Electronic Commerce

• Long term evolution of business environment coupled with technological developments (i.e. WWW)

• Phenomenon not recent (gradual increase over 25 years)

• Definition: automation of commercial transactions using computer and communications technologies

• commercial = transactions that involve the exchange of goods, funds or obligations...

• It is a reality in today’s modern environment => must become knowledgeable about it

eBusiness versus eCommerce• Conducting any kind of business via an electronic channel

WebCommerce

InternetCommerce

Electronic Commerce ElectronicBusiness

• Initial development of the phenomenon of E Commerce

• Attempts to change the nature of the linkage with suppliers / customers / competitors

• SABRE

• American Hospital Supply Corporation

• Japanese and American car making and retail industry in the 70s

• Concept of Just In Time (JIT)

Information systems for interacting with the environment

• American Hospital Supply Corporation (AHSC): system whereby customers can directly re-order their supplies from terminals located in their hospitals

• Successful because it enabled AHSC’s customers to cut their costs of administration

• originally meant as an INTERNAL systems by AHSC and extended to one main customer

Link with customers:

Links with customers and competitors

• SABRE (American Airlines): first effective electronic reservation systems in the US

• simple one-line database application

• available in any travel agent

• rented to other airlines

• competitive value of system still felt today

• in 1988 AA were making more money out of SABRE than out of flying air planes

Specific Features of Inter-Organisational Systems

• Require co-operation

• also some legal implications - e.g. prevention of computer crimes

• nature of the agreement extends beyond the system itself - e.g. AHSC started from the relationship between a store manager and a customer

Level of Integration between trading partners

• Exchanges of information between partners can be more or less structured:– Meetings and phone calls

– purchase orders

– invoices

– cheques

– …………….

– Shared systems

• Traditionally, structured exchanges were paper based => slow turnaround time

Electronic Commerce suggests new methods

• Invoice => Electronic Data Interchange instead of postal service

• Payments => Electronic Fund Transfer instead of cheque

• Short messages => Electronic Mail instead of Phone

• Group discussions => Electronic Bulletin Boards or computer conferencing instead of meetings

• Promotion => WWW instead of paper brochure

• Customer product query => on-line database instead of paper catalogue

Framework of generic forms of Electronic Commerce

Permanent

Ad Hoc

UnstructuredStructured

EDIIOS data retrieval systems

Electronic cataloguesWWW home pages

Electronic meeting roomscomputer conferencing

Electronic MailElectronic file transfer

Electronic Data Interchange (EDI)

• Creation of inter-organisation networks involving at least 2 organisations

• can be extended to a very large number of organisations (virtual trading community)

• Often use an intermediary - e.g a Value Added Network (VAN) Service provider

Electronic Data Interchange:

A Formal Definition:

“EDI is the transfer of structured data by agreed message standards from computer to computer by electronic means”

The definition points our three important issues:

• EDI uses structured data

• EDI uses agreed standards

• EDI uses electronic links

Important Points about EDI

EDI uses structured data

• EDI messages are processed by a computer not by an operator

• it is very different from simple E-Mail

• the information received is not displayed to anyone, but directly used by a program in a computer

• messages are coded

an EDI message:

• Messages are made up of STANDARD LOCATION SEGMENTS (LOC):

TYPE OF TYPE OF PLACE CODE CODE LIST DECODED TEXT DATA

LOC+ POD+ USNYC 01: NEW YORK, NY

EDI uses agreed standards

• Link between commercial partners who agree to do business in a certain way

• preliminary agreement on what data is being transferred and in what order

• Adherence to standards means Open Environment at both ends

• it also requires an universally agreed message structure to operate.

EDI uses electronic links

• in the beginning: EDI used computer tapes– slow

– vulnerable

– low level of integration across companies

• then EDI used telecommunications– scheduling

– cost

– compatibility

BILATERAL LINK:

Multilateral Links:

A modern solution for EDI

• Join an EDI network run by a VALUE ADDED NETWORK SERVICE (VANS) supplier

• similar to a postal service

• all messages are sent through a delivery service

• messages are delivered into people’s post boxes

EDI using a VAN

MAIL BOX

POSTBOX

What is wrong without EDI:• Companies use computers to process transactions and

produce paper

• Computers produce paper faster than humans can process it => strain

Result is that processes:

• are Inefficient• are open to errors• are often delayed• generate extra transaction costs

What is wrong without EDI:

• companies are using a combination of the most modern and efficient with the most archaic methods

• postal link or faxes are the wrong media

• re-keying of data at the reception is a waste of time

• these create bottlenecks in the communication of organisations

With EDI• Processes can be integrated and computerised fully from

end to end• Data entry error is considerably reduced• Data transfer can be extended to give immediate feed-

back:– order correctly received– goods not available– substitution good suggested

• Other on-line services can be added:– mail distribution list for new products / price changes– special offers

Benefits

• Cost savings - reduction in data entry errors - smaller staff

• reduced lead time for orders

• speed up communication

• creates stronger ties between partners

• improved customer service

Problems

• Set up difficulties:– integration with existing systems

– selection of EDI standard

• loss of flexibility resulting from initial choices

• requires high levels of commitment from partners

• substantial benefits only come with high volumes of data exchanges

Spread of EDI

• EDI was originally limited to the automotive and retail industries

• now involves virtually every sector of business:– shipping

– insurance

– banking

– government

– Customs

– Also, HR

Introduction of EDI:

EDI can be introduced in two ways

• pro-active way: company sets out to create a link with its suppliers / customers

• reactive way: company is asked (forced??) to switch to EDI by one of its customer / supplier

• benefits can only be maximised if EDI is introduced in a pro-active way (otherwise, standards are dictated by an organisation’s partners)

• companies need to formulate an EDI strategy - much like BPR (re-design processes to fully exploit EDI)

Example of EDI adoption:

• Before Northern Telecom joined Eirtrade

more than 5 days from ordering to delivery

Example of EDI adoption:• After Northern Telecom joined Eirtrade

EIRTRADE VANNorthernTelecom

Other suppliers

Other customers

Same day delivery

Another example: Hickey and Co.

• Irish clothing company - about 75000 garments a week

• formal request to implement EDI from large customer

• only superficial at first then integrated with manufacturing

• reduced stock levels, faster turnaround of orders, more attractive to other customers, easier to audit paper trail

• But too small to convince other customers to use EDI

The Internet

• Now, most of the business to business transactions (including EDI) are carried out on the Net

• Most of the business to customer are carried out on the Web

• Future of E-commerce is based entirely on the development of this vast network

Origins of the Internet Phenomenon

• 30 years in existence - 1969

• Communication network for the US Military!

• Dormant for many years

• Then confined to basic applications, such as FTP and Telnet, by the platforms used

The Explosion of the Internet• Huge growth in the number of machines on the NET

• Widespread coverage in the media - eg: buzzword “Information Superhighway”

• Recognition of new business opportunities provided by the NET

• Role of the WWW is and will be increasingly important

“The best business opportunity that most people are likely to find in a life time” (Hammond, 1996)

Number of Computers Connected to the Internet

Internet Opportunities

• Like the gold rush of 1849

• A shop in 0.5 m2

• Interactive advertising

• A lot of very optimistic predictions

Internet Threats

• Dangers inherent in a wait and see approach

• Companies can be international competitors on the WWW with little resources

• Industries are radically changed by the WWW

• WWW is becoming a crucial battleground

The Internet is like a set of cross roads where petrol stations fight a tough price war; except with the Internet, all companies are at the same cross roads

How to make money

• LAYER ONE - The Internet Infrastructure [$200 billion]

• LAYER TWO - The Internet Applications Infrastructure [$100 billion]

• LAYER THREE - The Internet Intermediary [just below $100 billion]

• LAYER FOUR - The Internet Commerce [$171 billion + fastest growth]

Where does the money go?

• Internet retailing grows 200% per year

• top 10 retailers account for 50%

• mix retailers (e.g. Dell) account for 60%

• portal sites only pocket 30% of E-revenues

As of the end of 1999

• Number of Sessions per Month 16

• Number of Unique Sites Visited 11

• Time Spent per Site 42: 11

• Time Spent per Month 7: 30: 51

• Time Spent During Surfing Session 28: 18

• Duration of a Page viewed 01: 05

• Active Internet Universe 64,953,584

• Current Internet Universe Estimate 109,993,829

• but double figure growth is over– redistribution towards vertical sites

– traffic congestion

Rank Nation Internet population (ms) Share of world population (%)

1. United States 135.7 36.2

2. Japan 26.9 7.18

3. Germany 19.1 5.10

4. UK 17.9 4.77

5. China 15.8 4.20

6. Canada 15.2 4.05

7. South Korea 14.8 3.95

8. Italy 11.6 3.08

9. Brazil 10.6 2.84

10. France 9.0 2.39

11. Australia 8.1 2.16

12. Russia 6.6 1.77

13. Taiwan 6.5 1.73

14. Netherlands 5.4 1.45

15. Spain 5.2 1.39

  Total 374.9 100

Revised statistics (Summer 2000)

Number of Sessions per Month 18

Number of Unique Sites Visited 10

Time Spent per Site 57: 02

Time Spent per Month 9: 40: 53

Time Spent During Surfing Session 31: 32

Duration of a Page viewed 00: 50

      Patterns of Internet browsing in the UK

Number of Sessions per Month 10

Number of Unique Sites Visited 18

Time Spent per Site 15: 39

Time Spent per Month 4: 39: 07

Time Spent During Surfing Session 29: 02

Duration of a Page viewed 00: 45

      Patterns of Internet browsing in the US

The Size of the Beast

• 12,844,877 unique domain names registered worldwide

• 1,570,000,000 pages

• 29,400,000,000,000 bytes of text

• 353,000,000 images

• 5,880,000,000,000 bytes of image data

The Growth of the Beast

For every 24 hours that elapses

• 3,180,000 new pages

• 59,700,000,000 new bytes of text

• 716,000 new images

• 1,900,000,000 new bytes of image data

• Imagine the implications for traffic

• But the capacity of the Internet backbone has doubled every 100 days !

Case Study of Web Fortune• Blue Mountain Arts (.com) - on-line postcard service

• One of the most highly trafficked sites on the Internet (16th, but 3rd E-Com site)

• 9.2 millions visitors per month

• Etoys inc. ready to pay £1 billion for it

• but quick response of competitors may spoil deal

• AOL, Yahoo and Amazon developed their own

• service may be extended to include flower, candy or fruit delivery!

How trivial can you get?

You have just received an animated greeting card from XXX

You'll see the personal greeting by using the following Web location.

http://www1.bluemountain.com/cards/box6958r/ufe4vyeufagkwy.htm

(Your greeting card will be available for the next 90 days)

There is no charge for this service! :) HAVE a good day and have fun!

Precursors of E-Com

• More than 2000 initiatives introduced over last 20 years

• most successful (still exist besides the Web) was France’s Minitel (1980)– infrastructure made available to companies to sell services through

telephone lines

– France Telecom equipped entire user population within 2 years

– hundreds of thousands of local and national services

• Most other attempts failed (e.g. Minitel in Ireland)

Key points in the current success• International, borderless initiative

• Technology is mainstream and affordable (e.g GUI)

• Flexibility is ensured through the existence of thousands of existing / developing local networks

• Global markets set free from the shackles of 9 to 5 constraints

• goes hand in hand with internal re-engineering carried out in many organisations ...

Fortune 500 E-Com

• All have Web sites

• Only 10% conduct transactions

• Mostly public relations, customer service and technical assistance (70% of sites)

• marketing and sales (30% of sites)

• Illustrates that E-Com is not a silver bullet

Limitations of current sites

• Only 3% of sites for direct sale (9% equipped for on-line transactions)

• more than 50% of users went on-line to make a purchasing decision...

• only 15% bought because sites did not (easily) allowed them to do it on-line

• 2/3 of customers put goods in their trolleys and then fail to complete transaction!

But...• Internet has potential to enable / impose radical changes:

• at first, e-mail is a replication of normal mail, just faster

• then, it take additional dimensions

• i.e. effects that go beyond its technical features (virtual communities)

• E-Mail has the power to change the key parameters in this definition

groups are those social aggregates that involve mutual awarenessand potential mutual interaction (McGrath, 1984)

For example:• Instigation of electronic exchanges with emerging nations /

markets

• simpler structure

• less tradition bound

• attracted to novel and efficient ways

• little costs in competing in most distant of markets

• Other experimentation include letting customers deciding the price

Internet does create opportunities that could not be exploited otherwise

Types of e-commerce

• Business to business:– EDI– largest in money terms (as in real world)

• business to consumers:– WWW retailing and brokerage services

• consumer to consumer:– free ads services / discussion groups

• attempt to implement single point of entry and limit errors and speed up process

• Also, higher degree of customisation of customer services (e.g. auction markets)

Some wise words

• Internet growth nothing special

• definition of Ecommerce and Ebusiness

• fact that non-E Business will virtually disappear

• ICDT Model of Ebusiness (Angehrn, 1997)

• Point about the crazy market valuations– disruptive technologies

– madness of crowds

• rise and fall of Ecom => post-net society will settle again

EBusiness• Conducting any kind of business via an electronic channel

WebCommerce

InternetCommerce

Electronic Commerce ElectronicBusiness

E-Commerce Challenges:

• Speed = service is never too fast

• Convenient = better integration along the supply chain (end to end value stream)

• Personalised = service is never too personalised

• Price = products and services are never too cheap

• = View the world from a customer perspective (visionary?)

Constructing a E-Commerce design

• All about offering new ways to service customer

• acquiring the capability to implement these new ways

• e.g. DELL’s BTO model for selling PCs

• company does not manufacture a PC before an order is received

• $10 million sales on-line per day! (soon 50% of all DELL sales) - Jan 97: $1 million.

• Never been easier to buy a PC

Step One: Self-diagnosis

• Diagnose the company and its markets– current / recent innovations?

– Evolving customer expectations

– any way to question industry assumptions

– any way to lower costs

• innovator / market leader - early adopter / visionary - silent majority - ...

Step two: reversing the value chain

• Linking emerging technology to new business designs

• More difficult than merely adapting new to current

• traditional break down into product and service not helpful => creating better offering

• outside-in approach (better attention to market changes)

• effectively and competitively presenting good products no longer sufficient

Step three: choosing a narrow focus

• Technology can be enabling, but also distracting

• concentration on a key area is required

• service excellence (knowing customers better)

• operational excellence (having better internal processes)

• continuous innovation excellence (having leading edge products)

• not compete on every aspect / feature of product service

Important points in establishing a Web presence

• ECommerce is not only a matter of interface

• Robust back end must be developed to cope with additional volumes of transactions

• Ecom is not a replacement for current business practices: rather a new way to do business:– Help retain customers

– Attract new customers

• Data must be totally reliable as web is very visible

Technology

• Best practice is not always the best model

• Technological evolution results in pockets of uneven development

• Cannot run the risk of excluding customers

• Must run in parallel with existing business practices

Technology (2)

• Breaks down barriers to entry

• Thus, source of threat as well as opportunity

• Loss of market by substitution of core competencies

• Failure to understand / evaluate the impact on market may spell disaster

Customer differentiation

• Develop the web site to learn about customers as well as support transactions– Login

– Archive of transactions: basis to learn about patterns and trends + who are the best customers

• Use profiles to present a “favourite” view of the web site

• Make sure the best customer gets the best offer

Constructing a E-Commerce design

• All about offering new ways to service customer

• acquiring the capability to implement these new ways

• e.g. DELL’s BTO model for selling PCs

• company does not manufacture a PC before an order is received

• $10 million sales on-line per day! (soon 50% of all DELL sales) - Jan 97: $1 million.

• Never been easier to buy a PC

Example: Dell

• Narrow focus on Supply chain innovation

• “quickly manufacturing and delivering inexpensive top quality PCs”

• the three plants are located close to their suppliers and operate in JIT

• Orders follow machines across the floor

• Automated customer requests mean operators are shown by flashing colours what components to use (i.e. what type of PC to assemble)

Critical Success Factors

• Back end systems enable extremely quick transmission of orders to factories

• CIM systems are then used to schedule production

• integration of operations with upstream design activities mean shorter time to market for new pdts

• no finished goods inventory (cost, obsolescence)

• outsourcing of non-critical components (e.g. screen)

• acceleration of payment cycle (goods paid for before they are built!)

Lessons from the Dell case

• Companies should try to:

• increase their ability to respond to the ever increasing and ever changing needs of customers

• requires very flexible business design

• based on solid technical foundation

• Even though E-Com is an extra-organisational mode of communication it has crucial implications for internal systems

The ICDT Framework (Angerhn, 1997)

TraditionalMarket Space

VIS VCS

VDSVTS

Current Ecom hypeRate of change / Value

Time

Rise and Fall of EcomVisibility

Timetoday

Managing customer relationship

• E-com presents specific challenge because contact is over the web

• personal relations are excluded

• only end of process is (sometimes) done with human operators

• searching for new customers / selling new services to old ones is difficult if you do not know who to talk to

But…

• Other side of the coin, underlying technologies make it easier to monitor customer behaviour

• Tracking software in web site

• Event-driven marketing

• Up-selling and cross-selling

E.g. Charles Schwab Ltd.• Brokerage service for DIY investors

• $200 billions assets

• all contacts through phone => little visibility on transactions

• sales reps + service people do not know enough

• Customer relationship management (CRM): integrating all activities involving customers

• All needs addressed together

marketing

Service

Sales

CRM

Many other such examples of integration

• Enterprise resource planning (Nestle)• Supply chain (Ford Motors comp)• Selling chain management (Whirlpool)

– pricing system was paper based– spreadsheet with 180,000 cells - many customer types / pricing

strategies– 15 days lead time to print booklets– integrated systems takes into account all parameters

• The e-commerce strategy is then constructed around these core systems

Planning for integration

• Ensure proper knowledge about the end-to-end demand planning function - variations and seasonality

• carry out data consistency and accuracy checks

• creating better relationship with partners up-stream and downstream

• envisage structural changes required (e.g. zero inventories)

• Plan for additional skills / re-training (e.g. MRP)

Prepare systems for integration

• Enable information sharing - more robust communication

• create joint performance measurement systems and collaborative planning processes

• exchange / re-distribute responsibilities

• redesign products and processes so work is easier and more efficient (BPR)

Business Process Re-Engineering:

• 90’s buzzword in management• Redesign the whole organisation to make it more effective rather

than efficient• Based on extensive studies of all processes• Create new ways to do things that minimise

- time spent- number of employee required- costs incurred

• and maximise:– Customer satisfaction– speed of service– profit margin

Process versus FunctionsMarketing Manufacturing Other functions

Production and Sales of Product A

Production and Sales of Product B

Other Vital Process - e.g. dealing with customers

BPR versus Process Rationalisation

• Up to now, emphasis on increasing efficiency

• But “there is nothing more useless than doing efficiently what should not be done at all”

• Dramatic improvements require revolutionary moves

• Everything must be questioned

Drucker, 1986

Information Systems to support the e-business strategy

• Enterprise Resource Planning (ERP)

• Customer relationship management (CRM)

• Supply chain management (SCM)

Enterprise Resource Planning (ERP)

• Large applications geared towards integrating the essential internal processes of an organisation

• e.g. SAP R/3, MFG/PRO, Baan, JD Edwards, Oracle

• Support the transactional backbone of the organisation

• 70% of fortune 500 companies have or are implementing ERP systems

• SAP and Oracle have become the second largest software producers in the world

Content of ERP systems• ERPs are not single systems: series of modules supporting specific

areas– admin functions– HR– manufacturing / MRP– order processing etc…

• single point of entry for each item of data: sits on top of a single database of shared data

• data is released from one module into the relevant modules once it has been checked

• ERPs have the potential to solve many back end headaches• Build upon earlier generation of CIM systems – e.g. MRP

E.g. DELL• three plants are located close to their suppliers and operate in

JIT

• Orders follow machines across the floor

• Automated customer requests mean operators are shown by flashing colours what type of PC to assemble)

• no finished goods inventory (cost, obsolescence)

• outsourcing of non-critical components (e.g. screen)

• acceleration of payment cycle (goods paid for before they are built!)

Introduction to MFG/PRO

• Each student get their own version of the training database – Quality Pencil company

• Create a new product and sell it: Packaged Pen

• Not so easy to go around the menus:– Codes are used to help users find their way – e.g.: 1.2.1 is product

line maintenance

– Users must learn which screens to use to do things

Computer Integrated Manufacturing (CIM)

• Overall computerisation process which started a long time ago

• Encompasses many different types of applications

• basis was the application of the Materials Requirements Planning (MRP) principles (early 70s)

• APICS (American Production/Inventory Control Society)

• All major software houses developed and marketed MRP systems

Reasons for MRP

• Snowball effect as companies moving to MRP imposed business changes to their partners

• MRP logic was always around, but switching costs in manufacturing made it worthwhile:– data processing costs decreasing

– inventory costs rising

• Sophisticated CIM systems easier to justify

• Other external pressures (eg financial / legal) mean that tighter control is required

Reasons for ERP systems

• Search for operational excellence using “best practice” models

• cost cutting / rationalisation• standardisation / compatibility of disparate IT

infrastructures (e.g. mergers)• Year 2000?• e.g. Ericsson reported following improvements:

– SOP 1 hour to 10 minutes– PO 4 hours to 5 minutes– production scheduling: 18 hours to 30 minutes– 98% of orders delivered on time

Example (2) Dell case study

• No stocks (RM not paid for until in the factory)

• Tracking of WIP on the floor

• Testing fully automated

• Impressive AGV for temporary storage of large orders

• 95 fully automated loading bays:– main sorting point of output for shipping

– scanner operated

– straight from assembly line to trucks

Example: Colgate Palmolive• Large corporation with many products:

Goal: streamlining the business while offering increasing flexibility to customers• SAP R/3 to address manufacturing / logistical complexity• 1996 - 2001 to equip the whole corporation

75 data centres 2 centres with 40 staff1 to 5 days for orders acquisition combined acquisition + 1 or 2 days to process them and processing in 4 hours! on-time deliveries = 91.5% = 97.5%

Also accounts payable and HRM consolidated in one location

Before: After:

How to get an ERP• No real build or buy decision

• try to minimise the high levels of risk:– Foxmeyer ($5 billion pharmaceutical comp.) went bankrupt in

1996

– sued SAP’s US subsidiary and Andersen Consult. for a combined $1 billion

– 3 years of implementation destroyed the company

– bought by McKesson Drugs - 1997

• Try to get best fit between ERP functionalities and business model

Critical issues in ERP implementation

• High cost and high stakes

• Misguided belief that there is an ERP that “does it all”

• difficulty in making a transition from an old model to an ERP model

• overestimation of the pace of change of some stakeholders (technical change is not sufficient)

• difficulty in obtaining any direct ROI

Buying ERPs• Many suppliers: SAP / Baan / JD Edwards / QAD• always implemented through a distributor• advantages are numerous (as against building)

– integrate best practice– insurance against obsolescence– cheaper !!??– Software development is not core competency for most firms

• but, selection process is difficult at best:– site visits– presentation– discussion groups– Magazines and newspapers

Alternative: The Application Service Provider model

• Over the last two years - Pressure from Y2K?

• "An ASP manages and delivers application capabilities to multiple entities from a data centre across a wide area network.”

• different types of ASP:– horizontal: enterprise / volume or regional ASP

– vertical model: task-specific or industry-specific ASP

• solution offered through a Best-of-breed or One-stop-shopping model

The current leaders in the ASP market include: Bull allied with Baan worldwide from June 1999 onwards British Telecom with SAP in the UK from May 1999 Catalyst Solution with JD Edwards in the UK from May 1999 Oracle by themselves in the States and the UK from May 1999 Compaq with SAP in the States and the UK from May 1999 Prologue Software by themselves in France from June 1999 Corio with Peoplesoft and Siebel in the States and the UK from August 1999 IBM with Oracle in Denmark from September 1999 IBM with SAP in Brasil from September 1999 IBM with JD Edwards in North America from September 1999 Symix by themselves worlwide from May 1998 with their Syteweb product which

enables integration with customers and suppliers over the web. This service waslater extended to reach full ERP specification over the following 12 months.

Groupe Galeries Lafayette with IBM in France (using their own in-housedeveloped software not available otherwise!) under the name LASER from July1999

Interpath and Sun for SAP from June 1999 Oracle and HP for SAP from June 1999

Bold indicates primary consortium partner.

ERP and ASP

• As with all ecom systems, service has two parts:– interface (web) or client

– back end functionality on a server

• opportunity to differentiate service for ASP + offer additional software in the package

• opportunity for customer to pay far less and to implement far quicker (c.f. SMEs)

• Also, traditional ERP market is contracting

• expertise is in short supply

Mechanics of ERP / ASP Services• 24 to 36 months contracts

• 400-500 euros per workstation per month + subscription fee at start

• service includes: technical setup / implementation + software licences + on-going support + upgrade

• some ASPs offer differentiated services for different industries

• others develop interfaces that allow some degree of customisation without touching the software

• SAP claim the same margins can be obtain

Critical Success Factors in ASP model

• Security of the data and application

• performance and reliability of application– at least 98% uptime

• flexibility of the service offered

• adaptation of the software

• relationship between supplier and customer / user

Potential partners

• Pure play ASPs - 100% new

• ISP and Telecom companies - own the infrastructure

• Software vendors - own the licences

• Hardware vendors - own the platform

• Distributors - own the customers

• No one has all the required competence

ERP Capabilities - SAP• Accounting / finance:

– Asset management, cash management, product cost accounting, A/R and A/P…

• Production planning and materials planning– purchasing, inventory management, MRP, production planning

• HR management– travel expenses, payroll, personnel planning

• sales and distribution– sales planning, order management, quality management

• e.g. Microsoft spent 10 months and $25 ms replacing 33 different systems in 26 sites with SAP

ERP capability - MFG/PRO

• meant to deal with requirements throughout the entire product supply chain

• multi-location / multi-factory / multi-products etc…

• Includes Inventory control Distribution / Manufacturing / Financial / Field services support / Planning

• Based on a large Progress® relational database and developed in 4th GL

Future trends

• A bit of a jungle - needs for standards

• Risk element is great for all partners involves - especially customers

• Application Service Provider Industry Consortium created end of 1999

• Code of good practice ready in January 2000

• creation of a certification that guarantees service and gives protection to customer (Ernst / Young and Deloite / Touche)

Next steps on this market

• Inclusion of Customer Relationship Management

• Platform provider for ASP solutions– e.g. Prologue + Microsoft: biz@large

• HP willing to enter into the capital of any venture if they provide the hardware

• Business Process Outsourcing (BPO)

• eXtended Resource Planning (XRP) - support decision making as well– e.g. business intelligence

– e.g. balanced scorecard

Customer Relationship Management

• Cost of selling to a new customer is six times as high as to existing customer

• Each dissatisfied customer tells 8 to 10 people

• 1 extra % of customer retention can boost turnover by as much as 15%

• Odds of selling to a new customer = 1/7 to an existing customer = 1/2

• 70% of dissatisfied customers will do business again if they feel their complains are handled well

• Many companies don’t have proper customer support

Why CRM?

• Customers don’t care about their suppliers’ internal difficulties

• They want to be able to access product and services at the least cost

• They want a single point of entry

• Existing loyalty programmes don’t go far enough

The 3 phases of CRM• Acquiring new customers

– by promotion

– leading edge product backed by superior service

• Enhancing profitability of existing customers– cross-selling and up-selling (one stop shopping)

– additional services

• Retaining most profitable customers– best customer list

– customer profitability analysis

– make best offer to best customer

Novelty of the CRM Approach

• Complete and integrated solution - breaks down the walls of conventional functional areas

• Most companies are good at one of the 3 activities - CRM concentrates on all 3

• Overall corporate objective of providing customer satisfaction – systems in place to collect, store, exploit CRM info

– active distribution of information about customers

• Offer single point of entry for customer queries

Supporting CRM

• Integration of customer content

• integration of customer contact

• integration of end-to-end business processes

• integration of the extended enterprise

Customer contact point

• Move from traditional phone + mail towards Web enabled contact:– how will this affect the content of the communication?

– will it be cheaper or more expensive?

• Call centre (70% of all contact points) evolving into a selling channel

• Goals of the contact point– Listening to the customer

– creating higher levels of loyalty (HD)

– providing a better experience

Conclusion on ERP

• Whether traditional or ASP - matching the business processes to the functionality

• obtain agreement from all organisational actors

• be ready for fundamental change

• don’t lose sight of the specificity of the firm

• try an incremental implementation rather than a culture shock

• leave the door open for change after the ERP implementation

Supply Chain Management• Increasingly common type of application

• e.g. Bergen Brunswig (pharmaceutical medical product distributor):– no longer see themselves as a distribution company but as managing the

medical supply channel on behalf of others

– not merely moving products but also managing information and the ultimate efficiency of the channel

• e.g. Dell

• anti e.g.: Boeing wrote off $2.6 billion in Oct. 1997:– raw material and internal assembly shortages

– unhappy customers

DefinitionComplex network of relationships that organisations

maintain with trading partners to source, manufacture and deliver its products

• includes material, information and financial flows as shown below

ProductFlow

ProductFlow

ProductFlow

ProductFlowSupplier Manufacturing Distribution Retailer Consumer

Information Flows

Payment Flows

Goal of SCMDelivering the best value proposition: what the customer want,

how and when it’s wanted, at the lowest possible price

• to achieve this companies need rapid, cost effective and flawless demand fulfilment

• Involves taking responsibility for what happens outside the walls of the organisation

• linkage with suppliers

• minimising the cost of order delivery process by trading off cost of inventory, transport, handling etc...

Obstacles to good SCM

• No player has enough info to synchronise the entire channel

• most SCc contain more than double the required inventory

• products are handled too many times (5/6 average)

• Physical carriers struggle to maintain costly equipment on slim margins

Novelty in SCM - eSCM

• Better techniques and software: e.g. SAP’s Advanced Planning and Optimisation

• Supply Chain planning => for the entire channel

• Web-based applications shared by all partners involved including consumers help both planning and execution + provide greater visibility

• e.g. complex product with fragmented supply in many different countries

Supply Chain Trends

• Increased worldwide dispersion of manufacturing and distribution facilities

• increased channel unpredictability

• responsiveness before efficiency: need to be quick and flexible disrupts existing paradigms

• Market share before profit margin (.com)

Key Areas of Investment in SCM

• Inter-enterprise co-ordination of design, manufacturing and business process

• Effective distribution and channel partnership

• customer responsiveness and accountability

Different stages in SCM

• Enterprise focus - traditional model– figure 1– characterised by fragmentation– sometimes semi-conflict between links in the chain

• Partner focus - modern vision– figure 2– characterised by collaborative idea

• Direct focus (e.g. Dell) - emerging vision– figure 3– characterised by customer-direct capability– near zero inventories

Service through SCM integration

Inferior integration of SCM results in:– erratic level of service

– no vision of future demand

– bad/inefficient production planning and scheduling

– rising inventory costs

• Good SCM leads to:– Responsive SC (quick and accurate)

– Enterprising SC (adaptable)

– Intelligent SC (dynamic and visionary)

Elements of SCM

Two key elements are

• planning – forecast of demand,

– inventory simulation

– manufacturing planning...

• Execution– procurement

– manufacturing

– distribution...

• Specific software exist to enable those

SC Planning

• Two types of software:– Order commitment (available-to-promise)

– Advanced scheduling and manufacturing planning

– Demand planning

– Distribution planning

– Transportation planning

• Understanding the impact of taking additional orders / changing current orders

• Integration with ERP required

SC Execution

• Key differentiator in today’s markets

• Planning can help to cut costs, be more efficient

• Execution is what truly satisfies customers’ needs

• key stages:– order acquisition

– production / purchase of goods

– replenishment

– distribution

– reverse logistics (dealing with returns - up to 14%)

Problems with SC

• Lack of knowledge of the end-to-end demand function

• inconsistent / out-of-date data about SC (poor decision making)

• lack of process integration with partners

• need for fundamental structural changes

Solutions

• Enable information sharing– robust communication process

• create joint performance measurement systems

• create joint collaborative planning processes

• exchange responsibilities / redesign across firms

• redesign products and services to facilitate work and satisfaction of customers

• All these are stages of the total solution

Key Questions in sorting out the SCM

• SCM is a business design issue

What is the right e-chain structure?

Does the chain enable us to differentiate ourselves?

Does it facilitate effective order fulfilment?

Is it matched by proper infrastructure / internal processes?

Types of SCM

• Integrated Make-to-stock– smoothing demand in mass production industries

– linked to postponement in distribution channel

• Continuous replenishment– customer-demand pull system across firms

– ECR, QR

• Build-to-order– efficient SCM allows return to BTO model

– inventory substituted with information (Dell)

Example: CVS-McKesson SCM• McKesson occupied key position

– 35000 customers / 60000 orders (1.6 m lines) daily– all orders in electronic forms– target: become the world leader

• CVS has acquired many prime locations on the market– US drug wholesalers down from 180 to 45– top 5 = 57% of market and growing

• Market evolution– market is growing– wholesalers are best distribution channel– manufacturers can concentrate on R&D– wholesalers are transforming their offering into information-based services

• Moves to greater integration between CVS & McKesson– McKesson takes over responsibility for stock levels– measures consumption / plan for demand– replenishes stocks to meet agreed upon levels– High level of inter-firm integration

Continuous replenishment

CISCO and SCM

• CISCO’s customers are resellers who sell networking products

• before: reps would go around visiting shops and fill orders or orders would arrive directly by fax at Cisco’s

• Orders were then re-keyed in the SOP systems

• After: automation of the process (see figure attached)