INTELLIGENT BUSINESS OPERATIONS

IMPACT OF INTERNET-BASED E-COMMERCE ON MANUFACTURING AND BUSINESS OPERATIONS Fawzy SOLIMAN and Ergun GIDE School of Management University of Technology, Sydney, AUSTRALIA ABSTRACT
The current dynamic and turbulent business environment and the approaching 21st century have put pressure on business operations all around the world to change traditional methods of conducting business to Internet-Based Electronic Commerce (or Internet Commerce). The development of Internet-Based E-Commerce offers the most exciting business opportunities in the marketplace. Organisations that want to stay in business beyond to the turn of the century must re-evaluate every aspect of their strategy and operations and incorporate these technological changes. Internet-Based Electronic Commerce is essential for the survival of companies entering a virtual distribution marketplace.
Electronic Commerce has been an idealised trading concept for many years. But the lack of integrated applications and the unavailability of universally accepted methods of communication have been a constant plague. As the Internet develops there is every possibility that e-mail and applications-based technologies will take over from traditional telephony as the common method of communications. Furthermore, the Internet provides an unprecedented infrastructure for moving information. This will have immense repercussions within the commercial world.
The real key to making electronic commerce over the Internet a normal, everyday business activity is the convergence of the telecommunications, content/media and software industries. The business-to-business and business-to-customer segments of E-Commerce contain both common and differing characteristics that must be understood to succeed in a given implementation.
This study is an attempt to analyse the benefits and drawbacks of the Internet-Based E-commerce and its possible applications for the business operations in the future. Accordingly this paper offers an overview and highlights the benefits from using Electronic Commerce over the Internet as a tool for future manufacturing and business operations.

INTRODUCTION
The application of Internet-Based Electronic Commerce in manufacturing is currently receiving a worldwide attention because of its promise of reducing the manufacturing costs and just-in-time (JIT) applications (Cronin, 1996).
The Internet-Based Electronic Commerce is rapidly emerging as an entirely new method to conduct business and to interact with customers, suppliers and partners. Electronic Commerce (E-Commerce) covers many aspects of buying/selling relationships. E-Commerce also covers many operations within production processes.
According to the inaugural report from Forrester Research’s Business Trade & Technology Strategies service, the value of goods and services traded between companies over the Internet is expected to skyrocket from $8 billion this year to $327 billion in the year 2002. In quantifying the potential of Internet commerce, Forrester researched the electronic commerce plans of 150 companies covering 12 major industrial categories. In-depth interviews were then conducted with executives at 63 of the businesses found to be actively trading goods and services over the Internet. Additionally, executives at 25 major suppliers of the Internet commerce software, services, and system integration providers were interviewed.
According to the same report, businesses are aggressively adopting inter-company trade over the Internet because they want to cut costs, reduce order-processing time, and improve information flow. For most firms, the rise in trade over the Internet also coincides with a marked decrease in telephone and facsimile use, allowing salespeople to concentrate on pro-actively managing customers’ accounts rather than serving as information givers and order takers.
A number of dominant industries have jumped on the Internet bandwagon. Examples are: the IT industry, publishers, retailers, banks and financial institutions, airlines and others. The following table (Table 1) highlights just a few of the thousands of examples.

Table 1: Examples of businesses using the Internet-Based E-Commerce

Business	Application of Internet-Based E-Commerce
Airlines	Over a hundred airlines have created Web sites and are actually receiving orders for tickets.
Banks	There are more than 140 banks on the Web from 26 countries.
Media & Publishing	Many publishing houses have developed Web versions of traditional print media, and entirely new Electronic Magazines “e-zines”.
Retail	Many retailers are now marketing on the Web with hundreds of on-line products and services are offered.

E- COMMERCE OVER THE INTERNET
Electronic Commerce over the Internet is very much in its infancy. A limited number of pilots to provide a trading scenario have taken place in the US. These pilot projects involve EDI (Electronic Data Interchange) messages being encapsulated in e-mail messages. The following figure (Figure 1) is an illustration of the E-Commerce Framework Model.

Figure 1: A Model of Internet-Based E-Commerce in Manufacturing.

Electronic trading opportunities offer businesses the chance to compete for an international scale. These Electronic Trading Opportunities, are being expanded to Web sites and many trading forums emerging.

There has been phenomenal growth in commercial presence on the Internet in recent times. In the last 2 years the commercial domain registrations on the entire Internet have grown to represent some 85% of all organisations. This effectively kills the myth that the Internet is an academic and research playground. Facts and figures from industry analysis show that:

Internet-Based E-Commerce is expected to reach $150 billion by the year 2000 and more than $1 trillion by the year 2010;

Sales generated via the Web have grown from $17.6 million in 1994 to nearly $400 million in 1995 (a growth rate of over 2100%);
The number of sites using the Internet for product transactions has increased from 14% in 1995 to 34% in 1996 and to a projected increase of 44% in the next 3 years.

The Internet has reduced the number of letters, voice calls and faxes around the globe. Thirty per cent of Internet users in one survey stated that Internet usage had resulted in new business opportunities and 43% said that it has increased productivity.

INTERNET-BASED E-COMMERCE AND TRADITIONAL EDITION

Internet-Based E-Commerce is giving a new way to electronic commerce, with different characteristics than traditional EDI. Internet Commerce is not a repeat of EDI, but rather is an evolution from the EDI.
The Internet offers the greatest potential for Electronic Commerce known to date. According to Steel (1996) "there are less than 100,000 EDI (Electronic Data Interchange) users world-wide after 40 years or so of endeavour".
There is no exact definition of the Internet-Based E-Commerce. Since, Internet commerce is still immature, so is the definition. However, one definition made by Kalakota (1996), as “the process of converting digital inputs into value-added outputs”. Basically, this process involves taking information as raw material and producing value added information-based products or services out of the original raw information as shown in the following figure (Figure 2).

Figure 2: Illustration of the process of adding value to information in a manufacturing setting using the Internet-Based E-Commerce.

The above figure shows that the two models (Physical and Conceptual Models) in a manufacturing setting are similar. In the Physical Model raw material enters the system and leaves as finished goods. In manufacturing the raw material and converting into finished products, the Internet-Based E-Commerce is used through two platforms (User and Security Platforms). In the Conceptual Model raw information is entered in the system and leaves as processed information.
So, electronic commerce refers to an on-line production process owned by intermediaries. Producers of information interact with services and other processed information, such as orders, payments or instructions.
In reality, Internet Commerce is about businesses and consumers adopting a new process or methodology in dealing with each other. These processes are in essence supported by electronic interactions that replace close physical presence requirements or other traditional means. The following table (Table 2) summarises the fundamental differences between traditional E-Commerce (EDI) and the Internet-Based E-Commerce.

Table 2: Traditional E-Commerce (EDI) and the Internet-Based E-Commerce (Adopted from Mougayar, 1997).

FACTORS	Traditional E-Commerce (EDI)	Internet-Based E-Commerce
Implementation dynamics	Proposition is biased towards a predetermined relationship, otherwise the transaction can’t happen.	Customers decide and initiate the request to buy in a one-to-many relationship.
Business case	Users develop transaction capabilities only after they know there is a market or willingness to use the channel.	Users develop content and make it ready for a critical mass of buyers to get connected.
Financial transactions	Financial transactions can take place over existing networks.	Internet gateways to financial networks, new instruments and micro-payments.
Effect on business processes	Any transaction done has a direct effect on internal business processes.	Transactions mirror reality or they should dramatically simplify a business process.
Frequency of transactions	Smaller frequency, but higher dollar value per transaction.	Mass market, infrequent usage and lower dollar value per transaction are acceptable.
Choice of products	Comparison-shopping is excluded.	Comparison-shopping is essential.
Level of trust	High.	Low to medium.
Duration of relationship	Long.	Short to medium.
Cost	Higher.	Lower.
Reliability	Higher.	Lower (but getting better).
Flexibility	Lower.	Higher.
Effect on distribution channels	No conflict of distribution channel due to primary focus on uniqueness of transactions.	Channel conflict on line, as the transaction becomes the “back end”, and the consumer interface becomes the “front end”.

BUSINESS VALUE OF E-COMMERCE
According to Mougayar (1997) there are various types of key measurements that must be tracked prior to embarking on a full implementation. Some of the important key elements to measure business value are:

Reducing costs: The most basic cost reductions could be related to publishing costs, which include the cost of production, printing and distribution. Furthermore, marketing and selling costs are also lower in an electronically enabled commerce environment.
Process simplification: Instead of using paper, using the World Wide Web (WWW) simplifies and speeds the approval process.
Improving customer service: Providing customers self-access to their accounts, transactions and orders, is a valuable service. The level of satisfaction for those customers interacting electronically will undoubtedly rise.
Generating new revenue: The new Internet-Based Electronic Marketplace generates new revenue by selling new products and services specifically designed for the electronic marketplace. Existing product or services can also be sold on the Internet.
Taking faster decisions: By receiving information about competition through an Intranet information retrieval database, it would be possible to develop a competitive strategy much faster than otherwise.

CURRENT CHALLENGES TO INTERNET-BASED E-COMMERCE

There are two main drawbacks or challenges in using Internet-Based E-commerce, these are: security issues and payment tools. These two issues are receiving the highest priority and the best attention they deserve, both from vendors and users and implementers.

Security Issues: A recent Forrester Research report found that security, has fallen from first place in 1995 to fifth place in 1996. This indicates that there is a growing confidence in solving the Internet security issues that have been very widely publicised. Even though security is a challenge it is not a barrier to E-Commerce. Security is fairly new to the Internet, so it has not matured yet. However, computer security professionals have known about the Internet security for years and are now improving it.
Payment Tools: There is confusion over the availability and choice of Internet payments tools. In addition, there are no interoperability standards to make one work with another. Over the past two years, new payment tools from small companies have emerged.

There are many traditional methods of payment are available in the real world such as: Cash, Cheques, Credit Cards, Traveller’s Cheques, Prepaid Cards, Debit Cards, Physical Tokens, Bank Notes, Secure Wire Transfers, Money Orders, Letters of Credit, etc. However, none of these mechanisms is directly transferable in an unmodified form to suit the Internet. This is because each method assumes a physical presence or that there is a delay incurred in the processing of funds so that fraud can be detected and stopped.
Some of the new E-Commerce payment tools that can be used in manufacturing and business operations are:

Digital Cash (Electronic Cash)- It is a token-based currency which translates into equivalent real currency units that are guaranteed by a bank. Usually, there is a trusted authority that allows the user to conduct and pay for transactions of this nature. This usually takes place after a pre-determined relationship has been established (eg DigiCash).
Smart Cards- Smart Cards can be used with or without a stored value. Usually, the user is able to pay with them without having to connect to a remote system. If they have a stored value which contains “real digital cash”, they are known as “Cash Cards” because they replace carrying cash (eg Mondex).
Electronic Cheques- These are the equivalent of paper based cheques. They are initiated during an on-screen dialog which results in the payment transaction. Authentication and verification are usually performed instantaneously by using digital signatures and time-stamping controls during the transaction (eg CheckFree).
Encrypted Credit Cards- There are varying degrees of encryption implementations credit of credit cards over the Internet, with the SET (Secure Electronic Transactions) holding the most promise (eg CyberCash).

The drivers for manufacturing are customer’s needs and time. Time is a major source of competitive advantage and competitive pressures requiring production schedules to be shortened.

Soliman (1997) demonstrated that if the various departments working in disjointed way were integrated it would lead to:

Reduction in scrap levels, and reworks.
Improving communication between the various parts of the organisation.
Improving vendors' selection method.
Reduction in the Lead Times of parts used.
Reduction in Manufacturing Costs.
Reduction in Inventory Levels.

This integration is possible by the implementation of the Internet-Based E-Commerce.

INTERNET BASED E-COMMERCE BENEFITS TO MANUFACTURING

To date the major benefits from the Internet include improved internal and external communications. The Web has specifically brought a new marketing medium and enhanced information resource. Innovative applications are starting to appear which allow for sales and database interrogation. Other benefits such as e-mail and file transfer functionality, Web utilisation gave many companies 'Internet presence' and provided them with opportunities to develop and expand new services.

In manufacturing, traditionally Design Engineering, Procurement and Production Departments communicate with each other using paper based methods. However the introduction of Internet–Based E-Commerce and its superiority of over traditional EDI is adding new dimension to reducing the cost of manufacturing.
In a typical manufacturing setting Design Engineering Department supply design drawings and specification to Procurement Department to procure material, commence production, and ultimately deliver goods to customers as per orders. There are three types of flows in a general manufacturing setting. These are:

Material flow (examples are raw material from supplier, Work-In-Process and Finished Goods);
Clerical flow (examples are Drawings, Specifications and Bills Of Materials); and
Information flow (examples are information on parts, suppliers, customers and the industry).

Improvement in the movement of raw material, Work-In-Process and Finished Goods is likely to occur as a result of using the Internet-Based E-Commerce. The main benefit to manufacturing lies in using the Internet for the second and third types of flow. The following figure (Figure 3) illustrates how clerical and production information can be efficiently communicated throughout the supply chain using the Internet-Based E-Commerce. Figure 3: Supply Chain Communication in Manufacturing using Internet-Based E-Commerce.

The number of parts used in production could be in the order of thousands of items. These parts are usually purchased from suppliers on the basis of price, quality, and delivery on time and suppliers financial position and reputation in the industry.
Accordingly Material Procurement professionals must be equipped with timely and valuable information on parts and their suppliers. The Internet-Based E-Commerce provides them with a fast and efficient way of obtaining comprehensive information of the market, feedback from the industry and the performance of suppliers.
The reduction in time and costs in the whole manufacturing chain make it possible to gain competitive advantages in price, product innovation and service. Accordingly using Internet-Based E-Commerce is a significant factor in competition because it leads to shorter Opportunity to Delivery (OtoD) cycle times and lower costs.
The British Government's Department of Trade & Industry has recently launched the Information Society Initiative site containing some case studies of multimedia and Internet usage from around the UK. The following table (Table 3) shows excerpts from those case studies: Table 3: Examples of Internet-Based E-Commerce.

Case	Benefits from using Internet-Based E-Commerce
Fertiliser producer	Received over 2,000 hits (page accesses) at their Web site every week, as well as communicating far more effectively via e-mail.
Ornament manufacturer	Has cut development time of products from 3 weeks to less than an hour through using the Internet to exchange design graphics and video images.
Bakery	Received 12,000 hits in the first 6 months of Web marketing. Revenue from the Web runs at about 140 Pounds per week which is fairly profitable considering post set-up running costs are 2.50 Pounds per week.

THE FUTURE OF INTERNET-BASED E-COMMERCE
Information Technology is developing so rapidly that it is difficult to predict correctly the future of Internet-based E-Commerce. However, expert predictions show that Internet-Based E-Commerce will dramatically change the way of conducting business in the near future. The early the firms adopt the Internet-Based E-Commerce, the more likely they will survive and compete with their rivals.
Over the next ten years, the growth of Internet-Based E-Commerce will outstrip the growth of traditional commerce. It is the commercialisation of the Internet that is leading the way to this remarkable growth in E-purchases. The Internet serves as a foundation for all of these new opportunities in commerce. The following table (Table 4) shows the projected growth of E-commerce purchases over the period 1994-2005.

Table 4: Projected growth of E-Commerce purchases in Billions of Dollars. (Adapted from Lynch,1996).

	1994	Estimate
	1994	2000	2005
Traditional Commerce	$5,150	$8,500	$12,000
Electronic Commerce	$245	$1,650	$2,950
Proportion of all purchases	4.5%	16.2%	19.7%

With Internet Commerce already headed for $8 billion in 1997, up 1,000% from 1996, Forrester looked at which industries are at the centre of the dramatic growth. Three different company types were identified as shown in the following table (Table 5).

Table 5: Percentage distribution of usage of Internet-Based E-Commerce within three industries.

Industry Type	1997 % Sales	1997 $Billion
Manufacturers of electronics and aeroplane parts	37.5%	3
Vendors of computer-related and office supplies	37.5%	3
Services and utilities providers	25%	2
Total	100%	8

It is clear from the above table that manufacturing is emerging as one of the main users of the Internet-Based E-Commerce.
According to the Internet marketing research firm ActivMedia (1997) projections indicate that global Web sales through 2002 could total $1.5 trillion, or about 3% of combined Gross Domestic Product (GDP) for all countries worldwide. The study tracked the following eight Web business segments: manufacturing, computers and software, business and professional, consumer, travel, investment/finance, publishing, and real estate. In addition the market research firm Paul Kagan and Associates released 10-year revenue projections for the interactive media industry, showing that in the year 2007, the Internet-related income is expected to be $46 billion, having risen from a projected $11.1 billion for 1997. Electronic Commerce, revenue is expected to increase from $0.9 billion in 1997 to $11.7 billion over the next 10 years.

CONCLUSIONS
Success in Internet-Based Electronic Commerce depends on how organisations strategically position their products and services through other Internet-based electronic communities and intermediaries, as well as on how they facilitate the interactions with their customers, suppliers, and partners.
Commerce over the Internet is very much in the early stages. Early indications are that (Electronic Data Interchange) EDI-over-the-Internet is a viable trading medium. The problems of cost, standards and a lack of interactivity will prohibit traditional batch-EDI scenarios.
Internet-Based E-Commerce is not an extension of EDI (Electronic Data Interchange) which has been primarily limited to computer-to-computer transactions, and has not been associated with major transformations of firms. Firms have to break new ground in Internet territory, in order to capture emerging digital markets or global Internet markets.
Even though E-Commerce makes sense theoretically for business activities, the reality is that it has to integrate with internal and external processes that are already in place. Sometimes, this integration is a challenge linked to a major re-engineering exercise accompanied by resistance to change. This is a threat, and at the same time an opportunity waiting for a positive outcome. Moreover, since E-Commerce implementation is in many cases evolutionary, organisations need to react to change the business process as demand increases.
Despite these benefits and success stories a number of issues remain to be resolved such as security. It is believed that this concern regarding security will be lessened due to a series of international developments.
Other issues regarding the growth of the Internet are the lack of: a public key infrastructure (particularly for international trade), governmental stance, access, reliability (service levels), integrated applications and understanding/awareness of the Internet-Based E- Commerce capabilities, and finally the relative cost of required technologies.

ABBREVIATIONS

EDI Electronic Data Interchange.
GDP Gross Domestic Product.
IT Information Technology.

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