E-marketplaces and Risk Management: Implementation on Greek para-pharmaceutical industry

Transcription

1 E-marketplaces and Management: Implementation on Greek para-pharmaceutical industry Vrassidas LEOPOULOS 1 Dimitra VOULGARIDOU 1 Konstantinos KIRYTOPOULOS 1 1 Mechanical Engineer Dpt National Technical University of Athens Iroon Polytechniou 9 GREECE Abstract: Aim of this paper is to attempt an integration of risk management in e-business practices, such as the e-marketplaces. The model proposed here is based on the development of an e-marketplace where the owner will act as the link among the points of sales (Pharmacies), the s and the para-pharmaceutical Production Companies. Moreover, the owner/ operator will use an information system that will use risk management as a criterion for suppliers/ buyers selection. The model is thoroughly described as well as its benefits. Some of them are: improved vendor selections process, in depth knowledge of temporary partners (vendors or customers) and strategic advantage of the e-marketplace itself. Key-Words: risk management, e-business, e-marketplace, para-pharmaceutical industry 1 Introduction The popularisation of the internet and the diversity of e-business practices facilitate the development of an e-supply chain bringing together manufacturers, suppliers and customers and leveraging the web technologies to smooth logistical co-ordination across the links [1]. The participation in an e-supply chain should be a win-win endeavour for each participant. Each one of the links of the chain adds value in the network, and expects to receive significant value from it. In order to achieve the expected benefits the e-supply chain partners have to co-ordinate the flow of information and further the physical logistics system not only among individual partners but throughout the chain. On the other hand, risk management is a technique that leads to better management of any process [2], thus, why not, the e-supply chain. Aim of this paper is to provide a model for the integration of e-business practices in the para-pharmaceutical industry in Greece, as well as to support these practices with a risk management module. The current supply chain channel, the e-marketplace concept and the typical risk management process are investigated and then a model is proposed for the co-ordination of the whole channel. Finally, the benefits for each participant are presented. The rest of this paper is organised as follows: In Section 2, 3 and 4, the current situation of the parameters that consist the model proposed, are presented. Section 2 describes the purchasing process of the para-pharmaceutical industry. Section 3 describes some of the typical e-commerce practices related to the model proposed and Section 4 presents the typical risk management process. The model is presented in Section 5 along with the expected benefits. Finally, in Section 6 the conclusions and opportunities for further research in the topic are presented. 2 Purchasing process in the parapharmaceutical industry The players of the purchasing process in the parapharmaceutical industry are depicted on a high level in Fig. 2. These players are: Para-pharmaceutical Production Companies. s, who operate, store and distribute products, acting as links between Production companies and the points of sales (either a or a Brand ). s are also importing products, which distribute are distributed afterwards. All those stores that are allowed to sell drugs (Pharmacies and Brand Pharmacies). Unlikely to other countries, the Greek law does not 1

2 permit drugs and related stuff to be sold in any store. Pharmacies are small and very small enterprises owned by individuals, where Brand Pharmacies are Unions. These Unions are formed by several independent (or not) Pharmacies under the same Brand. Greek legislation does not allow chains of pharmacies owned by a company. In the model described in Fig. 2, one can make out two categories that sell (Production Companies, s) and three categories that buy (s, Pharmacies, Brand Pharmacies). Pharmacies and Brand Pharmacies have the opportunity to buy either from a or the main vendor who is the Production Company. Although independent Pharmacies can buy from any vendor, it is often noticed that they develop an exclusive relationship with one of them. The transactions between buyers and sellers are, mostly, executed through conventional means, such as fax, telephone or face to face contact. The penetration of information systems in the sector is presented as follows: 9200 licences have been issued by the State for Pharmacies and the 8500 are active. Only 300 use an electronic procurement system. On the other hand, the majority of sellers (Production Companies and s) has either installed an ERP system or is moving towards this direction. In other words, the buyers (Pharmacies) lack technological evolution and this is explained by their limited size that cannot afford investments in information systems and the lack of know how to operate them. In the Model description part, the authors of this paper present how the e-commerce practises may enhance these transactions. 3 E-marketplaces The technology that links organisations through electronic means is known as e-commerce. E- business covers any form of transaction and information exchange among companies, customers and government, which take place using new information technologies mainly the internet [3]. Initially, e-commerce used the traditional fixed pricing models that grew out many years ago as mass production and extended distribution chains encouraged the economies of scale. Fixed prices met the necessity to manage the increase in both volume and variety of products over large geographic areas. However, fixed prices are slow to adjust to market conditions, thereby causing a gap between a price that is charged for a good and its actual market value. The second tier of e-commerce was the dynamic commerce. This type of e-commerce is the ability to buy and sell goods and services over the internet where price is changing depending on supply and demand [1]. Dynamic commerce, as any type of e-commerce, eliminates the need for many layers of intermediaries and reduces the overall cost of sales. For buyers, these markets provide a wider variety of suppliers and better, more widely available, information. For sellers, participation in these markets translates into higher revenues and quicker inventory turn over. The third tier, negotiated e-commerce, is the ability to map complex negotiation structures in business transaction, including multiple stages of negotiations with more than one bidding parameter, such as price, delivery time, and condition of goods or payment terms. The form of e-business that fits in the parapharmaceutical industry and can lead in tangible benefits is the e-marketplace (EM this point forward). EMs are becoming the new business venue for buying, selling and supporting customers, products and services. Still in their early evolutionary stages, they are primarily focused on bringing together buyers and sellers, but as their rapid development goes on, they will evolve from simple matchmaking services focused on transactions and e-commerce to new value-based business models. The main goal for the EM will be the integration of the transaction exchange, the value-added services, and the knowledge services into Value Trust Networks that offer secure collaboration to the members of the community. EMs can be categorised in three different ways. The first type of categorisation is Public vs Private EMs. At a Public EM, independent companies assume the responsibility of creating an electronic marketplace in which the participants, buyers and sellers, are free to take part in. At a private EM, a company installs the marketplace in order to manage its own supply processes and defines the participants access level. Each of these two versions has grown fast in the last two years, although the private one outnumbers. The second categorisation type is Vertical vs Horizontal EMs. Vertical are called the EMs which concern a specific sector, are industry-specific and aggregate supply or demand in vertical industries. Horizontal EMs concern a great range of industries and their purpose is to facilitate the exchange of products, information and services. For instance, according to ICAP study [4], an EM that deals with MRO (Materials, Repair and Operation) products is a horizontal EM where a participant can find several goods ranging from office machinery to furniture and software systems. The last categorisation type is Open vs Closed 2

3 EMs. A useful distinction of EMs based on their accessibility is that of open and closed EMs [5,6]. An open (global) EM, created among companies, companies and consumers or among companies and authorities, is characterised by low degree of information sharing and collaboration. However, the number of participants is unlimited, the network is open and unprotected, partners are not assessed and therefore security and authenticity is necessary. In an open EM the net is the market. On the contrary, closed EMs (often industry-specific clubs ) is created among companies, limited in number. Their main characteristic is the high degree of information sharing and collaboration since they are closed company-owned networks (with firewalls) and the partners are known and connected with high security level through networking. 4 Management management, as presented in the 6th WSEAS International Multiconference by the same authors, is not a new field of science [7]. The first approach of the formal introduction of Management (RM) techniques in the scientific community, was the effort put by Hammer [8] to apply it on technical solutions. There is also quite extended bibliography of RM in the theory of investments and financial risk field [9]. Recent trends have involved RM in the project management sector [10]. However, there is no literature considering the risk management as a tool embedded in the e-marketplaces services. This is what the authors are ambitious to achieve through this paper. The steps of Management can be summarised as in Fig. 1 [11]. The first step of the process is the Development of a Management Plan. This Plan sets the base for the other Management steps. The second step of the process is the identification of risks that might affect the project (in our case the procurement process). Identification is an important step of the process since one cannot cope with problems that have not been identified. There are many techniques indicating the way to identify risks, such as checklists, experts interviews, etc [12]. The third and fourth steps of the process address the analysis issue. Depending on the amount of information available or desirable, analysis could be either qualitative or quantitative. Next step for RM is the Mitigation Action Plan, i.e. the definition of specific and effective response, in order to smooth or completely eliminate the risk. Preventive or corrective actions maybe used in order to obtain the minimisation of risk [11]. The last step, which is the Follow Up and Control of risks, aims to assure that the outcome from the previous steps is still valid as the time passes by, the mitigation actions defined are really efficient and that every new risk is registered. Follow up Mgt Plan Identification Mitigation Qualitative Quantitative Fig. 1: Management Steps Analysis 5 E-marketplaces and the risk management tool 5.1 Model description The model presented in this paper aims to propose an integrated framework of risk management practices and e-marketplaces of the parapharmaceutical industry in Greece. The model is based on the development of an EM where the owner will act as the link among the points of sales (Pharmacies), the s and the parapharmaceutical Production Companies. The EM model proposed here is a vertical and closed EM belonging in the negotiated e-commerce practice (see section 3). Fig. 2 summarises the concept of the model. As it can be seen, all the interactions, apart from the physical distribution, are carried out through the marketplace, which is run by the operator (one of the links of the supply chain or an individual company). The development of an e-marketplace is described in the 8 th WSEAS Conference by the same authors (the paper has been accepted for publication) [13]. In a nutshell, one should follow three steps in order to set up the marketplace. First, select the operation type. Second, find the critical mass of participants. Third, initiate transactions. One of the most important aspects that has to be taken into consideration for the success of this endeavour are the so-called success factors. Some of these success factors are: The support from the top management, right systems infrastructure, internet site of high quality that meets or exceeds user expectations, etc. [14,15]. 3

4 Production Brand buyer did not succeed in paying on time, as well as the amount not paid. y product characteristics, such as vulnerability in environmental conditions (heat, light, etc). The operator provides risk cases that have been identified so that the potential buyer knows the most applicable vendor. For instance a product sensitive to heat should be bought from a vendor as near as possible to the point of sale or the vendor should have proven that delivery without problems is ensured. Information flow Supply Fig. 2: Proposed model for the Para- Pharmaceutical Industry From the strategic point of view, the role of the operator is to link the needs of the points of sales (Pharmacies) to the offers of the s and the producers. The core concept of this model is that Pharmacies do not negotiate by themselves but the operator runs the negotiation on their behalf. The strategic advantage of the operator is that since the needs of many Pharmacies or Brand Pharmacies may be aggregated, a scale economy can be achieved, when the or the Production Company is asked for goods. On the other hand, sellers have advantages, as well. The benefits for each participant of the electronic market are presented in sub-section 5.2. The innovative part of this paper is the use of risk management in the EM. The core conception is the creation of a Corporate Memory that includes all the products that can be sold in the EM, as well as all the participants. Each element of this memory is linked to the related risks that have been experienced in the past (Fig. 3). So, the operator of the EM offers to the participants the risk management module. The benefit that stems from this service is that the operator knows the problems that have been encountered by a specific vendor, customer or product, and takes them into account when deciding for a new deal (contract). A typical list of risks that the operator of the EM has to record in risk sheets is the following: Inability of a supplier (Production Company or ) to deliver on time (Number of occurrences, Delay in hours/ days, Type of product) Wrong shipments or improper products (Number of occurrences, Type of product) Insolvent Buyer ( or ). The operator may have data on how many times the Product Product CORPORATE MEMORY Production Company Product Fig. 3: Structure of Corporate Memory The aforementioned Corporate Memory is the tool that lets the operator of the EM to perform risk management, as well. However, the risk management steps followed are somehow different. Identification step: All the transactions among sellers and buyers, apart from the physical transportation of goods, take place through the EM. This means that the operator knows at any time the problems that have been faced in any phase of the supply chain. These problems are recorded and form the risk catalogue for each participant and product. Analysis step: The analysis of risks is semiquantitative. Scales are used in order to determine the exposure of a risk. The exposure is the probability of occurrence times the impact if the risk occurs and it is the measure of the seriousness of a risk. Fig. 4 shows an indicative scale for the aforementioned figures. Mitigation step: As stated earlier, the operator of the EM is also the negotiator that bridges the gap among Pharmacies, s and Production Companies. Taking the buyer s or the seller s side should be avoided. On the contrary effort should be put on an overall improvement process for the whole chain. This means that risks should be allocated to the participant that is most capable to deal with 4

5 them. Furthermore, when the operator is about to decide about a contract he should always take into account the risks that may affect either the buyer (low quality of the product, delivery delays, etc) or the seller (payments delays, refusal to receive certain product quantities, etc). Fig.4: Indicative scales for risk analysis Follow up step: This process is the continuous improvement step for the corporate memory. The operator tracks the transactions that take place in the EM and changes the Probability or the Impact for each risk, eliminates risks or adds new risks in the memory. 5.2 Benefits for each participant in the marketplace Although the benefits to buyers usually exceed those to suppliers [16], to date, business-to-business (B2B) technologies have been predominantly exploited by larger firms down-stream in the supply chain rather than by upstream SMEs [17]. This gives rise to our syllogism that Pharmacies (typical SMEs) should be involved in the aforementioned EM. However, tangible benefits occur for each and every participant of the EM. Furthermore, this specific EM proposed here includes a risk management module. Having such a module may rescue participants from misunderstandings, bad relations and above all, it is able to improve efficiency. The benefits from the use of this model are as follows: E-marketplace owner: EM operator (owner) holds the leading role of these new B2B relationships. In return for delivering this service, the operator gets substantial rewards by sharing the returns achieved by buyers and suppliers and increases the income by giving web space in the companies to advertise themselves. Moreover, instead of a fixed fee for their services, EM operators may have earnings calculated as a percentage of the decrease in cost that they achieve for Pharmacies. Since the operator acts as a negotiator between a and a vendor, sharing a part of the savings of the is normal. Moreover, the addition of a risk management module will improve participants selection for a deal (contract) by the operator, thus it will lead to high performance that will make participants happy. From another point of view, one can see the risk management module as a strategic advantage that will attract new participants and enlarge the e-market. Suppliers Production Companies: Suppliers can shorten sales channel and decrease prospecting costs by turning to the internet technologies. In addition, they can access new customers through B2B e- commerce and present their products while significantly reduce the promotional and advertising costs. Their benefits can reach further by creating close collaboration between trading partners in a secure environment and promoting price discovery. Last but not least, they will take advantage of the risk management tool as the operator will secure them from the buyers who do not hold to their payment agreements etc. s: One of the leading problems for a is the inventory. This problem can be directly attributed to a problem with reliable information exchange, by replacing goods based on information instead of estimation. Additionally, the EM will offer them a great range of suppliers, better quality of products, improved and fast information flow, as well as reduced cost for the procurements and less time spent in finding the right supplier or buyer Pharmacies: Pharmacies can use EMs to reduce direct and indirect supply chain costs by participating in bulk orders (through the EM operator) and buying from qualified new suppliers that were unknown before. The risk management done by the operator improves the procurement process and is something that could not be done by a small enterprise such as independent Pharmacies. In addition, they can manage their exchanges through 5

6 contracts, avoiding the cost of special orders (emergencies). It has been calculated the 35% of the procurements take place without existing contracts, resulting in a cost increase at about 20% [18]. Especially the local low-turnover Pharmacies can take advantage of the EM since they cannot achieve better prices otherwise.. 6 Conclusion further research There are several benefits not only for one of the links of the chain but for every organisation involved in the EM as shown in the previous sections. However, there are some points that need attention and might also be the spark for further research. As every information system, the EM has an installation and operation cost. Moreover, expenses for the education of the personnel are required and a period of time is needed for the company to adapt to the new operating system. Another issue that should be taken into consideration is the impartiality (neutral attitude) of the operator, as buyers and suppliers should be confronted equally. If the operator lays emphasis on the buyer s side, the suppliers profits are affected and vice versa. As far as the risk management module is concerned, the operator should be very careful. The scope of the process is not to eliminate some suppliers or buyers from the market as this will shrink the market. Aim of the risk management module is to be a criterion for the selection of the right mix of suppliers/ buyers for the right deal (contract). The aforementioned concepts are not consider to be major problems but techniques to overcome them should be developed/ investigated. References: [1] R.Warren The emarketplace Strategies for Success in B2B ecommerce, McGraw-Hill, [2] Tatsiopoulos I., Leopoulos V., Kirytopoulos K., 2001, as a strategic decision factor for the competitive bidding process in contract manufacturing, IFIP Conference, Aalborg, Denmark. [3] Ponis Stavros, A reference model for the Apparel Industry-Reengineering the Greek Apparel Virtual Enterprise, Ph.D. Thesis, National Technical University of Athens, [4] ICAP study, E-marketplaces 2001, Greece, [5] R. Steyer, Okonomische Analyse elektornischer Markte, Working paper, Johannes Gutenberg-University, Mainz, [6] B.F. Schmid, Electronische Markte-Merkmale, Organisation und Potentiale, The mcm institute, University of St.Gallen, Switzerland, [7] Leopoulos V. and Kirytopoulos K., 2002, Methodology for risk management in systems development, Recent advances in Computers, Computing and Communications, WSEAS Press, pp [8] Hammer R.W., 1972, Handbook of system and product safety, Englewood Cliffs, N.J.: Prentice Hall. [9] Alexander C., 1999, Management and Analysis: Measuring and Modelling Financial, John Wiley & Son Ltd. [10] Kliem R, Ludin I., 1997, Reducing Project, Gower Publishing Ltd, UK. [11] Project Management Institute, 2000, Project management book of knowledge. PMI. [12] R.Wideman, 1992, Project and program risk management: a guide to managing project risks and opportunities. PMI. [13] Leopoulos V., Kirytopoulos K. and Voulgaridou D., 2004, The benefits of e- commerce: A case study of the Greek parapharmaceutical industry, Transactions on Circuits and Systems, Accepted paper in print, World Scientific and Engineering Society Press. [14] E. Turban, J. Lee, M. Warkentin and H. Chung, Electronic Commerce 2002: A Managerial Perspective. Upper Saddle River, Prentice-Hall, Englewood Cliffs, NJ, [15] D. Phan, E-business development for competitive advantages: A case study. Information & Management, Vol. 40, 2003, pp [16] T. Eng, The role of EMs in supply chain management. Industrial Marketing Management, Vol. 33, 2004, pp [17] J. Zheng, N. Caldwell, C. Harland, P. Powell, M. Woerndl and S. Xu, Small firms and e- business: cautiousness, contingency and costbenefit. Journal of Purchasing & Supply Management Vol. 10, 2004, pp [18] Credit Suisse, B2B evolution, 5/2000. Acknowledgements The model presented in this paper is currently developing for a major para-pharmaceutical company in Greece. The project is partly funded by the General Secretariat for Research and Technology, Ministry of Development. 6