E-Commerce Solution

1.0       Introduction

The development of computer and internet technology has speeded up the adoption of those technologies for business purposes. The emerging dotcom companies, at initial stage in the early 1990s, had changed the way corporations operate, which in turn encouraged many businesses to run e-companies.

In 2000 alone, according to one report, the electronic commerce recorded the annual volume estimated to be between $100 billion and $200 billion (Litan 2000). The attractiveness of conducting online business has encouraged more and more companies from various industries to build their online stores and to generate income from it.

The situation soon provides huge benefits for business since commencing the period, customers and manufacturer/service providers is linked closely. It further influences the way the manufacturers/service providers interacts with their suppliers in order to ensure the products tailored to fit their customers’ needs at faster delivery while reducing inventories.

This idea heads for a bigger need to create sustainable supply chain management (SCM) that will improve the time-to-market of products, reduce costs, and allow all parties in the supply chain to manage current resources and plan for future needs.

Concerning e-commerce issue, this paper will discuss current problems in supply chain management and provide e-commerce solution that reduced costs by developing e-procurement. The chosen corporation in this paper is British Airways, which is known for their non e-commerce supply chain in airline industry. Fortunately, the airline also experiences many cancelled flights due to technical problems and unavailability of part supplies on time. The situation suggests that the company needs to amend their traditional SCM by replacing it with e-commerce system.

Prior to the discussion, this paper will present the trends in air traveling, background of British Airways, description of current British Airways’ procurement system, technical data of developing e-procurement, system requirements both hardware and software, securities issues in providing e-procurement system, and costing summary.

• Introduction to British Airways
  • Trends of Air Traveling

The 9/11 accident five years ago has changed the way airlines conduct their business. Previously, they race towards the deployment of big aircrafts. However, the accident has driven airlines to deploy small airplanes such as Boeing 737s or Airbus A320s. This hunger for small airplanes highlights the attractiveness of the low-cost carriers (LCCs) business models like cast successfully by Southwest Airlines in the U.S. and Ryan Air in the UK, to name a few.

In addition, the condition also gives birth to three magical words in today’s airline competition; they are operational efficiency, low costs and high level of customer value. These three enchanting words underlie low cost carriers to excel in air traveling industry since they capability in stimulating potential demand through low fares coupled and acquired the dissatisfied other airline customers. To be precise the three magical words in airline industry are as following:

1. Efficiency

Efficiency refers to the condition where low cost carriers providing air-traveling services that customer really want such as on time arrival and departure instead of fancy in-flight catering. Concerning the supply chain management, efficiency means that airline should manage their parts procurement in case that any fault occurs during a flight to cope with on time departure and arrival.

1. Low Costs

By deploying new medium aircrafts fleet, Low cost carriers are enabling to bring the maintenance cost down.

1. Third, High levels of Customer Value

Low cost carriers have improved their brands that help the company to win competition in airlines industry. Previously, low cost carriers are often associated with low fare and unsafe aircrafts.

However, through a series of public relations efforts, customers now realize that low fares are the result of no frills services including no in-flight catering, electronic ticketing, and the use of new aircrafts that are more fuel-efficient.

• Background of British Airways plc

British Airways is one of largest and the oldest airlines in the world that have extensive routes in the industry. The company established more than 60 years ago and to date they still dominate the industry. British Airways’ services include international and domestic scheduled and charter air services for the carriage of passenger, freight and mail.

British Airways has a long and considerably complicated history, due to its existence, which goes back to the birth of civil aviation in the early 1900. The company develops into a bigger airline due to a series of merger with several smaller UK air transport companies under the auspices of British government. In 1939, the company became state-owned enterprise and became private corporations again in 1987.

In terms of size of company, British Airways has the obvious advantage since it is the largest airline in United Kingdom and the second largest airline across Europe. The main hubs of British Airways located at London Heathrow and London Gatwick, which enable it to reach European and domestic short haul networks, including smaller hubs at other UK airports.

In December 2005, the company operated over 250 commercial aircrafts around the world consists of Airbus and Boeing. The coverage of British Airways service spans across the Atlantic with lots of frequency than other operators. In addition, British Airways also flies to more than 140 destinations in 75 countries including domestic routes in the United Kingdom, Continental Europe, the Middle East and Africa.

British Airways has a less vertical integration structure and has vast range of network by joining alliances consisting of several airlines that enable British Airways to reach a number of destinations. There are three major alliances: One-World Alliance program, the Codeshare Carriers, and the franchise programs.

The One World Alliance consists of members like the Aer Lingus, American Airlines, Cathay Pacific, Finnair, etc. The company franchises its services under the following brands, British Mediterranean Airways, Comair, GB Airways, Loganair, and Sunair.

Concerning the use of technology, British Airways has advanced check-in stations in airports that provide customers with various services like choosing seats electronically and choosing baggage-handling systems (Leonhardt, 2003). In addition, the company also devotes their resource to the R& D department with the intention to focus on finding improved ways to deploy their premium services

1.2       Introduction to E-Procurement

            Corsi (2006) defines e-Procurement as “…the use of electronic methods, typically over the Internet to conduct transactions between awarding authorities and suppliers…”  The scope of e-procurement activities include every stage of purchasing, from the preliminary request for a product or services through tendering process, the payment and contract management.

            Currently, many large companies have implemented the e-procurement such as Rolls-Royce and governments in 40+ countries. Both private companies and government have obtained benefits from implementing this system especially regarding the cost reduction, efficiency, and the elimination of corruption as described by a researched performed by Gerhard Pohl, a Director of e-Government Development Gateway Foundation.

2.0       Current Procurement Procedures at British Airways

Like other legacy airlines, British Airways has a good quality in the range of coverage category. The airline has extensive routes across continents in the world and continues growing as corporate affiliates enhance. The company has also a better quality of service in terms of in-cabin facilities. The standard services consist of free in-flight catering, snacks and drinks; and the premium services provides one of the highest class of flying services in the industry.

Although the airline seems to have delighted in-flight services, travelers also find that British Airways has a higher degree of late services or cancelled flights. Interestingly, many of these delays are due to supplies management that takes extra time to prepare for the next flights and has larger chances of encountering problems that require delays (British Airways, 2006).

This serious problem can be alleviated if the company conducts appropriate strategy regarding its supply chain management (SCM) process including the e-procurement since the mandatory services that air travelers love to have is on time departure and arrival.

In order to improve its services, British Airways implement improved supply chain management (SCM) strategy as described in its official website (www.britishairways.com). Currently, the implementation of SCM strategy includes the services delivery at the right place, the right time, and the right cost (British Airways, 2006).

            The needs of deploying supply chain management are driven by situations in airline industry that faces a complex modern aircraft and the far-flung nature of airline operations. The conditions cause airline to face huge logistic and supply chain challenges (British Airways, 2006).

Furthermore, British Airways realizes that the use of supply chain management will help them in “acquiring the right [aircraft] parts and ensuring that the parts are handed over to engineers at the right time and right place at the right cost British Airways (British Airways, 2006).

The delivery of appropriate aircraft parts is very important for British Airways since it helps the airline to transports passengers on time, which in turn provides them with smooth and professional operation. In addition, the distribution of appropriate parts have also critical consequences as British Airways can manage their budget and most importantly there are no unscheduled delays in the hangers that may causes greater number of complains and reduced customers’ satisfaction (British Airways, 2006).

The center of British Airways’ supply chain operation is at The Link, a site that located outside Heathrow international airport at London (Figure 1). In the location, the main SCM operation consists of management of the supply and distribution of components across the British Airways fleet including avionics (aviation electronics), engine spare parts, cabin lighting, and the new Club World seat (British Airways, 2006).

The complexity of supply chain management in British Airways is due to multi supplier relationship in which British Airways work with various suppliers that are responsible in devising specifications. These conditions enable suppliers to have closed relationship with British Airways’ marketing professionals, our design teams and specialists in fields such as ergonomics (British Airways, 2006).

Figure 1           Representation of Supply Chain Management for Parts Distribution at British Airways

Based on the official website of British Airways, it is found that major supply chain management located near to Heathrow international airport at London. This situation suggests that the airline finds difficulty in distributing their aircrafts’ components when the troubles occur far away the U.K.

Concerning the situation, the purpose of this paper is to develop integrated supply chain management especially e-procurement in order to speed up the delivery of required aircrafts’ spare parts to any British Airways’ aircrafts all over the world. The costs saving will be based on millions of dollars savings within the 3-year cost period when the company carries out e-procurements that connect the airline to their suppliers.

• Why Do Airlines Need e-Procurement?

The airline industry becomes one of the most competitive businesses in the world. Many factors influence the operations of companies in the business. Sometimes it is difficult to differentiate between airlines, but other times, the differences could be as big as a plane. Nevertheless, all airlines have one similarity, which is the extent of competition they face. In the modern industry, there is no escaping the fierce competition which influenced by various factors.

For instance, one of the most influential factors in the airline industry today is Information Technology in which passengers expect that flight must arrive and depart on time, travel safely etc (Barnett, 2003). This requires a huge amount of information being routed to numerous stations each minute. Airlines that can Information Technology generally will lead in several aspects of the competition. On the other hand, companies that failed to take advantage of innovation in technology will be left behind.

3.0       Objectives of the E-commerce proposal

The objective of this proposal is to describe the benefits that British Airways may have when they implement e-procurement system, especially concerning the aircraft parts distribution in order to minimize unscheduled delays caused by unavailability of parts supplies in the hanger. The situation suggests that e-procurement process will help British Airways to save money and eliminate the opportunity losses caused by unscheduled delays of flights.

4.0       Technical Data

4.1       What Type of Business Model is This Proposal?

Qizhi Dai and Robert J. Kauffman (2000) in their article ‘Business Models for Internet-based e-Procurement Systems and B2B Electronic Markets: An Exploratory Assessment’, say that e-procurement system is the business model since it differs from electronic data interchange (EDI). E-procurement is open systems that allow corporations to talk and conduct transaction with suppliers over the Internet.

This business model is line with Search CIO (2006) that defines SCM as “the oversight of materials, information, and finances as they move in a process from supplier to manufacturer then to wholesaler/retailer and finally to consumer” (Search CIO, 2006).

4.2       System Requirements

4.2.1    Hardware

In this proposal, there is the need to develop new infrastructure to handle the e-procurement although it does not major investment. This is because British Airways has already set up reliable corporate website that can be developed to convey the e-procurement purposes.

However, there is still additional hardware that British Airways should invest in order to separate corporate information or data from e-procurement web sites. The investment includes the dedicated servers and its back ups in order to protect British Airways’ internal data and to provide secure information made in e-procurement system.

Like other application, this e-procurement system will take two main servers; they are application server for hosting the e-procurement application and software and data server to store transaction data. In addition to server requirement, British Airways need to establish communication network with remote site.

Concerning the investment value of this hardware requirement, it depends on specifications, brands of the hardware, and telecommunication carriers that provide the network.

In this proposal, I will propose the use of powerful and reliable products in order to minimize the down time and maintenance procedures. Therefore, this proposal recommended using Dell or IBM servers and Cisco routers with the estimated prize as following:

• Dell or IBM Servers
  • Dell Servers à DELL PowerEdge 2900 that has specifications as following: Xeon 5110, 2GB FDDR2-533 ECC, 4x 73GB HDD 10K SAS HotSwap, 48x CD, VGA ATI 16MB, 2x GbE NIC, Tower Case with Redundant PSU (US$4,199)
  • IBM Servers à IBM p5 520 Express Star Premium with following specifications: Dual IBM Power5 2.1 GHz c/1.9MB, 4GB DDR2-533 ECC, Dual Channel U320 SCSI, 2x 73GB HDD 10K SCSI, DVD-ROM, 2x GbE NIC, Tower Case (US$11,399)
• Cisco Routers (2 pieces for each link): CISCO 2650XM with following specifications: High Performance 10/100 Modular Router with Cisco IOS IP, 32Flash / 256DRAM (US$2,660 each)

Based on the above characteristics, the total investment for each link that connects British Airways and remote location of part supplies distribution will cost about US$14,500 at maximum.

 4.2.2 Software

In addition to hardware requirement, developing e-procurement needs extensive investment on software as well. According to Search CIO (2006), the critical part of deploying supply chain management is to employ suitable software systems that also equipped with Web interfaces to lessen the SCM processes.

Moreover, at software levels, there are two main applications needed to perform SCM or e-procurement; they are planning applications and execution applications. The planning applications refer to the software utilization to decide the best way to fill an order. Meanwhile, the execution applications deal with “the physical status of goods, the management of materials, and financial information involving all parties” (Search CIO, 2006).

Concerning the investment value for software, Sharyn Leaver, an analyst at Forrester Research in Cambridge, says that investment for e-procurement varies from $200,000 to $3 million including in-house e-procurement software, installation and software license costs at a given period (Hildebrand, 2002). Below is the list of e-procurement software based on type and price:

• full e-sourcing programs covering e-RFPs and e-auctions: $4 million
• E-procurement software from Ariba: $10 million to $15 million

(Hildebrand, 2002)

 

5.0       Usability

5.1       Implementation

The implementation of e-procurement is vital part since it determines whether the usage fulfills the requirement or not. Since British Airways operate in five continents, therefore, it is useful that the e-procurement system is available in several languages in addition to English to lessen the implementation.

Furthermore, in order to succeed the system implementation, British Airways should find typical demands of their users that will reduce the inventory cost since it represents about 20 percent of total e-procurement costs. Below is common difficulty during implementation:

Figure 2          Difficulty during e-procurement implementation

Source: (Hildebrand, 2002)

• E-Procurement at British Airways

British Airways’ SCM strategy can be performed well due to the support of Boeing Company that supplies most of aircraft equipments. The cooperation fits the airline’s needs to eliminate inventory inefficiencies that provide high cost to British Airways.

            Figure 3 shows the integration of supply chain management that does not only relate to the provision of parts but also integrate other supply system such as human resources and IT services and my others.

Figure 3          Integrated Supply Chain of British Airways

 

6.0       Critical Evaluation of E-Procurement

6.1       Benefits of E-Procurement

            There are several benefits for British Airways because of performing supply chain management (SCM) as following:

• its programs support the improvement of the labor productivity
• it provides better services, cost savings, enabling on time arrival and departure, time savings, transparency

(Corsi, 2006)

 

6.2       Disadvantages of e-procurement

            The disadvantage of e-procurement system is the result of initial investment that may prevent companies to implement this electronic application. Another disadvantage is that this e-procurement requires extensive session of training for officers that will involve with the program operation. However, if the companies assess the benefit that e-procurement may have, the disadvantage may be eliminated.

 

7.0       Security Issues with the e-Procurement System

Since e-procurement processes critical data of British Airways, therefore, the company should also protect the data from hacking, stealing and many other e-criminals. The situation suggests that there is the need to provide updated anti virus software and at hardware level, it require firewalls.

Figure 4 exhibits an example of e-procurement architecture network that composes of two slim layers of protection. The use of firewalls in this figure acts as primary protection for e-procurement site.

Figure 4          An Architecture of Secured E-Commerce Site

Source: ‘The Ultra-Secure Network Architecture’, 2006, RSM McGladrey, Inc

8.0       Costing Summary

8.1       Summary of assumptions made

• In this proposal, we assume the use of Dell or IBM servers and Cisco routers with the estimated costs about US$14,500 at maximum.
• In the software levels, we assume that the total investment is about $1,600,000. It is obtained from the average investment in e-procurement software.
• In addition, the proposal also assumes that British Airways’ SCM strategy is still supported by Boeing Company that supplies most of aircraft equipments
• The amount savings is obtained by calculating the number of cancelled flights (@ carries 400 passengers; each with $500 airfare) that previously occurred before implementing e-procurement system.

 

• Financial Data

Based on the above elaboration of e-procurement development for British Airways, below is the costing summary of e-procurement implementation:

Table 1           Costing Summary of British Airways’ e-Procurement

	$	$	$	$
	Year 0	Year 1	Year 2	Year 3
Software (Ariba)	15,000,000
Hardware per site	14,500	0	0	0
Implementation	1,000,000	1,000,000	1,000,000	1,000,000
Savings		24,000,000	24,000,000	24,000,000
Cash Flow	(16,014,500)	23,000,000	23,000,000	23,000,000

The amount of savings is obtained by considering the number of cancelled flights and costs of traditional communications that British Airways may incur during the absence of e-procurement system. The above calculation is obtained by considering 10-cancelled flight per month; each has 400 passengers that pay $500 for airfares. The number of cancelled flight bases on British Airways’ official website.

9.0       Conclusion

Concerning e-commerce issue, this paper has discussed current problem in supply chain management and provides solution via e-commerce to reduce costs by developing e-procurement. The chosen corporation in this paper is British Airways, which has conducted the best non e-commerce SCM method in airline industry by conducting cooperation with Boeing Company as the major parts supplier for British Airways.

There are several assumptions in the discussion of e-procurement development as following:

• British Airways uses of Dell or IBM servers and Cisco routers with the estimated costs about US$14,500 at maximum.
• In the software levels, it is assumed that total investment is about $15,000,000. It is obtained from the average investment in e-procurement software.
• It assumes Boeing Company still support British Airways aircraft equipments
• The amount savings is obtained by calculating the number of cancelled flights (@ carries 400 passengers; each with $500 airfare) that previously occurred before implementing e-procurement system.

 

By using the above assumptions, we find that British Airways may have enormous savings about $52,9 million in three-year period.

10.0     References

 

Books

Jenkins, D. 1995, Handbook of Airline Economics, McGraw-Hill, New York

Tanenbaum, A. & Woodhull, A. S. 1997, Operating Systems: Design and Implementation, Prentice Hall, New York

Journals

Dai, Qizhi and Kauffman, Robert J. 2000, ‘Business Models for Internet-based e-Procurement Systems and B2B Electronic Markets: An Exploratory Assessment’, University of Minnesota

Esler, D. 2003, ‘Why is business aviation a decade behind?’ Business and Commercial Aviation, pp. 68.

Huhns, Michael N and Stephens, Larry M. 2001, ‘Automating Supply Chains’, IEEE Internet Computing, July – August 2001

Barnett, A. 2003, ‘Airline security’s false hope’, MIT Enterprise Technology Review

Harcourt, Robert H. and Robert W. Hutchinson. 2004, ‘Supply Chain Management’, CPA Journal 2004

Websites

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Future Vacations. 2003, ‘Benefits of buying a package’, [Online] Available at: http://www.futurevacations.com/benefits.asp

Hildebrand, Carol. 2002, ‘How to Save Money with e-Procurement’, [Online] Available at: http://searchcio.techtarget.com/originalContent/0,289142,sid19_gci843895,00.html?topic=300515

Leonhardt, D. 2003, ‘Airlines using technology in a push for shorter lines’, Regisoft, [Online] Available at: http://www.regisoft.com

O’Brien, Kevin and Brian Springman. 2004, ‘Optimizing Supply Chains, Understanding Demands’, [Online] Available at: http://www.crmbuyer.com/story/35892.html

Search CIO.com. ‘Supply Chain Management’, [Online] Available at: http://searchcio.techtarget.com/sDefinition/0,,sid19_gci214546,00.html

Skytrax. 2003. ‘Global airline quality monitor: 2003’, [Online] Available at: http://www.airlinequality.com/main/aqm_02.htm

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White Papers

Corsi, Marcella. 2006, ‘e-Procurement’, Università “La Sapienza” di Roma

Oracle. 2002, ‘Networking Challenges in the Internet Age’, Leiden University

Pohl, Gerhard. 2004, ‘Enabling e-Government in Caribbean Countries: From Vision to Implementation’, Development Gateway Foundation

‘The Ultra-Secure Network Architecture’, 2006, RSM McGladrey, Inc