1. © 2007 Prentice Hall, Inc.1 Using Management Information Systems David Kroenke E-commerce and Supply Chain Systems Chapter 8

2. © 2007 Prentice Hall, Inc.2 Learning Objectives Understand Porters five competitive forces model. E-Commerce Define e-commerce and important e-commerce terms. Understand the effect of e-commerce on market efficiency. Learn technology for supporting commerce servers. Supply Chain Understand the structure, profitability, and dynamics of supply chains. Data Exchange: EDI Know the purpose, concepts, advantages, and disadvantages of EDI. Web Design: XML Know the purpose, concepts, advantages, and disadvantages of XML.

3. © 2007 Prentice Hall, Inc.3 PORTER’S FIVE COMPETITIVE FORCES MODEL Porter developed a third model that helps to introduce the notion of interorganizational systems called the Porter’s five competitive forces model. According to this model, five competitive forces determine profitability: Bargaining power of suppliers Bargaining power of customers New entrants to the market Rivalry among firms Threats of substitutions for an organization’s products or services

4. © 2007 Prentice Hall, Inc.4 Porter’s Five Competitive Forces Model (Continued) These factors determine not only how organizations gain competitive advantages, but also how sustainable those advantages are. For example, when an organization adds value to its products and obtains an increase in price, it may not be able to sustain that price. Information systems play a key role in obtaining sustainable advantages among organizations.

5. © 2007 Prentice Hall, Inc.5 Figure 8-1 Porter’s Model of Industry Structure Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster Adult Publishing Group, from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright © 1985, 1998 by Michael E. Porter. All rights reserved.

6. © 2007 Prentice Hall, Inc.6 E-COMMERCE E-commerce is the buying and selling of goods and services over public & private computer networks. (include marketing and service) 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.

7. © 2007 Prentice Hall, Inc.7 Figure 8-2 E-Commerce Categories

8. © 2007 Prentice Hall, Inc.8 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 e-commerce concerns sales between a supplier and a retail customer (the consumer). 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.

9. © 2007 Prentice Hall, Inc.9 E-Commerce Merchant Companies (Continued) B2B 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. B2G 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.

10. © 2007 Prentice Hall, Inc.10 Figure 8-3 Example of Use of B2B, B2G, and B2C

11. © 2007 Prentice Hall, Inc.11 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.

12. © 2007 Prentice Hall, Inc.12 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.

13. © 2007 Prentice Hall, Inc.13 Figure 8-4 Amazon Clearinghouse Sales Source: © 2005 Amazon.com, Inc. All Rights Reserved.

14. © 2007 Prentice Hall, Inc.14 E-Commerce Improves Market Efficiency E-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.

15. © 2007 Prentice Hall, Inc.15 E-Commerce Improves Market Efficiency (Continued) E-commerce also improves the flow of price information (continued) 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. 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.

16. © 2007 Prentice Hall, Inc.16 E-Commerce Improves Market Efficiency (Continued) 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. Many B2B and other interorganizational information systems require meetings among the companies involved to design the joint processes that will be used and eventually to negotiate contracts.

17. © 2007 Prentice Hall, Inc.17 Figure 8-5 E-Commerce Market Consequences

18. © 2007 Prentice Hall, Inc.18 E-Commerce Economics Companies need to consider the following economic factors: Channel conflict Price conflict Logistics expense Customer service expense

19. © 2007 Prentice Hall, Inc.19 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.

20. © 2007 Prentice Hall, Inc.20 Figure 8-6 Internet Protocols and Users

21. © 2007 Prentice Hall, Inc.21 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.

22. © 2007 Prentice Hall, Inc.22 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.

23. © 2007 Prentice Hall, Inc.23 E-Commerce: E-Payment & Security Systems

24. © 2007 Prentice Hall, Inc.24 Three-Tier Architecture Most commerce server applications use what is called three-tier architecture: user, server, database The tiers refer to three different computers’ classes. The first tier user tier consists of computers that have browsers that request and process Web pages. The second tier server tier consists of computers that run Web servers and in the process generate Web pages in response to requests from browsers. Web servers also process application programs.

25. © 2007 Prentice Hall, Inc.25 Three-Tier Architecture (Continued) 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 coordination among multiple Web server computers is a fantastic dance. The third tier is the database tier. The computers at this tier receives and processes SQL requests to retrieve and store data.

26. © 2007 Prentice Hall, Inc.26 Figure 8-8 Three-Tier Architecture

27. © 2007 Prentice Hall, Inc.27 Figure 8-9a Sample of Commerce Server Pages: Product-offer Page Source: Used with permission of REI.

28. © 2007 Prentice Hall, Inc.28 Figure 8-9b Shopping-Cart Page Source: Used with permission of REI.

29. © 2007 Prentice Hall, Inc.29 SUPPLY CHAIN MANAGEMENT A 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.

30. © 2007 Prentice Hall, Inc.30 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.

31. © 2007 Prentice Hall, Inc.31 Figure 8-10 Supply Chain Relationships

32. © 2007 Prentice Hall, Inc.32 Figure 8-11 Supply Chain Example

33. © 2007 Prentice Hall, Inc.33 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.

34. © 2007 Prentice Hall, Inc.34 Figure 8-12 Drivers of Supply Chain Performance

35. © 2007 Prentice Hall, Inc.35 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 and the sum of the costs that all organizations in the supply chain incur to obtain that revenue. 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.

36. © 2007 Prentice Hall, Inc.36 The Bullwhip Effect The 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. 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.

37. © 2007 Prentice Hall, Inc.37 The Bullwhip Effect (Continued) 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. An interorganizational information system is necessary to share such data. Some SRM packages include features to support procurement auctions.

38. © 2007 Prentice Hall, Inc.38 The Bullwhip Effect (Continued) Generally, companies use auctions to obtain large amounts of materials, energy, or other consumables. In these procurement auctions, an organization indicates its desire to purchase a product or service and invites would-be sellers to submit bids. Typically, the low bid wins the auction. Organizational auctions can attract a large number of vendors and often result in substantial cost savings.

39. © 2007 Prentice Hall, Inc.39 Figure 8-13 The Bullwhip Effect

40. © 2007 Prentice Hall, Inc.40 Figure 8-14 B2B One Section of the Supply Chain

41. © 2007 Prentice Hall, Inc.41 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. A manufacturer is a supplier to a distributor.

42. © 2007 Prentice Hall, Inc.42 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 find Negotiate terms and conditions Formalize 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.

43. © 2007 Prentice Hall, Inc.43 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. 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.

44. © 2007 Prentice Hall, Inc.44 Figure 8-15 Summary of SRM Processes

45. © 2007 Prentice Hall, Inc.45 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.

46. © 2007 Prentice Hall, Inc.46 Figure 8-16 ERP II in One Section of the Supply Chain

47. © 2007 Prentice Hall, Inc.47 Information Technology for DATA EXCHANGE Web 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.

48. © 2007 Prentice Hall, Inc.48 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. In the past, EDI was used over point-to-point or value- added networks. Recently, EDI systems have been developed that use the Internet as well. eXtensible Markup Language (XML), is a standard that offers advantages over EDI and that most believe will eventually replace EDI.

49. © 2007 Prentice Hall, Inc.49 Figure 8-17 Alternatives for Inter organizational Message and Data Exchange

50. © 2007 Prentice Hall, Inc.50 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.

51. © 2007 Prentice Hall, Inc.51 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.

52. © 2007 Prentice Hall, Inc.52 Figure 8-18 Portion of EDI 850 (Purchase Order) Standard

53. © 2007 Prentice Hall, Inc.53 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. With usage, organizations find a need to make adjustments to the standards. There are various versions of each of the X12, EDIFACT, and HIPAA standards.

54. © 2007 Prentice Hall, Inc.54 WEB DESIGN: eXtensible MARKUP LANGUAGE (XML) 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.

55. © 2007 Prentice Hall, Inc.55 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 provides a superior means for organizations to exchange documents. XML solves the problems mentioned for HTML, and has become a significant standard for computer processing.

56. © 2007 Prentice Hall, Inc.56 Figure 8-19 XML Industry Standards

57. © 2007 Prentice Hall, Inc.57 Application Interaction in the Supply Chain 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.

58. © 2007 Prentice Hall, Inc.58 Distributed Computing Using Proprietary Designs One 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.

59. © 2007 Prentice Hall, Inc.59 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.

60. © 2007 Prentice Hall, Inc.60 XML Web services XML Web services, sometimes called simply 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. Every major software vendor has products that support Web services: Microsoft provides.Net development tools IBM provides J2EE development tools

61. © 2007 Prentice Hall, Inc.61 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.

62. © 2007 Prentice Hall, Inc.62 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.

63. © 2007 Prentice Hall, Inc.63 Figure 8-20 Example of Web Services for Sharing Sales Data

64. © 2007 Prentice Hall, Inc.64 Summary Organizations 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. 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.

65. © 2007 Prentice Hall, Inc.65 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, and CRM. Organizations can exchange documents and data between programs using various alternatives. 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.