Chapter 10 Payments and Order Fulfillment

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Chapter 10Payments and Order Fulfillment
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Learning Objectives

• Understand the crucial factors determining the
  success of e-payment methods
• Describe the key elements in securing an
• e-payment
• Discuss the players and processes involved in
  using credit cards online
• Describe the uses and benefits of purchase cards

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Learning Objectives (cont.)

• Describe different categories and potential uses
  of smart cards
• Discuss various online alternatives to credit
  card payments and identify under what
  circumstances they are best used
• Describe the processes and parties involved in
  e-checking

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Learning Objectives (cont.)

• Describe the role of order fulfillment and
  back-office operations in EC
• Describe the EC order fulfillment process.
• Describe the major problems of EC order
  fulfillment
• Describe various solutions to EC order
  fulfillment problems

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LensDoc Organizes Payment Online

• The Problem
• LensDoconline retailer of contact lenses, sun
  and magnifying glasses
• Dental care and personal care products
• Customers pay by credit card (90 of all online
  purchases in the U.S.)
• Easy to purchase
• Easy to purchase fraudulently
• Contact lenses cannot be returned once used, but
  unsatisfied customers want their money back

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LensDoc (cont.)

• Solutions
• Process credit card purchases by hand
• Require
• Home address
• Shipping address
• Assumption is that if the card being used is a
  fraudulent one, the perpetrator is unlikely to
  know the cardholders address

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LensDoc (cont.)

• The Results
• Investigating alternative methods of payment
• Cash cards
• Special card-swiping peripherals
• Credit card processing services
• Currently disadvantages outweigh advantages of
  any of these alternatives

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Electronic Payments

• Paying with credit cards online
• Until recently consumers were extremely reluctant
  to use their credit card numbers on the Web
• This is changing because
• Many of people who will be on the Internet in
  2004 have not even had their first Web experience
  today
• 85 of the transactions that occur on the Web are
  B2B rather than B2C (credit cards are rarely used
  in B2B transactions)

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Electronic Payments (cont.)

• Four parties involved in e-payments
• Issuer
• Customers must obtain e-payment accounts from an
  issuer
• Issuers are usually involved in authenticating a
  transaction and approving the amount involved
• Customer/payer/buyer
• Merchant/payee/seller
• Regulator

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Electronic Payments (cont.)

• Key issue of trust must be addressed
• PAIN
• Privacy
• Authentication and authorization
• Integrity
• Nonrepudiation

• Characteristics of successful e-payment methods
• Independence
• Interoperability and portability
• Security
• Anonymity
• Divisibility
• Ease of use
• Transaction fees

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Security for E-Payments

• Public key infrastructure (PKI)a scheme for
  securing e-payments using public key encryption
  and various technical components
• Foundation of a number of network applications
• Supply chain management
• Virtual private networks
• Secure e-mail
• Intranet applications

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Security for E-Payments

• Public key encryption
• Encryption (cryptography)the process of
  scrambling (encrypting) a message in such a way
  that it is difficult, expensive, or time
  consuming for an unauthorized person to
  unscramble (decrypt) it

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Security for E-Payments (cont.)

• All encryption has four basic parts
• Plaintextan unencrypted message in
  human-readable form
• Ciphertexta plaintext message after it has been
  encrypted into unreadable form
• Encryption algorithmthe mathematical formula
  used to encrypt the plaintext into ciphertext and
  vice versa
• Keythe secret code used to encrypt and decrypt a
  message

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Security for E-Payments (cont.)

• Two major classes of encryption systems
• Symmetric (private key)
• Used to encrypt and decrypt plain text
• Shared by sender and receiver of text
• Asymmetric (public key)
• Uses a pair of keys
• Public key to encrypt the message
• Private key to decrypt the message

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Security for E-Payments (cont.)

• Public key encryptionmethod of encryption that
  uses a pair of keysa public key to encrypt a
  message and a private key (kept only by its
  owner) to decrypt it, or vice versa
• Private keysecret encryption code held only by
  its owner
• Public keysecret encryption code that is
  publicly available to anyone

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Exhibit 10.1Private Key Encryption
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Exhibit 10.2Key Sizes Time to Try All Possible
Keys
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Security for E-Payments (cont.)

• Digital signaturesan identifying code that can
  be used to authenticate the identity of the
  sender of a message or document
• Used to
• Authenticate the identity of the sender of a
  message or document
• Ensure the original content of the electronic
  message or document is unchanged

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Security for E-Payments (cont.)

• Digital Signatureshow they work
• Create an e-mail message with the contract in it
• Using special software, you hash the message,
  converting it into a string of digits (message
  digest)
• You use your private key to encrypt the hash
  (your digital signature

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Security for E-Payments (cont.)

1. E-mail the original message along with the
   encrypted hash to the receiver
2. Receiver uses the same special software to hash
   the message they received
3. Company uses your public key to decrypt the
   message hash that you sent. If their hash matches
   the decrypted hash, then the message is valid

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Exhibit 10.3Digital Signatures
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Security for E-Payments (cont.)

• Digital certificatesverification that the holder
  of a public or private key is who he or she
  claims to be
• Certificate authorities (CAs)third parties that
  issue digital certificates

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Standards for E-Payments

• Secure socket layer (SSL)protocol that utilizes
  standard certificates for authentication and data
  encryption to ensure privacy or confidentiality
• Transport Layer Security (TLS)as of 1996,
  another name for the Secure Socket Layer protocol

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Standards for E-Payments (cont.)

• Secure Electronic Transaction (SET)a protocol
  designed to provide secure online credit card
  transactions for both consumers and merchants
  developed jointly by Netscape, Visa, MasterCard,
  and others

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Electronic Cards and Smart Cards

• Payment cardselectronic cards that contain
  information that can be used for payment purposes
• Credit cardsprovides holder with credit to make
  purchases up to a limit fixed by the card issuer
• Charge cardsbalance on a charge card is supposed
  to be paid in full upon receipt of monthly
  statement
• Debit cardcost of a purchase drawn directly from
  holders checking account (demand-deposit account)

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Electronic Cards and Smart Cards (cont.)

• The Players
• Cardholder
• Merchant (seller)
• Issuer (your bank)
• Acquirer (merchants financial institution,
  acquires the sales slips)
• Card association (VISA, MasterCard)
• Third-party processors (outsourcers performing
  same duties formerly provided by issuers, etc.)

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Exhibit 10.4Online Credit Card Processing
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Electronic Cards and Smart Cards (cont.)

• Credit card gatewayan online connection that
  ties a merchants systems to the back-end
  processing systems of the credit card issuer

• Virtual credit cardan e-payment system in which
  a credit card issuer gives a special transaction
  number that can be used online in place of
  regular credit card numbers

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Electronic Cards and Smart Cards (cont.)

• Electronic wallets (e-wallets)a software
  component in which a user stores credit card
  numbers and other personal information when
  shopping online the user simply clicks the
  e-wallet to automatically fill in information
  needed to make a purchase
• One-click shoppingsaving your order information
  on retailers Web server
• E-walletsoftware downloaded to cardholders
  desktop that stores same information and allows
  one-click-like shopping

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Electronic Cards and Smart Cards (cont.)

• Security risks with credit cards
• Stolen cards
• Reneging by the customerauthorizes a payment and
  later denies it
• Theft of card details stored on merchants
  computerisolate computer storing information so
  it cannot be accessed directly from the Web

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Electronic Cards and Smart Cards (cont.)

• Purchasing cardsspecial-purpose payment cards
  issued to a companys employees to be used solely
  for purchasing nonstrategic materials and
  services up to a preset dollar limit
• Instrument of choice for B2B purchasing

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E-Cards (cont.)

• Benefits of using purchasing cards
• Productivity gains
• Bill consolidation
• Payment reconciliation
• Preferred pricing
• Management reports
• Control

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Exhibit 10.5Participants Process of Using a
Purchasing Card
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Smart Cards

• Smart cardan electronic card containing an
  embedded microchip that enables predefined
  operations or the addition, deletion, or
  manipulation of information on the card

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Smart Cards (cont.)

• Categories of smart cards
• Contact carda smart card containing a small gold
  plate on the face that when inserted in a
  smart-card reader makes contact and so passes
  data to and from the embedded microchip
• Contactless (proximity) carda smart card with an
  embedded antenna, by means of which data and
  applications are passed to and from a card reader
  unit or other device

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Smart Cards (cont.)

• Securing smart cards
• Theoretically, it is possible to hack into a
  smart card
• Most cards can now store the information in
  encrypted form
• Same cards can also encrypt and decrypt data that
  is downloaded or read from the card
• Cost to the attacker of doing so far exceeds the
  benefits

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Smart Cards (cont.)

• Important applications of smart card use
• Loyalty
• Financial
• Information technology
• Health and social welfare
• Transportation
• Identification

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E-Cash and Innovative Payment Methods

• E-cashthe digital equivalent of paper currency
  and coins, which enables secure and anonymous
  purchase of low-priced items
• Micropaymentssmall payments, usually under 10

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E-Coin.net

• System consists of three participants
• User
• Opens an account with eCoin.com
• Downloads a special e-wallet to their desktop PC
• Purchases some eCoins with a credit card
• Merchantembeds a special eCoin icon in its
  payment page
• eCoin serveroperates as a broker
• Keeps customer and merchant accounts
• Accepts payment requests from the customers
  e-wallet
• Computes embedded invoices for the merchant

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E-Cash and Payment Card Alternatives (cont.)

• Wireless payments
• Vodafone m-pay bill system that enables
  wireless subscribers to use their mobile phones
  to make micropayments
• Qpass (qpass.com)
• Charges to qpass account, are charged to a
  specified credit card on a monthly basis

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Stored-Value Cards

• Stores cash downloaded from bank or credit card
  account
• Visa casha stored-value card designed to handle
  small purchases or micropayments sponsored by
  Visa
• Mondexa stored-value card designed to handle
  small purchases or micropayments sponsored by
  Mondex, a subsidiary of MasterCard

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E-Loyalty and Reward Programs

• Loyalty programs online
• B2C sites spend hundreds of dollars acquiring new
  customers
• Payback only comes from repeat customers who are
  likely to refer other customers to a site
• Electronic scripta form of electronic money (or
  points), issued by a third party as part of a
  loyalty program can be used by consumers to make
  purchases at participating stores

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E-Loyalty and Reward Programs (cont.)

• Beenza form of electronic script offered by
  beenz.com that consumers earn at participating
  sites and redeem for products or services
• Consumer earns beenz by visiting, registering, or
  purchasing at 300 participating sites
• Beenz are stored and used for later purchases
• Partnered with MasterCard to offer
  rewardzcardstored-value card used in U.S. and
  Canada for purchases where MasterCard is accepted
• Transfer beenz into money to spend on Web, by
  phone, mail order, physical stores

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E-Loyalty and Reward Programs (cont.)

• MyPoints-CyberGold
• Customers earn cash for viewing ads
• Cash used for later purchases or applied to
  credit card account
• Prepaid stored value cardsused online and
  off-line
• RocketCash
• Combines online cash account with rewards program
• User opens account and adds funds
• Used to make purchases at participating merchants

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Internetcash

• Teenage marketprimary reason for going online
• Communicating with friends via email and chat
  rooms
• homework
• Researching information
• Playing games
• Downloading music or videos

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Internetcash (cont.)

• Why they do not shop online
• Parents will not let them children their (the
  parents) credit cards online
• They cannot touch the products
• It is difficult to return items purchased on the
  Web
• They do not have the money
• Transaction may be insecure

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Internetcash (cont.)

• InternetCash offers prepaid stored-value cards
  sold in amounts of 10, 20, 50, and 100
• Must be activated to work
• Gives the user shopping privileges at online
  stores that carry an InternetCash icon
• Purchases are automatically deducted from the
  value of the card
• InternetCashs transactions are anonymous

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Internetcash (cont.)

• InternetCash is facing obstacles
• First, they have to find retailers willing to
  sell the cards
• Must persuade merchants to accept the card for
  online purchases
• Legal issues

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Person-to-Person Payments

• Person-to-person (P2P) paymentse-payment schemes
  (such as paypal.com) that enable the transfer of
  funds between two individuals
• Repaying money borrowed
• Paying for an item purchased at online auction
• Sending money to students at college
• Sending a gift to a family member

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Global B2B Payments

• Letters of credit (LC)a written agreement by a
  bank to pay the seller, on account of the buyer,
  a sum of money upon presentation of certain
  documents
• TradeCard (tradecard.com)innovative e-payment
  method that uses a payment card

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Electronic Letters of Credit (LC)

• Benefits to sellers
• Credit risk is reduced
• Payment is highly assured
• Political/country risk is reduced

• Benefits to the buyer
• Allows buyer to negotiate for a lower purchase
  price
• Buyer can expand its source of supply
• Funds withdrawn from buyers account only after
  the documents have been inspected by the issuing
  bank

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TradeCard Payments

• TradeCard allows businesses to effectively and
  efficiently complete B2B transactions whether
  large or small, domestic or cross-border, or in
  multiple currencies
• Buyers and sellers interact with each other via
  the TradeCard system
• System
• Checks purchase orders for both parties
• Awaits confirmation from a logistics company that
  deliveries have been made and received
• Authorizes payment completing financial
  transaction between the buyer and seller

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E-Checking

• E-checkthe electronic version or representation
  of a paper check
• Eliminate need for expensive process
  reengineering and takes advantage of the
  competency of the banking industry
• eCheck Secure (from vantaguard.com) and
  checkfree.com provide software that enables the
  purchase of goods and services with e-checks
• Used mainly in B2B

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Order Fulfillment Overview

• Order fulfillmentall the activities needed to
  provide customers with ordered goods and
  services, including related customer services
• Back-office operationsthe activities that
  support fulfillment of sales, such as accounting
  and logistics
• Front-office operationsthe business processes,
  such as sales and advertising, that are visible
  to customers

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Overview of Logistics

• Logisticsthe operations involved in the
  efficient and effective flow and storage of
  goods, services, and related information from
  point of origin to point of consumption
• Delivery of materials or services
• Right time
• Right place
• Right cost

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Exhibit 10.9Order Fulfillment and Logistics
Systems
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EC Order Fulfillment Process

• Steps in the process of order fulfillment

• 1. Payment clearance
• 2. In-stock availability
• 3. Arranging shipments
• 4. Insurance
• 5. Production (planning, execution)
• 6. Plant services
• 7. Purchasing and warehousing

• 8. Customer contacts
• 9. Returns (Reverse logisticsmovement of returns
  from customers to vendors)
• 10. Demand forecast
• 11. Accounting, billing

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Order Fulfillment and the Supply Chain

• Order fulfillment and order taking are integral
  parts of the supply chain.
• Flows of orders, payments, and materials and
  parts need to be coordinated among
• Companys internal participants
• External partners
• The principles of supply chain management must be
  considered in planning and managing the order
  fulfillment process

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Problems in Order Fulfillment

• Manufacturers, warehouses, and distribution
  channels were not in sync with the e-tailers
• High inventory costs
• Quality problems exist due to misunderstandings
• Shipments of wrong products, materials, and parts
• High cost to expedite operations or shipments

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Problems in Order Fulfillment (cont.)

• Uncertainties
• Major source of uncertainty is demand forecast
• Demand is influenced by
• Consumer behavior
• Economic conditions
• Competition
• Prices
• Weather conditions
• Technological developments
• Customers confidence

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Problems in Order Fulfillment (cont.)

• Demand forecast should be conducted frequently
  with collaborating business partners along the
  supply chain in order to correctly gauge demand
  and make plans to meet it
• Delivery times depend on factors ranging from
  machine failures to road conditions
• Quality problems of materials and parts (may
  create production time delays)
• Labor troubles (such as strikes) can interfere
  with shipments

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Problems in Order Fulfillment (cont.)

• Order fulfillment problems are created due by
  lack of coordination and inability or refusal to
  share information
• Bullwhip effectlarge fluctuations in inventories
  along the supply chain, resulting from small
  fluctuations in demand for finished products

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Solutions to Order Fulfillment Problems

• Improvements to order taking process
• Order taking can be done on EDI, EDI/Internet, or
  an extranet, and it may be fully automated.
• In B2B, orders are generated and transmitted
  automatically to suppliers when inventory levels
  fall below certain levels.
• Result is a fast, inexpensive, and a more
  accurate process
• Web-based ordering using electronic forms
  expedites the process
• Makes it more accurate
• Reduces the processing cost for sellers

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Solutions to Order Fulfillment Problems (cont.)

• Implementing linkages between order-taking and
  payment systems can also be helpful in improving
  order fulfillment
• Electronic payments can expedite order
  fulfillment cycle and payment delivery period
• Payment processing significantly less expensive
• Fraud can be controlled better

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Inventory Management Improvements

• Inventories can be minimized by
• Introducing a make-to-order (pull) production
  process
• Providing fast and accurate demand information to
  suppliers
• Inventory management can be improved (inventory
  levels and administrative expenses) can be
  minimized by
• Allowing business partners to electronically
  track and monitor orders and production
  activities
• Having no inventory at by digitizing products

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Automated Warehouses

• B2C order fulfillmentsend small quantities to a
  large number of individuals
• Step 1 retailers contract Fingerhut to stock
  products and deliver Web orders
• Step 2 merchandise stored SKU warehouse
• Step 3 orders arrive
• Step 4 computer program consolidates orders from
  all vendors into pick waves

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Automated Warehouses (cont.)

• Step 5 picked items moved by conveyors to
  packing area computer configures size and type
  of packing types special packing instructions
• Step 6 conveyer takes packages to scanning
  station (weighed)
• Step 7 scan destination moved by conveyer to
  waiting trucks
• Step 8 full trucks depart for Post Offices

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Same Day, Even Same Hour Delivery

• Role of FedEx and similar shippers
• From a delivery to all-logistics
• Many services
• Complete inventory control
• Packaging, warehousing, reordering, etc.
• Tracking services to customers

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Same Day, Even Same Hour Delivery (cont.)

• Supermarket deliveries
• Transport of fresh food to people who are in
  homes only at specific hours
• Distribution systems are critical
• Fresh food may be spoiled

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Partnering Efforts

• Collaborative commerce among members of the
  supply chain results in
• Shorter cycle times
• Minimal delays and work interruptions
• Lower inventories
• Less administrative cost
• Minimize bullwhip effect problem

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Order Fulfillment in B2B

• Using e-marketplaces and exchanges to ease order
  fulfillment problems
• Both public and private marketplaces
• E-procurement system controlled by one large
  buyer, suppliers adjust their activities and IS
  to fit the IS of the buyer
• Company-centric marketplace can solve several
  supply chain problems
• Use an extranet
• Use a vertical exchange

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Order Fulfillment in B2B (cont.)

• Players in B2B fulfillment

• Shippers (sellers)
• Receivers (buyers)
• Carriers
• Third-party logistics providers
• Warehouse companies

• Vertical e-marketplaces
• Transportation
• e-marketplaces
• Logistics software application vendors

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Handling Returns

• Necessary for maintaining customer trust and
  loyalty using
• Return item to place it was purchased
• Separate logistics of returns from logistics of
  delivery
• Completely outsource returns
• Allow customer to physically drop returned items
  at collection stations

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UPS Provides Broad EC Services

• Electronic tracking of packages
• Electronic supply chain services for corporate
  customers by industry including
• Portal page with industry-related information
• Statistics
• Calculators for computing shipping fees
• Help customers manage electronic supply chains

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The UPS Strategy (cont.)

• Improved inventory management, warehousing, and
  delivery
• Integration with shipping management system
• Notify customers by e-mail of
• Delivery status
• Expected time of arrival of incoming packages

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The UPS Strategy (cont.)

• Representative tools
• 7 transportation and delivery applications
• Track packages
• Analyze shipping history
• Calculate exact time-in-transit
• Downloadable tools
• Proof of delivery
• Optimal routing features
• Delivery of digital documents
• Wireless access to UPS system

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Managerial Issues

• What B2C payment methods should we use?
• What B2B payment methods should we use?
• Should we use an in-house payment mechanism or
  outsource it?
• How secure are e-payments?
• Have we planned for order fulfillment?
• How should we handle returns?
• Do we want alliances in order fulfillment?
• What EC logistics applications would be useful?

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Summary

• Crucial factors determining the success of an
  e-payment method
• Key elements in securing an e-payment
• Online credit card players and processes
• The uses and benefits of purchasing cards
• Categories and potential uses of smart cards
• Online alternatives to credit card payments

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Summary (cont.)

• E-check processes and involved parties
• The role of order fulfillment and back-office
  operations in EC
• The order fulfillment process
• Problems in order fulfillment
• Solutions to order fulfillment problems