B2B E-Commerce: To Be or Not to Be in the Brave New World of Global Business Virtualities

Elias G. CARAYANNIS <caraye@research.circ.gwu.edu>
George Washington University
USA

Jeffrey ALEXANDER <jeffalex@wcore.com>
Washington CORE / George Washington University
USA

Abstract

Information technology, especially the Internet, has been having an increasingly large and broad impact on industrial structures and the ways we measure and evaluate such fundamental concepts as risk, the valuation of and return on intangibles such as intellectual capital, brand-related goodwill, and service sector productivity. Identifying the key value-adding factors underpinning productivity in the service sector has always been a significant challenge. With the advent of the World Wide Web and the broad diffusion of Internet-enabled technologies and mechanisms such as electronic commerce, this challenge may well have become intractable.

In this paper, we compile a number of empirical case studies from industry where the use of electronic commerce has served as a strategic differentiator. We end by identifying best practices in deploying electronic commerce as a strategic agent of change within and across firms and industries in the pursuit of increasingly higher levels of service sector productivity and quality

Keyword(s): business-to-business e-commerce, global branding, co-opetition, value-adding chain, industrial structures

Introduction

Much of the recent discussion of electronic commerce (EC) has focused on the business-to-consumer segment of EC activity. This seems natural, as there are over 100 million consumer households in the United States alone, making this a very large and attractive market. But as recent behavior of professional investors shows, the opportunities in business-to-business (B2B) EC may be much greater. A 1999 study by Forrester Research, a market research and consulting firm in Cambridge, Massachusetts, predicted that business-to-consumer EC will grow from $18 billion in 1999 to $108 billion in 2003. By comparison, B2B EC was expected to grow from $109 billion in 1999 to over $1.3 billion in 2003. A more recent report, issued in January 2000 by a unit of the Connecticut-based research firm Gartner Group, is even more optimistic, forecasting B2B EC sales of $105 trillion in 2004, or about 7 percent of all global transactions.

Companies have much greater incentive to adopt EC than consumers. B2B transactions tend to have much higher value than consumer purchases and are conducted more frequently and more regularly. This means that a small percentage change in the cost of each transaction can lead to massive cost savings. But there are key advantages beyond simple cost cutting, including the development of more dynamic and flexible relationships with key business partners and the resulting increase in strategic flexibility.

Forms of B2B EC

Many organizations are implementing electronic commerce in numerous ways and receiving tangible benefits. But as electronic commerce matures and develops, these ways are likely to change based on the accelerating adoption rate. Based on our review, three specific implementation models are starting to appear in the marketplace.

1. Transaction based. A single company establishes a common transactional method for conducting business with its major customers or key suppliers. This offering is common across all business units within the company and includes common tools, techniques, and infrastructure.
2. Process based. Two companies establish a common business process to conduct business efficiently and effectively between the two firms. The two firms establish and share this common practice jointly, both within their firm and outside their organization with this predetermined trading partner.
3. Strategic relationship based. Two or more companies establishing a strategic relationship partnership based on all major interactions between the organizations. This includes transactions, processes, and any other collaboration between the two organizations. From a technology perspective this includes linking the CRM, ERP and SCM systems of the two organizations. This way each organization can actually monitor sales activity, production schedules, inventory management, and technical service exchanges.

Among these three modes, strategic electronic commerce partnerships represent the best means to obtain added competitive advantage in the marketplace, but under very specific circumstances. In many situations, the risks incurred from undertaking strategic linkages with trading partners are not justified by the likely benefits. Some examples of EC relationships which are not strategic include the following:

• Electronic procurement. A number of companies are creating Web-based systems for obtaining so-called "indirect" goods -- supplies that are necessary for conducting business but not directly used in a company's products or services. Office supplies are one primary example of indirect goods. Often, the only advantage offered by moving procurement of indirect goods to the Internet is the ability to force down prices by directly playing alternate suppliers against each other. In such cases, a firm may simply want to establish an on-line auction system where suppliers bid against each other to fulfill the firm's procurement needs.
• Open buying. Development of process-based EC systems may be necessary to facilitate trading partner transactions. If a firm and its supplier have a long-term, predictable, and noncritical relationship, standardization and integration of processes simply help to reduce the costs of repeated transactions. This has led to process-based EC standards, such as OBI (Open Buying on the Internet) and the RosettaNet consortium, which helps streamline the purchasing of information technology products.

The risks inherent in strategic EC relationships are often underestimated. For example, integration of a firm's supply chain in a just-in-time configuration may make the firm critically reliant on the performance of a few vendors. One example of this occurred in 1997, when Ford Motor Company was using the Dana Corporation to supply the majority of the chassis for its profitable light truck product line. A flood in Ohio temporarily cut off the supply of assemblies flowing from the Dana plant to the Ford assembly facility. This threatened to shut down five Ford plants, potentially costing Ford $1 million per plant per hour of downtime. Fortunately, Ford was able to fly its engineers and managers to the Dana site and work with the supplier to find alternate routes to maintain the supply of components.

Case studies in B2B EC

As the following three case studies show, the implementation of a specific form of B2B EC that is appropriate to a particular business scenario can produce substantial benefits.

Process based

EC based on common or shared business processes between two trading partners has brought fundamental change to businesses like BOC Gases. Its British parent, the BOC Group, has been pushing for online supplier and customer transactions supported by common business processes for a long time. These common business processes implemented throughout its multinational operations, which include a wide variety of warehousing, distribution, and cargo-handling services, have been in operation for over three years. And the benefits for both BOC and its trading partners affect not only back-office efficiency but also key business process such as order fulfillment and order-to-cash.

Alex Cahill, a BOC purchasing manager in Murray Hill, cites the example of tungsten hexafluoride. The company sells the gas in six-foot steel cylinders that are worth $10,000 each when filled, making for an unwieldy, expensive inventory.

"In previous years, our stock has been bloated to accommodate for miscommunication, upturn in demand, returns, or problems with quality," Mr. Cahill said. "So it was typical to have three months of inventory in the system -- which could be between 50 and 60 cylinders, with a bunch en route."

The primary reason for such "blind stocking," as Mr. Cahill put it, was the inefficiency of the order fulfillment process. "We have quite a lot of people interested in each purchase order," he said. "All that communication was handled through faxes, e-mails or the phone, one on one -- which is great until someone goes on vacation or sick leave, or they leave the office for a few hours, or transcribe something incorrectly."

Under the system, which the San Diego site put in place in March 1998, BOC negotiates a bulk purchase with suppliers for a year's worth of gas and posts the information on a restricted-access Web site. This site, or extranet, is accessible only to select BOC suppliers and customers as well as many BOC employees, who place orders by choosing from an online catalogue of gases that has been screened for price and selection, based on the bulk purchase agreement.

As the order progresses through delivery, both the supplier and BOC will update the Internet order page, noting the shipping dates, quantity, and shipping method. This gives key personnel instant access to the order's status, which cuts down the need for correspondence, slashes the amount of time spent processing purchase orders, and greatly reduces the opportunities for human error.

Perhaps more significantly, Mr. Cahill said the system's precision had enabled the company to reduce substantially the number of filled cylinders it keeps in stock, saving his division "several hundred thousand" dollars in annual inventory costs.

A longtime customer, the Massachusetts Institute of Technology, which has been buying gases from the company since 1989 for use in science experiments and other purposes, pulled BOC into EC. Four years ago, seeing the Internet's potential for more efficient business practices, MIT persuaded BOC and another of the university's big vendors, Office Depot, to offer their products for sale in a virtual catalog. Like BOC, Office Depot gave it a try, liked what it saw and has since become an EC evangelist. BOC hired IBM in early 1996 to custom-design its extranet. But the system also includes a large amount of software written by BOC's own engineers, which helped keep the initial outlay below $1 million, according to BOC's Wilcox, who said annual maintenance now ran around $150,000.

Beyond money, though, companies embarking on EC must also become accustomed to doling out ample portions of trust. BOC, for example, gives its suppliers unprecedented access to its own inventory data, in order to keep its stockpiles replenished. BOC customers like MIT give BOC access to their cost accounting systems to avoid having to re-enter data as an order works its way through the process. Such trust is a departure from traditional business practices, Wilcox conceded. "But somebody's got to be willing to do something a little differently for this to work."

The business-to-business process is just a lot more complex," Davis said. "And organizations don't always behave like consumers." With layers of bureaucracy to navigate, and with procurement and sales methods ingrained in the corporate culture, he said, those who champion EC within corporations must be prepared to move slowly. "The sun and the moon and the stars have to line up to make this work," said Wilcox. "We're so intertwined with a customer and their processes, we can't just do things suddenly without re-engineering the whole process. That's why business-to-business e-commerce will have a more organic growth than the flash growth on the retail side."

Strategic partnership relationship

Each month, a purchasing agent for Eastman Chemical, a manufacturer and distributor of formulated chemicals with its U.S. headquarters in Tennessee, pulls a chair up to a computer, logs on to the Internet, and looks for a bargain. In this case, the bargain involves not only the price of the product but an entire cost-saving process set in motion when the on-screen "order" button is clicked.

Nearly 7,000 miles away from Tennessee, in a Japanese silicone processing plant, an Eastman supplier receives the million-dollar order for silicone, a required raw material used in manufacturing, among other purposes. Within minutes, some 2,500 miles from Tennessee, an Eastman distribution center in Los Angeles receives electronic notice from Japan that the shipment is on the way.

No multilingual phone calls or faxes required. No written purchase orders, invoices, or shipping notices to lose. Because the entire process takes place on the World Wide Web, there are no extra charges for handling the order over a special long-distance data network -- which until a few years ago would have been the only way to conduct business electronically. Eastman makes some $20 million worth of purchases from the Japanese supplier a year, and Eastman officials say the Internet will save the company several hundred thousand dollars annually.

Unlike in consumer-oriented EC, there are no ready-made software programs sophisticated enough to quickly apply to most business situations. Analysts and industry executives note that the requisite B2B software tends to be expensive -- often more than $1 million for the initial software license, from vendors like Ariba Technologies and Spaceworks. Making the system fit the specific needs of a particular company, not to mention keeping it in tune, typically requires an internal support staff as well as continued consultation with the software vendor. "For every dollar that businesses will spend on the packaged application, they'll spend $5 to $50 on system development and integration," said Ms. Terhune, a Gartner Group analyst.

B2B EC market makers in the chemicals industry

Several startup ventures are now seeking to facilitate the earliest steps in B2B EC, namely the mutual identification of buyers and sellers for a prospective transaction. A primary source of transaction costs in B2B EC is the time and effort needed to locate a supplier who can provide the appropriate goods at the best price. In addition, firms often incur a substantial opportunity cost by trading with a known supplier, although another supplier might exist that could provide an even better product for a lower price. Web-based intermediary sites can help subscribers to lower transaction costs by making it easier to find the best trading partners. These intermediaries are often very specialized, often focusing on a segment within the B2B activity of a particular industry. This specialization helps the site to cater to the specific needs of its members and to maintain a high level of sophistication in content and services.

The chemical production industry has a number of B2B segments with very different characteristics. Customers of chemical producers (which are often chemical firms themselves) use bulk chemicals in certain products that are essentially commodities (i.e., products from different vendors are difficult to distinguish). Others use highly specialized chemicals that are essentially custom-produced by suppliers. Some chemicals are bought in extremely small quantities for laboratory use, while others are traded in tons by the day. These varied characteristics make it difficult to standardize all business processes involved in B2B EC for the chemical industry.

For this reason, market makers in the chemical B2B space are becoming highly specialized by product type and application. While buyers would typically prefer a "one-stop shop" setup for all of their chemical supply needs, these vertical "portals" add value by collecting producers of like chemicals for like applications in a single online database. Once a customer knows the type of chemical needed, finding the appropriate Web-based marketplace for the purchase is easy. The table below shows the range of market makers operating in the chemical industry. Many are backed by particular firms: for example, ChemConnect receives capital from Dow, while CheMatch is funded by DuPont and Millennium Chemicals.

Adapted from S.G. Cowen, 1999.

Future direction: the changing business-to-business model

As the world moves toward e-business, the traditional order/invoice process is being subsumed by a new, more diverse order/deal management process that requires a portfolio approach to trading partner relationships. Electronic marketplace, electronic catalogs, electronic bidding systems, and Internet search agents are creating an open-sourcing environment for certain product classes.

Trends accelerating the adoption rate of collaborative activities include the following:

• A switch from enterprise-centric business models to customer-centric business models is mandating an external process view.
• Increased global competition and the emergence of the global logistics network is forcing some enterprises (e.g., the U.S. apparel industry) to band together to compete more effectively.
• Increased demand from customers for service that is faster, cheaper, and better is creating a need to increase the speed at which goods and information move up and down the entire supply chain.

Overall, firms need to realize that only some modes of EC transactions will be suitable for particular needs. Some transactions may also require a hybrid approach bridging these categories. The key is to first identify the critical nature of the transaction and then define the relationships needed with trading partners, which are then implemented in EC.

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