IMS 6485: B2B Commerce 1 Dr. Lawrence West, MIS Dept., University of Central Florida Topics The Market Space and Size ($12 trillion)

IMS 6485: B2B Commerce

1Dr. Lawrence West, MIS Dept., University of Central [email protected]

Topics

• The Market Space and Size ($12 trillion)• Themes• The Costs of Procurement• The Procurement Market• Trends in Response to Procurement Costs• Types of Net Marketplaces• Private Industrial Networks• Technologies• Cases



Where is B2B Commerce on the Value Chain?

TRANS-PORTATIONCOMPANY

BROKER

INFORMATION FLOWS(SELLERS TO BUYERS)

FLOW OF GOODS

ADVERTISING .

INVOICE .

ORDER INFORMATION .

INFORMATION FLOWS(BUYERS TO SELLERS)

REQUEST INFORMATION .

PLACE ORDER .

MAKE PAYMENTS .

Animal

Vegetable

Mineral

INVENTORY

INVENTORY

INVENTORY

FACTORY WHOLE-SALER

INTERMEDIATE

GOODS

WHOLE-SALER RETAILER

Pretty much the whole thing



The Market Space

• B2B Commerce is $12 trillion in a $13.2 trillion economy

• Not strictly additive– B2B feeds all final sectors

• Retail• Services• Government

• But a big market all the same!!!• Q: Do you see any reason why governments cannot

participate in B2B-type markets?



The Market Space (cont.)

• In 2005 the amount of e-B2B eCommerce was only $1.5 trillion of the $10 trillion total

• By 2008 this was $3.8 trillion of $13.2 trillion total B2B• How is the other $9.4 trillion conducted?

– And why has this portion not moved into the electronic arena?

• Growth in e-B2B expected to reach $6.3 trillion by 2012– But the 3rd edition of the text (2007) estimated $9

trillion by 2009



The Value Proposition (so to speak)

• Business spend a lot of money conducting business with each other– Estimate that PO for support products (not direct

inputs) costs $100 each to process– GE alone saved $900 million annually in procurement

costs by automating B2B purchasing• If even a portion of inter-firm trade could be automated,

…, 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" (p. 770)



Themes

• We will look at several B2B market mechanisms• For each, determine

– Ownership– Bias (Buyer, Seller, Neutral)– Economic arguments for participation by each party– Tradeoffs parties make to participate– Enabling investments needed by each party– Viability of the mechanism



Themes (cont.)

• Look for the relative importance in each mechanism of achieving– Cost savings through process efficiencies– Price savings through increased competition– Price savings through decreased competition

• Look for the importance of network externalities• Restructuring market relationships, including

– Giving up control for longer term commitments– Sharing proprietary information



Why is B2B Purchasing so Expensive?

• Custom products with engineering specifications• Delivery and availability critical to production

processes– Severe consequences of supplier not performing

• High volume – Makes opportunities for savings more important– Makes control of spending more important– Requires more effort to track status of individual

actions• Many more steps in the procurement, delivery,

invoicing, payment, and accounting processes



Why is B2B Purchasing so Expensive (cont.)?

• Life cycle of a procurement is longer• Volume and life cycle introduces uncertainty

– Price changes during life cycle– Downstream demand shock– Upstream supply shock (e.g., gasoline prices)

• Greater uncertainty typically requires more complicated contract terms– Expensive to negotiate

Look for ways that B2B eCommerce systems address these costs




• Review the steps in Figure 12.3– Search for products– Qualify vendors (technical ability, reliability, solvency)– Negotiate price, delivery, quality, payment– Purchase Order to vendor– Invoice – Ship– Pay– Receive payment

BuyerSeller




• The corporate purchasing experience requires extensive data entry in each firm's internal systems– These systems may not be integrated (even within the

same firm)– Sales, inventory, and production may be managed by

separate systems requiring redundant data storage (and sometimes entry)

• These are the issues ERP systems are intended to address

– A large purchase from a supplier may trigger a round of purchases from suppliers even further up the value chain




The U.S. Census Bureau reports in 2005 that over 3 million American workers work in the

procurement process3rd Edition



The Procurement Market—Subdivide by Type

• Type of product– Direct goods—used in production as raw materials or

enablers (e.g., fuel)– Indirect goods/MRO—not used in production (e.g.

office supplies, repair parts, etc.)• How purchased

– Contract—longer term– Spot—immediate purchase

• 80% of B2B is contract purchase of direct goods• 20% is spot purchase of indirect goods



Trends in Response to Procurement Expense

• The total cost of procurement consists of two components– Purchase price of goods and services– Costs of managing the procurement process (previous

discussions)• Many firms have come to believe:

– The costs of negotiating incremental price discounts from competitive suppliers aren't worth the benefit

– The biggest area for savings is from reducing the cost of procurement management

• Watch for these trends



B2B e-Commerce Benefits

• Lower administrative costs• Lower search costs for buyers• Reduce inventory costs

– Increased competition → lower prices– Reduce inventory buffer levels

• Lower transaction costs through efficiency• Increase production flexibility through JIT delivery• Improve product quality through increased supply

chain cooperation



B2B e-Commerce Benefits (cont.)

• Decrease product cycle time by sharing designs and production schedules with suppliers

• Increase collaboration with suppliers and distributors– (How is this beneficial?)

• Create greater price transparency– (Whose prices are transparent and to who?)– (How is this beneficial?)

• Strategic advantages– First mover achieving cost benefits



Trends in Response to Procurement Expense (cont.)

• Four trends emerged in response to trends in procurement expense– Supply Chain Simplification– Electronic Data Interchange (EDI)– Supply Chain Management Systems– Collaborative Commerce

• These changes preceded Web-enabled B2B eCommerce• But watch for their impact as drivers of modern B2B

eCommerce systems• Changing attitudes arising concurrently with

technological capabilities



Trends—Supply Chain Simplification

• Refers to eschewing the competitive market for longer term relationships with a smaller number of suppliers

• Preferring stability and trust in a proven partner to seeking marginal price improvements

• Stability and proven track records important in JIT inventory management systems

• What are benefits to each party?



Trends—Electronic Data Interchange

• Back in the 1970s some systems allowed purchasers to directly enter orders into supplier order entry systems– Baxter and American Hospital Supply created ordering

systems for hospitals– Allowed terminal based modem connection to seller

system– Also provided simple inventory management and

analysis services• What were the advantages to each party in this

transaction? The bias? The investments?



Trends—Electronic Data Interchange (cont.)

• EDI has developed, including using the Web as a networking mechanism– Eliminates one or more layers of paperwork– Exposing portions of the buyer's inventory and

production data and plans to suppliers• Suppliers automatically produce and ship

– Ties trading partners together– Not suited for open procurement (any supplier may

participate)– Many large buyers require suppliers to participate in

order to sell (Seller biased)



Trends—Supply Chain Management

• SCM exposes much more of the supply chain to each participant– Suppliers expose internal production and inventory

information to buyer– Buyer exposes downstream demand information to

suppliers– Goal is to enable more planning by each party



Trends—Collaborative Commerce

• Couples value chain partners through more of the product life cycle– Component producers may collaborate in product

design instead of accepting component specifications as a given requirement to be met

– May coordinate in production planning– Previously proprietary information must be exposed to

partners– Adversarial relationships are relaxed



Types of B2B Marketplaces

• Net Marketplaces– eDistributor– Independent Exchanges– eProcurement– Industry Consortia

• Private Industrial Networks



Net Marketplaces—eDistributors

• Catalog-based sellers of goods– Purchase from multiple sources– Sell to multiple buyers– Tend to focus on indirect goods– Tend to operate in spot markets

• Look at http://www.grainger.com• What is bias of these marketplaces?• Who benefits and how?

http://www.grainger.com/



Net Marketplaces--eProcurement

• A single point of sale for multiple suppliers and single point of purchase for multiple buyers– Do not directly own or sell inventory– May expose competing goods from many suppliers– Assist suppliers with catalog creation and management

• What is bias• Who benefits and how?



Net Marketplaces—Exchanges

• Essentially portals that expose buyers and sellers to each other– Did not manage their own catalogs but exposed

supplier information to buyers– Tended to operate in single industry environments– Biased to buyers (why)– Sellers did not like them and often refused to

participate– Most of 1,000 or so start-up exchanges failed



Net Marketplaces—Industry Consortia

• Similar to exchanges but…– Owned by industry participants– Industry did not like exchanges encroaching on their

industries– Sellers invited to participate—not open– Definitely biased to buyers– Some consortia have expanded role into standard

setting and market coordination– Some major concerns about anti-competitive behavior

(see discussion in text)



Private Industrial Networks

• EDI on Steroids • A major participant (P&G, Wal Mart, etc.) builds

systems that integrate the actions up and down the value chain (centered on the network owner)– Increases collaboration– Reduces transaction costs– Increases information flows– Supports collaborative commerce– Reduces inventory costs

• May require partner participation in a pretty blatant exercise of market power



Technologies

• The book has focused on business cases and general technological capabilities of various B2B systems

• What specific technology investments are needed by each party to operate in these systems?

• Which investments are likely to leverage off existing resources?– (And which existing commitments are likely to impede

participation in new systems?)



The Volkswagen Case

• VW made a specific decision to go it alone instead of joining an established industry procurement consortium

• What were the tradeoffs from this decision?• VW achieved a $122 million cost reduction from the

system– Is this a strategic advantage?– Do you think it is a sustainable advantage?



RFID Technology

• Given the focus of this chapter—what is the advantage of RFID technologies?– (Why would the automotive industry spend $25 million

on them?)• What investments are needed to use RFID?



The Wal Mart Case

• Wal Mart has 30,000 suppliers worldwide!!!• Enough said• Wal Mart's 2008 sales of $374 billion makes it the 28th

largest economy in the world (just ahead of Greece)



Siemens Case

• What choices did Siemens make?• What benefits are they realizing?• How are the benefits being realized?

– What is the causality from a choice to a realized benefit?

Documents

IMS 6485: B2B Commerce 1 Dr. Lawrence West, MIS Dept., University of Central Florida Topics The Market Space and Size ($12 trillion)