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Economic Analysis of B2B Impact

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					B2B e-Commerce Valuation:
Exploring the Role of Process
 and Organizational Factors

   Michael J. Shaw

   Department of Business Administration
   University of Illinois at Urbana-Champaign
Value of B2B E-Commerce
 As Web-enabled B2B e-commerce is been
   increasingly implemented…
   What is the value of B2B e-commerce
   to an enterprise? How to measure this
   value?
   What factors most affect the realization
   of the potential value of B2B e-
   commerce?
         Web-based Procurement System
                                 Web-based Procurement System


                                         Procurement Support
 Buyer                   Decision                                                              Supplier
                                            Authorization &       Product
                         support
                                                Security          catalogs
                         Web-based
                                              management         management
                         collaboration
 Buyer                                                                                         Supplier
                                    Procurement Transaction Support



 Buyer      Enterprise                     Communication &                         Supplier    Supplier
                                             Coordination        Order
           Information        Search &                         management
                                                                                 Information
             Systems          Ordering                                             Systems
             Gateway                                                               Gateway
                          Receiving &                             Order
                          Accounting                            Fulfillment

                                                Shipping &
                                                 Logistics

 Buyer                                                                                         Supplier

                                            Market Making

                         CFQ & CFP          Forming Auction,    Bidding,
                                            Reverse auction,    Negotiation, &
Buyers                                       Or Exchanges       Contracting                    Sellers

                          Demand                 Inter-               Supply
                            side             organizational            side
              Requisition                     Approval
               Creation                        Cycle

 Product &
  Process                                               P.O.
Development                                          Generation

 Concept
                             eProcurement
 to Check                                                   Supplier
                                                         Communications


               INVOICE                                Advance
                                                     Ship Notice
                             INVOICE
          Payment
                                              Receipt of
                            Invoice         Goods/Services
Research Questions
   What is the value of Web-based
   procurement to an organization? How do
   we measure this value?
   What conditions affect the realization of the
   value? What are the relative importance of
   each of these conditions?

 …in need of both empirical and economic
  analysis
Buying patterns for non-production goods
 and services with respect to volume and
                  value
Observations from a Field
Study                                                   Effect of process type on value




                       Cost savings as % of total
                         procurement costs
                                                    Structured procurement         Unstructured procurement
                                                           (planned)                     (unplanned)

                                     process savings          error savings   inventory savings   total savings


 For unstructured processes, such as unplanned
 procurement, the most value of Web-based procurement
 comes from process savings
 For structured processes, such as planned procurement,
 the most value of Web-based procurement comes from
 inventory savings
Observations from a Field Study
                                                        Effect of process complexity on value




            Cost savings as % of total procurement
                            costs




                                                      Office        MRO        Office    Softw are &   Hazardous
                                                     supplies                equipment    services
                                                                           Increasing complexity
                                                       process savings                     error savings
                                                       inventory savings                   total savings


Web-enabling moderately complex purchases
provides the greatest value
           Valuation framework
     B2B process                           B2B
                                      E-Procurement
 Process type                            System
 Process complexity


    Organization of         Price      Transaction     Technology
     business units        Benefits    Cost Savings   Lock-in Costs
Size
Dominant process type
Change in centralization



 Extended enterprise                     Value of
                                           B2B
 Integration
 Participation
                                      E-Procurement
 Fragmentation
   Economic Valuation Model
Total economic value (V) is given
as
Price benefits + Transaction cost benefits –
  Technology lock-in costs

   ( Ai  qi )  qi
V                    kf ((1   )  (1  qi )( n   (1  n)))  r (   f )qi
    1   (1   )
Effects of
  Procurement Types
  Process Complexity
  Degree of Centralization
  Fragmentation of Suppliers
                                   Unstructured,
Benefit
                                                                 Benefit                                     Complex
7

6
                                    unplanned                    5

5
                                                                 4
4

3                                                                3

2
                                                                 2
1

                                               Demand                                                        Demand
              2        4       6       8                                   2         4         6         8




                      Greater Centralization                                     Higher Fragmentation
    Benefit
                                                                 Benefit
                                                                                                                      Demand = high
    4                                                            5


                                                                 4
    3

                                                                 3
    2

                                                                 2                                                    Demand = low
    1

                                                                 1
                                                        Demand
                  2        4       6       8
                                                                                                                      Fragmentation
                                                                               0.2       0.4       0.6       0.8
  Effects of Process Complexity+Procurement
  Type
                                      Unstructured
                                                     Procurement Type

                                                       Structured

                                                               10

                                                               8

                                                               6    Level of
                                                                    Benefits
                                                            4

                                                           2

                                                           0
                                                     low



                         Process
                 high
                         complexity



• Among simple procurement processes, Web-enabling
  unstructured procurement (significantly) provides
  greater benefits (think MROs!)
• Among complex processes, Web-enabling structured
  procurement provides (slightly) greater benefits
Effects and Centralization+Procurement
                 Type
           Change in                                                                 Change in
           centralization                                                            centralization     High
                             High                                              Low
           10
                Low                                                       10

                                                                          8
            8

Benefits    6
                                                               Benefits    6

                                                                           4
            4
                                                                           2
            2
                                                                           0
            0                                                                  Structured
                Structured
                                                Unstructured                                       Unstructured
                             Procurement type                        Procurement type

                        (a) Process complexity = low                                 (b) Process complexity = high

           • At low complexity, change in centralization has a greater
             impact on unstructured procurement and almost no impact on
             structured procurement (as seen in the decreasing needs for
             computer central store)
           • For more complex processes, neither the procurement type
             nor the change in centralization has any significant impact on
             the level of benefits
           Effects of Complexity+Fragmentation

                                                                                                                                                  10
                                                                 10
                                                                                                                                                  8
                                                                8
                                                                                                                                                  6
                                                                6                                                                                     Benefits
                                                                      Benefits                                                                4
                                                             4
                                                                                                                                              2
         High                                               2                       High                                                      0
                                                            0                                                                          Unstructured
                                                         Unstructured
                                                                                 Fragmentation
      Fragmentation
                                               Procurement type                                    Low                     Procurement type
                      Low
                                 Structured                                                                   Structured




                (a) Process complexity = low                                                     (b) Process complexity = high




• When the process complexity is low, the Web benefits are
  significantly affected by the type of procurement, but not by
  the fragmentation
• When the process complexity is high, the Web benefits are
  significantly affected by fragmentation in the supply chain, but
  not by the type of procurement (e.g., specialized machine tools)
  Empirical Studies Economic Analysis 
           eProcurement Strategy
Observation: One user dealing with unplanned
procurement spent 80% of her time in resolving errors
and mismatches, while another user dealing with
planned procurement spent less than 20% of her time
in error resolution
Analysis results:A Web-based procurement system is
of more value to the first type of user than the second
Observation: A procurement manager at a large
manufacturing facility was not convinced of the benefits
of Web-based procurement as the existing processes
were very streamlined and efficient
Analysis results: The value of Web-based
procurement for this business unit lies in Web-enabling
complex procurement dealing with fragmented supply
chain, not by Web-enabling the planned processes
 (A) Web-based Procurement Systems              (B) E-Marketplaces

  Supplier 1                  Supplier 2         Supplier 1                    Supplier 2


                                                              E-Marketplaces


  Buyer 1                                         Buyer 1                       Buyer 2
                              Buyer 2
 (C) Private Exchanges                          (D) Aggregators
  Supplier 1                  Supplier 2         Supplier 1                    Supplier 2


Private Exchange             Private Exchange                     Aggregator


  Buyer 1                     Buyer 2             Buyer 1                       Buyer 2
           Transformations
B2B process
  Key business processes are centralized for better
  visibility and control, while end-user services are
  decentralized for more personalized experience
Organizational roles
  Some administrative and logistics support
  functions are eliminated
  Corporate B2B function is transformed from
  administrative/operational role to
  consultative/strategic role
The values of eProcurement vary, affected by
Product, process, and organizational
characteristics

				
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