E-Commerce: Doing Business on the Internet

Businesses communicate with customers and partners through channels. The Internet is one of the newest and, for many purposes, best business communications channels. It is fast, reasonably reliable, inexpensive, and universally accessible—it reaches virtually every business and more than 200 million consumers. Doing business online is electronic commerce, and there are four main areas in which companies conduct business online today: direct marketing, selling, and service; online banking and billing; secure distribution of information; and value chain trading and corporate purchasing.

Direct Marketing, Selling, and Service

Today, more Web sites focus on direct marketing, selling, and service than on any other type of electronic commerce. Direct selling was the earliest type of electronic commerce, and has proven to be a stepping-stone to more complex commerce operations for many companies. Successes such as Amazon.com, Barnes & Noble, Dell Computer, and the introduction of e-tickets by major airlines, have catalyzed the growth of this segment, proving the reach and customer acceptance of the Internet. Across consumer-targeted commerce sites, there are several keys to success:

• Marketing that creates site visibility and demand, targets customer segments with personalized offers, and generates qualified sales leads through observation and analysis of customer behavior.

• Sales-enhancing site design that allows personalized content and adaptive selling processes that do more than just list catalog items.

• Integrated sales-processing capabilities that provide secure credit card authorization and payment, automated tax calculation, flexible fulfillment, and tight integration with existing backend systems, such as inventory, billing, and distribution.

• Automated customer service features that generate responsive feedback to consumer inquiries, capture and track information about consumer requests, and automatically provide customized services based on personal needs and interests ^[3].

• This business-to-consumer (B2C) electronic commerce increases revenue by reaching the right customers more often. Targeted and automated up-selling and cross-selling are the new fundamentals of online retailing. Sites that most frequently provide the best and most appropriate products and services are rewarded with stronger customer relationships, resulting in improved loyalty and increased value.

Financial and Information Services

A broad range of financial and information services are performed over the Internet today, and sites that offer them are enjoying rapid growth. These sites are popular because they help consumers, businesses of all sizes, and financial institutions distribute some of their most important information over the Internet with greater convenience and richness than is available using other channels. For example, you have:

• Online banking

• Online billing

• Secure information distribution

Online Banking

Consumers and small businesses can save time and money by doing their banking on the Internet. Paying bills, making transfers between accounts, and trading stocks, bonds, and mutual funds can all be performed electronically by using the Internet to connect consumers and small businesses with their financial institutions.

Online Billing

Companies that bill can achieve significant cost savings and marketing benefits through the use of Internet-based bill-delivery and receiving systems. Today, consumers receive an average of 23 bills per month by mail from retailers, credit card companies, and utilities.

Secure Information Distribution

To many businesses, information is their most valuable asset. Although the Internet can enable businesses to reach huge new markets for that information, businesses must also safeguard that information to protect their assets. Digital Rights Management provides protection for intellectual and information property, and is a key technology for secure information distribution.

Maintenance, Repair, and Operations (MRO)

The Internet also offers tremendous time and cost savings for corporate purchasing of low-cost, high-volume goods for maintenance, repair, and operations (MRO) activities. Typical MRO goods include office supplies (such as pens and paper), office equipment and furniture, computers, and replacement parts. The Internet can transform corporate purchasing from a labor- and paperwork-intensive process into a self-service application. Company employees can order equipment on Web sites, company officials can automatically enforce purchase approval and policies through automated business rules, and suppliers can keep their catalog information centralized and up-to-date. Purchase order applications can then use the Internet to transfer the order to suppliers. In response, suppliers can ship the requested goods and invoice the company over the Internet. In addition to reduced administrative costs, Internet-based corporate purchasing can improve order-tracking accuracy, better enforce purchasing policies, provide better customer and supplier service, reduce inventories, and give companies more power in negotiating exclusive or volume-discount contracts. In other words, the Internet and e-business have changed the way enterprises serve customers and compete with each other, and have heightened awareness for competing supply chains (see sidebar, “Supply Chain Management”).

Supply Chain Management

Supply chain management (SCM) is changing as companies continue to look for ways to respond faster, improve service for customers, and maximize sales while decreasing costs. SCM solutions must support highly configurable products, such as computers and automobiles, global markets with local specifications, and widely dispersed suppliers and partners. Yet most companies’ SCM solutions are linear, sequential, and designed for controlled conditions. They rely on accurate forecasting of demand, but are disconnected from the actual demand. Decisions are made centrally, and changes typically take days, weeks, or even months. However, companies increasingly need to respond to changes in hours and minutes. Supply chains in this century must be adaptive and provide greater visibility, velocity, flexibility, and responsiveness to enable enterprise value networks to adapt to changes in supply and demand in real time.

Management Shift

As supply chain networks extend across organizational and geographic boundaries, companies must find ways to manage the unmanageable. The future of supply chain management lies in the ability of the enterprise to respond instantaneously to shifts in global supply and demand, and to major events that occur across extended supply chain processes. The faster a supply network can adapt to these events, the more value that will be created. For example, with Walldorf, Germany-based SAP mySAP™ Supply Chain Management (mySAP(tm) SCM), enterprise systems supplier SAP is delivering what it believes is the most adaptive supply chain management solution available on the market. In addition, SAP is developing adaptive-agent technology and repair-based optimization that is expected to enable the next generation of adaptive solutions and services.

Supply chain management is now the key to increasing and sustaining profitability. In fact, Stamford, Connecticut-based Gartner Group recently predicted that 91 percent of leading companies that fail to leverage supply chain management would forfeit their status as preferred vendors.

According to SAP, mySAP SCM has demonstrated bottom-line benefits for its users. For example, New York, N.Y.-based Colgate-Palmolive increased forecast accuracy to 98 percent, reduced inventory by 13 percent, and improved cash flow by 13 percent. The reason: mySAP SCM enables end-to-end integration of supply chain planning, execution, networking, and coordination.

The Profits of Adaptive

Proponents of adaptive supply chain networks say that by sharing information about customer demand with all partners simultaneously—rather than in the traditional, sequential fashion, with its inherent delays—network partners can act more like a single entity to stay in-sync with customer needs.

The adaptive supply chain network puts the customer at the center of all activities in the supply chain, which allows companies to improve overall costs and profits across the network, instead of just shifting costs to other parts of the supply chain. Given the dynamics of today’s markets, manufacturers need to rethink their business model on an almost continuous basis, keep redefining markets and pricing, serve ever-smaller customer niches, and provide increasingly customized products.

Internal integration helps enterprises break down functional silos and share actionable information. The adaptive supply chain network relies upon real-time integration of all supply chain systems, including networking, planning, execution, coordination, and performance-management systems. But, it also requires integration across systems that support a variety of functions beyond the traditional supply chain.

Customer relationship management (CRM) is about capturing customer requirements, building life-long customer relationships and brand value, and influencing demand through promotions. This information must be fed back into the supply chain network to improve planning. Although this flow of information generally does not occur now, it represents the key to customer-segmentation strategies and effective demand management, which will lead to increasing overall profitability. Customer feedback and trends must also drive product development to ensure that products are designed according to customer requirements.

In addition, integration between a product life-cycle management (PLM) system and an SCM solution reduces time-to-market for new products and ensures that engineering changes are seamlessly integrated back into manufacturing. Last but not least, aligning a company’s business model with operational capability requires engineering and sourcing products differently. To support mass customization and postponement strategies, products tend to be designed in a modular fashion and sourced from fewer strategic suppliers. Close collaboration with these suppliers on product design is essential to reduce time-to-market, increase product quality, and ensure that products are designed for supply.

With that kind of integration, a superior understanding of the customer drives everything—CRM, product design, supply chain operations, and even the value proposition of the entire network. In an adaptive supply chain network, SCM, CRM, and PLM must all work together. That is the hallmark of a truly customer-centric organization—and the key to profitability.

Competitive Advantage

Making adaptive supply chains a reality means fundamental changes in a company’s internal operations, starting with the integration of processes and systems across organizational boundaries. Then, companies can leverage the increased visibility within and across organizations to achieve change in their supply chain processes, including functionality for the following.

Adaptive Planning

Today, most supply chain planning and scheduling systems rely primarily upon historical data collected from enterprise resource planning (ERP) and legacy systems. However, as companies aim to create virtually “inventory-less” supply chains, they require the ability to realign demand and supply almost continuously to consider the latest demand situation and supply status. Adaptive planning replaces batch-oriented, period planning with an event-driven, real-time response to demand signals and changing supply situations.

Dynamic Collaboration

Traditional supply chains rely mostly upon inventory and assets, but the adaptive supply chain network is information-based—it uses shared data for planning and execution processes. By incorporating data garnered from collaborative processes (such as vendor-managed inventory [VMI]; collaborative planning, forecasting, and replenishment [CPFR]; collaborative supply management; and collaborative transportation management), these networks replace inventory and capacity buffers (long used to make up for a lack of supply chain visibility) with information.

Distributed Execution

Most execution systems are ill-prepared to support the emerging virtual supply network. Distributed execution considers the distributed nature of processes in a world of outsourcing, in which multiple partners in the extended network might manage a single process. Distributed execution allows the management of processes across different ERP systems by supporting cross-system integration and collaboration.

Event-Driven Coordination

Today, even small disruptions in supply chains initiate a wave of e-mails, faxes, and phone calls just to keep pace with the problem. Adaptive supply chain networks address the challenge of managing the virtual enterprise through up-to-the minute monitoring and control of business processes and the rapid, intelligent resolution of exceptions. Event-driven coordination complements adaptive planning by trying to solve supply chain exceptions locally to support existing, optimized plans. The result? Faster response to market changes and instantaneous adaptation to customer needs across the enterprise and the network.

Continuous Performance Management

Most executives would agree that consistent performance metrics are the key to steering the behavior of individuals and reconciling conflicting goals across functional areas. However, key performance indicators (KPIs) also play a major role in managing collaborative processes and in providing decision makers with actionable information to increase the quality and speed of decisions.

Continuous performance management enables closed-loop learning processes by allowing the company to measure the quality of processes constantly, and by feeding this information back into supply chain planning. Besides addressing the need for consistent performance metrics, companies are increasingly complementing supply chain KPIs with balanced scorecards to get a level view of the state of the organization, and to align operational targets with strategic objectives across functional silos.

Combined, these elements enable companies to implement closed-loop learning processes across the supply network. In business, the ability to adapt to change is increasingly important. For those who do it right, the adaptive supply chain network will be an important competitive weapon. Those who don’t may well become the dinosaurs of their industries ^[4].

Value Chain Integration

No other business model highlights the need for tight integration across suppliers, manufacturers (see sidebar, “The Manufacturing E-Commerce Bottom Line”), and distributors quite like the value chain. Delays in inventory tracking and management can ripple from the cash register all the way back to raw material production, creating inventory shortages at any stage of the value chain. The resulting out-of-stock events can mean lost business. The Internet promises to increase business efficiency by reducing reporting delays and increasing reporting accuracy. Speed is clearly the business imperative for the value chain.

The Manufacturing E-Commerce Bottom Line

The economic downturn in the United States has played havoc with the country’s manufacturing and engineering sectors for more than three years, leading to the longest continual month-over-month decline in industrial production since World War II. But, if there is a bright spot in what economists are predicting for manufacturers in 2004, it is a trend toward increasing e-commerce revenues and initiatives within the industrial sectors.

The Federal Reserve recently reported that production in American factories fell 3.3 percent. The September 11 terrorist attacks created additional uncertainty in all markets, but particularly in manufacturing, where inventory levels among retailers and suppliers were already high. Consumer spending for durable goods took a drop in the wake of the attacks and as a result of the developing war on terrorism. Analysts also say they do not expect an uptick in manufacturing production until consumers begin spending with confidence.

Still, companies like General Electric and General Motors were reporting increases in online sales and predicting gains in e-commerce by the end of 2003. Officials at GE indicate they expect to increase the amount of online revenue calendar-year-over-calendar-year from $9 billion to $24 billion.

Historically, online revenue figures in manufacturing, engineering, and supply sectors have been difficult to determine, because most companies in those sectors do not separate online revenue from other income. Economic statistics compiled by the U.S. Department of Commerce and others have consistently noted that although e-commerce activities have continued to grow despite unfavorable economic conditions, determining the exact portion of the national economy they represent is difficult.

A recent study by the National Association of Manufacturers (the leading industry group of industrial producers) saw dramatic increases in the number of companies developing Web-based activities to reach both new customers and suppliers. Despite the intense hype surrounding e-commerce, right now it’s still just a small fraction of most business and manufacturing operations. But, nearly three quarters of the companies surveyed reported they were developing e-commerce initiatives to grow their revenues, a harbinger of dramatic change down the road. As capital spending rebounds, there should be a significant increase in networking and business-to-business software investments.

In another recent study of e-business activities within the manufacturing sector (commissioned by Interbiz, a division of Computer Associates International), a significant increase in focus was shown on e-commerce activities in 2002 within manufacturing and related industrial areas. According to the survey, 56 percent of manufacturing concerns indicated they were actively involved in e-commerce, with 89 percent reporting effectiveness within their e-business strategies; 22 percent reported those activities as “highly effective.”

Unfortunately, speed can be costly. Today, approximately 60,000 businesses exchange business documents such as orders and invoices with their trading partners through a standard communication and content protocol called Electronic Data Interchange (EDI). Most EDI implementations use leased lines or value added networks (VANs) that require significant integration for each trading partner. Network design, installation, and administration can be costly in terms of hardware, software, and staff. In fact, these costs are the key reason that EDI is most widely deployed only in larger companies.

Moving forward, all companies will be able to take advantage of value chain integration through the low cost of the Internet. Open standards for electronic document exchange will allow all companies to become Internet trading partners and function as suppliers, consumers, or both in this business-to-business electronic commerce. This integrated trading will tighten relationships between businesses while offering them greater choices in supplier selection.

Issues in Implementing Electronic Commerce

Although it is simple to describe their benefits, it is not nearly as easy to develop and deploy commerce systems. Companies can face significant implementation issues:

• Cost

• Value

• Security

• Leveraging existing systems

• Interoperability

Cost

Electronic commerce requires significant investments in new technologies that can touch many of a company’s core business processes. As with all major business systems, electronic commerce systems require significant investments in hardware, software, staffing, and training. Businesses need comprehensive solutions with greater ease-of-use to help foster cost-effective deployment.

Value

Businesses want to know that their investments in electronic commerce systems will produce a return. Business objectives such as lead generation, business-process automation, and cost reduction must be met. Systems used to reach these goals need to be flexible enough to change when the business changes.

Security

The Internet provides universal access, but companies must protect their assets against accidental or malicious misuse. System security, however, must not create prohibitive complexity or reduce flexibility. Customer information also needs to be protected from internal and external misuse. Privacy systems should safeguard the personal information critical to building sites that satisfy customer and business needs ^[6].

Leveraging Existing Systems

Most companies already use information technology (IT) to conduct business in non-Internet environments, such as marketing, order management, billing, inventory, distribution, and customer service. The Internet represents an alternative and complementary way to do business, but it is imperative that electronic commerce systems integrate existing systems in a manner that avoids duplicating functionality and maintains usability, performance, and reliability.

Interoperability

When systems from two or more businesses are able to exchange documents without manual intervention, businesses achieve cost reduction, improved performance, and more dynamic value chains. Failing to address any of these issues can spell failure for a system’s implementation effort. Therefore, your company’s commerce strategy should be designed to address all of these issues to help customers achieve the benefits of electronic commerce.

Your company’s vision for electronic commerce should also be to help businesses establish stronger relationships with customers and industry partners. For example, a successful strategy for delivering this vision is described by three workflow elements (platform, portal, and industry partners), each backed by comprehensive technology, product, and service offerings.

From self-service portals to transaction processing, a successful workflow strategy can be the underlying engine delivering state-based, processed-focused control services for e-business applications. Human labor is expensive, and workflow technology allows e-businesses to supplement, and in some cases eliminate, reliance on human supervision and intervention.

Workflow Technology

Creating e-business processes without a vision for workflow is shortsighted and expensive. Workflow addresses business needs, streamlines transactions, and is the glue for process coordination and consistency.

Self-service applications are perfect examples of how workflow can be employed to automatically coordinate requests and track fulfillment, thereby allowing corporations to relocate human resources to more difficult tasks. E-business flexibility can be realized through workflow’s logic encapsulation that isolates the logic of the business process from the Web server middleware and associated Web pages. Every Web page click is an opportunity to invoke workflow-based interaction, guidance, and fulfillment.

E-businesses need workflow technology to react rapidly to process changes. For example, an instant change to the workflow process can be accomplished with a simple change to the workflow map by a nonprogrammer, to effect temporary or continuous changes in the business process, thus accommodating short-term business needs or long-term process improvements. A workflow driven e-business will see immediate shifts that allow it to process more efficiently under high volume circumstances.

The bottom line? Workflow design tools should be a core requirement for e-business applications. A detailed discussion of workflow technology is presented in Chapter 2, “Types of E-Commerce Technology.”

Now, let’s take a look at the transformation of the scope of the Internet and the Web. The discussion centers around the Session Initiation Protocol’s (SIP) effect on multimedia-enabled e-commerce.

^[3]Microsoft Corporation, “Electronic Commerce Explained,” 2003 Microsoft Corporation. All rights reserved. The Business Forum 9297 Burton Way, Suite 100, Beverly Hills, CA 90212, (August 2002): pp. 1–19.

^[4]Runge, Wolfgang and Renz, Alexander, “Adaptive Networks Broaden Relationships,” Copyright 2003 SAP AG. All rights reserved, SAP America Inc., Strategic Planning & Support Office, 3999 West Chester Pike, Newtown Square, PA 19073,USA, [Advertising supplement in June, 2002 edition of MSI, Reed Business Information, 2500 Clearwater Drive, Oak Brook, IL 60523 (June 2002)].

^[6]Vacca, John R., Net Privacy: A Guide to Developing & Implementing an Ironclad ebusiness Privacy Plan, McGraw-Hill Trade, 2001.