Chapter 6
B2B E-Commerce
Copyright © 2013 Pearson Education
Teaching Objectives

Define B2B commerce and explain its scope and
history.

Explain the procurement process, the supply chain,
and collaborative commerce.

Identify the role of private industrial networks in
transforming the supply chain.
Copyright © 2013 Pearson Education
Slide 12-2
Introduction

The VWGroupSupply case illustrates the
exciting potential for B2B e-commerce to
 Lower production costs
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 Increase collaboration among firms
 Speed up new product delivery
The success of VWGroupSupply and similar
networks operated by the major automobile
firms in the world stands in contrast to an
earlier industry-sponsored Net marketplace
called Covisint
Copyright © 2013 Pearson Education
Slide 12-3
Introduction (cont.)

Covisint, founded in 1999 by five of the world’s
largest automakers
 General motors
 Ford
 Chrysler
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 Nissan
 Peugeot
Covisint hoped to provide an electronic market
connecting thousands of suppliers to a few huge
buyers using auctions and procurement services
Copyright © 2013 Pearson Education
Slide 12-4
B2B E-commerce and Supply chain
management

The process of conducting trade among business firms is
complex and requires significant human intervention, and
therefore, consumes significant resources

Some firms estimate that each corporate purchase order for
support products costs them, and average, at least $100 in
administrative overhead
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processing paper, approving purchase decisions,
spending time using the telephone and fax machines to
search for products and arrange for purchases,
arranging for shipping, and receiving the goods
Copyright © 2013 Pearson Education
Slide 12-5
B2B E-commerce and Supply chain
management (cont.)

Across the economy, this adds up to trillions of dollars
annually being spent for procurement processes that could
potentially be automated
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If even just a portion of inter-firm trade were automated, and
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parts of the entire procurement process assisted by the Internet,
then literally trillions of dollars might be released for more
productive uses,
consumer prices potentially would fall,
productivity would increase, and
the economic wealth of the nation would expand
Copyright © 2013 Pearson Education
Slide 12-6
B2B E-commerce and Supply chain
management (cont.)

The challenge of B2B e-commerce is changing existing
patterns and systems of procurement, and

designing and implementing new Internet-based B2B solutions
Copyright © 2013 Pearson Education
Slide 12-7
Defining B2B Commerce

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B2B commerce:
 All types of computer-enabled inter-firm trade
B2B e-commerce (B2B digital commerce):
 The portion of B2B commerce enabled by the Internet
Supply chain
 The links that connect business firms in the production
of goods and services
Supply chains are a complex system of organizations, people,
business process, technology, and information, all of which
need to work together to produce products efficiently
Copyright © 2013 Pearson Education
Slide 12-8
Evolution of the Use of
Technology Platforms in B2B Commerce
Figure 12.1, Page 762
Copyright © 2013 Pearson Education
Slide 12-9
The Evolution of B2B Commerce
 Automated order-entry systems
 Seller-side solution

Seller-biased markets that are owned by, and show only goods
from, a single seller
 Involve the use of telephone modems to send digital
orders

to health care products companies such as Baxter Healthcare
 Baxter, a diversified supplier of hospital supplies,
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placed telephone modems in its customers’ procurement
offices
to automated re-ordering from Baxter’s computerized
inventory database and
to discourage re-ordering from competitor
Copyright © 2013 Pearson Education
Slide 12-10
The Evolution of B2B Commerce (cont.)
 Electronic data interchange (EDI)
 Buyer-side solution

Buyer-biased markets that are owned by buyers and that aim to
reduce the procurement costs of supplies for buyers
 A communications standard for sharing business
documents (such as invoices, purchase orders, shipping
bills, product stocking numbers) and

settlement information among a small number of firms
 Hub-and-spoke

system
The buyers in the center and the suppliers connected to the
central hub via private dedicated networks
Copyright © 2013 Pearson Education
Slide 12-11
The Evolution of B2B Commerce (cont.)

B2B electronic storefronts
 Online catalogs of products made available to the public
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marketplace by a single supplier – similar to Amazon
for the B2C retail market
Net marketplaces
 Brings hundreds to thousands of suppliers and buyers
into a single Internet
 Establish the prices of the goods they offer in many
ways
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Fixed catalog prices
Negotiation
Auction
Copyright © 2013 Pearson Education
Slide 12-12
The Evolution of B2B Commerce (cont.)
 Net marketplaces earn revenue in a number of ways
including
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Transaction fees
Subscription fees
Service fees
Advertising and marketing
Sales of data and information
Private industrial networks
 Private trading exchange
 Internet-based communication environments that
extend far beyond procurement to encompass truly
collaborative commerce
Copyright © 2013 Pearson Education
Slide 12-13
The Evolution of B2B Commerce (cont.)
 Private industrial networks permit buyer firms
and their principal suppliers to
 share product design and development,
 marketing,
 inventory,
 production scheduling, and
 unstructured communications
Copyright © 2013 Pearson Education
Slide 12-14
Potential Benefits of B2B E-commerce
Lower administrative costs
 Lower search costs for buyers
 Reduced inventory costs
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 Increasing competition among suppliers
 Reducing inventory carried (minimum stock)
Lower transaction costs:
 Automation, eliminating paperwork
Increased production flexibility by ensuring
just-in-time parts delivery
Copyright © 2013 Pearson Education
Slide 12-15
Potential Benefits (cont.)
Improved quality of products by increasing
cooperation among buyers and sellers
 Decreased product cycle time
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 Sharing designs and production schedules with
suppliers
Increased opportunities for collaboration
 Greater price transparency
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 The ability to see the actual buy and sell prices in a
market
Increased visibility, real-time information sharing
Copyright © 2013 Pearson Education
Slide 12-16
The Procurement Process
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Procurement process:
 how firms purchase materials they need to make
products for consumers
Steps in procurement process
 Deciding who to buy from and what to pay
 Searching for suppliers of specific products
 Qualifying both the seller and the products they sell
 Negotiating prices, credit terms
 Scheduling of delivery
 Completing transaction
Copyright © 2013 Pearson Education
Slide 12-17
Types of Procurement
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Firms use two methods to purchase
 Contract purchasing:
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Involves long-term written agreements to purchase specified
products, with agreed-upon terms and quality
 Spot purchasing:
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Involves purchase of goods based on immediate needs in larger
marketplaces that involve many suppliers
The key players in the procurement process
are the purchasing managers
 They ultimately decide who to buy from, what to buy,
and on what terms
Copyright © 2013 Pearson Education
Slide 12-18
Trends in Supply Chain Management
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Supply chain management (SCM)
 Activities used to coordinate key players in the
procurement process
Major developments in SCM
 Just-in-time production
 Supply chain simplification
 Adaptive supply chains
 Electronic data interchange
 Supply chain management systems
 Collaborative commerce
Copyright © 2013 Pearson Education
Slide 12-19
Just-in-Time production
 Method of inventory cost management
 Seeks to eliminate excess inventory to bare
minimum
 In just-in-time production, the parts needed for, say,
an automobile,
 arrive at the assembly factory a few hours or even
minutes before they are attached to a car
 Payment for the parts does not occur until the parts
are attached to a vehicle on the production line
Copyright © 2013 Pearson Education
Slide 12-20
Supply Chain Simplification
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Reducing size of supply chain
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Working with strategic group of suppliers to reduce
product and administrative costs and improving quality
Essential for just-in-time production models
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For instance, the automobile industry has systematically
reduced the number of its supplier by over 50%
Instead of open bidding for orders, large manufacturers
have chosen to work with strategic partner supply firms
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under long-term contracts that guarantee the supplier
business and also establish quality, cost, and timing goals
Copyright © 2013 Pearson Education
Slide 12-21
Supply Chain Simplification (cont.)
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May involve:
 Joint product development and design
 Integration of computer systems
 Tight coupling
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Ensuring precise delivery of ordered parts at specific times
and particular location
To ensure the production process is not interrupted for lack
of parts
Copyright © 2013 Pearson Education
Slide 12-22
Adaptive Supply Chains
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Reducing centralization
 Reduce risks caused by relying on single suppliers who
are subject to local instability
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Key suppliers in Japan were forced to shut down or slow
production
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e.g., European financial crisis, Japanese earthquake/tsunami
because of nuclear contamination of the entre Fukushima
region where, as its turns out,
major Japanese and American firms had automobile parts
factories
As a result, General Motors, could no longer obtain
transmissions for its Voltelectric car, and
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had to shut down a truck factory in Louisiana due to a lack of parts
from Japan
Copyright © 2013 Pearson Education
Slide 12-23
Adaptive Supply Chains (cont.)
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By 2012, the risks and costs of extended and
concentrated supply chains had begun to change
corporate strategies
To cope with unpredictable world events,
 firms are taking steps to break up single global
supply chain systems
 into regional or product-based supply chains
 Firms can decide to locate some production of
parts in Latin America,
 rather than all their production or suppliers in a single
country such as Japan
Copyright © 2013 Pearson Education
Slide 12-24
Adaptive Supply Chains (cont.)
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Allowing production to be moved to temporary
safe harbors in case of local manufacturing
disruptions
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This may result in higher short term costs, but
provide substantial,
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longer term risk protection in the event any single region is
disrupted
Copyright © 2013 Pearson Education
Slide 12-25
Electronic Data Interchange (EDI)
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EDI was developed to reduce the cost, delays and
errors inherent in the manual exchanges of
documents such as
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purchase orders, shipping documents, price lists, payments,
and customer data
EDI differs from an unstructured message because
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its messages are organized with distinct field for each of the
important pieces of information in a commercial transaction
such as
transaction date, product purchased, amount, sender’s name,
address, and recipient’s name
Copyright © 2013 Pearson Education
Slide 12-26
Electronic Data Interchange (cont.)

Broadly defined communications protocol for
exchanging documents among computers
 Stage 1: 1970s–1980s—Document automation
 Procurement agents created purchase orders
electronically and sent them to trading partners, who in
turn shipped order fulfillment and shipping notices
electronically back to the purchaser
 Invoices, payments, and other documents followed
 These early implementations replaced the postal system
for document transmission, and
 resulted in same-day shipping of orders (rather than a
week’s delay caused by the postal system), reduced errors,
and lower costs
Copyright © 2013 Pearson Education
Slide 12-27
Electronic Data Interchange (cont.)
 Stage 2: Early 1990s—Document elimination
 EDI was used to eliminate purchase orders
and other documents entirely,
 replacing them with production schedules and
inventory balances
 Supplier firms were sent monthly statements
of production requirements and precise
scheduled delivery times, and
 the orders would be fulfilled continuously, with
inventory and payments being adjusted at he end
of each moth
Copyright © 2013 Pearson Education
Slide 12-28
Electronic Data Interchange (cont.)
 Stage 3: Mid-1990s—Continuous
replenishment/access model
 Suppliers were given online access to selected parts
of the purchasing firm’s production and delivery
schedules, and,
 under long-term contracts, were required to meet those
schedules on their own without intervention by firm
purchasing agents
 For instance, Walmart and Toys“R”Us provide their
suppliers with access to their store inventories, and
 the suppliers are expected to keep the stock of items on the
shelf within pre-specified targets
Copyright © 2013 Pearson Education
Slide 12-29
The Evolution of EDI as a B2B Medium
Figure 12.5, Page 777
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Slide 12-30
Electronic Data Interchange (cont.)

Today:
 EDI provides for exchange of critical business
information between computer applications supporting
wide variety of business processes
 EDI is an important industrial network technology,
 suited to support communications among a small set of
strategic partner in direct, long term trading relationship
 The technical platform of EDI has changed from
mainframes to personal computers,
 an the telecommunications
environments is changing
from private to the Internet (referred to as Internetbased EDI)
Copyright © 2013 Pearson Education
Slide 12-31
Supply Chain Management Systems
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Continuously link activities of buying, making, and
moving products from suppliers to purchasing firms
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SAP and Oracle Mobile apps for smartphones, tablets
Integrates demand side of business equation by
including order entry system in the process
 With SCM system and continuous replenishment,
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inventory is eliminated and production begins only when order is
received
Hewlett Packard’s SCM system: Elapsed time from
order entry to shipping PC is 48 hours
Copyright © 2013 Pearson Education
Slide 12-32
Supply Chain Management Systems (cont.)
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Hewlett-Packard (HP) has a Web-based, order-driven supply
chain management system that begins with either
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a customer placing an order online or the receipt of an order from a
dealer
The order is forwarded from the order entry system to HP’s
production and delivery system
From there, the order is routed to one of several HP contractor
supplier firms
One such firm is Synnex in Fremont, California
At Synnex, computers verify the order with HP and validate the
ordered configuration to ensure the PC can be manufactured
 e.g., will not have missing parts or fail a design specification set
by HP
Copyright © 2013 Pearson Education
Slide 12-33
Supply Chain Management Systems (cont.)
 The order is then forward to a computer-based
production control system that issues
 a bar-coded production ticket to factory assemblers
 Simultaneously, a parts order is forwarded to Synnex’s
warehouse and inventory management system
 A worker assembles the computer, and then
 the computer is boxed, tagged,
customer
and shipped to the
 The delivery is monitored and tracked by HP’s supply
chain management system,
 which links directly to one of several overnight
systems operated by Federal Express, and UPS
Copyright © 2013 Pearson Education
delivery
Slide 12-34
Collaborative Commerce
A direct extension of supply chain management
systems
 Use of digital technologies for organizations to
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collaboratively design, produce, and manage products through life
cycles
This is a much broader mission than EDI or simply
managing the flow of information among
organizations
 Moves focus from transactions to relationships
among supply chain participants
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Copyright © 2013 Pearson Education
Slide 12-35
Collaborative Commerce (cont.)
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P&G, the world’s largest manufacturer or personal
and health care products, from Crest toothpaste to
Tide soap,
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to work with suppliers and even customers to develop 50% of its
product line over time
Copyright © 2013 Pearson Education
Slide 12-36
Collaborative Commerce (cont.)
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In the past, for instance, P&G would design a bottle
or product package in-house, and then
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turn to over 100 suppliers of packaging to find out what it would
cost and try to bargain that down
In 2011, using Ariba’s procurement network, P&G
asks its suppliers to come up with innovative ideas
for packaging and pricing
 Taking it a step further, P&G Web site,
Pgconnectdevelop.com , solicits new product ideas
from suppliers and customers

Copyright © 2013 Pearson Education
Slide 12-37
Collaborative Commerce (cont.)
About 50% of P&G new products originate with
substantial input from its suppliers and customers
 Other well-known companies using collaboration to
develop and deliver products include
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 Lego (DesignBy Me),
 Harley Davidson,
 Starbucks
Copyright © 2013 Pearson Education
Slide 12-38
Collaborative Commerce (cont.)
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Although collaborative commerce can involve
customers as well as suppliers in the
development of products,
 for the most part, it is concerned with the development
of a rich communications environment to enable interfirm sharing of
 designs, productions plans, inventory levels,
 delivery schedules, and the development of shared
products
Copyright © 2013 Pearson Education
Slide 12-39
Private Industrial Networks
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or Private trading exchanges (PTXs)
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Web-enabled networks for coordination of transorganizational business processes (collaborative
commerce)
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Private industrial networks can be viewed as
“extended enterprises” in the sense that
 they often begin as ERP systems in a single firms, and
are then expanded to include (often using an extranet)
the firm’s major suppliers
Copyright © 2013 Pearson Education
Slide 12-40
Private Industrial Networks (cont.)
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In P&G private industrial network, customer sales
are captured at the cash register,
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which then initiates a flow of information back to distributors, P&G,
and its suppliers
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This tell P&G and its suppliers the exact level of
demand for thousands of products
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This information is then used to initiate production,
supply, and transportation

to replenish products at the distributors and retailers
Copyright © 2013 Pearson Education
Slide 12-41
Characteristics of Private
Industrial Networks
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Objectives include:
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Typically, focus on single sponsoring company that
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Efficient purchasing and selling industry-wide
Increasing supply chain visibility (knowing the inventory levels)
Closer buyer-supplier relationships
“owns” the network, sets the rules, establishes governance (a
structure of authority, rule enforcement, and control), and invites
firms to participate at its sole discretion
Therefore, these networks are “private”
Copyright © 2013 Pearson Education
Slide 12-42
Characteristics of Private
Industrial Networks (cont.)
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True Value is one of the largest retailer-owned
hardware cooperatives with operations in
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The existing inbound supply chain system was
fragmented,
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54 countries, 5,000 plus stores, and 12 regional distribution
centers
did not permit real-time tracking of packages, and
when shipments were short or damaged, could not alert stores
The supply chain was “invisible”:

suppliers could not see store inventory levels, and stores could not
see supplier shipments
Copyright © 2013 Pearson Education
Slide 12-43
Characteristics of Private
Industrial Networks (cont.)
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Using a Web-based solution form Sterling Commerce (an
IBM company),
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The network focuses on three processes:
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True Value created its own private industrial network to which all
suppliers, shippers, and stores have access
domestic prepaid shipping,
domestic collect, and
international direct shipping
For each process the network tracks in real-time the
movement of goods from suppliers to shippers, warehouses,
and stores
Copyright © 2013 Pearson Education
Slide 12-44
Characteristics of Private
Industrial Networks (cont.)
The system has led to a 57% reduction in lead-time
needed for orders
 If goods are delayed, damaged, or unavailable, the
system alerts all parties automatically

Copyright © 2013 Pearson Education
Slide 12-45
Implementation Barriers

One barrier is that participating firms are required to share
sensitive data with their business partners up and down the
supply chain
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This is a huge corporate mindset change since what was
previously considered proprietary and secret must now be
shared
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Furthermore, in the digital environment, it can be difficult to
control the limits of this information sharing

Information that a firm willingly gives to its largest customer may
wind up being shared with its closest competitor
Copyright © 2013 Pearson Education
Slide 12-46
Implementation Barriers (cont.)

Other barriers include difficulties in integrating private
industrial networks into existing ERP (enterprise resource
planning) systems and EDI (electronic data interchange)
networks
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Most ERP systems were not designed initially to work with
extranets or even to be particularly Internet compliant;
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they were based on business models that use entirely internal
business processes
Furthermore, changes in corporate culture and attitudes
organization-wide and among all employees are essential

so that a shifting of allegiances occurs from the firm to the wider
trans-organizational enterprise
Copyright © 2013 Pearson Education
Slide 12-47
Implementation Barriers (cont.)

Employees must recognize that the firm’s fate is intertwined
with that of their suppliers and distributors
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Suppliers in turn, must change how they manage and
allocate resources
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because their own production is closely aligned with the demands
of the private industrial network partners
A loss of independence among all participants in the supply
and distribution chains occurs and

this requires huge behavioral changes in individual organizations
in order for their participation to reap the benefits of participation
Copyright © 2013 Pearson Education
Slide 12-48