Posing New Challenges

The shift of commerce from the physical
world to the virtual world will force companies to get in sync with
ecommerce or left behind by tomorrow’s business.

Packaged software solutions
The earliest packaged solutions for EC mainly addressed commerce
activities between businesses and consumers. At that time, businesses
wanting to deploy such applications for their business-to-business
EC needs were required to add a significant amount of custom design
and programming. Newer packaged applications offer more comprehensive
solutions. 

Business-to-business EC software products
can be divided into two primary categories: buy-side and sell-side.

Buy-Side:
On the buyer’s side, multiple individuals often are involved in
the procurement process. They play various roles, including requesting
or approving the expenditure, negotiating the purchase, recording
receipt of the goods, approving the invoice, processing the payment
via check or electronic funds transfer and handling the accounting
or financial reporting. Core enterprise business systems such as
materials management, procurement, accounts payable and general
ledger are employed to document and record the various components
of the transaction life cycle.

New procurement systems from vendors
including Ariba, Commerce One, Elekom (in the process of becoming
part of Clarus), Fisher and Harbinger move routine purchasing activities
to the desktop and improve compliance with an organization’s purchasing
guidelines and policies while lowering costs. The trend is to start
by using these products to purchase maintenance, repair and operation
(MRO) materials but transition toward the organization’s major purchases
through integration with enterprise resource planning (ERP) applications.
For other types of procurement, web-based bid systems such as Digital
Market and Free Markets Online let buyers obtain the lowest prices
on requests for proposals (RFPs) and reduce costs for the process.
Buy-side solutions typically include workflow capabilities, linkages
into ERP suites and user profile analysis.

Sell-Side:
On the seller’s side, core business systems are employed to track
and record the various elements of the transaction life cycle. For
example, sellers use core business systems to describe their products
and pricing catalog, to maintain buyer information including payment
history, to track inventory and warehousing, to process and fulfill
orders and ship goods, and to record payments and generate financial
reports.

Sell-side products include catalogs,
transaction engines, payment mechanisms and supply chain management
tools. Beyond the basic services of taking orders, clearing credit and
inventory verification, software from vendors such as iCat, Netscape
and Open Market also provide catalog customization for individual
buyers, manage account information and interface with accounting
systems. Online trading exchanges such as FastParts provide a framework
for buyers and sellers to negotiate prices competitively.

Business-to-business
process examples

Both traditional EDI and newer forms of business-to-business commerce
over the internet can allow a company to save money. Savings can
result from less-expensive ways of processing transactions themselves
or by eliminating the need to receive invoices in paper from and
then manually re-key them into financial applications. They also
can allow a company to operate in a more efficient build-to-order
process by eliminating excess inventory and facilitating ‘just-in-time’
(JIT) production planning and manufacture. JIT benefits include
smaller on-hand inventories and more inventory ‘turns’ like replacements
of inventory used in orders or manufacturing. The JIT process has
been tailored to meet the needs of various industries engaged in
business-to-business EC, including:

  • Quick Response
    (QR):
    Retailers can improve
    their profitability by increasing the number of stock turns during
    a season and eliminating end-of-season mark-downs. EDI enables
    market data gathered by point-of-sale (POS) terminals to be delivered
    from retailers to suppliers more quickly. Retail industry studies
    estimate that a fully implemented QR system returns about 5% of
    gross sales to the bottom line.
  • Model Stock Replacement:
    A retailer identifies the desired level of inventory, known as
    ‘model stock’, for each location and provides POS data to suppliers
    on a daily basis. The suppliers then restock the shelves as needed.
    The retailer monitors the suppliers’ activities while allowing
    the original model stock level to be adjusted by suppliers as
    the volume of sales changes over time. Payments are made on delivery
    rather than on invoice, reducing the costs of handling payables.
  • Materials Management:
    Materials Management uses EDI, materials requirements planning
    (MRP), and JIT manufacturing to reduce the level of parts inventory
    required. Suppliers receive planned material usage information,
    which allows them to deliver the right amount of suppliers just
    in time for use by the manufacturer.
  • Efficient Customer
    Response (ECR):
    Similar
    to Quick Response and Model Stock Replacement but found in the
    grocery industry, ECR enables sales data to be transferred electronically
    between the supplier, the distributor and the retail store. The
    goal is to match product flow to consumption in a timely and accurate
    manner.
  • Evaluated Receipt
    Settlement:
    This process
    eliminates the invoice from the purchase order cycle. The customer
    authorizes payment to the supplier upon confirmation of the arrival
    of goods, making the issuing of an invoice unnecessary.
  • Collaborative
    Forecasting and Replenishment (CFAR):

    CFAR is a formal way for manufacturers and retailers to collaborate
    on estimates of future demand for products. Organizations post
    selected data about their sales forecasts on a common web server,
    which supply chain partners use to develop more accurate forecasts.
    CFAR affects forecasting, purchasing, inventory and logistics
    planning.

Business-to-consumer
EC:
Prior to EC, there were
three business-to-consumer models: retail stores, direct sales,
and mail or phone order along with a later version of mail order,
television shopping:

  • Retail stores:
    In this model, the consumer
    comes to a place of business (a store) and the supplier’s staff
    are in place, providing a physical environment in which consumers
    can shop and buy. Significant costs are involved in retail stores,
    including the physical plant, inventory, staff, advertising and
    so on.
  • Direct sales:
    In this model, the supplier
    visits the customer’s residence. Direct sales effort by door-to-door
    salespeople and multilevel marketing existed prior to EC but have
    only a limited relationship to its evolution.
  • Mail order:
    In this model, the supplier and customer transact business without
    meeting. Mail order, for example, is based on printed catalogs
    from which shoppers choose their products and either mail, call
    or fax in their orders. Mail order also can be costly, but it
    offers key advantages: IT is ‘open’ 24 hours per day, can reach
    a national or global market without the need for multiple store
    locations, and is highly flexible.

These retail channels all differ along
several dimensions, such as the following:

  • Price and cost of delivery.
  • Speed of fulfillment and guarantee
    of satisfaction.
  • Scope of the selection.
  • Purchasing content (for example,
    what information is present when making the decision).
  • Pleasure of the shopping experience.

Traditional retail organizations are
designed to optimize different combinations of those factors, under
the constraints of the physical world. The reason some web retail
models take off and others do not is due primarily to the fact that
the web has created new models rather than that it has changed the
economics of existing methods. Thus, although it is true that business-to-consumer
EC allows stores to become virtual store-fronts that are always
open and lightly staffed or even not staffed at all, the web as
a medium offers very different possibilities from the physical world.
Advertisements on the web, for example, allow consumers to click
on them to make a purchase. This process changes the economics of
what is possible along those different dimensions by offering the
following:

  • The advantages of a worldwide audience,
    assuming that through branding or other mechanisms businesses
    can draw visitors to their web site.
  • Theoretically unlimited selection
    from a database–freed from the constraints of floor space, printed
    space and cost of a catalog or minutes of television air time.
  • Intermediaries and aggregators now
    sometimes referred to as ‘portals’ that provide detailed product
    information and context, and simultaneous access to many sites.
  • Lowered risk and barriers to entry
    for fun or exciting purchase experiences, such as online auctions.
  • Highly targeted marketing that presents
    each consumer with a timely and appropriate offer, before shopping
    has even begun.

Business-to-consumer EC can lower the
cost of traditional retail operations dramatically. Although initially
the focus was on the transition of traditional business models such
as catalog sales to the internet, the more interesting events are
the evolution of new business models that fit the requirements of
the consumer.

For example, mass marketing is moving
to a focus on targeted customer segments. In addition, newer business
models are developing such as product aggregators, auction sites
or service providers. In other words, specialized forms of business
are emerging that fit the business’ market objectives by responding
to the needs of targeted customers. Today, most online business-to-consumer
transactions are conducted using credit cards.

Business-to-consumer
process examples:
EC providers
aiming to serve consumers must provide ways for them to shop, buy
and obtain customer service. The shopping process should enable
shoppers to find a ‘store’, find the types of products they want
to purchase, learn more about a particular product and evaluate
alternatives before purchasing. The buying process involves the
buyers actually placing an order and arranging to pay. The customer
service process begins after the purchase and includes order and
shipment tracking, returns and problem resolution, customer questions
and the increasingly important issue of managing customer information.

The challenge for this type of EC is
marketing: attracting, selling to and retaining customers. Depending
on a company’s business objectives and resources, the cost of building
and maintaining a website for online EC can range from less than
$100,000 to more than $2 million.

A typical website runs off a commerce
server, which presents products to customers and allows them to
shop–with a transaction processing engine or service in the background
to process the actual orders in real time. Product configuration
tools allow customers to build orders for component-based products
such as PCs and a database integrated with the merchant server stores
information about the products for sale and the consumers who are
purchasing them. Consumers provide payment information using a browser
over an encrypted Secure Sockets Layer (SSL) connections so creditcard
numbers and other order information cannot be intercepted. The browser
also may be integrated with an electronic wallet, which stores information
about consumers (such as an X.509 digital certificate) and their
available forms of payment as well as information about the orders
themselves.

Retail:
EC likely will have a strong impact on the retail sector, with the
emergence of new types of online virtual stores set up specifically
to sell via the web. Online vendors of flowers, books, cars, music,
computers, software and even grocery items have been making inroads
into traditional retailing by specializing in unusual or rare product
lines, customized services or aggressive pricing. Electronic retail
purchasing also facilitates tracking of customer buying patterns,
enabling sellers to target advertising and information on the basis
of stated preferences. Probably the most well-known electronic retailer
is the internet bookseller Amazon.com.

Catalog:
Despite the success of specialized retailing, many electronic shopping
malls and online catalog sites have been less successful for the
reasons discussed previously. New models being tried by mega stores
or malls offer a wide array of products and provide one-stop shopping.
However, the processes of locating a particular product, evaluating
alternatives and negotiating prices online still need to be improved.
Some of the emerging models referred to as ‘portals’ are offering
improved search methods to help consumers locate products or information
more quickly, but the comparison shopping and price negotiation
issues remain.

Aggregator:
At the same time, websites specializing in particular products are
evolving to address niche audiences. Such sites operate without
inventory, merely placing orders for customers with an array of
suppliers willing to negotiate on price in response to a specific
offer. These sites enable customers to search among items such as
airline tickets, wine and even automobiles to find the best price
and the best services, or other specific requirements. Travelocity.com
and Priceline.com are examples of aggregators that help customers
locate bargain air fares and vacation packages.

Auction:
Online auctions increasingly are becoming popular and offer alternatives
to traditional retail business models. These sites typically bring
together sellers and buyers in an auction that capitalizes on the
internet’s strengths of real-time communication and interaction:
users can see and respond to one another’s bid seconds after they
are placed. In addition to buyers placing bids, these sites attract
many people who just watch the auctions. For example, eBay.com and
Onsale.com each offer a range of products including antiques and
collectibles, photographic equipment, consumer electronics, sports
equipment, computers and peripherals, and toys to the highest bidder.

Specialty:
These sites tend to focus on those specific services– making investments
or booking airline tickets, for example–consumers may find more
convenient to accomplish online on a personalized timetable according
to individual needs.

Electronic
commerce servers

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