Electronic Commerce: Putting Information Technology To Work Today
Brian G. Caffrey
Brian G. Caffrey, President, Solutions Consulting Group, Jackson Heights, NY 11372, 718/457-3246.
Jenny Martin, C.P.M., A.P.P.
Jenny Martin, C.P.M., A.P.P., Supply Chain Manager, Coors Brewing Company, Elkton, VA 22827, 540/289-8138.
Roland Rugoletti, C.P.M.
Roland Rugoletti, C.P.M., Purchasing Agent, Norton Company, Worcester, MA 01615, 508/795-5649.
Dee Smith, Director of Electronic Commerce, Department of Defense, Arlington, VA 22209, 800/EDI-3414.
82nd Annual International Conference Proceedings - 1997
The Issue. Many forward thinking companies are actively developing strategic plans to integrate some form of Internet-based electronic commerce into their supply chain management practices to allow them to develop and/or maintain a competitive advantage. Such electronic commerce offers many benefits and may very well hold the key to future success in an increasingly global marketplace; however, it is not without formidable obstacles that must be overcome before it gains wide-spread acceptance. Nevertheless, a number of innovative organizations have found ways to engage in electronic commerce - apart from the Internet -- by putting information technology to work today in purchasing.
Electronic Commerce Defined. With all of the media coverage that it is receiving, when most people speak of electronic commerce, they are referring to the use of the Internet. Additionally, they naturally tend to focus on the transactional aspect of commerce: the actual consumer and business-to-business buying and selling. Although there are notable exceptions, buying and selling on the Internet is still predominantly a consumer activity. There are, however, other elements to electronic commerce -- many of which are "alive and well" both on the Internet and on privately established networks:
- Product Information
- Public Relations
- Customer/Product Support
- Product Distribution
- Buyer/Supplier Interaction
- EDI (ANSI X12)
- Price Catalogs
- Status/Inquiry Reports
- Payment (EFT )
Electronic Commerce Benefits. Electronic commerce holds many benefits for buyers and sellers alike:
- Increased Competition
- Decreased Administrative Burden
- Lower Operating Costs
- Online Bidding
Bid Submission & Award Review
- Geography Less of a Factor
- Greater Variety Through Expanded Markets
- Faster Times To Market
- Reduced Inventories Through Electronic Buyer/Seller Links
Electronic Commerce Obstacles. The baseline survey results from a NAPM-Silicon Valley & CommerceNet study on the topic of Internet-based electronic commerce identified the following as the most significant obstacles:
- Suppliers Not Online
- Lack of Payment Services
- Lack of Purchasing Tools
- Lack of Trained Purchasers
The good news is that all are surmountable. More companies are making their products and services available through the Internet everyday. Commercial catalogs are becoming readily available and the quality, and variety, on online sourcing tools is improving. As we will see, security concerns can be addressed in a number of ways. There are already several electronic payment options, including the use of purchasing cards. New software tools are being developed and released on an almost weekly basis to facilitate electronic commerce. NAPM and other conferences and training programs are educating buyers about the benefits of doing business online.
Security. Of all the obstacles, security offers perhaps the greatest challenges. Since purchasing will be involved in procurement of information technology related products, it is important to be familiar with some of the basic security related issues.
Physical security refers to safeguarding your company's computer system from hackers who, for one purpose or another, might want to gain access. Firewalls are the answer to physical security concerns. Firewalls can take many forms from software applications to completely independent operating systems established explicitly with physical security in mind. Likewise, the costs can range from free to tens of thousands of dollars. Regardless of configuration and cost, they are all designed to filter the information that flows to and from your company's computer system. They essentially capture packets of information, analyze them according to a pre-established set of rules, and then either send them on their way or reject them.
Before companies become comfortable conducting business transactions online, they need assurances concerning the integrity & privacy of the data being transmitted. Encryption technologies can provide this assurance.
Authenticity & non-repudiation are related concerns that encryption technologies can also address through the use of "digital signatures".
Encryption. There are two basic types of encryption: symmetric & public key. Symmetric encryption systems operate in a manner similar to the "one write" pad systems that were used by the OSS during World War II. There is only one key used in symmetric systems. They are highly secure, but require that you give the decryption key to the other party. This is their weakness in electronic communications: the key is vulnerable while in transit. Public key encryption systems overcome this weakness by utilizing both public and private keys. A message encrypted with a particular public key can only be decrypted using the corresponding private key. Likewise, a message encrypted with a particular private key can only be decrypted using the corresponding public key.
Looking at this in practice: if you want to send someone a message that only the intended recipient can read, you encrypt it using the recipient's public key. The message, in turn, can only be decrypted using the recipient's private key. This addresses data integrity and privacy concerns. Since a message encrypted with a particular private key can only be decrypted using the corresponding public key, it is possible to affix a digital signature by encrypting what is known as the "digest" portion of the message further with the sender's private key. Digital signatures can guarantee the authenticity and non-repudiation of messages.
Although technology can address authenticity and non-repudiation concerns, it should be noted that the legal system has some catching up to do. Some, but not all, jurisdictions have passed legislation that specifically recognizes digital signatures as legally binding. This doesn't mean that digital signatures would not necessarily be found legally binding in other jurisdictions. It simply means that legislation and/or court rulings have not yet been made.
Before we dismiss encryption as being too "cloak & dagger" and not of real concern to practitioners, consider the issue of attorney/client privilege. E-mail communications to corporate, or personal, counsel may not be protected by the principle of attorney/client privilege unless they are encrypted!
Electronic Commerce Today. Rather than waiting for the technology that will enable secure Internet-based electronic commerce, Coors Brewing Company, the Department of Defense, and Norton Company have taken the initiative to make paperless purchasing a reality for their organizations today.
Coors Brewing Company. Today's business environment, with its demands to do more with reduced resources, has challenged the purchasing and supply management professional like no other time in history. Purchasing and supply management organizations are under intense pressure to lower both the costs of their procurements and the cost of their own operations. Information technology has helped by providing tools that can eliminate much of the non-value added work and allow concentration on having bottom line impact. One strategy that many companies have adopted is to reduce the supplier base, strengthen relationships with remaining suppliers and obtain the maximum synergy from these relationships.
Coors uses a combination of the following supply chain management concepts and technological tools to put information technology to work today in a program that provides for continued savings, and a strong and effective supply chain.
- Supplier Quality management Program
- Vendor Certification Program
- Vax to Fax
- On line production scheduling
- 5 week forecasts
- 10 day requirements by day
- Integrated supply program
- Supplier managed and consignment inventories
- JIT deliveries
- RF Terminals
- Driver Log-in
- input trailer number
- receive location to drop trailer
- material committed to inventory within location
- Purchasing cards for small dollar, non-routine, emergency purchases
Coors-Elkton, VA produces 5.2 million barrels per year. This facility, with its 350 employees and $130 million in annual purchases, is supported by a five person Supply Chain Department and 67 suppliers, 89% of whom are electronically linked. Coors Vax to Fax system provides suppliers with periodic information about: commodities stored in silos and pressurized vessels; and, empty and full vehicles on site - without human intervention.
Just-In-Time deliveries are an important part of Coors' success story. Critical material suppliers (commodities such as bottles, cans, wraps and corrugated materials) can view on line production schedules and schedule their deliveries accordingly. Since there is no warehouse on site, suppliers schedule their deliveries in 2-6 hour increments to keep the lines flowing. MRO & OEM suppliers support Coors' electrical, power transmission/bearing and general industrial supply needs. Eighty nine percent of spare parts are ordered by EDI with delivery of "A" items scheduled daily, and "B" & "C" items delivered weekly, resulting in an annual savings of 12.5%.
Coors has rationalized the payables process as well with a program called "Evaluated Receipts". Repetitive, high dollar, transaction suppliers are paid based upon blanket order prices and packing slips/bills of lading. Checks are cut based upon the "receiver" quantity times the contract price.
Coors Brewing Company has successfully used both information technology tools and strengthened supplier relationships to integrate their supply chain and make the benefits of electronic commerce a reality, including: reduced staffing requirements; less paperwork; increased inventory turns; reduced supplier base; and, on line real time ordering and information management data.
Department of Defense. When you consider the fact that the Internet of today developed and evolved from Arpanet, a Department of Defense initiative, it should not be too surprising to learn that the Department of Defense (DoD) has been at the forefront of electronic commerce. In fact, the use of electronic commerce in support DoD procurement processes has been under consideration for some time. A 1988 Deputy Secretary of Defense memo calls for maximum use of EDI (electronic data interchange), based upon 10 years of DoD investigation and experiments. In 1990, Defense Management Review Decision 941 stated, "The strategic goal of DoD's current efforts is to provide the department with the capacity to initiate, conduct, and maintain its external business related transactions and internal logistics, contracting, and financial activities without requiring the use of hard copy media."
Ranging from use of the IMPAC card -- a purchasing card program -- as the preferred micro purchase (< $2500) method to computer system integration, the DoD has an extensive plan for rapid implementation of electronic commerce containing specific time-phased recommendations, options, and actions including estimates of required resources. The benefits for both Government and Industry are as follows:
* Mutual Benefits
- Significantly increases visibility of requirements and requiring activities. DoD suppliers have greater opportunities to quote and compete. Also, the supplier will now have the opportunity to see the results of the preceding procurement of the item because the Government will be electronically posting the award results of all its EDI solicitations. This information will allow suppliers to compare and analyze their quotes to the contractor winning the award, thus significantly improving their knowledge of their competitors and their prices. In turn, this provides the DoD with more competitive pricing.
- Single point registration will allow Government suppliers to register one time for all Government buying offices. This automatically improves the governments sourcing efforts.
- Electronic payment processing will allow for better information flow across the Government procurement and logistics functions to the payment office. This departure from the paper based payment process will reduce the required administrative effort, and increase the ease and speed with which payment data can be handled.
- Greater buyer productivity. Historically the buyer has been inundated with clerical functions associated with the processing of Request for Quotes (RFQs). Electronic transmission of these documents will eliminate many of the repetitive and redundant clerical entries such as a significant reduction in reproduction, mailing, handling, telephone contacts, and repetitive data entry to legacy systems. With this capability, the buyer will be able to process more RFQs, in an efficient manner and with higher quality, thereby allowing time for the more complex decision process required by the buyer.
- More complete picture of requirements to Industry. The visibility of the Government small purchase requirements will expand exponentially for suppliers as the number of the Government buying offices transition to EDI. This allows the suppliers greater opportunities to quote and compete.
- Lower item prices will be a result of the transparency of, and ease of access to, pricing information. This will also save suppliers the effort associated with quoting on items for which they are not competitive.
- Reduced lead times. Elimination of repetitive tasks and physical paper handling provides for faster administrative throughputs and correspondingly faster delivery times.
- Reduced inventories. Inventory adds the value of availability to a product. Reduced lead times combined with implementation of "Just In Time" supply management techniques, will lessen the needs for many classes of inventory.
Mutual reengineering opportunities
- Reduced administrative workload and the use of multi-use databases. A generic small purchase of a COTS item routinely requires a six-page Government file (often duplicated across various Government functional offices for the requirement) to document the purchase and support payment of the transaction. This multiplied by the almost 12 million purchases and delivery orders made by the DoD in FY92 adds up to over 100,000 reams of paper. Normal distribution of these actions consumes an additional 500,000 reams of paper. EDI will automate this collection process and provide for data bases that can be shared by the separate functional offices. Electronic storage of this data will also facilitate less expensive archiving, retrieval, and audit and analysis of the small purchase data.
- Automated linkage from DoD acquisition systems to DoD trading partner systems. From the trading partners perspective, the automation of the Government purchase order provides an opportunity to interface directly with the trading partners' other internal automated systems that support the order fulfillment process. This can reduce the administrative burden associated with invoicing, payment, transportation, and restocking. Depending on the sophistication of the vendors material requirement planning system, EDI may even support an automated interface. Such interfaces enhance accurate reporting of sales/orders to the company's warehouse or factory floor.
- Electronic ordering and bar coding. The use of electronic cataloging allows the internal customer the opportunity to interface with the trading partner during the small purchase process without the direct involvement of the purchasing personnel. The EC in Contracting PAT observed examples of electronic cataloging currently in operation by the Government. The Naval Air Warfare Center Weapons Division, China Lake, California and GSA both provided briefings and demonstrations on operational use of electronic cataloging that allow end user ordering of small purchase items without the imposition of the contracting buyer for each small purchase. Both operations are successfully conducted with few, if any, technical problems. EDI will facilitate the use of these two associated technologies and the benefits that accrue from them.
The DoD procurement community, including its suppliers, face declining DoD budgets, reductions in manpower, and shrinking business bases. Survival in this challenging environment requires re-thinking traditional procurement methods with emphasis on reduced inventories, and increased operational efficiency and effectiveness. The innovations that electronic commerce brings will be an important part of the survival kit.
Norton Company. Paperless Purchasing . . . For many companies, this is a distant goal. At Norton Company's Bonded Abrasives Division, Paperless Purchasing is a reality. Norton's fully-integrated system automatically faxes purchase orders to suppliers and, in the process, ties together purchasing, material control, receiving, and accounts payable in a tight, well-controlled manner. Norton Company, the world's largest manufacturer of abrasive products, was acquired in 1990 by Saint Gobain Company, Paris, France, a world leader in glass products and building materials. Even though the abrading process goes back to the Stone Age, the top management of Saint Gobain reasoned that, in today's advanced, technological world, the purchase order (and other manufacturing systems and documents) should not reside there. As a result of their determination, Norton Company set out on the path to an integrated paperless system.
As with all important cultural changes in business, the support and cooperation of top management is crucial. Norton was fortunate in having the full commitment of its executive management to support the best in manufacturing processes with the latest in systems technology.
Beginning with defining the output requirements for their desired system, Norton set out to search the market place for systems software that would meet their needs. Specifically, the search was for software to accommodate their financial, accounting and MRP II materials management needs together with the less complex sundries orders. Since their raw materials and process systems are so varied, they chose one software package for ordering and control of raw materials and an entirely different software package for everything else. Moreover, conscious decisions were made in both cases to purchase off-the-shelf software rather than buying custom-made systems. Management had reasoned that, in this way, bad habits that might have been developed over the years would not find their way into the new systems. It proved to be the right direction for Norton.
Norton employed a cross-functional and cross-disciplinary approach to the tasks of needs assessment, product selection, installation, training and support for their new applications software. Designing the implementation infrastructure that had to be in place before the first electronic purchase order could fly out the door also required teamwork, very careful planning, and meticulous project management. Purchase order format, notice to suppliers, terms and conditions, data base creation (from archival systems as well as supplier provided data) and loading into the new system, training (purchasing, user community, and support staff), legal boilerplate language, security issues, and approval authorities were just some of the numerous elements that had to be considered and included in the implementation plan. Once all of the necessary internal elements were in place, the supplier base had to be brought on board. This involved supplier notification, acknowledgment and, in some cases, training.
Fully integrated systems such as Norton's are expensive - not only in monetary terms, but also in the amount of work effort and corporate cultural changes that are required. The payoff for this investment, however, can be huge. Prior to implementing the paperless system, it took over a week to create and mail a traditional paper purchase order because of the approvals and logistics considerations that were involved. Now, a typical order for tooling can be created and in the hands of the supplier in six minutes! In addition to eliminating volumes of unnecessary paperwork and needless administrative work, the professional purchasing staff is freed up to really make a difference in how business is conducted. Rather than tracking down missing paperwork, effort is now concentrated on things like supplier base management, better reporting systems, improved communications, timely auditing, and energy management. Some examples of specific accomplishments are:
- data bases that track trends in electric, gas, coal, and oil prices and allow for better projections of the future budget impact of these commodities
- control of engineering and industrial contractors through systems data collection
- sourcing guides to help factory personnel select proper tooling
- queries for sophisticated data collection and reporting
Wrap-up. Information technology has been a key enabler in the transformation of purchasing into a strategic business function. It has allowed business to move at a much faster pace than ever before. Purchasing is faced with the challenge of remaining current with a wide range of technologies that will further revolutionize the way in which commerce is conducted, but it is not enough to merely remain academically current on these technologies. The real challenge lies in finding ways to put the technology to use today to create value and competitive advantage. Carpe diem!