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Prentice Hall, 2003 Chapter 10 Payments and Order Fulfillment 1.

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Presentation on theme: "Prentice Hall, 2003 Chapter 10 Payments and Order Fulfillment 1."— Presentation transcript:

1 Prentice Hall, 2003 Chapter 10 Payments and Order Fulfillment 1

2 2 Prentice Hall, 2003 Learning Objectives Understand the crucial factors determining the success of e-payment methods Describe the key elements in securing an e-payment Discuss the players and processes involved in using credit cards online Describe the uses and benefits of purchase cards

3 3 Prentice Hall, 2003 Describe different categories and potential uses of smart cards Discuss various online alternatives to credit card payments and identify under what circumstances they are best used Describe the processes and parties involved in e-checking Learning Objectives (cont.)

4 4 Prentice Hall, 2003 Learning Objectives (cont.) Describe the role of order fulfillment and back-office operations in EC Describe the EC order fulfillment process. Describe the major problems of EC order fulfillment Describe various solutions to EC order fulfillment problems

5 5 Prentice Hall, 2003 LensDoc Organizes Payment Online The Problem LensDoc—online retailer of contact lenses, sun and magnifying glasses Dental care and personal care products Customers pay by credit card (90% of all online purchases in the U.S.) Easy to purchase Easy to purchase fraudulently Contact lenses cannot be returned once used, but unsatisfied customers want their money back

6 6 Prentice Hall, 2003 LensDoc (cont.) Solutions: Process credit card purchases by hand Require: Home address Shipping address Assumption is that if the card being used is a fraudulent one, the perpetrator is unlikely to know the cardholder’s address

7 7 Prentice Hall, 2003 LensDoc (cont.) The Results Investigating alternative methods of payment Cash cards Special card-swiping peripherals Credit card processing services Currently disadvantages outweigh advantages of any of these alternatives

8 8 Prentice Hall, 2003 Electronic Payments Paying with credit cards online Until recently consumers were extremely reluctant to use their credit card numbers on the Web This is changing because: Many of people who will be on the Internet in 2004 have not even had their first Web experience today 85% of the transactions that occur on the Web are B2B rather than B2C (credit cards are rarely used in B2B transactions)

9 9 Prentice Hall, 2003 Electronic Payments (cont.) Four parties involved in e-payments Issuer Customers must obtain e-payment accounts from an issuer Issuers are usually involved in authenticating a transaction and approving the amount involved Customer/payer/buyer Merchant/payee/seller Regulator

10 10 Prentice Hall, 2003 Electronic Payments (cont.) Key issue of trust must be addressed PAIN Privacy Authentication and authorization Integrity Nonrepudiation Characteristics of successful e-payment methods Independence Interoperability and portability Security Anonymity Divisibility Ease of use Transaction fees

11 11 Prentice Hall, 2003 Security for E-Payments Public key infrastructure (PKI)—a scheme for securing e-payments using public key encryption and various technical components Foundation of a number of network applications: Supply chain management Virtual private networks Secure e-mail Intranet applications

12 12 Prentice Hall, 2003 Security for E-Payments Public key encryption Encryption (cryptography)—the process of scrambling (encrypting) a message in such a way that it is difficult, expensive, or time consuming for an unauthorized person to unscramble (decrypt) it

13 13 Prentice Hall, 2003 Security for E-Payments (cont.) All encryption has four basic parts: Plaintext—an unencrypted message in human- readable form Ciphertext—a plaintext message after it has been encrypted into unreadable form Encryption algorithm—the mathematical formula used to encrypt the plaintext into ciphertext and vice versa Key—the secret code used to encrypt and decrypt a message

14 14 Prentice Hall, 2003 Security for E-Payments (cont.) Two major classes of encryption systems: Symmetric (private key) Used to encrypt and decrypt plain text Shared by sender and receiver of text Asymmetric (public key) Uses a pair of keys Public key to encrypt the message Private key to decrypt the message

15 15 Prentice Hall, 2003 Security for E-Payments (cont.) Public key encryption—method of encryption that uses a pair of keys—a public key to encrypt a message and a private key (kept only by its owner) to decrypt it, or vice versa Private key—secret encryption code held only by its owner Public key—secret encryption code that is publicly available to anyone

16 16 Prentice Hall, 2003 Exhibit 10.1 Private Key Encryption

17 17 Prentice Hall, 2003 Exhibit 10.2 Key Sizes & Time to Try All Possible Keys

18 18 Prentice Hall, 2003 Digital signatures—an identifying code that can be used to authenticate the identity of the sender of a message or document Used to: Authenticate the identity of the sender of a message or document Ensure the original content of the electronic message or document is unchanged Security for E-Payments (cont.)

19 19 Prentice Hall, 2003 Security for E-Payments (cont.) Digital Signatures—how they work: 1.Create an e-mail message with the contract in it 2.Using special software, you “hash” the message, converting it into a string of digits (message digest) 3.You use your private key to encrypt the hash (your digital signature

20 20 Prentice Hall, 2003 Security for E-Payments (cont.) 4.E-mail the original message along with the encrypted hash to the receiver 5.Receiver uses the same special software to hash the message they received 6.Company uses your public key to decrypt the message hash that you sent. If their hash matches the decrypted hash, then the message is valid

21 21 Prentice Hall, 2003 Exhibit 10.3 Digital Signatures

22 22 Prentice Hall, 2003 Security for E-Payments (cont.) Digital certificates— verification that the holder of a public or private key is who he or she claims to be Certificate authorities (CAs)—third parties that issue digital certificates Name : “Richard” key-Exchange Key : Signature Key : Serial # : 29483756 Other Data : 10236283025273 Expires : 6/18/04 Signed : CA’s Signature

23 23 Prentice Hall, 2003 Standards for E-Payments Secure socket layer (SSL)—protocol that utilizes standard certificates for authentication and data encryption to ensure privacy or confidentiality Transport Layer Security (TLS)—as of 1996, another name for the Secure Socket Layer protocol

24 24 Prentice Hall, 2003 Standards for E-Payments (cont.) Secure Electronic Transaction (SET)—a protocol designed to provide secure online credit card transactions for both consumers and merchants; developed jointly by Netscape, Visa, MasterCard, and others

25 25 Prentice Hall, 2003 Electronic Cards and Smart Cards Payment cards—e lectronic cards that contain information that can be used for payment purposes Credit cards—provides holder with credit to make purchases up to a limit fixed by the card issuer Charge cards—balance on a charge card is supposed to be paid in full upon receipt of monthly statement Debit card—cost of a purchase drawn directly from holder’s checking account (demand-deposit account)

26 26 Prentice Hall, 2003 Electronic Cards and Smart Cards (cont.) The Players Cardholder Merchant (seller) Issuer (your bank) Acquirer (merchant’s financial institution, acquires the sales slips) Card association (VISA, MasterCard) Third-party processors (outsourcers performing same duties formerly provided by issuers, etc.)

27 27 Prentice Hall, 2003 Exhibit 10.4 Online Credit Card Processing

28 28 Prentice Hall, 2003 Electronic Cards and Smart Cards (cont.) Credit card gateway— an online connection that ties a merchant’s systems to the back- end processing systems of the credit card issuer Virtual credit card—an e-payment system in which a credit card issuer gives a special transaction number that can be used online in place of regular credit card numbers

29 29 Prentice Hall, 2003 Electronic Cards and Smart Cards (cont.) Electronic wallets (e-wallets)—a software component in which a user stores credit card numbers and other personal information; when shopping online; the user simply clicks the e- wallet to automatically fill in information needed to make a purchase One-click shopping—saving your order information on retailer’s Web server E-wallet—software downloaded to cardholder’s desktop that stores same information and allows one-click-like shopping

30 30 Prentice Hall, 2003 Electronic Cards and Smart Cards (cont.) Security risks with credit cards Stolen cards Reneging by the customer—authorizes a payment and later denies it Theft of card details stored on merchant’s computer—isolate computer storing information so it cannot be accessed directly from the Web

31 31 Prentice Hall, 2003 Electronic Cards and Smart Cards (cont.) Purchasing cards—s pecial-purpose payment cards issued to a company’s employees to be used solely for purchasing nonstrategic materials and services up to a preset dollar limit Instrument of choice for B2B purchasing

32 32 Prentice Hall, 2003 E-Cards (cont.) Benefits of using purchasing cards Productivity gains Bill consolidation Payment reconciliation Preferred pricing Management reports Control

33 33 Prentice Hall, 2003 Exhibit 10.5 Participants & Process of Using a Purchasing Card

34 34 Prentice Hall, 2003 Smart Cards Smart card—an electronic card containing an embedded microchip that enables predefined operations or the addition, deletion, or manipulation of information on the card

35 35 Prentice Hall, 2003 Smart Cards (cont.) Categories of smart cards Contact card—a smart card containing a small gold plate on the face that when inserted in a smart-card reader makes contact and so passes data to and from the embedded microchip Contactless (proximity) card—a smart card with an embedded antenna, by means of which data and applications are passed to and from a card reader unit or other device

36 36 Prentice Hall, 2003 Smart Cards (cont.) Securing smart cards Theoretically, it is possible to “hack” into a smart card Most cards can now store the information in encrypted form Same cards can also encrypt and decrypt data that is downloaded or read from the card Cost to the attacker of doing so far exceeds the benefits

37 37 Prentice Hall, 2003 Smart Cards (cont.) Important applications of smart card use: Loyalty Financial Information technology Health and social welfare Transportation Identification

38 38 Prentice Hall, 2003 E-Cash and Innovative Payment Methods E-cash—the digital equivalent of paper currency and coins, which enables secure and anonymous purchase of low-priced items Micropayments—small payments, usually under $10

39 39 Prentice Hall, 2003 System consists of three participants: User Opens an account with Downloads a special e-wallet to their desktop PC Purchases some eCoins with a credit card Merchant—embeds a special eCoin icon in its payment page eCoin server—operates as a broker Keeps customer and merchant accounts Accepts payment requests from the customer’s e- wallet Computes embedded invoices for the merchant

40 40 Prentice Hall, 2003 E-Cash and Payment Card Alternatives (cont.) Wireless payments Vodafone “m-pay bill” system that enables wireless subscribers to use their mobile phones to make micropayments Qpass ( Charges to qpass account, are charged to a specified credit card on a monthly basis

41 41 Prentice Hall, 2003 Stored-Value Cards Stores cash downloaded from bank or credit card account Visa cash—a stored-value card designed to handle small purchases or micropayments; sponsored by Visa Mondex—a stored-value card designed to handle small purchases or micropayments; sponsored by Mondex, a subsidiary of MasterCard

42 42 Prentice Hall, 2003 E-Loyalty and Reward Programs Loyalty programs online B2C sites spend hundreds of dollars acquiring new customers Payback only comes from repeat customers who are likely to refer other customers to a site Electronic script—a form of electronic money (or points), issued by a third party as part of a loyalty program; can be used by consumers to make purchases at participating stores

43 43 Prentice Hall, 2003 E-Loyalty and Reward Programs (cont.) Beenz—a form of electronic script offered by that consumers earn at participating sites and redeem for products or services Consumer earns beenz by visiting, registering, or purchasing at 300 participating sites Beenz are stored and used for later purchases Partnered with MasterCard to offer rewardzcard— stored-value card used in U.S. and Canada for purchases where MasterCard is accepted Transfer beenz into money to spend on Web, by phone, mail order, physical stores

44 44 Prentice Hall, 2003 E-Loyalty and Reward Programs (cont.) MyPoints-CyberGold Customers earn cash for viewing ads Cash used for later purchases or applied to credit card account Prepaid stored value cards—used online and off- line RocketCash Combines online cash account with rewards program User opens account and adds funds Used to make purchases at participating merchants

45 45 Prentice Hall, 2003 Internetcash Teenage market—primary reason for going online Communicating with friends via email and chat rooms homework Researching information Playing games Downloading music or videos

46 46 Prentice Hall, 2003 Internetcash (cont.) Why they do not shop online Parents will not let them children their (the parents) credit cards online They cannot touch the products It is difficult to return items purchased on the Web They do not have the money Transaction may be insecure

47 47 Prentice Hall, 2003 Internetcash (cont.) InternetCash offers prepaid stored-value cards sold in amounts of $10, $20, $50, and $100 Must be activated to work Gives the user shopping privileges at online stores that carry an InternetCash icon Purchases are automatically deducted from the value of the card InternetCash’s transactions are anonymous

48 48 Prentice Hall, 2003 Internetcash (cont.) InternetCash is facing obstacles First, they have to find retailers willing to sell the cards Must persuade merchants to accept the card for online purchases Legal issues

49 49 Prentice Hall, 2003 Person-to-Person Payments Person-to-person (P2P) payments—e- payment schemes (such as that enable the transfer of funds between two individuals Repaying money borrowed Paying for an item purchased at online auction Sending money to students at college Sending a gift to a family member

50 50 Prentice Hall, 2003 Global B2B Payments Letters of credit (LC)—a written agreement by a bank to pay the seller, on account of the buyer, a sum of money upon presentation of certain documents TradeCard (—innovative e- payment method that uses a payment card

51 51 Prentice Hall, 2003 Electronic Letters of Credit (LC) Benefits to sellers Credit risk is reduced Payment is highly assured Political/country risk is reduced Benefits to the buyer Allows buyer to negotiate for a lower purchase price Buyer can expand its source of supply Funds withdrawn from buyer’s account only after the documents have been inspected by the issuing bank

52 52 Prentice Hall, 2003 TradeCard Payments TradeCard allows businesses to effectively and efficiently complete B2B transactions whether large or small, domestic or cross-border, or in multiple currencies Buyers and sellers interact with each other via the TradeCard system System Checks purchase orders for both parties Awaits confirmation from a logistics company that deliveries have been made and received Authorizes payment completing financial transaction between the buyer and seller

53 53 Prentice Hall, 2003 E-Checking E-check—the electronic version or representation of a paper check Eliminate need for expensive process reengineering and takes advantage of the competency of the banking industry eCheck Secure (from and provide software that enables the purchase of goods and services with e-checks Used mainly in B2B

54 54 Prentice Hall, 2003 Order Fulfillment: Overview Order fulfillment—all the activities needed to provide customers with ordered goods and services, including related customer services Back-office operations—the activities that support fulfillment of sales, such as accounting and logistics Front-office operations—the business processes, such as sales and advertising, that are visible to customers

55 55 Prentice Hall, 2003 Overview of Logistics Logistics—the operations involved in the efficient and effective flow and storage of goods, services, and related information from point of origin to point of consumption Delivery of materials or services Right time Right place Right cost

56 56 Prentice Hall, 2003 Exhibit 10.9 Order Fulfillment and Logistics Systems

57 57 Prentice Hall, 2003 EC Order Fulfillment Process 1. Payment clearance 2. In-stock availability 3. Arranging shipments 4. Insurance 5. Production (planning, execution) 6. Plant services 7. Purchasing and warehousing 8. Customer contacts 9. Returns (Reverse logistics—movement of returns from customers to vendors) 10. Demand forecast 11. Accounting, billing Steps in the process of order fulfillment

58 58 Prentice Hall, 2003 Order Fulfillment and the Supply Chain Order fulfillment and order taking are integral parts of the supply chain. Flows of orders, payments, and materials and parts need to be coordinated among Company’s internal participants External partners The principles of supply chain management must be considered in planning and managing the order fulfillment process

59 59 Prentice Hall, 2003 Problems in Order Fulfillment Manufacturers, warehouses, and distribution channels were not in sync with the e-tailers High inventory costs Quality problems exist due to misunderstandings Shipments of wrong products, materials, and parts High cost to expedite operations or shipments

60 60 Prentice Hall, 2003 Problems in Order Fulfillment (cont.) Uncertainties Major source of uncertainty is demand forecast Demand is influenced by Consumer behavior Economic conditions Competition Prices Weather conditions Technological developments Customers’ confidence

61 61 Prentice Hall, 2003 Problems in Order Fulfillment (cont.) Demand forecast should be conducted frequently with collaborating business partners along the supply chain in order to correctly gauge demand and make plans to meet it Delivery times depend on factors ranging from machine failures to road conditions Quality problems of materials and parts (may create production time delays) Labor troubles (such as strikes) can interfere with shipments

62 62 Prentice Hall, 2003 Problems in Order Fulfillment (cont.) Order fulfillment problems are created due by lack of coordination and inability or refusal to share information Bullwhip effect—large fluctuations in inventories along the supply chain, resulting from small fluctuations in demand for finished products

63 63 Prentice Hall, 2003 Solutions to Order Fulfillment Problems Improvements to order taking process Order taking can be done on EDI, EDI/Internet, or an extranet, and it may be fully automated. In B2B, orders are generated and transmitted automatically to suppliers when inventory levels fall below certain levels. Result is a fast, inexpensive, and a more accurate process Web-based ordering using electronic forms expedites the process Makes it more accurate Reduces the processing cost for sellers

64 64 Prentice Hall, 2003 Solutions to Order Fulfillment Problems (cont.) Implementing linkages between order- taking and payment systems can also be helpful in improving order fulfillment Electronic payments can expedite order fulfillment cycle and payment delivery period Payment processing significantly less expensive Fraud can be controlled better

65 65 Prentice Hall, 2003 Inventory Management Improvements Inventories can be minimized by: Introducing a make-to-order (pull) production process Providing fast and accurate demand information to suppliers Inventory management can be improved (inventory levels and administrative expenses) can be minimized by: Allowing business partners to electronically track and monitor orders and production activities Having no inventory at by digitizing products

66 66 Prentice Hall, 2003 Automated Warehouses B2C order fulfillment—send small quantities to a large number of individuals Step 1: retailers contract Fingerhut to stock products and deliver Web orders Step 2: merchandise stored SKU warehouse Step 3: orders arrive Step 4: computer program consolidates orders from all vendors into “pick waves”

67 67 Prentice Hall, 2003 Automated Warehouses (cont.) Step 5: picked items moved by conveyors to packing area; computer configures size and type of packing; types special packing instructions Step 6: conveyer takes packages to scanning station (weighed) Step 7: scan destination; moved by conveyer to waiting trucks Step 8: full trucks depart for Post Offices

68 68 Prentice Hall, 2003 Same Day, Even Same Hour Delivery Role of FedEx and similar shippers From a delivery to all-logistics Many services Complete inventory control Packaging, warehousing, reordering, etc. Tracking services to customers

69 69 Prentice Hall, 2003 Same Day, Even Same Hour Delivery (cont.) Supermarket deliveries Transport of fresh food to people who are in homes only at specific hours Distribution systems are critical Fresh food may be spoiled

70 70 Prentice Hall, 2003 Partnering Efforts Collaborative commerce among members of the supply chain results in: Shorter cycle times Minimal delays and work interruptions Lower inventories Less administrative cost Minimize bullwhip effect problem

71 71 Prentice Hall, 2003 Order Fulfillment in B2B Using e-marketplaces and exchanges to ease order fulfillment problems Both public and private marketplaces E-procurement system controlled by one large buyer, suppliers adjust their activities and IS to fit the IS of the buyer Company-centric marketplace can solve several supply chain problems Use an extranet Use a vertical exchange

72 72 Prentice Hall, 2003 Order Fulfillment in B2B (cont.) Shippers (sellers) Receivers (buyers) Carriers Third-party logistics providers Warehouse companies Vertical e-marketplaces Transportation e-marketplaces Logistics software application vendors Players in B2B fulfillment

73 73 Prentice Hall, 2003 Handling Returns Necessary for maintaining customer trust and loyalty using: Return item to place it was purchased Separate logistics of returns from logistics of delivery Completely outsource returns Allow customer to physically drop returned items at collection stations

74 74 Prentice Hall, 2003 UPS Provides Broad EC Services Electronic tracking of packages Electronic supply chain services for corporate customers by industry including: Portal page with industry-related information Statistics Calculators for computing shipping fees Help customers manage electronic supply chains

75 75 Prentice Hall, 2003 The UPS Strategy (cont.) Improved inventory management, warehousing, and delivery Integration with shipping management system Notify customers by e-mail of: Delivery status Expected time of arrival of incoming packages

76 76 Prentice Hall, 2003 The UPS Strategy (cont.) Representative tools 7 transportation and delivery applications Track packages Analyze shipping history Calculate exact time-in-transit Downloadable tools Proof of delivery Optimal routing features Delivery of digital documents Wireless access to UPS system

77 77 Prentice Hall, 2003 Managerial Issues What B2C payment methods should we use? What B2B payment methods should we use? Should we use an in-house payment mechanism or outsource it? How secure are e-payments? Have we planned for order fulfillment? How should we handle returns? Do we want alliances in order fulfillment? What EC logistics applications would be useful?

78 78 Prentice Hall, 2003 Summary Crucial factors determining the success of an e-payment method Key elements in securing an e-payment Online credit card players and processes The uses and benefits of purchasing cards Categories and potential uses of smart cards Online alternatives to credit card payments

79 79 Prentice Hall, 2003 Summary (cont.) E-check processes and involved parties The role of order fulfillment and back- office operations in EC The order fulfillment process Problems in order fulfillment Solutions to order fulfillment problems

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