Purchasing, logistics, and supportactivities

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• In previous lectures we talked about ways thatgoods and services are marketed, promoted,and sold.

• In terms of the value chain, this involves:– Identify customers– Market and sell– Deliver

• We now consider how technology can improve:– Purchasing– Logistics– Support

Perspective

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Figure 1-10

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Purchasing activities include:• Identifying vendors• Evaluating vendors• Selecting specific products• Placing orders• Resolving issues that arise after receipt

of goods or services:– Late deliveries– Incorrect items or quantities shipped– Defective items

Purchasing

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• The term procurement refers to all purchasingactivities, as well as the monitoring of allelements of purchase transactions.

• Procurement also includes the managementand development of relationships withsuppliers.

• In many case procurement staff must havedetailed knowledge about products.

• Specialized Web sites can aid in disseminatingnecessary information.Example: Neoforma

Procurement

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• Maintenance, repair, and operating (MRO) suppliesare commodity items that companies buy on arecurring basis.

• Price is usually the main selection criterion.• By using a Web site to process orders, vendors

in this market can save the cost of printingand shipping catalogs and the cost of handlingtelephone orders.

• Examples: W.W. Grainger, McMaster-Carr, OfficeDepot, Digi-Key, Global Computer Supplies

MRO supplies

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• Objective: Provide the right goods in the rightquantity in the right place at the right time.

• Major transportation companies want to be seenas information management firms as well asfreight carriers.Example: Freight tracking Web pages madeavailable by Schneider Logistics, FedEx, UPS.

• Logistics activities include receiving, warehousing,inventory control, vehicle scheduling and control,and finished goods distribution.

Logistics

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Support activities include:• Finance and administration• Human resources• Technology development

Support activities

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• Making payments• Processing payments received• Planning capital expenditures• Budgeting and planning• Operation of the computing infrastructure

Finance and administration

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• Hiring• Training (not always)• Evaluating employees• Benefits administration• Complying with government record-keeping

regulations

Human resources

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Activities included here depends on the nature ofthe business or organization.

May include:• Networking of researchers into virtual collaboration• Posting of research results• Publishing research papers online• Providing connections to outside sources of research

and development services

Developing technology

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• In some companies training is handled by humanresources.

• In other organizations it may decentralized and bedone by individual departments.

• Where it occurs can depend on the type of training.• Example: At DePaul orientation for benefits and

for incoming faculty is handled by a centralizedgroup. CTI does its own training for advising.

Training

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Examples of firms providing support activitiesservices:• OnLine Benefits: Benefit management• TheTrip.com: Employee travel policies• CyLex Systems: Document storage• PayMaxx: Payroll processing• Driveway Business Solutions: Electronic file

storage

Examples

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Three different forms of economic organization:• Markets: Buyers and sellers come together to

conduct transactions• Hierarchies: Large organizations that conduct

many different business activities entirelywithin the structure of the firm

• Networks: Firms coordinate their strategies,resources, and skills sets by forming long-term,stable relationships based on a shared purpose.

Forms of economic organization

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• One trend in in purchasing, logistics, and supportactivities is a move away from hierarchicalstructures toward network structures.

• Highly specialized firms can now exist and tradeservices very effectively on the Web.

• The emerging networks of firms are more flexibleand can respond to changes in the economicenvironment more quickly than hierarchicalcompanies.

Effect of technology

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• Electronic data interchange (EDI) is a computer-to-computer transfer of business informationbetween firms that use a standard format forrepresenting the information.

• The two businesses trading information are calledtrading partners.

• Firms that exchange data in specific standardformats are said to be EDI-compatible.

• The types of information include invoices, purchaseorders, requests for quotations, bills of lading, andreceiving reports.

Electronic data interchange

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• By the 1960s companies began exchanging punchcards or magnetic tape with transaction data.

• Data communications improvements resulted inphone lines being used to exchange information.

• In 1968 a number of freight and shipping companiesformed the Transportation Data CoordinatingCommittee (TDCC). The TDCC created a formatincluding all elements found on bills of lading,freight invoices, shipping manifests, and otherpaper forms.

• Standardization across industries remained difficult.

Early efforts

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• In 1979, the American National Standards Institute(ANSI) chartered a new committee, called theAccredited Standards Committee X12 (ASC X12)to develop uniform EDI standards.

• The ASC X12 standard benefited from memberparticipation across a wide variety of industries.

• The current standard includes specifications forseveral hundred transaction sets, which are thenames of the formats for specific business datainterchanges.

Broader standards

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• Although the ASC X12 standards were quicklyadopted by major firms in the U.S., businessesin other countries continued to use their ownstandards.

• In 1987, the United Nations published its firststandards under the title EDI for Administration,Commerce, and Transport (UN/EDIFACT).

• The ASC X12 organization has voted to move itsU.S. standards toward the UN/EDIFACTstandards, although no date for the final migrationhas been set.

International standards

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• Example: A company that needs to replace one ofits metal cutting machines.

• Figure 9-5 on page 294 shows the paper version.• Figure 9-6 on page 298 shows the EDI version.• The same messages are exchanged between the

departments, but EDI reduces paper flow andstreamlines the interchange of information bothwithin and outside a company.

Paper versus EDI

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Trading partners can implement the EDI networkand EDI translation processes in several ways.

Each of these uses one of two basic approaches:1. Direct connection2. Indirect connection

Implementation

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• Each business in the network operates its ownon-site EDI translator computer.

• The EDI translator computers are then connecteddirectly to each other using modems and dial-uptelephone lines or dedicated leased lines.

• Trading partners using different communicationprotocols can make direct connection optionsdifficult to implement.

Direct connection

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• A value-added network (VAN) is a company thatprovides communications equipment, software,and skills needed to receive, store, and forwardelectronic messages that contain EDI transactionsets.

• In an indirect connection, the trading partners usethe services of a VAN for communication.

• The VAN often supplies EDI translator softwareas part of their package of services.

Indirect connection

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The benefits of using a VAN include:• Support for only one communications protocol• The audit log maintained by the VAN can be

used to resolve disputes.• The VAN can provide translation if the partners

use different transaction sets.

Examples of VAN services include General ElectricInformation Services, IBM Global Services, GPAS,and Sterling Software.

Advantages

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The disadvantages of using VAN include:• Requires an enrollment fee, a monthly maintenance

fee, and a transaction fee.• Using VAN is cumbersome for companies that want

to do business with a number of trading partnersusing different VANs.– Costs are unpredictable and tend to be higher– There is not always a clear paper trail

Disadvantages

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• The Internet was seen as a way to replaceleased lines and dial-up connections.

• Potential problems include:– Concerns about security– Inability to provide audit logs– Third-party verification of message

transmission and delivery

EDI on the Internet

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• EDI on the Internet is called Open EDI.• Many new firms offer Open EDI including:

– Commerce One– EB2B.com– VanTree

• The Internet allows customization for dataexchanges.

• New tools such as XML are helping tradingpartners be more flexible in exchangingdetailed information.

Open EDI

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• The EDI transaction sets that provide instructionsto a trading partner’s bank are called financialEDI (FEDI).

• EDI-capable banks are those banks that areequipped to exchange payment and remittancedata through VANs.

• Value-added banks offer VAN services for non-financial transactions.

Financial EDI

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• Many companies are reluctant to send over theInternet FEDI transaction sets that containtransfer instructions for large amounts of money(in some cases millions of dollars) because ofthe perceived low level of Internet security.

• Reliability of FEDI transaction sets is also an issuesince a delay in delivery of $10 million can resultin a large loss of interest income.

Perceived risk

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• Hybrid EDI solutions use the Internet for part ofthe transaction.

• For example, EDI-HTML translation servicesallow EDI-enabled firms to communicate withfirms that are non-EDI-enabled.– EDI-enabled firm transmits document to the

service– The service translates this into HTML for the

non-EDI-enabled partner– The partner’s response is translated back

Hybrid solutions

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• The part of an industry value chain that precedesa particular strategic business unit is often calleda supply chain.

• A company’s supply chain for a product or serviceincludes all the activities undertaken by everypredecessor in the value chain to design, produce,promote, market, deliver, and support eachcomponent of that product or service.

• Example: Car manufacturer’s supply chain wouldinclude engine manufacturers, steel fabricators,glass manufacturers, etc.

Supply chain

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• In recent years businesses have realized that theycan save money and increase product quality bynegotiating more actively with suppliers.

• Companies can work together with suppliers toidentify new ways to serve customers morequickly and cheaply.

• The process of taking an active role with suppliersto improve products and processes is calledsupply chain management.

Supply chain management

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• Business develop long-term relationships with asmall number of very capable suppliers, calledthe tier one suppliers.

• Tier one suppliers work with a select group oftheir suppliers in the same way. This secondlevel is called the tier two suppliers.

• Tier two suppliers work with tier three suppliers.• The long term relationships created are called

supply alliances.

Levels in the supply chain

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• In exchange for stability, buyers expect pricereductions and quality improvements fromtheir suppliers.

• By working together, supply chain membersreduce costs and increase the value of theproduct or service to the consumer.

• With clear communication up and down thesupply chain, each participant can knowwhat the ultimate consumer is demandingand can plot a strategy to meet the demand.

Value creation

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• Clear communications and quick responses tothose communications are a key element ofsuccessful supply chain management.

• The Internet and the Web can be very effectivecommunication enhancers.

• Software can help all members of the supplychain review past performance, monitorcurrent performance, and predict when andhow much of certain products need to beproduced.

Technology in the supply chain

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Suppliers can:• Share information about demand fluctuations• Receive rapid notification of product design

changes and adjustments• Provide specifications and drawings more

efficiently• Increase speed of processing transactions• Reduce cost of handling transactions• Reduce errors in entering transaction data• Share information about defect rates and types

Advantages

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• Dell computer has used technology-enabledsupply chain management to give customersexactly what they want.

• It reduced inventories from three weeks’ salesto six days’ sales.

• Dell’s top suppliers have access to a secureWeb site that lets them see:– The latest sales forecasts– Planned product changes– Defect rates and warranty claimsThis enables the suppliers to plan better.

Example