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Chapter 10

Payments and Order Fulfillment


Prentice Hall, 2003

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 epayment 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 10.1
Private Key Encryption

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Exhibit 10.2
Key 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:
1. Create an e-mail message with the
contract in it
2. Using special software, you hash the
message, converting it into a string of
digits (message digest)
3. You use your private key to encrypt the
hash (your digital signature
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Security for E-Payments (cont.)


4. E-mail the original message along with
the encrypted hash to the receiver
5. Receiver uses the same special software
to hash the message they received
6. 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 10.3
Digital Signatures

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Security for E-Payments (cont.)


Digital certificates
verification 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

Name : Richard
key-Exchange Key :
Signature Key :
Serial # : 29483756
Other Data : 10236283025273
Expires : 6/18/04
Signed : CAs Signature

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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.) Prentice Hall, 2003

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Exhibit 10.4
Online 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 card


an 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 10.5
Participants & 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 rewardzcard
stored-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 storedvalue 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 epayment 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 echecks
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 10.9
Order Fulfillment and Logistics Systems

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EC Order Fulfillment Process


Steps in the process of order
fulfillment
1. Payment clearance
2.
3.
4.
5.

In-stock availability
Arranging shipments
Insurance
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 ordertaking 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 emarketplaces
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 backoffice operations in EC
The order fulfillment process
Problems in order fulfillment
Solutions to order fulfillment
problems
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