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«Abstract Web-enabled business-to-business (B2B) e-commerce enhances inter-organizational coordination and results in transaction cost savings and ...»

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A Study on the Value and Impact of B2B E-commerce: The Case of

Web-based Procurement

Chandrasekar Subramaniam and Michael. J. Shaw1

Department of Business Administration, University of Illinois at Urbana-Champaign,

Urbana, IL, USA

csubrama@uiuc.edu

Department of Business Administration, and Beckman Institute for Advanced Science

and Technology, University of Illinois at Urbana-Champaign,

Urbana, IL, USA

m-shaw2@uiuc.edu

Abstract

Web-enabled business-to-business (B2B) e-commerce enhances inter-organizational coordination and results in transaction cost savings and competitive sourcing opportunities for the buyer organization. However, organizations are unsure if this is an improvement over existing information technology such as EDI. In particular, what is the value of B2B e-commerce to a buyer organization and how to measure this value?

What factors most affect the realization of the value of B2B e-commerce? Using the case of Web-based B2B procurement system, we propose a framework to quantify and measure the value of B2B e-commerce system and identify the factors that determine this value. We apply our methodology to help a major mid-western heavy equipment manufacturer evaluate the potential of its Web-based procurement system. Our preliminary results indicate that, even though all stages of B2B procurement is affected by the Web, the value of Web-based procurement is most determined by the process characteristics, organization of business units and the “extended enterprise”.

(Keywords: Inter-organizational information systems, Value of B2B e-commerce, Webbased procurement, Measurement of value, Extended enterprise) Corresponding author. Address for correspondence: Michael J. Shaw, 2051 Beckman Institute, 405 N.

Mathews Ave., Urbana, IL 61801. Telephone: 217-244-1266. Fax: 217-244-8371 A Study on the Value and Impact of B2B E-commerce: The Case of Web-based Procurement

1. Introduction Web-enabled applications for business-to-business (B2B) electronic commerce are expected to enhance inter-organizational coordination and improve relationships among business partners. In B2B procurement, proposed potential benefits are in transaction cost savings and competitive sourcing opportunities. However, organizations still are unsure whether a Web-based B2B e-commerce system can deliver the promised benefits.

For example, is the use of the Web an improvement over existing, and mature, information technology (IT) systems, such as electronic data interchange (EDI)? In this

context, two of the important research questions that we address in this paper are:

1. What is the value of Web-based procurement to an enterprise? How is it created?

How do we measure this value?

2. What factors most affect the realization of the potential value of a Web-based procurement system?

Central to this inquiry is the need for organizations to measure and determine the impact of Web-based system on B2B processes and the value to the enterprise. Knowing the value of Web-based systems is a necessary first step to motivate users to adopt the system. In the current economic environment, when organizations are critically evaluating each of their investment, Web-based B2B systems are no exception. But, as IT evolves from a mere productivity tool to a more pervasive and strategic business tool, the measurement of its value to an organization has become more challenging. Most evidence of Web benefits at organizational level are anecdotal and there are very few systematic studies that look at the value from organization’s perspective. Moreover, the nature of the Web creates impacts beyond the traditional organizational boundaries, requiring the cooperation of business partners and, in some cases, even competitors within the industry. Thus, there is a need for a better framework to determine the value of the Web for an organization.

Using Web-based B2B procurement as a case, we present a value framework that draws on prior work on IT impact, but considers the capability of Web to create new value. We apply our methodology to help a major mid-western heavy equipment manufacturer evaluate the potential of its Web based procurement system. Our preliminary results indicate that even though all the stages of B2B procurement can be affected by Web, the realized value is dependent on the characteristics of B2B process, the organization of business units and the supply chain. Our B2B impact framework, in addition to clearly identifying the areas of Web value, help organizations understand and manage the critical factors that influence this value.

Our paper is organized as follows. We discuss Web-based procurement systems to know how they create benefits for an organization and formulate the research questions being addressed in this paper. We then review the existing literature on IT value and present the need for a different framework to understand value of the Web. Our valuation framework is presented followed by an analysis of the effect of critical factors on the value of Web-based system. We use our framework for evaluating the Web-based procurement efforts of a large organization, drawing important implications for B2B strategies based on the results of our analysis.

2. Web-based B2B procurement systems A significant proportion of organizational resources are devoted to managing interorganizational processes, such as procurement of goods and services from other companies, collaboration for product development, and financial transactions between companies. Among these, the procurement of goods and services, called business-tobusiness (B2B) procurement, involves the largest cost for an enterprise, with many organizations spending 50% to 60% of their revenues on goods and services [12]. Yet, information technology applications have focused mostly on more structured processes, such as manufacturing, leaving most procurement processes inefficient and ineffective.





Procurement usually covers two types of purchases – direct and indirect. Direct purchases involve materials, such as raw materials and components, which go into the finished products sold to the customer. Indirect purchases, on the other hand, involve goods and services that are not part of the finished product, but support the internal business activities. Examples of such items are computers, office equipment, operating supplies and office supplies. Indirect procurement involves a wide variety of items of different complexities, and caters to a range of internal needs and preferences. In addition, unlike direct items which are managed through company-wide standards and controls, indirect purchases are highly decentralized and have multiple and, in many cases, incompatible applications within the same organization. Thus, managing indirect procurement through traditional IT systems has been a major challenge to IS professionals.

The use of the Internet for procurement2 has generated great excitement among organizations because of its potential to reduce procurement costs and improve strategic sourcing [6,16]. The availability of electronic markets and industry specific B2B exchanges has added to the choices available for organizations to manage their procurement [1]. However, from the point of view of B2B procurement, we have identified four models of Web-based procurement systems (figure 1). These models reflect the different ways that a buyer or supplier can choose to execute a B2B transaction [13,17,22]. Each model creates value for the buyer and seller in unique ways and organizations typically use more than one, if not all, models. We discuss briefly the four procurement models.

Buy-side procurement system: This form of procurement system is developed and implemented by large buyer organizations to Web-enable their purchases with selected suppliers. The entire procurement cycle, covering product development, transactions and procurement management are Web-enabled and integrated. This actually creates a virtually integrated IOS between the buyer and the seller, like the EDI system, but with greater scope and capabilities. The two major areas of emphasis of this system are transaction efficiency and process control.

In this paper, we use the term “procurement” to refer to the procurement of indirect materials

–  –  –

Private marketplace: Some organizations form their own electronic markets to aggregate their suppliers to get competitive price for products. The suppliers are limited to those who wish to trade with the buyer-owned private e-market, which limits the extent of liquidity and competition possible. The emphasis of private electronic markets is on reducing the procurement price of the items, but the organization forming the market place has control over how the market operates. Private e-markets also reduce search costs for locating sellers and serve as exchange mechanisms for proprietary knowledge of the enterprise. Examples of such marketplaces are Walmart’s RetailLink and GE’s Global Exchange.

Industry B2B exchange: Each organization building a private e-market limits the liquidity of each market and forces suppliers to work with multiple markets. Hence, organizations in some industries form consortiums and build industry-specific B2B exchanges. This model aggregates buyers and sellers in the specific industry. As this is an industry-wide effort, it is easy to build liquidity with suppliers wanting to participate where most of the industry purchases are going to be. The emphasis of industry-wide exchanges is to increase transparency of the process and force competition among suppliers, which results in lower prices for buyers. This model also reduces the search costs for both buyers and sellers. Examples are Covisint in the auto industry and Transora in the consumer goods industry.

Third-party marketplace: These marketplaces are created by companies called market-makers, (or infomediaries), who have both technological and domain expertise.

Third-party marketplaces can be horizontal or vertical. Horizontal marketplaces aggregate buyers and sellers across a particular function across multiple industries.

Fob.com is an example of such horizontal marketplace. Vertical marketplaces aggregate buyers and sellers across a particular industry across multiple functions. VerticalNet is an example of a vertical marketplace. Third-party marketplace is suitable in fragmented markets (buy side or sell side), where locating the buyer or seller is very expensive and in standard and commodity products, where price and availability are the major purchase criteria. Third-party markets provide value by lowering the product price for the buyers, and lowering the search costs for both buyers and sellers [1].

–  –  –

Table 1 summarizes the factors that create value and factors that affect the value in each form of B2B procurement system. Even though researchers have predicted a significant shift towards more electronic market based transactions [1,18], each Webbased model creates value in a different way and B2B managers have to evaluate the role of each model in their enterprise. But, it is clear that organizations, buyers or sellers, can derive competitive advantage from any of these systems in the form of economic benefits and increased business opportunities [9,11,29]. However, our interactions with B2B managers of a large manufacturing organization showed that there are still doubts about the real benefits of the Web. For those organization that already have some form of IOS, such as electronic data interchange (EDI), there is uncertainty if the Web is an improvement over the existing system. Also, the different players in the B2B procurement process, such as user, business units, central procurement managers and the suppliers, each have their own expectations from the system, which are often at conflict with the expectations of other players. Hence, all the players may not perceive the same value from implementing a B2B system and their perception is critical for successful adoption of the system [8].

It is important for researchers and practitioners to know more precisely how the Web impacts B2B processes in an organization and all the players involved. In studying Webbased procurement, our research questions become more specific and are summarized as

follows:

1. What are the impacts of using Web-based procurement system? Where and how do these impacts occur in organizations?

2. What is the value of Web-based procurement system to an organization? How do we measure this value?

3. What factors affect the realization of the benefits of Web-based procurement? How do they affect the level of benefits and what is their relative importance?

4. What strategies can be used by organizations to motivate increased participation in Web-based procurement by internal users and external partners? What are the implications of these strategies?

To answer these questions, we take the case of a Web-based procurement model, the buy-side procurement system3, and analyze the creation and realization of value by the buyer organization. Many large organizations, particularly manufacturing firms, find that third-party procurement systems are not adequate or have to make extensive design changes to meet their customized needs of procurement. Several of them have initiated efforts to create a buy-side Web-based procurement system that is capable of integrating with their internal operations, yet allow them to use the Web to improve their sourcing opportunities. As they explore the potential of private e-markets or industry B2B exchanges, they do not want to abandon their Web-based initiative and there is a need to identify where the value of their Web-based system lies and what factors help realize the maximum value. In the following section we review the existing research literature on the impact of IT systems and then derive our framework to study Web impact.



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