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IS 4402: Electronic Commerce

Dr. Frederic Adam


Department of Accounting, Finance and
Information Systems
University College Cork
Ireland
Frederic Adam, 2000

Information systems for interacting


with the environment
Primary aspect 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)
Frederic Adam, 2000

Link with customers:


American Hospital Supply Corporation (AHSC):
system whereby customers can directly re-order
their supplies from terminals located in their
hospitals
Successful because it enabled AHSCs customers
to cut their costs of administration
originally meant as an INTERNAL systems by
AHSC and extended to one main customer

Frederic Adam, 2000

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
Frederic Adam, 2000

Specific Features of InterOrganisational 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

Frederic Adam, 2000

Level of Integration between


trading partners
Exchanges of information between partners can be
more or less structured:

purchase orders
invoices
cheques
.
phone inquiries (not totally reliable)
face-to-face meetings between staff (time consuming)

Traditionally, structured exchanges were paper


based => slow turnaround time
Frederic Adam, 2000

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
Frederic Adam, 2000

Framework of generic forms of


Electronic Commerce
Permanent

Ad Hoc

EDI
IOS data retrieval systems

Electronic meeting rooms


computer conferencing

Electronic catalogues
WWW home pages

Electronic Mail
Electronic file transfer

Structured

Unstructured
Frederic Adam, 2000

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

Frederic Adam, 2000

Electronic Data Interchange:


A Formal Definition:
EDI is the transfer of structured data by agreed
message standards from computer to computer
by electronic means

Frederic Adam, 2000

Important Points about EDI


The definition points our three important issues:
EDI uses structured data
EDI uses agreed standards
EDI uses electronic links

Frederic Adam, 2000

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

Frederic Adam, 2000

an EDI message:
Messages are made up of STANDARD
LOCATION SEGMENTS (LOC):
TYPE OF
DATA

TYPE OF PLACE

LOC+

POD+

CODE

USNYC 01:

CODE LIST

DECODED TEXT

NEW YORK, NY

Frederic Adam, 2000

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.

Frederic Adam, 2000

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

Frederic Adam, 2000

BILATERAL LINK:

Frederic Adam, 2000

Multilateral Links:

Frederic Adam, 2000

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 peoples post boxes

Frederic Adam, 2000

EDI using a VAN

MAIL BOX

POSTBOX

Frederic Adam, 2000

Advantages of VANS:
They enables ASYNCHRONOUS
COMMUNICATION
there is no need for DIRECT COMPUTER TO
COMPUTER COMPATIBILITY
PROTOCOL CONVERSION is straight forward
control and security of the messages are easier to
enforce
error handling is done by the carrier
Frederic Adam, 2000

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

Frederic Adam, 2000

EDI - a Business Perspective


The main benefits of EDI stems from receiving orders
as quickly as possible after the buying decision has
been made. That speed of movement of information
means that it is possible to get the right stock in the
right place; to deliver quickly; to make sure you have
captured the market opportunity and to minimise the
working capitals
PURCHASING DIRECTOR OF A MULTINATIONAL

Frederic Adam, 2000

EDI - a Business Perspective


I see EDI as reducing the efforts required in
entering invoices, with less transcription efforts.
We will be able to use the people we have to far
greater benefit to the company
CHAIRMAN OF A LARGE FOOD SUPPLYING
COMPANY.
Frederic Adam, 2000

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

Frederic Adam, 2000

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

Frederic Adam, 2000

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
Frederic Adam, 2000

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

Frederic Adam, 2000

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

Frederic Adam, 2000

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 proactive way (otherwise, standards are dictated by an organisations
partners)
companies need to formulate an EDI strategy - much like BPR (redesign processes to fully exploit EDI)

Frederic Adam, 2000

EDI in Ireland
Largest VAN in Ireland is called EIRTRADE
managed by Eircom
proposes a variety of services:
EDI trading service
E-Mail between customers

more than 250 companies use the service in


Ireland and the UK
Linked to other VANs in the world (GEIS,
CFM...)

Frederic Adam, 2000

Example of EDI adoption:


Before Northern Telecom joined Eirtrade

more than 5 days from ordering to delivery

Frederic Adam, 2000

Example of EDI adoption:


After Northern Telecom joined Eirtrade
Other suppliers

EIRTRADE VAN

Northern
Telecom

Other customers
Same day delivery

Frederic Adam, 2000

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

Frederic Adam, 2000

The Internet
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

Frederic Adam, 2000

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
Frederic Adam, 2000

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)

Frederic Adam, 2000

Number of Computers
Connected to the Internet

Frederic Adam, 2000

Some recent statistics

400,000 companies have a web site


90,000,000 people access the net regularly
Sales over the Net reached $5.1 billions
business to business accounts for 78%
travel is one of the most common type of
transactions

Frederic Adam, 2000

Internet Opportunities
Like the gold rush of 1849
A shop in 0.5 m2
Interactive advertising
A lot of very optimistic predictions
Frederic Adam, 2000

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

Frederic Adam, 2000

The Internet in Ireland


Computer industry very important
13 % of all Irish exports are software
International head-quarters for EMC, Digital, Apple
etc....

Internets significance is recognised


more than 1000 significant WWW server sites
65,000 corporate users
one of the top 10 countries for WWW development in
the world
Number of Internet Service Providers very high
Frederic Adam, 2000

Finger on the Pulse!!

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

Frederic Adam, 2000

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!

Frederic Adam, 2000

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/ufe4vyeufagkw
y.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!

Frederic Adam, 2000

Electronic Commerce
As indicated by spread of EDI, phenomenon not
recent (gradual increase over 25 years)
Interest growing rapidly
Definition: automation of commercial transactions
using computer and communications technologies
commercial = transactions that involve the
exchange of goods, funds or obligations...

Frederic Adam, 2000

Precursors of E-Com
More than 2000 initiatives introduced over last 20
years
most successful (still exist besides the Web) was
Frances 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)


Frederic Adam, 2000

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 ...

Frederic Adam, 2000

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

Frederic Adam, 2000

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!
Frederic Adam, 2000

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


groups
those social aggregates that involve mutual awareness
this are
definition
and potential mutual interaction (McGrath, 1984)

Frederic Adam, 2000

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
Frederic Adam, 2000

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)

Frederic Adam, 2000

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

Frederic Adam, 2000

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?)

Frederic Adam, 2000

Constructing a E-Commerce
design

All about offering new ways to service customer


acquiring the capability to implement these new ways
e.g. DELLs 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

Frederic Adam, 2000

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 - ...

Frederic Adam, 2000

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
Frederic Adam, 2000

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
Frederic Adam, 2000

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)
Frederic Adam, 2000

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!)
Frederic Adam, 2000

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
Frederic Adam, 2000

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
Frederic Adam, 2000

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
Sales
Service
marketing

CRM
Frederic Adam, 2000

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
Frederic Adam, 2000

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)
Frederic Adam, 2000

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)

Frederic Adam, 2000

Business Process ReEngineering:


90s 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

Frederic Adam, 2000

Process versus Functions


Marketing

Manufacturing

Other functions

Production and Sales of Product A

Production and Sales of Product B

Other Vital Process - e.g. dealing with customers

Frederic Adam, 2000

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
Drucker, 1986

Dramatic improvements require revolutionary


moves
Everything must be questioned
Frederic Adam, 2000

Information Systems to support


the e-business strategy

Customer relationship management (CRM)


Selling chain management
Enterprise Resource Planning (ERP)
Supply chain management (SCM)

Frederic Adam, 2000

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
90% of companies may not have the customer support required
for e-business

Frederic Adam, 2000

Why CRM?
Customers dont 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 dont go far enough

Frederic Adam, 2000

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
Frederic Adam, 2000

Acquiring new customers


Creating a bit of magic!
E.g. IBMs new product site
Market research indicates that sales are more
secured in the two or three minutes after the
inquiry was made!
Create a sound relationship from the start may no
be so expensive

Frederic Adam, 2000

Enhancing existing relationships


Listening to customer complains is a key aspect of
CRM (better to know)
e.g. Best Buys (electronic retailer): 3000 calls /
day!(average 15 minutes)
Many different types of inquiries must be dealt
with at the same point (call centre)
Operators must have broad knowledge + access to
specific info (e.g. TNT)
Frederic Adam, 2000

Retaining the best Customers


Selecting best customers (on rigorous basis)
e.g. State Farm insurance offers best products to people
without claims over last five years
already in place in many industries - e.g. car insurance

Holding on to them using some positive


discrimination
Listening to them should tell you how
provide incentive to salesreps to boost retention
some companies reward more highly to retain existing
customers than for getting new ones

Frederic Adam, 2000

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

Not as easy as it looks


Frederic Adam, 2000

Supporting CRM

Integration of customer content


integration of customer contact
integration of end-to-end business processes
integration of the extended enterprise

Frederic Adam, 2000

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
Frederic Adam, 2000

Selling Chain Management


Sales information is not always available (e.g.
self-service environments)
sales people sometimes have too much admin to
do
Fragmented order support means multiple contact
points
Legacy systems not integrated

Frederic Adam, 2000

Definition
An integrated order acquisition strategy
Systems to streamline the set of activities the
business performs to acquire and fulfil orders
see figure attached

Frederic Adam, 2000

Goals of SCM
Focus on the most appropriate and profitable
opportunities
shorten sales cycles
increase repeat sales
improve visibility on orders
better information / forecasting

Frederic Adam, 2000

Why SCM?
Increase of self-service ordering (limited choice and
interaction - e.g. second hand cars)
excessive cost of pre-sales technical support
Increasing cost and volume of errors in ordering cycle
increasing diversity of channels for selling
increasing complexity of products
increasing complexity of markets (deregulation,
mergers etc)

Frederic Adam, 2000

CISCO and SCM


CISCOs 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 Ciscos
Orders were then re-keyed in the SOP systems
After: automation of the process (see figure attached)

Frederic Adam, 2000

Enterprise Resource Planning


(ERP)
Large application geared towards integrating the
essential internal processes of an organisation
e.g. SAP R/3, MFG/PRO, Baan, JD Edwards
Support the transactional backbone of the
organisation
70% of fortune 500 companies have or are
implementing ERP systems
SAP has become the second largest software
producer in the world
Frederic Adam, 2000

Example: Colgate Palmolive


Large corporation with many products:
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 staff
1 to 5 Before:
days for order acquisition + 1 or 2 days
to process it
After:
/ combined acquisition and processing in 4 hours!
on-time deliveries = 91.5% /
97.5%
Also accounts payable and HRM were consolidated in one location

Frederic Adam, 2000

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 all 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 the back end headaches of ecommerce solutions

Frederic Adam, 2000

Reasons for ERP systems


Search for operational excellence
cost cutting / rationalisation
standardisation / compatibility of disparate IT
infrastructures (e.g. mergers)
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
Frederic Adam, 2000

Benefits of ERP
Understanding the implications of changes in production
schedule (by de-expediting parts)
Keeping inventory low (25% decreases reported) while
removing risk of stock-outs
Better planning leading to:
reduction in lead times
better use of capacity
lowered risk of obsolete production (e.g. engineering firms)

Early warning system: earliest delivery dates are known


before promises are made
Frederic Adam, 2000

Different Applications of ERP


Increased flexibility in design / production in
order to serve niche markets (focus on small
output) - more Europe
Better organisation of mass production - more
Japan
Better utilisation of the capacity, optimisation of
performance - more US

Frederic Adam, 2000

How to get an ERP


Build or buy decision
try to minimise the high levels of risk:
Foxmeyer ($5 billion pharmaceutical comp.) went
bankrupt in 1996
sued SAPs 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
Frederic Adam, 2000

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
Frederic Adam, 2000

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

selection process is difficult at best:


site visits
presentation
discussion groups...
Frederic Adam, 2000

The ASP 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 Onestop-shopping model


Frederic Adam, 2000

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 was
later extended to reach full ERP specification over the following 12 months.
Groupe Galeries Lafayette with IBM in France (using their own in-house
developed software not available otherwise!) under the name LASER from July
1999
Interpath and Sun for SAP from June 1999
Oracle and HP for SAP from June 1999
Bold indicates primary consortium partner.
Frederic Adam, 2000

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
Frederic Adam, 2000

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
Frederic Adam, 2000

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)
Frederic Adam, 2000

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

Frederic Adam, 2000

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

Frederic Adam, 2000

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

Frederic Adam, 2000

Nest steps on this market


All ERPs will include CRM modules
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
Frederic Adam, 2000

Conclusion on ERP
Whether traditional or ASP - matching the business
processes to the functionality
obtain agreement from all actors
be ready for fundamental change
dont lose sight of the specificities of the firm
try an incremental implementation rather than a
culture shock
leave the door open for change after the ERP
implementation
Frederic Adam, 2000

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
Frederic Adam, 2000

Case Study of SAP implementation


Vandelay Industries Inc. (95 - 97)
SAP R/3 ERP
Goals:

end the fragmentation of systems


allow process standardisation
give more visibility on data across entire corporation
give competitive advantage

much enthusiasm especially amongst plant managers


high expectations / low level of understanding what ERPs
are
Frederic Adam, 2000

Company background
Manufacture and distribute industrial process
equipment
$8 billion turnover
rapid expansion from 1945 to 1985 by opening new
sites and buying smaller firms
30,000 staff on four continents
find themselves too expensive and too slow
three plant closures and 10,000 staff lost
return to profitability but fear that it may not be enough
Frederic Adam, 2000

Information Systems
Each plant had own systems (MRP, planning,
scheduling)
corporate finance IS only integrated one
problems resulting:
integration often impossible
scheduling incompatible => no end-to-end vision of
processes as soon as more than 1 plant involved
no overall planning
order acquisition entirely manual (faxes and phones)
no integration of key functions - e.g. HR
also, processes complex on factory floors

Frederic Adam, 2000

The Team and the Project


SAP - market leader at the time (6000 sites 400,000 users in 1996)
Deloitte and Touche / ICS subsidiary - favourite SAP implementer
general management consultants
SAP specialists

18 months planned with 50 f/t staff


budget $20 million
50/50 split: designing to be processes / implementing SAP

target sites:
8 manufacturing
4 order entry
headquarters

Frederic Adam, 2000

Key issues in the project


Steering committee made up of high level, highly committed
managers - monthly meetings
Pluridisciplinary project team - IS + key functional areas full time
centralisation vs autonomy (involvement of users)
standardisation of practices (e.g. part numbers)
Suitability of SAP
change business to match SAP
interface SAP with other system
extent SAP system to match current practices

Persuasion of key change agents

Frederic Adam, 2000

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

Frederic Adam, 2000

Definition
Complex 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
Information Flows
Product

Supplier Flow

Product

Manufacturing Flow

Product

Distribution Flow

Payment Flows

Product

Retailer Flow

Consumer

Frederic Adam, 2000

Goal of SCM
Delivering the best value proposition: what the customer want,
how and when its 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...

Frederic Adam, 2000

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

Frederic Adam, 2000

Novelty in SCM - eSCM


Better techniques and software: e.g. SAPs
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
Frederic Adam, 2000

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)

Frederic Adam, 2000

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

Frederic Adam, 2000

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
Frederic Adam, 2000

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)

Frederic Adam, 2000

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


Frederic Adam, 2000

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
Frederic Adam, 2000

SC Execution

Key differentiator in todays 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%)
Frederic Adam, 2000

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

Frederic Adam, 2000

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
Frederic Adam, 2000

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?

Frederic Adam, 2000

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)

Frederic Adam, 2000

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

Frederic
Adam, 2000
Continuous replenishment

Moving into E-Business


Ecom value proposition
what is the customer looking for?
Strategy of the firm

e-business foundation
blueprint for value creation

capacity evaluation
current business and capabilities

e-business design
how the value is packaged into product, services and sites?

Execution and monitoring


Frederic Adam, 2000

Value proposition
Knowledge building
much to learn on customers and their perception of value
Why are doing things the way we are?

Specific questions:

who are my customers? (profile / categories)


What are their priorities?
How can I create value for them?
How does my product reach them?
Who are (will be) my real competitors?
How can we use technology to change these parameters?
Frederic Adam, 2000

Capability evaluation
What can we do now?
Organisation specific assets
staff

what do we urgently need?

Staff development / new hiring


investments
plans for acquisition
plans for linkages across functions

Frederic Adam, 2000

E-Business design
Category killer (first mover)
Channel reconfiguration (change access to customers,
suppliers etc..)
transaction intermediary (internet for operational support)
Infomediary (reduction of search cost)
self-service innovator (total service to customer)
Supply Chain innovator (integration of SCM agents)
Channel Mastery
CVS

Frederic Adam, 2000

Case Study: E Trade


Self service innovator
invented on-line trading
strong web presence offering self-directed traders the
best prices
Also, real time access to quality information
New entrant philosophy = clean slate approach and
quick decision making
opposed to current players - e.g. Merril Lynch who
have brand, customers etc...
Frederic Adam, 2000

Traditional versus startup


planning
Analyse trends and compare firm to best practice
Phase 1 VS: develop a plan that solves a critical customer
pb
design fundamental change plan VS: design an
Phase 2
ebusiness that matches the business model
developed + find suitable partners (BOB)
Phase 3 Implement change VS: deploy electronic
architecture to attack new segments. Spend!

Frederic Adam, 2000

E-trade: key to success

24 hour service
lower price because of lower transaction costs
instantaneous access to selected sources of info
remove barriers to offer transparency / remove
inefficiency in brokering business
No precedent / no given way to do business

Frederic Adam, 2000

E-trade statistics

New breed of customers - very active


25% of customers on-line every day!
Customer trade 25 times / year on average
customer retention rate 96%
create a situation where customer perceives high
switching costs
copy cat: 30 on-line traders (x2 in 1 year)
e.g. eSchwab has 1m on-line customers
traditional agents face challenge of diversification
Frederic Adam, 2000

Etrade: maintaining success


Maintain momentum + holding on to customers
customer acquisition costs increase as competition
intensifies
first mover advantage
massive advertising
develop partnerships (e.g. franchise in Canada and
Australia)

Frederic Adam, 2000

Etrade - the future


Quick progression by forging alliances to give
additional depth to product range
Resulting lack of integration of services
no cross selling
need a change of structure to take advantage
has already become a traditional business?

Frederic Adam, 2000

Seminar from M.Fahy - NUI


Galway
Financial markets will not be re-opened so easily
barriers to entry as still strong
markets still highly regulated within geographical
areas
big players have decided to wait, but not for long
At current stage, the kids are playing Ecom!
there may be a big shake-up where large resources
will be needed to survive
Frederic Adam, 2000

Key factors in surviving


Robust back end: the Ecom iceberg
After the novelty has faded, only companies with a sound business
model with succeed
The underlying / support systems and technology that are truly useful
will make the difference:
ERP
c.f. SABRE and AIMS

ATM model: simple but robust


very moral conclusion that only companies who know what they are
doing will survive
Also current financial madness will not last as shareholders demand
traditional rewards ()

Frederic Adam, 2000

Selection of customers
Ecom breaks barrier to entry for customer as well
as supplier
In a garage, only customers with cars, on the web...
Little info available about customers
how to detect the most profitable ones?
Can companies really turn anyone down?

Frederic Adam, 2000

Adoption of technology
Guru claim
Productivity
Actual
development
Managers
interest
Time
Frederic Adam, 2000

Organisational stages

Stage 1: rudimentary offering


Stage 2: basic internet banking
Stage 3: clear growth strategy
what stage are we at?

Frederic Adam, 2000

Clive Holtham s (City


University London) seminar

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
Frederic Adam, 2000

EBusiness
Conducting any kind of business via an electronic
channel
Electronic Commerce

Web
Commerce

Electronic
Business

Internet
Commerce

Frederic Adam, 2000

ICDT Model:
Most Ecom Strategies will include
one or more of these aspects

Virtual

Virtual

Information

Communication

Space

Space

Virtual

Virtual

Transaction

Distribution

Space

Space

Frederic Adam, 2000

Current Ecom hype


Rate of change / Value

Time
Frederic Adam, 2000

Rise and Fall of Ecom


Visibility

today

Time
Frederic Adam, 2000