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Business to Business E-Commerce Basics
One of the last and greatest promises during the Internet boom of the late
1990s was the impact of business-to-business (B2B) e-commerce on the traditional
business landscape. Industry experts along with marketing “gurus” hyped B2B
e-commerce so much that near panic often ensued, with business leaders demanding
B2B solutions to be investigated at all costs. Thousands of online marketplaces
(e-marketplaces) began to appear to satisfy the apparent need, but the Internet
bubble soon burst and these e-marketplaces disappeared as fast as they had
once materialized. B2B e-commerce quickly fell out of favour with the same
lack of informed decision-making that had once started the whole process.
As with e-business in general, B2B e-commerce has quietly begun to mature
out of the spotlight of speculation and hyperbole and is poised to truly redefine
business processes in the new millennium. This document will introduce you
to the basics of B2B e-commerce from the perspective of small and medium-sized
enterprises (SMEs), separating fact from fiction, with a dose of common sense
thrown in for good measure.
What is Business-To-Business E-Commerce?
Business-to-business e-commerce may be defined as the buying and selling of
goods and services between companies online. There are two distinct aspects
of B2B e-commerce that separate it from the more familiar business-to-consumer
(B2C) “e-tailing” model:
- Flexibility in pricing. Transactions between businesses often require variability
in the pricing of products between purchasers. This concept of haggling is
rare in the B2C marketplace.
- Integration of business systems. To realize increased productivity and
savings, businesses involved in B2B will integrate their internal systems
together, enabling less human intervention.
Internet-based electronic procurement of goods and services between companies
is called e-procurement. In the same way that B2C e-commerce is often referred
to now as e-tailing, labeling B2B e-commerce as e-procurement better shows
how B2B affects a company’s traditional supply chain.
Electronic marketplaces, also known as B2B exchanges, serve as electronic
hubs bringing together suppliers and purchasers in common virtual environments.
E-marketplaces are either “many-to-many,” bringing together many buyers and
sellers in a particular vertical market, or “one-to-many” where one major supplier
or consumer will attract many of its trading partners to its e-marketplace.
Over the past couple of years, it has been these private, one-to-many e-marketplaces
that have proven to be the most successful. One well-known public Canadian
e-marketplace is SourceCan.com.
In their ever increasing need to label things they didn’t understand, marketing
pundits began touting yet another e-commerce buzzword: B2G, or business-to-government,
e-commerce. Buzzwords aside, e-procurement by various levels of government
in Canada has been quite successful. MERX (www.merx.com/)
is an online e-marketplace where businesses can bid on contracts from federal
and provincial governments, and recently also the MASH (Municipal, Academic,
Schools and Hospitals) sector.
MERX has opened up more opportunities for SMEs to bid on government contracts.
It is free to browse MERX, and it’s available in both official languages. Alberta
entrepreneurs can also access the Alberta Purchasing Connection at www.purchasingconnection.ca/ to
bid on provincial government contracts.
Supply Chain Basics
The Bridgefield Group Inc. (www.bridgefieldgroup.com) defines a supply chain
The linked set of resources and processes that begins with the sourcing
of raw material and extends through the delivery of end items to the final
customer. It includes vendors, manufacturing facilities, logistics providers,
internal distribution centers, distributors, wholesalers and all other entities
that lead up to final customer acceptance. The extended supply chain for a
given company may also include secondary vendors to their immediate vendors,
and the customers of their immediate customers.
The traditional model is known as the “push” model, whereby suppliers and
vendors on top push their products or services through the supply chain to
the end consumer. Costs are accumulated through the chain with the end consumer
typically incurring much of the cost.
“Pull” Model for Supply Chains
E-Procurement has given rise to the concept of a “pull” model supply chains.
In this model, the consumer has the most power in the supply chain, and suppliers
must react to their demands. Greater efficiencies in the supply chain can occur,
and the linear nature of the chain may be broken as customers become better
able to circumvent middlemen and resellers.
E-Procurement’s Effect on Supply Chains
Besides the general shift to a “pull” model, e-procurement can have many other
effects on the supply chain. For example, with greater visibility comes greater
efficiency. Resellers are forced to truly bring some sort of added value to
the table lest customers deal directly with their suppliers and remove them
completely from the equation. Suppliers can now quickly respond to consumer
demand and limit excessive inventory and associated storage costs. Shipping
logistics become easier to control, and costs are reduced. Customers can handle
most, if not all, shipping tracking, notification, auditing, documentation,
and labeling online. This reduces paperwork and overall time required for products
to pass through the distribution system.
Electronic Data Interchange
Electronic Data Interchange, or EDI for short, is the dinosaur of B2B e-commerce
that still will not go away. The forerunner of today’s Internet-driven e-procurement,
EDI was established in the early 1970s as a way to automate buyer-seller transactions,
such as invoices and purchase orders. Large corporations began standardizing
the format for electronic business documents, and industries started agreeing
on common standards, administered by recognized standards organizations. The
two most common EDI standards are EDIFACT in Europe and ANSI X.12 in North
For many businesses, EDI is far too expensive to implement. All EDI traffic
takes place over a value-added network (VAN) that exclusively transmits the
data over a private network, offering transaction management and auditing.
Businesses implementing EDI used to require expensive mainframe computers,
with VANs that charged for each character transmitted.
From a technical standpoint considering the Internet of today, EDI is well
past its prime. Data transmission rates are often still at 9600 bits per second
(for you non-techies, a cable or DSL Internet connection is about 200 times
faster), standards differ across industries, and on the surface it is just
a glorified email inbox. So why is it still around? Quite simply, the amount
of time and money companies have invested in EDI over the years makes changing
to a new system not very attractive. Industries spent years agreeing to EDI
standards, and none are too willing to start the process again.
Wal-Mart: An E-Business Success Story
Possibly the single greatest success story of e-business and B2B implementation
is that of the rise to dominance by Wal-Mart in the North American retail market.
Love them or hate them, you have to hand it to Wal-Mart for their impressive
growth in such a short time span. And arguably the single most important factor
in this rise was their harnessing of the power of e-business, e-procurement,
and the adjustment of internal processes to maximize this advantage.
More than any other company, Wal-Mart has revolutionized supply chain management
by using a “pull” model where customer demands drive the suppliers. Inventory
control is finely honed and purchasing trends are available to suppliers, whom
now must be able to quickly respond to the needs of millions of customers.
The business decision to decentralize the procurement process means that front-line
staff in every store can immediately order the appropriate stock electronically,
which will in turn require rapid turnout of product from the suppliers. This
rapid replenishment system, coupled with accurate purchasing forecasting, helps
Wal-Mart reduce overall costs.
While not always good for suppliers in general, Wal-Mart’s power as a giant
in business has helped in establishing new standards for B2B e-commerce. Wal-Mart’s
mindset of cutting costs at all costs resulted in them deploying EDI over the
Internet to eliminate the costly VAN altogether. EDI over the Internet (EDI-INT)
uses a new standard called AS2, a communication protocol that attempts to make
EDI communications over the Internet both secure and reliable. By mandating
their suppliers to use AS2, Wal-Mart leads the way in creating a demand for
a new generation of EDI, and in turn drives the whole world of e-business forward.
B2B for the SME
Your IT staff might only consist of your neighbour’s child who seems to know “everything
about computers.” Being a supplier for Wal-Mart or similar corporations is
impossible due to minimal margins, lack of the enormous IT investment, and
nowhere near the capacity to supply such a demand. So where can small and
medium-sized enterprises benefit from business-to-business e-commerce?
Purchasing Indirect Supplies
Indirect supplies, such as office furniture, pens, paper, and general office
equipment, are often a first step for smaller businesses to implement B2B e-commerce.
Many suppliers offer catalog-based websites for corporate purchases, and are
similar to buying online from a B2C website. Corporate accounts can be established
online, and organizations can save significant time and money on automating
this purchasing process.
Purchasing Direct Materials
Direct materials are any products that go into the production of your goods
or services for sale. Establishing a relationship with a vendor that supports
e-procurement may reduce costs. Joining an e-marketplace and holding reverse
auctions where your suppliers bid on your requirements can lead to a real reduction
in the overall cost of manufacturing your product.
Selling Products or Services to New Vendors
Joining an e-marketplace can open up new opportunities to sell your products
around the globe. While many private e-marketplaces are restricted to vendors
of the particular organization running the exchange, public hubs can allow
you to offer your services to all other participants. Hopefully the same e-marketplace
where you make purchases can be the same place where you sell your wares, thus
increasing your reputation as a valued member of the online community.
Leveraging Your Existing Web Presence
Perhaps you already have a business-to-consumer e-commerce website. Greater
sophistication can be programmed into your online store to target business
clientele. This often includes adding account registration and per-user price
discounting, as well as possibly allowing for purchase orders as payment for
corporate clients. You should keep in mind that this additional functionality
is not trivial, and could require rebuilding your online store from the ground
up at a significant cost.
Investing in Your Own E-Procurement Solution
If your business is a major consumer of various suppliers, perhaps it is you
who can lead your whole supply chain into the world of e-procurement. This
is not for the faint of heart, and will require considered financial investment.
But, hey, if Wal-Mart could do it, why couldn’t you?
Before you start looking into the cost of implementing a full scale EDI-INT
system, then expecting your small suppliers to spend significant sums with
little or no benefit to them, stop and consider smaller-scale supply chain
automation. Perhaps you only have a single supplier. You may communicate via
email already, but how about seeing if your inventory databases and purchasing
systems could more closely communicate without human interactions. Examine
your purchasing process, and identify potentials for automation. With a manageable
expenditure you could realize a significant return on investment.
The world of business-to-business e-commerce may not be the overnight sensation
that it once was, but it is slowly becoming a necessity to compete in today’s
marketplace. Any contemplation of entering the B2B world demands that you examine
your own processes to discover where automation can reduce costs and potentially
increase revenue. In the same manner that businesses tested the Internet waters
with email and brochure-style websites, there may be free e-marketplaces within
your sector that can be the first step on the road to true B2B e-commerce.
When continuing your investigations on the subject, be aware of the date of
the material, as pre-2002 documents and websites may be nothing more than style
and no substance. With informed decision-making, organizational commitment,
business savvy, and forward thinking, you could reap the many benefits of B2B.