Ecommerce And Its Impact On Operations Management

2. LITERATURE REVIEW

2.1 Theoretical Background

The new digital economy and electronic business are developing so quickly that it is hard for anyone to keep abreast. At the end of 2015, more than 3 billion people around the world were connected to the Internet, and the statistics continue to show a steady growth.

Many people now use the Internet for everything from doing homework, downloading games or reading books, to buying and selling stocks, or bidding in an auction. The Internet and wireless technologies provide individuals with better access to timely information, the means to publish their views to an international audience and greater capacity to form alliances.

Regarding the business world, the Cyberspace is fundamentally changing the way companies conduct businesses, providing unlimited options and opportunities for both companies and customers. Many industries are using the Internet and many others are just identifying the need to do so to remain competitive in the cost and the overall service they offer compared to their competitors. The focus is not on one industry, but rather on the benefits businesses have derived from using the Internet to be able to better serve their customers.

By easing and speeding the exchange of real-time information, the Cyberspace enables companies to increase the visibility of their offerings, support product and service customization, enhance sales force automation, and reduce operational costs. On the other hand, the Internet facilitates disintermediation-direct sale to the final customers, allowing them to locate the products and services they need, conduct quick online comparisons and interact in digital communities to exchange ideas and compare experiences.

The fast evolution and adoption of Internet has introduced the concept of “electronic commerce” (e-commerce) or “electronic business” to market transactions. In order to stay competitive, companies are forced to re-examine their traditional methods of conducting business to meet the increasing sophistication of new technologies. One way to do so is by creating and implementing an e-commerce strategy.

2.2 Definition of e-commerce and its major elements

“Commerce is a basic economic activity involving trading or the buying and selling of goods. The earliest example of e-commerce is electronic funds transfer where allows financial institutions to transfer funds between one another in a secure and efficient manner.”

Beginning in 2003, electronic commerce began to show signs of new life. As the economy grew, e-commerce also grew, but at a more rapid pace. Thus, e-commerce gradually became a larger part of the total economy.

Fig. 2.2.1 Traditional Commerce vs. E-commerce

“E-commerce is the exchange transactions which take place over the Internet primarily using digital technology. These exchange transactions include buying, selling, or trading goods, services, and information. This encompasses all activities supporting market transactions including marketing, customer support, delivery and payment.”

In other words, e-commerce represents the process of trading goods and information among various entities in order to satisfy an organizational or individual objective. The scope of EC (i.e., e-commerce), sometimes referred to as electronic trading, is to allow companies to streamline their business processes, expand their marketplace and enhance customer service.

According to Kalakota and Whinston, e-commerce can be defined from four perspectives:

“Communication perspective – EC is the deliverer of information, products/services or payments over telephone lines, computer networks or any other electronic means;

Business process perspective – EC is the application of technology towards the automation of business transactions and work flows;

Service perspective – EC is a tool that addresses the desire of firms, consumers and management to cut service costs while improving the quality of goods and increasing the speed of service delivery;

Online perspective – EC provides the capacity to buy and sell products and information on the Internet as well as other online services.”

Electronic commerce also describes a broad range of technologies and operations that are now available to boost the effectiveness of trading relationships. At the application level, typical technologies would include: fax, telephone, EDI, electronic mail, electronic funds transfer, and the Internet – web-based solution.

Electronic mail (E-mail)

“Electronic mail is the exchange of computer-created and computer-stored messages via a telecommunications network. E-mail was one of the first uses of the Internet and is still the most popular Internet use – a large percentage of Internet traffic is e-mail.”

When talking about e-mail, individuals are mainly linking it with the action of sending a message. However, it really represents only one aspect of messaging – interpersonal messaging (IPM), which is the exchange of text messages and attachments among subjects.

By establishing itself as a fast and cost-effective mean of communication, e-mail soon became the first choice among individuals who wanted to share thoughts and experiences with their loved-ones, regardless of the geographic location. It has also revolutionized the e-working area, enhancing intra-company communication and the coordination with business partners and suppliers across boundaries of time and space.

However, email has several downfalls to go along with its benefits, one of them being the e-mail volume that can be so great that it inhibits productivity rather than enhancing it. Under such conditions, groupware becomes a viable option to facilitate electronic interaction among groups of people who must communicate to accomplish group tasks.

Electronic Data Interchange (EDI)

Transacting regular business via e-mail has its limitations. Beyond a certain traffic volume, EDI becomes a preferred alternative. “Electronic Data Interchange may be defined as the transmission of business data in a structured, electronic format from a computer application in one business to a computer application in another”.

EDI is an important subset of e-commerce and it can occur between computers if each of them can accept a specific data format. An EDI system gets data from an application and converts them into one format specified by the EDI protocol. The data are processed and delivered according to the agreed standard, with no human intervention.

The major benefits of this technology are realized when EDI is integrated into a company’s EC system. Researchers claim that EDI can facilitate exchange of information, eliminate errors and language barriers, foster Just-In-Time management, and reduce operational costs. EDI systems have reported general advantages of expedited purchasing processes, reduced labour costs and inventories and overall improved service.

Internet and Electronic Commerce

As mentioned above, e-commerce is simply a vehicle for obtaining goods and services via the Internet. It includes all aspects of trading, from commercial market making, until ordering, supply chain management and funds transfer.

Electronic trading opportunities offer companies the chance to expand their contract cycle, negotiate new contracts, reach new customers and ultimately compete for a global scale. The capabilities provided by a web-based e-commerce system will significantly improve the productivity and competitiveness of any company, whether it is a large or a small-medium seized one. Besides helping companies to gain access to worldwide markets, web-based e-commerce also enables organizations to shorten procurement cycles through the use of on-line catalogues, ordering and payment, and reduce costs on both stock and manufactured parts through competitive bidding.

Due to its major benefits and a combination of technological innovation and regulatory reform, e-commerce soon became a successful business model. Facts and figures from industry analysis show that:

Global retail e-commerce sales reached 1.671 trillion dollars in 2015, accounting 7.4% of total retail spending. By 2019, online sales are expected to double to 3.578 trillion dollars, making up 12.8% of total retail spending.

Fig. 2.2.2 Retail E-commerce Sales Worldwide

The largest retail e-commerce market by region is Asia-Pacific, with sales amounted to 877 billion dollars in 2015, making up for more than half of global sales. One of the biggest players on the market is China’s Alibaba, who recorded 14.3 billion dollars in sales on 11th November 2015.

1.46 billion internet users (aged 14 and older), accounting 51.5% internet users worldwide and 24.3% of the population, made at least one purchase via a digital channel in 2015.

Fig. 2.2.3 Digital Buyers Worldwide by Region

2.3 Need for e-commerce

Today more and more companies become interested in e-commerce as one of the instruments for business efficiency improvement. E-commerce is no longer treated as only a marketing instrument. It becomes an important part of business performance that can generate significant additional value for company and other subjects in the value-added chain.

The need of e-commerce occurs throughout the entire organization, across all the departments. Studies reveal that effective e-commerce implementation help companies to provide faster delivery, lower administration costs, and increase revenue.

Benefits of implementing e-commerce

The benefits of the companies that succeed in e-commerce market are compelling. The cost areas are significantly reduced through the implementation of e-commerce, and the customer service is improved.

The most significant advantages for the companies are reduction in inventories, by electronically linking the suppliers and buyers, reduced production cycle time, since the production teams share designs and functional requirements over the web, and better customization of products or services. Also, less time spent on paperwork, phone calls and faxes. According to a Forrester Research study, “web service costs companies just 0.4 dollars per customer on average for a simple Web page query vs. 1.44 dollars per phone call”. The researchers note that e-commerce not only saves companies money but also increase convenience for their customers.

E-commerce applications provide great opportunities for customers as well. Since they are no longer geographically constrained to reach a specific item, end-users can now choose from a large product portfolio. Take as an example Amazon’s wide range of products. Even though it started as an online bookstore, today Amazon sells DVDs, audio books, video games, furniture, apparel, toys and jewelry.

The main advantages e-commerce offers to customers are competitive prices, greater customization in the delivery of services and virtual auctions. For example, on eBay registered users can participate in live auction events and place bids, hoping to win the item they are bidding for.

Limitations of e-commerce

Counterbalancing its many benefits, electronic commerce has some limitations which have slowed its growth and acceptance.

The disadvantages from the business viewpoint include extra expense and expertise for e-commerce infrastructure, needs for expanded reverse logistics and constant upkeep. In order to make sure their systems work properly, owners have to invest money in the platform development, hire a professional and be ready to upgrade technology.

Although buying online is convenient, there are also some drawbacks customers have to consider when using e-commerce platforms. The main disadvantages include security issues, as credit card information is very sensitive, and there are high chances of scams over the Internet, hidden costs and delay in receiving the goods.

2.4 Business Models of E-commerce

In the digital age, organizations are changing their operations throughout the world. They are flattening hierarchical structures, eradicating the barriers between divisions and creating new business models to meet their customers’ needs.

The different types of e-commerce business models are business to business (B2B), business to consumer (B2C), consumer to business (C2B), consumer to consumer (C2C), intra-commerce, government to citizen (G2C) and mobile commerce.

Business to Business

B2B e-commerce refers to online transactions between companies, such as a manufacturer and a wholesaler. Due to the organizational systems integration, these online operations occur with minimum human intervention.

Since the advent of the web, companies have invested massively in B2B e-commerce to stay competitive on the market. A new analysis reveals that “B2B e-commerce sales are forecasted to reach 6.7 trillion dollars by 2020. This growth will be led by China, a country projected to be the largest online B2B market in the world by 2020, with approximately $2.1 trillion in sales.”

An example of a B2B platform is Global Sources; a Hong-Kong media company which facilitates trade from China to the world and vice-versa.

The B2B market has two main components: e-frastructure and e-markets.

E-frastructure is the architecture of B2B, primarily consisting of logistics, application service providers who help in deployment and hosting, auction solutions software and content management software.

E-markets are web sites where sellers and buyers interact with each other and conduct online transactions.

Business to Consumer (B2C)

B2C model encompasses all the online transactions in which organizations offer products or services to consumers. At its core, B2C involves marketing and selling goods to the consumer without the help of intermediaries. This business model brings major benefits to SMSs (i.e., small and medium sized companies) because it saves them from factoring in the additional cost of a physical distribution network.

According to an eMarketer’s forecast, business to consumer sales worldwide will increase by 14.8% in 2017, accounting 2.357 trillion dollars.

One of the most successful B2C platforms is Amazon.com, the online bookseller launched in 1995. Another popular B2C e-commerce is Dell.com, who sells laptops online to customers.

Consumer to business (C2B)

“C2B e-commerce is a business model in which consumers (individuals) offer products and services to companies and the companies buy them.” Depending on the area, “the consumer” can be a photographer or a designer offering images to companies by selling them through a platform like Fotolia.

Consumer to Consumer (C2C)

This business model refers to transactions between private individuals or consumers via a third party intermediary. Good examples of this e-commerce type are online auction portals like eBay and Craiglist which allow real-time bidding on a wide range of products.

Intra-commerce

In this case a company uses e-commerce internally to improve its operations. A special case of this is known as B2E commerce which allows companies to provide products and services to their employees.

Government to citizen (G2C)

In this type the government provides services to its citizens via EC systems. Governments can do online transactions with other governments (G2G) as well as with businesses (G2B).

Mobile commerce (m-commerce)

Mobile commerce is resulting from the convergence of two of the fastest growing industries the Internet and mobile communications markets.

“The distinction between electronic commerce and mobile commerce is becoming blurred as the capabilities of the mobile devices become more sophisticated. In addition, m-commerce offers extra functionalities such as location, localization services and personal mobile support.”

2.5 Major players on the global market

In the past ten years, the growth of web-based e-commerce outstripped the growth of traditional commerce, fueling the emergence of new brands on the market. The global top ten e-commerce companies in terms of revenue include B2C platforms and EC marketplaces. The leading company in terms of generated revenue in 2014 was Amazon Inc, accounting 88.99 billion dollars. In second place with 18.5 billion dollars sales is Chinese B2C E-Commerce merchant JD.com Inc. eBay and the American retailer Wal-Mart rank next. The Chinese marketplace Alibaba makes the last place in the top 5 with 8.75 billion dollars revenue. The German multichannel merchant Otto Group is number six on the list. Ranking below are British groceries retailer Tesco, Japanese giant Rakuten, American marketplace Groupon and UK-based fashion retailer Asos.

Fig.2.5.1 Leading e-commerce companies

2.3 Operations Management

2.3.1 What is Operations Management?

Operations Management represents the design, operations and continued improvement of the system that creates and delivers a firm’s products and services. It is viewed primarily as a part of the organization, which conducts and controls the transformation processes of a range of inputs into the required outputs.

Joseph G. Monks defines operations management as “the process whereby resources, flowing within a defined system, are combined and transformed by a controlled manner to add value in accordance with policies communicated by management.” Therefore, operations management uses and converts resources within a system into valuable outputs, such as goods and services.

Resources are the human, material and capital inputs to the production process. Human resources, such as labor and management, are the key assets of any company. Material resources are the raw materials supplied by nature, such as wood, metals and glass (which comes from sand), whilst capital resources include cash, lines of credits, bridge loans and other saleable assets.

The system is the arrangement of components designed to achieve objectives according to the plan. A business system is divided in many subsystems such as personnel, finance, and engineering, which will help the organization to work properly.

The scope of combining resources under controlled conditions is to convert them into products and services with greater value than the original inputs. The conversion process applied will be in the form of technology to the inputs. The impact of the resources in the transformation process will be known as operational efficiency. In the business context, operational efficiency refers to the ration between the inputs to run an operation and the output gained from it.

The person who is in charge of improving the transformation efficiency and increasing the ratio is the operation manager.

Fig.2.3.1.1 Schematic model for operations

2.3.2 People in Operations

Operations management is often seen as a subject that focuses all the attention upon non-human parts of the organization, such technology, systems, procedures and facilities. This is not true. On the contrary, the manner in which a company’s human resources are managed has a great impact on the effectiveness of business operations.

People who lead the operations department are called operations managers. Their role is to assure the production of a quality good and/or service. In other words, operations managers come up with ideas to increase business efficiency and reduce costs, control and forecast demand, assure a safe workplace for all employees, and, when possible, assist in assuring high quality customer service.

Slack, Chambers and Johnston define operations managers as “the people who have particular responsibility for managing some, or all, of the resources which compose the operations function. In some organizations the operations manager could be called by some other name. For example, he or she might be called the ‘fleet manager’ in a distribution company, the ‘administrative manager’ in a hospital, or the ‘store manager’ in a supermarket.”

Besides controlling resources and designing the working environment, operations managers have to determine which products are bought and sold, set their prices and decide to whom they will be marketed.

2.3.3 Operations in the organization

Companies regardless of their type (private, government, non-for-profit), size or financial position, they all are devoted to producing good or providing services. Their goals, products, and services may be alike or quite different. Nonetheless, their functions, and the way they operate are similar.

Each business organization has three core functions: marketing, finance and operations. These three functions, and other supporting functions, perform different but related activities necessary for the operation of the organization.

The marketing function works to find and create demand for the company’s goods and services by understanding customer needs and developing new markets. The operations function is responsible for performing all the activities related to producing goods and providing services. “The need for marketing and operations to work closely together is particularly important as the marketing function will provide the forecast of demand from which operations can plan sufficient capacity in order to deliver goods and services on time”. The finance function is responsible for securing financial resources at favourable prices and allocating those resources throughout the organization.

In addition, each company has some support functions to facilitate the working of the core functions, such as the accounting and logistics function, the personnel and the design function.

2.3.4 Supply Chain Planning and Control