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Chapter 9

Strategies for Purchasing

and Support Activities

Electronic Commerce

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Objectives

Improving purchasing, logistics, and other support activities

Creating network organizations that extend beyond traditional limits

EDI, how it works, and how it is moving to the Internet

Internet improvements to supply chain management

Software packages for business-to-business e-commerce and supply chain management

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Purchasing, Logistics, andSupport Activities

Purchasing activities include: Identifying and evaluating vendors Selecting specific products Placing orders Resolving issues after receiving the

ordered goods or services. These include: late deliveries, incorrect quantities shipped,

incorrect items shipped, and defective items.

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Electronic Data Interchange

The computer-to-computer transfer of business information between two businesses that uses a standard format

In the 1950s, companies began to use computers to store and process internal data and information

By the 1960s, companies began exchanging transaction information with each other on punched cards or magnetic tape

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Electronic Data Interchange

Eventually, trading partners transferred data over telephone lines instead of shipping punched cards or tapes to each other

In 1968, the Transportation Data Coordination Committee (TDCC) was formed, and charged with exploring ways to reduce the paperwork burden

Note, since 1918, the American National Standards Institute (ANSI) became the coordinating body for standards in the United States

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Electronic Data Interchange

In 1979, ANSI charted the Accredited Standards Committee X12 (ASC X12) to develop EDI standards

The current ASC X12 standard includes specifications for several hundred electronic transaction sets (the names of the formats for specific business data interchanges)

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Commonly Used ASC X12 Transaction SetsFigure 9-3

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Electronic Data Interchange

Although the ASC X12 standards were quickly adopted by major U.S. firms, businesses in other countries continued to use their own standard.

In the mid-1980s, the United Nations (UN) Economic Commission for Europe built a common set of EDI standards based on the U.S. model.

In 1987, the UN published its first standard under the EDI for Administration, Commerce, and Transport (EDIFACT, or UN/EDIFACT).

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Commonly Used UN/EDIFACT Transaction SetsFigure 9-4

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How EDI Works

Paper-Based Purchasing Process: Paper-based purchasing process results in a

paper document created at each information processing step (purchase order, shipping document, invoice, receiving, account payable) that must be delivered to the department handling the next step

Paper-based transfers between buyer and vendor can be delivered via mail, courier, or fax

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The Paper-Based Purchasing Process

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How EDI Works

EDI Purchasing Process:

In this process: Traditional mail service is replaced with

the data communications of an EDI network

Flows of paper have been replaced with computers running EDI translation software

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The EDI Purchasing Process

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Value Added Networks

Three key elements in EDI purchasing process are: the EDI network that connects the buyer and the seller the buyer EDI translator computer that converts data from

internal format to standard EDI transaction set and vice versa

the seller RDI translator computer that converts data from internal format to standard EDI transaction set and vice versa

Trading partners can implement the EDI network and EDI translation process in several ways, each using one of two basic approaches Direct connection Indirect connection

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Direct Connection BetweenTrading Partners

Requires each business in the network to operate its own on-site EDI translator computer

EDI translator computers are connected to each other using modems or dedicated leased lines

Trading partners using different protocols can make direct connection options difficult to implement

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Indirect Connection BetweenTrading Partners

Companies use the services of a value-added network (VAN)

The VAN provides communications equipment, software, and skills needed to receive, store, and forward electronic messages containing EDI transaction sets

The VAN often supplies the software needed to connect to its services

Examples include General Electric Information Services and IBM Global Services

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Direct Connection EDI vs. Indirect Connection EDIthrough a VAN

Figure 9-7

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Advantages of Using aValue Added Network

Users support only one communications protocol

The VAN records activity in an audit log, providing an independent record of transactions

The VAN can provide translation between different transaction sets

The VAN can perform automatic compliance checks to ensure the transaction set is in the specified EDI format

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Disadvantages of Using aValue Added Network

Most VANs require an enrollment fee, a monthly maintenance fee, and a transaction fee

VANs can be cumbersome and expensive for companies with trading partners using different VANs

Inter-VAN transfers do not always provide a clear audit trail

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EDI on the Internet

The Internet is viewed as a replacement for expensive leased lines and dial-up connections

Small companies have the opportunity of selling to large customers that demanded EDI capabilities of their suppliers

Although, concerns about security and lack of audit logs continue to be a major roadblock

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Open Architecture of the Internet

The open architecture of the Internet allows trading partners virtually unlimited opportunities to customize their information interchanges

A new ASC X12 Task Group has been charged with several broad objectives: Converting the ASC X12 EDI data elements and

transaction set structures to XML, retaining one-to-one mapping

Developing XML data element names consistent with existing ASC X12 transaction sets

Meeting the needs of application-to-application and human-to-application interfaces

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Financial EDI

A trading partner’s bank is called a Financial EDI (FEDI)

Many trading partners are reluctant to send FEDI transfers for large sums of money over the Internet

Companies may opt to establish an indirect connection through a VAN for the added security for FEDI transaction

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Financial EDI

All banks have the ability to perform electronic funds transfers (EFTs)

When EFTs involve two banks, they are executed using a clearinghouse.

In the United States, most EFTs are handled through the Automated Clearing House (ACH).

EDI-capable banks are those banks that are equipped to exchange payment and remittance data through VANs.

Some banks also offer VAN services for nonfinancial transactions. They are called value-added banks (VABs)

Nonbank VANs that can translate financial transaction sets into ACH formats and transmit them to banks that are not EDI-capable are sometimes called financial VANs (FVANs).

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Hybrid EDI Solutions

Utilize the Internet for only part of an EDI transaction PayBase package of Bottomline Technologies allows

hybrid EDI NetTransact provides an interface for smaller

businesses connected to the Internet, but do not have EDI capability.

NetTransact software can convert an HTML-document (used by a small company) into an ASC X12 formatted document (used by a large EDI firm) and vice versa.

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NetTransact EDI-HTML Conversion Service

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Supply Chain Management

Money can be saved and product quality can be improved through active negotiations with suppliers

Businesses that engage in supply chain management work to establish long-term relationships (supply alliances) with a small number of very capable suppliers are called tier one suppliers

For example, a car manufacturer would include partners from engine manufacturers, steel fabricators, glass manufacturers, tire manufacturers, and so on.

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Supply Chain Management

By working together, supply chain members can reduce costs and increase the value of the product or service to the ultimate customer

With clear communication along the supply chain, each participant can know the demands of the ultimate customer and plot a strategy to meet those demands

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Technology in the Supply Chain

The Internet and the Web can be very effective communication enhancers

Software can allow members to review past performance, monitor current performance, and predict future production levels of products

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Advantages of Internet and Web Technologies in Supply Chain Management

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Software for Purchasing, Logistics, and Support Activities

Enterprise resource planning (ERP) software is designed to integrate manufacturing, finance, distribution, and other internal business functions into one information system

Major ERP vendors include Baan, J.D. Edwards,Oracle, PeopleSoft, and SAP

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Business-to-BusinessCommerce Software

Designed to help companies build Web sites that host catalog and other commercial sales activities

Major software packages include: Netscape’s SellerXpert Open Market’s LiveCommerce-Transact IBM’s Net.Commerce Microsoft’s Site Server, and Ariba, which provides a way for companies t

ostandardize purchase requisitions for office supplies.

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Supply Chain Management Software

Includes demand forecasting tools and planning capabilities to allow all supply chain members to coordinate their activities and adjust their production levels

Two major firms offer supply chain management software i2 Technologies RHYTHM Manugistics