CHAPTER 5

Business-to-Business
Activities: Improving
Efficiency and Reducing
Costs

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 Learning Objectives

In this chapter, you will learn:

• How businesses use the Internet to improve
purchasing, logistics, and other support activities
• How the Internet facilitates implementation of
outsourcing and offshoring business strategies
• How electronic data interchange works and how it
has evolved using Internet technologies

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 Learning Objectives (cont’d.)

• What supply chain management is and how

businesses are using Internet technologies to
improve it
• How the various types of online business
marketplaces operate to make B2B transactions
easier and more efficient

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 Introduction

• After a year of working in Ghana teaching English,

Leila Janah started Samasource in 2008
– Links workers in developing countries with companies
who need work done
– Has lifted more than 6,500 African, Asian and Haitian
workers above the poverty line
– Cost-effective for businesses
– Builds worker knowledge and skills in less developed
countries and gives low-income workers in developed
countries similar opportunities
– Use of the Internet to do good around the world

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 Outsourcing and Offshoring

• Outsourcing is using other organizations to perform

specific activities
– Typically used for manufacturing
• Offshoring is outsourcing done by organizations in
other countries
– Business process offshoring includes purchasing,
research and development, record keeping,
information management
– Impact sourcing (smart sourcing) is offshoring done
by or through not-for-profit organizations

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5
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Purchasing Activities

• Identify and evaluate vendors, select specific

products, place orders, resolve any issues after
receipt of goods or services
• Supply chain is the part of industry value chain
preceding a particular strategic business unit
– Includes all activities undertaken by every
predecessor in the value chain to design, produce,
promote, market, deliver, support each individual
component of a product or service
• Traditionally purchasing department buys
components at lowest price possible via bidding
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 Purchasing Activities (cont’d.)

• Procurement includes all purchasing activities,

monitoring all purchase transaction elements and
managing and developing supplier relationships
– Also called supply chain management
• Procurement staff have high product knowledge to
identify and evaluate appropriate suppliers
– Sourcing is identifying suppliers and determining
qualifications
– e-sourcing is the use of Internet technologies in
sourcing activities

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 Purchasing Activities (cont’d.)

• Business purchasing process is more complex than

most consumer purchasing processes
• Spend is the total yearly dollar amount for goods
and services purchased
– Managing spend is an important function and can be
a key component in overall profitability
• Institute for Supply Management (ISM) is the main
organization for procurement professionals

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 FIGURE 5-1 Steps in a typical
business purchasing process

© Cengage Learning 2017

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 Direct vs. Indirect Materials Purchasing

• Direct materials become part of finished product

• Direct materials purchasing
– Replenishment purchasing (contract purchasing)
• Company negotiates long-term material contracts
– Spot purchasing
• Purchases made in loosely organized (spot) market
• If demand exceeds contract purchasing estimates
• Indirect materials are all other materials company
purchases
– Includes factory supplies and replacement parts for
machinery
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 Direct vs. Indirect Materials Purchasing
(cont’d.)
• Maintenance, repair, and operating (MRO) supplies
are indirect materials purchased on a recurring
basis
– Standard items (commodities) with price as main
criterion
• Purchasing cards (p-cards) allow managers to make
multiple small purchases with cost-tracking
information sent to procurement
• Leading suppliers
– MRO: McMaster-Carr, W.W. Grainger,
– Office Depot, Staples, Digi-Key, Newark.com
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 Logistics Activities

• Classic objective is to provide the right goods in the

right quantities in the right place at the right time
• Managing materials, supplies and finished goods
– Web and the Internet providing increasing number of
opportunities to better manage activities
– Third-party logistics (3PL) provider operates a
customer’s materials movement activities
• Marriage of GPS and portable computing with the
Internet is an example of second-wave e-commerce
• Third-wave e-commerce supported by smart phones

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 Business Process Support Activities

• Finance and administration, human resources (HR),

technology development
– Human resources, payroll, retirement plan servicing
often outsourced by small/midsized companies
• Common support activity is training
– May be handled by HR or individual departments
• Knowledge management is the intentional collection
and classification; dissemination of information
about a company and its products and processes

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 © Cengage Learning 2017
FIGURE 5-2 Categories of support activities

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 E-Government

• Use of Internet technologies by governments and

government agencies
– Enhances functions performed for stakeholders and
businesslike activity operations
– U.S. government Financial Management Service
(FMS) uses Pay.gov to handle activity
– Bureau of Public Debt: TreasuryDirect site
– Also used in other countries
• U.S. states and cities usually have sites
– Information about laws and regulations, licenses,
jobs, tourism and more
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FIGURE 5-3
State of
California portal
site

© 2012 State of California

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Network Model of Economic Organization in
Purchasing: Supply Webs
• Trend in purchasing, logistics, and support activities
is the shift from hierarchical structures toward
network structures
– Procurement departments being given new tools to
negotiate and possibly form strategic alliances
• Supply Web is replacing the term “supply chain”
– Parallel lines interconnect to form a Web or network
configuration
• Roots of Web technology for B2B transactions lie in
a hierarchically structured approach to inter-firm
information transfer: electronic data exchange
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 17
 Electronic Data Interchange

• Computer-to-computer business information transfer

using a standard format
– Businesses exchanging info are trading partners
• EDI compatible firms exchange data in specific
standard formats
– Often transaction data but can include other
information related to transactions
• Most B2B e-commerce adapted from EDI or based
on EDI principles
• Dominant technology for electronic B2B transactions

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 Early Business Information
Interchange Efforts
• The need to create formal business transaction
records began in the late 1800s and early 1900s
• Companies were using computers for recording
internal transactions by the 1950s
– Information flows between companies on paper which
was slow, inefficient, redundant and unreliable
• In the 1960s businesses with volume transactions
exchanged info on punched cards or magnetic tape
– In the 1960s and 1970s technologies improved and
intercompany information could be transferred over
telephone lines
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 19
 Early Business Information
Interchange Efforts (cont’d.)
• Information transfer agreements between trading
partners increased efficiency but not ideal
– Incompatible data translation limited participation
• Freight and shipping companies joined together in
1968 to create a standardized information set
– Used a computer file transmittable to any freight
company adopting the standard
– Benefits limited to members of industries that created
standard-setting groups
• Full realization of EDI economies and efficiencies
required standards for all companies in all industries
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 Emergence of Broader Standards:
The Birth of EDI
• American National Standards Institute (ANSI) is the
coordinating body for standards in the U.S.
– Accredited Standards Committee X12 (ASC X12)
develops and maintains EDI standards
– Data Interchange Standards Association (DISA) is the
administrative body coordinating ASC X12 activities
– Transaction sets are names of the formats for specific
business data interchanges
• EDI for Administration, Commerce, and Transport
(EDIFACT, or UN/EDIFACT)

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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 21
 © Cengage Learning 2017
FIGURE 5-4 Commonly used EDI transaction sets

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 How EDI Works

• Basic idea: straightforward

• Implementation: complicated
• Example:
– Company replacing metal-cutting machine
• Steps to purchase using paper-based system
• Steps to purchase using EDI

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 Paper-Based Purchasing Process

• Buyer and vendor not using integrated software for

business processes so each information processing
step results in paper document
• Must be delivered to department handling next step
– Paper-based information transfer
• Mail, courier, fax
– Information flows shown in Figure 5-5

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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 24
 © Cengage Learning 2017
FIGURE 5-5 Information flows in a paper-based purchasing
process

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 EDI Purchasing Process

• Mail service replaced with EDI network data

communications
– Paper flows within buyer’s and vendor’s organizations
replaced with computers running EDI translation
software
– Information flows shown in Figure 5-6

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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 26
 © Cengage Learning 2017
FIGURE 5-6 Information flows in an EDI purchasing process

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 Value-Added Networks

• Trading partners can implement the EDI network

and EDI translation processes in several ways
• Each way uses one of two basic approaches
• Direct connection EDI requires each business to
operate its own on-site EDI translator computer
– Connected directly to each other using leased lines
– Few companies use direct connection EDI because
dedicated leased lines are expensive

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 © Cengage Learning 2017
FIGURE 5-7 Direct connection EDI

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 Value-Added Networks (cont’d.)

• Company may use a value-added network (VAN)

– Receives, stores, forwards electronic messages
containing EDI transaction sets
• With indirect connection EDI trading partners use
VAN to retrieve EDI-formatted messages
– Must install compatible EDI translator software
– Trading partners pass messages through the VAN
instead of directly connecting computers

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 © Cengage Learning 2017
FIGURE 5-8 Indirect connection EDI through a VAN

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 Value-Added Networks (cont’d.)

• Advantages of a VAN
– Need to support one communications protocol and
the VAN provides translation between different
transaction sets
– VAN performs automatic compliance checking and
records message activity in an audit log
• Helps establish nonrepudiation: ability to establish that
a particular transaction actually occurred
• Cost used to be a disadvantage, now much lower
– Internet presents low-cost communications medium
used by VAN services

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 Value-Added Networks (cont’d.)

• EDI on the Internet called Internet EDI, Web EDI, or

open EDI
– Internet is open architect network
• EDIINT (Electronic Data Interchange-Internet
Integration, EDI-INT) is the most common protocol
for Internet EDI transaction sets
• EDI exchanges encoded using AS2 (Applicability
Statement 2) or AS3 (Applicability Statement 3)
– Secure electronic receipts returned to senders for
every transaction which helps establish repudiation

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 EDI Payments

• EDI transaction sets provide instructions to trading

partner’s bank
• Negotiable instruments, the electronic equivalent of
checks
• Electronic funds transfers (EFTs) is the movement of
money from one bank account to another
– Executed using an Automated clearing house (ACH)
system which is used by service banks to manage
accounts with each other
• Operated by U.S. Federal Reserve Banks, private
ACHs

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Supply Chain Management Using Internet
Technologies
• Supply chain management is the job of managing
integration of company supply management and
logistics activities
– Across multiple participants in a particular product’s
supply chain
– Ultimate goal is to achieve higher-quality or lower-cost
product at the end of the chain

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 Value Creation in the Supply Chain

• Engaging suppliers in cooperative relationships can

lead to better, faster, cheaper service to customers
– Company goes beyond its limits and creates a new
network form among members of the supply chain
• Use of technology to improve operational efficiency
is supply chain competition
– Can help implement management techniques
• Just-in-time reduces inventory and lean production
focus on eliminating waste and unnecessary processes
• Originally developed as a way to reduce cost
– Now adds benefits to the ultimate consumer
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Value Creation in the Supply Chain (cont’d.)

• Requires establishment of long-term relationship

with a small number of capable tier-one suppliers
– Tier-one suppliers develop relationships with tier-two
suppliers who provide components and raw materials
– Tier-three suppliers provide components and raw
materials to tier-two suppliers
• Key element is trust among the supply alliance
• Buyers expect annual price reductions, quality
improvements from suppliers at each stage
• Ideally each level of supplier can share the benefits of
reduced cost and more efficient operations
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Value Creation in the Supply Chain (cont’d.)

• Key coordination effort is a consistent production

strategy adopted by all supply chain participants
– How competitive advantage is achieved, such as
efficient processing or market-responsive flexibility
• Clear communications and quick response are key
elements of successful supply chain management
• Adaptive supply chain exists when company uses
technology to quick respond to change in market
demand and supplier conditions
– Leads to higher efficiency, lower costs and greater
profits
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 © Cengage Learning 2017
FIGURE 5-9 Advantages of using Internet technologies in supply chain
management

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 Increasing Supply Chain Efficiency and
Cooperation
• Using Internet and Web technologies to manage
supply chains can yield increases in efficiency and
cooperation throughout the chain
– Increase process speed, reduce costs, coordinate
design effort and increase manufacturing flexibility
– Allows response to changes in quantity and nature of
ultimate consumer demand
• Using Internet technologies, as Boeing and other
firms do, to integrate the design, development,
construction, testing, and refinement of products is
called collaborative commerce
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 Materials-Tracking Technologies

• Challenging task to track materials as they move

from one company to another or within a company
• Optical scanners and bar codes track movement of
materials and integration with EDI is now prevalent
– Manages inventory flows and forecasts materials
needs across the supply chain
– Real-time location systems (RTLS) are bar code
tracking system used by fulfillment centers
• Second wave of electronic commerce includes new
types of tracking integrated with Internet-based
materials-tracking systems
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 © Cengage Learning 2017
FIGURE 5-10 Shipping label with bar-coded elements from EDI
transaction set 856, Advance Ship Notification

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Materials-Tracking Technologies (cont’d.)

• Radio Frequency Identification Devices (RFIDs)

– Small chips using radio transmissions track inventory
quicker and more accurately than bar codes
– Active RFIDs have their own power supply
– Passive RFID tags are inexpensive and small and do
not need a power source
– Goal is to help reduce lost sales from stockouts
• Industry observers believe RFID tagging in retail will
become widespread starting in 2017 when many
retailers plans to have them in all locations

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 © Albert Lozano/Shutterstock.com
FIGURE 5-11 Passive RFID Tag

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 © Cengage Learning 2017
FIGURE 5-12 Key features of bar code, passive RFID, and
active RFID technologies

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Creating an Ultimate Consumer Orientation
in the Supply Chain
• One main goal of supply chain management is to
help each company focus on meeting needs of
consumer at the end of the supply chain
– Ultimate consumer orientation difficult to maintain
• Michelin North America pioneered use of Internet
technology to go beyond next step in its value chain
– 1995: launched online business initiative BIB NET
– Allowed dealer access to tire specifications, inventory
status, and promotional information
• Saved money for Michelin and gave dealers better
service making them more likely to recommend tires
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 Building and Maintaining Trust in
the Supply Chain
• Major issue in forming supply chain alliances is
developing trust
• Key elements are continual communication and
information sharing
• Internet and the Web provide excellent ways to
communicate and share information and offer new
avenues for building trust
– Provides easy, inexpensive contact with customers
– Gives buyers instant access to sales representatives
– Provides comprehensive information quickly

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Online Business Marketplaces and Portals

• Vertical portals are industry-focused hubs

– Offer marketplaces and auctions for contact and
business transactions
– Doorway (or portal) to the Internet for industry
members
– Vertically integrated: each hub services just one
industry

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 Independent Industry Marketplaces

• First vertical portals were trading exchanges

focused on a particular industry
• Independent industry marketplaces
– Industry marketplaces: focused on a single industry
– Independent exchanges: not controlled by established
buyer or seller in the industry
– Public marketplaces: open to new buyers and sellers
just entering the industry
• Ventro opened industry marketplace Chemdex
– Trade in bulk chemicals

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Independent Industry Marketplaces (cont’d.)

• By mid-2000s, more than 2200 independent

exchanges
– Today fewer than 100 industry marketplaces still
operating due to lack of profitability
• By 2010, various forms of B2B marketplace models
gradually replaced independent marketplaces
• In 2012 Amazon.com launched AmazonSupply that
is now part of Amazon Business Marketplace
• Google followed with Google Shopping for
Suppliers, which was later folded into its Google
Shopping site
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 Private Stores and Customer Portals

• Large established sellers feared industry

marketplaces would dilute their negotiating power
• Many had already invested heavily in Web sites they
believed would meet customer needs better
– Password protected private stores for major
customers with price reductions on some products
– Customer portal sites offer private stores along with
other services that would be needlessly duplicated in
sellers participated in industry marketplaces

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 Private Company Marketplaces

• Large companies purchasing from relatively small

vendors exert power in purchasing negotiations
• E-procurement software allows companies to
manage purchasing function through Web interface
– Automates authorizations, other steps and usually
includes marketplace functions
• When industry marketplaces opened for business,
these large companies were reluctant to abandon
their e-procurement software investment
– Force suppliers to deal with them on their terms
rather than negotiate with industry marketplace
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Private Company Marketplaces (cont’d.)

• Private company marketplace is a marketplace

providing auctions, request for quote postings, other
features similar to those of e-procurement software
– Many have expanded to include functions allowing
supply chain participants to manage multiple functions
• Manufacturing, tier-one and tier-two suppliers,
distribution centers, transportation, orders, invoicing
and payment
– Expanded arrangements are called private industrial
networks or private trading exchanges

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Industry Consortia-Sponsored Marketplaces

• Some companies have strong negotiating positions

but not enough power to force suppliers to deal with
them through a private company marketplace
• Industry consortia-sponsored marketplace is a
marketplace formed by several large buyers in a
particular industry
• Characteristics of five general marketplace forms in
B2B electronic commerce today
– Shown in Figure 5-13

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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 54
 Adapted from: Raisch, W. 2001. The eMarketplce, p. 225

FIGURE 5-13 Characteristics of B2B marketplaces

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use. 55