal
Identify potential suppliers
Invite suppliers to bid
Suppliers download project information
Suppliers submit electronic bidReverse auction in real-time, or it can take a fewdays
Buyers evaluate and award contract
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Buy Side: Reverse Auctions (cont.)
Web-based reverse auction process
Benefits:Electronic process is faster
Administratively much less expensive
Enables location of cheapest possibleproducts
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Procurement Revolution at GE
TPN at GE Lighting DivisionPurchasing was inefficient —too many administrativetransactions
Process for each requisition took 7 daysComplex and time-consuming
Could only send out bids for 2 or 3 suppliers
Trading Process Network (TPN) —electronic bids
Entire process takes 7 days (for suppliers tobid)
2 hours to send information to suppliers
Evaluate and award bids same day
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Procurement Revolution at GE (cont.)
Benefits to GE
Involvement in procurement process
Labor declined 30%Material costs declined 5%-20%--widerbase of suppliers online
Redeployment
60% of the staff Sourcing department concentrates onstrategic activities instead of paperwork,etc.
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Procurement Revolution at GE (cont.)
Benefits to GE
Time to identify suppliers, prepare a request forbid, negotiate a price, and award the contract
Was 18-23 days
Now 9-11 days
Invoices automatically reconciled reflecting
modificationsGE procurement departments share informationabout their best suppliers across the world
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Procurement Revolution at GE (cont.)
Benefits to buyers
Worldwide supplier partnerships
Current business partnersStrengthen relationships
Streamline sourcing process
Rapid distribution of information
Transmit electronic drawings to multiple suppliers
Decrease sourcing cycle time
Quick receipt and comparison of pricing bids
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Procurement Revolution at GE (cont.)
Benefits to suppliers
Increased sales volume
Expanded market reach, finding new buyersLowered administration costs for sales andmarketing activities
Shortened requisition cycle time
Improved sales staff productivity
Streamlined bidding process
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Procurement Revolution at GE (cont.)
Deployment strategies
Start EC in one division and slowly go to alldivisions
Use the site as public bidding marketplace togenerate commission income to GE
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Aggregating Catalogs
Aggregating suppliers’ catalogs: an internalmarketplace
Maverick buying to save time leads to high prices Aggregating all approved suppliers’ catalogs inone place
Reduced number of suppliers
Buyers at multiple corporate locations
Fewer and remote suppliers
Larger quantity/lower costs
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Group Purchasing
Group purchasing —orders from severalbuyers are aggregated
Internal aggregationEconomy of scale
Reduced transaction processing cost
External aggregation
Aggregating demand online
Putting together orders from multiplebuyers to make large volumes/lower costs
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Electronic Bartering
Electronic barteringExchange of goods or services without the use of
moneyExchange a surplus for other need
Bartering exchange
Submit surplus to exchange for points
Points used to buy what company needsBenefits:
Faster than manually
Easier to match
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Collaborative Commerce (C-Commerce)
Web-based systems used betweenand among suppliers for:
Communication
Design
Planning
Information sharingInformation discovery
Collaborative Commerce
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Collaborative Commerce
(C-Commerce) (cont.)
Webcore construction goes online with itspartners
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Figure 6-6
Suppliers Extranet: Hudson Dayton Case
Collaborative Commerce
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Collaborative Commerce
(C-Commerce) (cont.)
Reduce design cycle time by connectingsuppliers: Adaptec, Inc.
Microchip manufacturer supplying electronic
equipment makersOutsources manufacturing tasks
Delivery times exceeded their competitors
Solution to the problem
Extranet and enterprise-level supply chainintegrated software
Significantly reduced order-to-productdelivery time
Collaborative Commerce
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Collaborative Commerce
(C-Commerce) (cont.)
Suppliers
Distributors
Overseas
Factories
Customers
Reduce product development time by connectingsuppliers: Caterpillar, Inc.
Heavy machinery manufacturer uses extranetRequest for customized component directly to
designers and suppliers ship to buyers
Connect engineering and manufacturing division with
worldwide
Collaborative Commerce
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Collaborative Commerce
(C-Commerce) (cont.)
Other examples of c-commerce
Tricon Restaurant International —global brand
marketing managementRE/MAX —real estate franchiser improvedcommunication and collaboration betweenindependent owners
Marriott International —links corporations,franchising partners, suppliers, customers
Nygard of Canada —interorganizational collaboration
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B2B Infrastructure
Server to host database and applications
Software for executing sell-side (catalogs)
Software for conducting auctions and reverseauctions
Software for e-procurement (buy-side)
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B2B Infrastructure (cont.)
Software for CRM
Security hardware and software
Software for building a storefront
Telecommunications networks and
protocols
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Extranet and EDI
Secure interorganizational networks
Traditional EDI limits accessibility of smallcompanies
Internet-based EDI offers wide accessibilityto companies around the world
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Integration
ERP software
Customer, supplier, and other databases
Legacy systemsCatalog (product) information
Inventory systems
Sales statisticsDecision support systems (DSS) and SCMapplications
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Integration (cont.)
Integration with existing information systems
Issues in integrating with back-end information
systems:Intranet-based work flow
Database management systems (DMBS)
Application packages
ERP
Back-end sell-side integration works forsellers but not buyers and vice versa
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Integration (cont.)
Integration with business partners
Easy integration with one company-centric side
Not easy to integrate for many buyers or sellers
Need buyer owned shopping cart that can
interface with back-end information systems
Figure 6-7
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B2B Agents
Figure 6 7
Intelligent Agent-Based Commerce
Source: J. K. Lee and W. Lee (1997).
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Implementation Issues
Justification and prioritization
Must conduct cost benefit analysis of proposedprojects
Include organizational impacts
Possible channel conflicts
Dealing with resistance to change due toprocesses reengineering
Cost-benefit analysis related to:
Finding B2B opportunities
Prioritizing potential initiatives
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Implementation Issues (cont.)
Vendor selection
Primary vendor uses its software and procedures,
adds partners as neededIntegrator mixes and matches existing productsand vendors to create “best of the breed”
Affiliate programs
Referral program
Useful for B2B intermediaries
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Implementation Issues (cont.)
Implementing e-procurement
Fit e-procurement into EC strategyReview and change procurement process itself
If ERP or SCM is in place —integrate e-procurement,If not in place —BPR before implementation
Coordinate buyer’s information system with seller’s
Managerial Issues
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Managerial Issues
B2B marketing —sell-side marketplaces requireadvertisement and incentives
Which models to use and when —need forimplementation strategies and prioritization
Purchase process reengineering (BPR)
Establish buy-side marketplace on its server if volume is big enough to attract major vendors
Join third-party intermediary-oriented marketplace if volume is small
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Managerial Issues (cont.)
Integration —trading in e-marketplaces isinterrelated with logistics
Particularly true in many-to-many exchanges
Company-centric marketplaces must integrate:
Logistics
Other support services
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Managerial Issues (cont.)
Business ethics
Accessing unauthorized areas in the tracingsystem should not be allowed
Privacy of partners should be protectedtechnically and legally
Auctions —both forward and reverse
Benefits are substantialImplementation is relatively simple
Considerable flexibility in implementation
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Managerial Issues (cont.)
E-procurement —critical success factors
Need to cut down number of routinetasks
Reduce overall procurement cycle usingappropriate information technologies
Workflow
GroupwareERP software
B2B models