“E-REVERSE AUCTIONS IN PURCHASING: THE PROBLEM OF DESIGNING AN APPROPRIATE E-REVERSE AUCTION SOLUTION” A study submitted in partial fulfilment of the requirements for the degree of Master of Science in Information Systems at THE UNIVERSITY OF SHEFFIELD by ANDREA LOESCH September 2003 i Abstract This dissertation aims to investigate e-reverse auctions in corporate purchasing. The research issue comprises the problem of how to design an appropriate e-reverse auction solution that meets the complex constraints of purchasing. In order to answer that question, a case study was carried out at a German software designer called Hybris. Interviews with both the CSO and the Manager for Technical Support and Training were conducted following the stages of Soft System Methodology (SSM). The revision of previous work suggests that e-reverse auctions are a valid tool for buyers to purchase goods from suppliers as they allow for great cost reductions. They may be applied to different purchasing situations, for instance private B2B exchanges or marketplaces. However, each application area requires its own functionality: The purchasing situation determines which people are involved in the e-reverse auction, what goods are purchased, and which processes need to be included. Regarding the technical environment of e-reverse auction software, the Internet provides a good basis for e-reverse auctions as it greatly reduces the transaction costs and allows to share and display remote data. In addition, technologies such as XML, CGI, and API enable the integration of the e- reverse auction tool with already existing information systems. The research findings correspond to the suggestions of the literature review: The e-reverse auction tool as suggested by Hybris does not only support the essential e-reverse auction processes. Depending on the purchasing situation it may also include additional processes required by the particular setting. Yet, the technical environment for the e-reverse auction solution is limited because the tool will be developed as a part of the Hybris Jakarta – a software platform provided by Hybris. Due to the special situation of consulting a software designer, the results and findings in this dissertation can only be discussed with regard to the evidence obtained from the literature review. At the same time, the critical discussion reveals the major drawback of the e-reverse auction tool: its dependency on the Hybris Jakarta platform. The summary and conclusions of this study indicate that a lot of research needs to be done in future to further investigate the problem of how to design an appropriate e-reverse auction solution. (362 words) i Acknowledgements I wish to take this opportunity to thank the following people who have been crucial to the creation of this of work: Firstly, my supervisor Miguel Nunes for his great support throughout the whole year, not only regarding this dissertation but also regarding my PhD. Thanks for your help, your advice and the interesting discussions. Secondly, special thanks to my dear granny who has always been encouraging me with my studies and who has now the probably highest phone bill ever. Je te remercie beaucoup, Bernadette! Thirdly, I want to thank my parents and my ‘little’ brother for their continuous support and the hundreds of miles they have been driving to collect me at the airport. Fourthly, big thanks and a big hug to my great boyfriend Ed who has been there for me throughout all ups and downs and never let me down. Thanks for keeping me going! Last but not least, thanks to all my friends in England and back at home. That goes especially to Mo and AJ who waited with their wedding till I would have finished my dissertation! ii List of Figures Figure 1: Dependencies within the Software Industry Producing B2B Purchasing Solutions 6 Figure 2: Purchasing Process Model and some Related Concepts (van Wheele, 2000:15) 18 Figure 3: Market Framework (Teich et al., 1999:47) 31 Figure 4: Bundled Bid Example (Davenport et al., 2001:13) 36 Figure 5: Simple Bids, Bundled Bids and Supply Curves (i.e. Volume Discount Bids) (Davenport et al., 2001:10) 37 Figure 6: Process Flow for E-Reverse Auctions (Davenport et al., 2001:9) 39 Figure 7: The Typical Architecture for Web-based Software Solutions (Korper and Ellis, 2000:92) 45 Figure 8: The Basic Internet Architecture (Kalakota and Whinston, 1997:96) 48 Figure 9: CGI and the Internet (Kalakota and Whinston, 1997:96) 52 Figure 10: The Rich Picture of E-Reverse Auctions 57 Figure 11: The First Conceptual Model of E-Reverse Auctions 66 Figure 12: The Second Conceptual Model of E-Reverse Auctions 68 Figure 13: The Final Conceptual Model of E-Reverse Auctions 69 iii Figure 14: The Functional Requirements 71 Figure 15: The Non-Functional Requirements 75 Figure 16: The Business System Options (BSOs) 76 Figure 17: The J2EE Architecture (Sun Microsystems, 2003b) 77 Figure 18: The Hybris Jakarta Platform Layers (Latka, 2003) 79 Figure 19: The E-Reverse Auction Extension Folder in the Hybris Jakarta 83 Figure 20: TSO 1 as proposed by Hybris (Hybris, 2001) 86 Figure 21: TSO 2 as proposed by Hybris (Hybris, 2001) 86 Figure 22: TSO 3 as proposed by Hybris (Hybris, 2001) 86 Figure 23: TSO 4 as proposed by Hybris (Hybris, 2001) 87 Figure 24: TSO 5 as proposed by Hybris (Hybris, 2001) 87 Figure 25: TSO 6 as proposed by Hybris (Hybris, 2001) 87 Figure 26: TSO 7 as proposed by Hybris (Hybris, 2001) 88 Figure 27: TSO 8 as proposed by Hybris (Hybris, 2001) 88 iv Table of Content 1 INTRODUCTION 1 1.1 BACKGROUND 1 1.2 DEFINITIONS 2 1.3 THE RESEARCH ISSUE 4 1.4 RESEARCH QUESTIONS AND OBJECTIVES 4 1.5 METHODOLOGY 5 1.5.1 THE RESEARCH ENVIRONMENT 5 1.5.2 APPROACH TO RESEARCH 6 1.5.3 METHODS OF INVESTIGATION 10 1.5.4 LIMITATIONS 12 1.6 DISSERTATION STRUCTURE 15 2 LITERATURE REVIEW 16 2.1 PURCHASING 16 2.1.1 DEFINITIONS: PURCHASING AND E-PROCUREMENT 17 2.1.2 THE DIFFERENT DIMENSIONS OF PURCHASING 20 2.1.3 ICT IN PURCHASING 24 2.1.4 ORGANISATION OF ELECTRONIC PURCHASES 26 2.2 E-REVERSE AUCTIONS 28 2.2.1 AUCTIONS 29 2.2.2 REVERSE AUCTIONS 30 2.2.3 ICT IN AUCTIONING 33 2.2.4 CURRENT ISSUES IN E-REVERSE AUCTIONING 34 2.2.5 PROCESS OF E-REVERSE AUCTIONS 38 2.3 TECHNOLOGY FOR E-REVERSE AUCTION SOFTWARE 43 2.3.1 BASIC REQUIREMENTS FOR E-REVERSE AUCTION SOFTWARE 43 2.3.2 ARCHITECTURE FOR E-REVERSE AUCTION SOFTWARE 45 2.3.3 THE INTERNET AS TOOL FOR INTEGRATION 47 2.4 SUMMARY 53 v 3 RESULTS AND FINDINGS 55 3.1 DOMAIN DESCRIPTION 55 3.2 THE PROBLEM SITUATION EXPRESSED: RICH PICTURE 56 3.3 ROOT DEFINITION AND CATWOE ANALYSIS 61 3.3.1 THE CLIENTS: FOR WHOM? 61 3.3.2 THE ACTORS: WHO? 62 3.3.3 THE TRANSFORMATION: WHAT? 62 3.3.4 THE WELTANSCHAUUNG: ASSUMPTIONS 63 3.3.5 THE OWNER 63 3.3.6 THE ENVIRONMENT 64 3.3.7 THE RESULTING ROOT DEFINITION 65 3.4 THE CONCEPTUAL MODEL 65 3.4.1 IDENTIFYING AND EXTRACTING THE VERBS WHICH FORM THE MAIN TRANSFORMATION 66 3.4.2 ORGANIZING THE VERBS INTO ACTIVITIES AND DEFINING THE MAIN LOGICAL DEPENDENCIES 66 3.4.3 CONSIDERING EACH ACTIVITY IN TURN AND ASKING “WHAT ACTIVITIES MUST GO ON DIRECTLY PRIOR TO THIS ACTIVITY?” 67 3.4.4 ADDING CONTROL ACTIVITIES BY CONSIDERING THE IDEA OF THE SYSTEM 68 3.5 THE REQUIREMENTS 69 3.5.1 FUNCTIONAL REQUIREMENTS 70 3.5.2 NON-FUNCTIONAL REQUIREMENTS 72 3.6 RESULTING BUSINESS SYSTEM OPTIONS (BSOS) 75 3.7 IMPLEMENTATION 76 3.7.1 THE SOFTWARE PLATFORM 77 3.7.2 FRONT- AND BACK-END INTEGRATION 82 3.8 THE RESULTING TECHNICAL SYSTEM OPTIONS (TSOS) 85 4 DISCUSSION 89 4.1 THE DEVELOPMENT OF BSOS AND TSOS 89 4.2 BUSINESS SYSTEM OPTIONS (BSOS) 91 4.2.1 THE BASIC VERSION 91 vi 4.2.2 APPROVAL OF E-REVERSE AUCTIONS 92 4.2.3 FACILITIES TO AUCTION HETEROGENEOUS GOODS 93 4.2.4 ALGORITHMS FOR OTHER REVERSE AUCTION TYPES 95 4.3 TECHNICAL SYSTEM OPTIONS (TSOS) 95 4.4 SUMMARY 99 5 CONCLUSIONS AND FUTURE WORK 101 5.1 SUMMARY AND CONCLUSIONS 101 5.2 FUTURE WORK 102 REFERENCES 105 GLOSSARY 112 APPENDIX 120 vii 1 Introduction The dissertation at hand is concerned with e-reverse auctions in purchasing and the problem of how to design an appropriate e-reverse auction solution. In order to facilitate the understanding of this subject, this chapter will give a brief summary of the background of this particular business area (1.1 Background). It will then develop the relevant definitions (1.2 Definitions) and present both the research issue (1.3 The Research Issue) and the research questions and objectives (1.4 Research Questions and Objectives). The chapter will also introduce and discuss the methodology used to investigate the research issue (1.5 Methodology). Finally, the dissertation structure will be presented (1.6 Dissertation Structure). 1.1 Background Information and Communication Technology (ICT) are frequently addressed as the enabler of great improvements: Advances in information technology allow for more information to be communicated in the same unit of time, thus reducing transaction costs; furthermore, a tighter electronic linkage between buyer and seller is enabled (Axelsson and Wynstra, 2002). However, the use of ICT to support business activities is not completely new. In the early 1970s, Electronic Funds Transfer (EFT) proved to be the only way of efficiently handling massive volumes of transactions generated daily by the banking industry (Barnes and Hunt, 2001:1).