Chapter Eleven: Electronic Commerce Payment Systems, Order Fulfillment, and Other Support Services 1

ONLINE FILE W11.1 EC Application ’S OCTOPUS CARD

In Hong Kong, virtually everyone uses public transportation city bus system, the electric trams on Hong Kong Island, at least once in a while, and, as a consequence, close to the trains to and from the airport, as well as the tram to 95 percent of the residents in Hong Kong carry a metro card. Victoria Peak. A number of private or quasi-government In Hong Kong, the metro card is known as the Octopus Card, firms run these systems. Early in 1997, the various systems named after the company—Octopus Ltd.—that issues the decided to sign with the Octopus system. In all likelihood, cards and manages the payment system. The Octopus Card is if they had decided to issue their own transit cards, the a contactless stored value that comes in many smart card payment system would have failed to reach shapes and sizes. Besides its standard smart card format, critical mass. the card’s chip has been embedded in jewelry, watches, and Today, the public transportation system in Hong Kong mobile phones, to name just a few items. runs on the assumption that nearly everyone has an Regardless of its form, the card works the same way. Octopus Card. Those riders without cards often face long The card is passed near a scanner mounted on a subway lines and the constant need to have coins for fares. This is turnstile or at the front of a bus, tram, or ferry. The especially true on the city bus system where fares must be scanner reads the card, deducts the fare, and displays the paid with coins in the exact amount or a higher amount. remaining amount on the card. The scan takes about The Octopus Card eliminates all the hassle. The only 0.3 seconds, compared with 1 or 2 seconds for a contact downside of the card is that riders who lose their cards are card. Altogether, the Octopus system handles over out of luck. The Octopus Card is like cash, so if someone 7 million transactions per day, worth about $6.4 million. finds a card he or she can use it until its value is Octopus Cards can be purchased in a number of exhausted. places. They cost $20, of which $6.50 is a safety deposit Besides paying for transit fares, the Octopus Card is and the remainder is the amount that can be spent on starting to become an all-purpose debit card. , transportation fares. When the available funds on the card Circle K, 7-Eleven convenience stores, Maxim’s cake shops, are exhausted, simply inserting the card in an add-value a number of fast-food restaurant chains, and a range of machine along with $6.50, $13, or $65 in cash reloads the grocers now accept the card as a form of payment. Even card. The amount of cash is credited to the card and then so, over 90 percent of all transactions made with the card it is ready to go. Physically, the card has a life span of are for transit fares. about 10,000 transactions. The public transportation system in Hong Kong offers a wide variety of options, including the Mass Transit Questions Railway (MTR) subways, the Kowloon-Canton Railroad that runs to the Chinese border, the Light Rail Transit in the 1. How does the Octopus Card work? , the , the interisland ferries, the 2. What accounts for the success of the Octopus system?

REFERENCES FOR ONLINE FILE W11.1 Bailey, S. “Riding the Hong Kong Octopus.” geocities.com/hal9000report/hal56.html (accessed ThingsAsian, June 26, 2003. thingsasian.com/ March 2008). stories-photos/2582 (accessed March 2008). Munroe, T. “Plugged In: Hong Kong Embraces the Octopus Card.” BusinessWorld Online, June 6, 2002. 2 Part 5: EC Support Services

ONLINE FILE W11.2 EC Application STORED-VALUE CARDS: TAPPING THE TEEN AND PRETEEN MARKETS

“We’re living on a plastic planet, where even vending WildCard was looking for a way to provide a turnkey machines, parking meters and Starbucks branches are now payment system that would meet the needs of both parents accepting credit and debit cards for everyday transactions. and teens by offering a card that would provide: Small wonder that high schoolers—who were expected to ◗ A parent-controlled reloadable payment card that would spend $195 billion in 2006, according to a study by the be accepted anywhere that Visa was accepted, including Harrison Group—hanker for their own charge cards” online and ATM cash machines. (Campbell 2006). According to a 2006 study by the ◗ Stored-value functionality so that teens can only spend Jump$tart Coalition for Financial Literacy, almost up to the amount established by their parents and 50 percent of high school seniors in the United States loaded onto the card. have a credit card. Close to half of the students have a ◗ A Web site where parents and teens could enroll for the card in their own names, whereas the other half uses their card; add value through checking accounts, savings parents’ cards. In order to serve the market of children accounts, credit cards, or debit cards; set up recurring under the age of 18, MasterCard and Visa have introduced allowance schedules; shop online; and check balances a number of preloaded, open-loop stored-value cards. and transaction history. These prepaid cards look like a regular plastic credit ◗ Parental-control features so parents could maintain card, but the cardholder has no line of credit. Instead, control over the account through the Web site. they are more like debit cards where the cardholder can ◗ An educational component on the Web site so that teens only spend up to the amount loaded on the card. The could learn about financial responsibility and budgeting. cards are accepted anywhere a MasterCard credit card or Visa credit card are accepted—at stores, online, and at WildCard licensed the Visa Buxx product to Visa. Five ATM machines. Visa card issuers, including Bank of America, Capital One, For the under-18 market, MasterCard offers the National City, U.S. Bank, and Wachovia Bank, launched the affinity-based MYPlash card, which features images system in 2000. Today, the card is offered by a wide range of rock stars and athletes on the cards, as well as of banks throughout the United States. For issuing banks, the Allow Card (short for allowance card), which is a the card helps build stronger relationships with existing prepaid debit card. Not to be outdone, Visa offers a customers (parents) and establishes relationships with new variety of cards that cater to the under-18 market. One customers (the teens). In 2005, eFunds acquired WildCard. of these is the RushCard, developed in conjunction with Although these prepaid cards have a number of hip-hop mogul Russell Simmons. Besides working any- benefits, there is also a big downside. Excluding the actual where a Visa card is accepted, the card also works with use of the card, card issuers charge users fees for virtually mobile phones and provides discounts on clothing from every action. Most card issuers collect fees for enrolling in Simmons’ Phat Farm and Baby Phat. Another is the Visa the program, reloading or replacing the card, and for UPside card, which teaches responsible spending. making inquiries about the balance remaining on the card. Toward this end, Visa has developed a number of Some issuers charge the cardholder if the card is not used financial literacy programs for teachers and schools for a few weeks or months. (see spendresponsibly.com). Probably the best known of the Visa offerings aimed at the under-18 market is the Visa Buxx card (pronounced Questions “bucks”). The Visa Buxx program was started in the fall of 1. What is the market for MasterCard’s MYPlash card 1999 by WildCard Systems. WildCard created the system in and Visa’s RushCard? order to tap into the teen market. In the United States, there are more than 30 million teens between 13 and 2. What key characteristics underlie WildCard’s Visa 18 years of age, and they spend more than $160 billion Buxx system? annually. Most of their spending involves cash provided by 3. What is the major downside of prepaid, preloaded their parents. cards for the under-18 market? Chapter Eleven: Electronic Commerce Payment Systems, Order Fulfillment, and Other Support Services 3 REFERENCES FOR ONLINE FILE W11.2 Campbell, C. “Educating Teens About Credit.” 2006. mijumpstartcoalition.org/PDF/2006NatJumpstart bankrate.com/cnn/news/cc/20070109_teen_credit SurveyAnswers.pdf (accessed March 2008). _debit_card_a1.asp (accessed March 2008). WildCard Systems. “Visa Buxx: Case Study.” 2004. Jump$tart Coalition for Financial Literacy. “2006 corporate.wildcardsystems.com/index.cfm?pageid Jump$tart Questionnaire with Answers.” 2006. =p09 (accessed March 2008).

ONLINE FILE W11.3 EC Application GOLDEN CHANG MOVES TO TRADECARD ONLINE PAYMENTS

Golden Chang is a medium-sized, Taiwanese footwear resolved, we await the buyer’s approval and payment.” manufacturer with annual sales of over $250 million and TradeCard is bank neutral and provides access to multiple over 10,000 employees. The company specializes in the financial institutions. production of casual shoes, safety shoes, and hiking boots. The TradeCard system enables Golden Chang’s financial It has its own trademark brand, Road Mate Casuals, but it and sales staff to view all transactions online instantly; also manufactures shoes for many well-known global immediately check the status of any transaction; monitor brands, including Timberland, Dr. Martens, Wal-Mart, and report on cash flows; negotiate discrepancies online; L.L.Bean, Caterpillar, and Wolverine Worldwide. Most of and approve documents regardless of whether they are in Golden Chang’s shoes are sold overseas, with the main the office or on the road. This has resulted in a substantial markets being Europe, the United States, and Canada. reduction of paperwork between the company’s offices in Shoe manufacturing is a complex business, requiring Taiwan, Macao, Hong Kong, and the United States; the hundreds of external suppliers to provide a range of product elimination of errors caused by rekeying data; faster turn- materials for the soles, heels, and uppers in addition to around of documents and orders; cheaper document trans- accessories, such as laces, eyelets, nails, and thread. The mission; and better management of cash flows and credits. supply of these materials has to be coordinated with peak In the future, Golden Chang plans to institute tighter demands in April and October, as well as a continuous integration between its trade processes and its ERP and EDI stream of small deliveries aimed at replenishing retail stock systems. Currently, its ERP system is used to manage factory on very tight delivery schedules. operations and to link those operations to various head- Wolverine Worldwide Inc. introduced Golden Chang to office functions, such as order and procurement processing. the TradeCard system for automating financial processes in Integrating the ERP systems with TradeCard would speed the the supply chain. Golden Chang began using the system in flow of documents and reduce transaction time. A key ele- 2001. One of Golden Chang’s primary goals was to replace ment of this integration is EDI. EDI enables the online L/Cs with payment-assured transactions. Assured trans- exchange of documents between trading partners regardless actions reduce bank fees and make it possible to address of their format. EDI reduces keying errors, speeds transac- discrepancies online. Golden Chang estimates that assured tions, and reduces costs. Golden Chang expects to build the transactions have saved about 75 percent on transaction integration of these systems on TradeCard. costs, reduced the number of errors, and, as a result, By 2005, Golden Chang’s use of TradeCard helped to substantially reduced the number of discrepancies. significantly reduce its reliance on paper documents for TradeCard offers an “open network” that provides an many of its transactions. This has reduced the flow of online interface that all the trade partners—suppliers and paperwork between its offices in Taiwan, Macao, Hong buyers—across multiple supply chains can use. This Kong, and the United States. eliminates the need to set up individual links between the partners for particular processes. The overall system enables complete processing of transactions from purchase to pay- Questions ment. In Golden Chang’s own words, “We receive and view 1. How does Golden Chang employ the TradeCard Open the online purchase order, create shipping documents, and Network? eventually, when the consignment has been delivered to the 2. What are the key benefits of TradeCard to Golden customer, complete an invoice and submit all documents to Chang? the TradeCard engine. When any discrepancies have been 4 Part 5: EC Support Services REFERENCES FOR ONLINE FILE W11.3 TradeCard. “TAL Apparel Takes Online Goods to the TradeCard. “TradeCard Brings Innovative Financial Next Stage with Tradecard.” 2004. tradecard.com/ Supply Chain Solution to Footwear Companies in languages/EN/documents/TALCaseStudy.pdf China.” September 21, 2005. tradecard.com/ (accessed March 2008). news/pressreleases/dongguanfootwear.html (accessed March 2008).

ONLINE FILE W11.4 EC Application HOW DELL COMPUTER FULFILLS CUSTOMER REPAIR ORDERS

One of Dell’s success factors is its superb logistics and about 10 employees to successfully process more than order fulfillment systems. Customer orders, which are 6,000 service orders every day. received mostly online, are automatically transferred to The online system generates timely information about the production area, where configuration determines which demand forecast, the cost of needed inventory, and “days components and parts are needed to create the customized of supply of inventory.” It compares actual with forecasted computer that the customer wants. demand. This enables Dell to communicate critical Once configuration is complete, the problem becomes information to external and internal customers, reducing how to get all the needed components so that a computer order fulfillment delays. can be ready for shipment the next day. As part of the Producing or acquiring the required parts through solution, Dell created a network of dedicated suppliers for component substitution, upgrades, and engineering- just-in-time deliveries, as well as a sophisticated change orders must be effective in order to provide superb computerized global network of components and parts customer service at a low inventory cost. The system also inventories. The global network also is used for product provides an online standard body of knowledge about parts services (e.g., repairs, upgrades, demanufacturing, etc.). and planning strategies. Let’s examine how Dell provides service when a computer that is in the customer’s possession needs to be repaired. Dell is trying to achieve for repairs, upgrades, Questions and other services the next-day shipment that it uses for 1. What portions of order fulfillment does this process new computers. For repair activities, Dell needs parts and improve? subassemblies to be delivered to hundreds of repair 2. Enter xelus.com and find information about its stations, worldwide, from internal warehouses or external inventory optimization and other SCM-related vendors. The search for the parts and their delivery must products. List the major capabilities of the products be done very quickly. it offers. To facilitate this search for parts, Dell is using an online intelligent inventory optimization system from LPA 3. Enter dell.com and find information about how Dell software (xelus.com). The system can reconcile the demand conducts repair (warranty) customer service. for parts with the action needed (e.g., repair, upgrade, 4. Relate this case to the discussion of “returns” in transfer, or demanufacture). For example, the system this chapter. allows Dell to factor the yield on reusable parts into its 5. What competitive advantage is provided by this Dell supply projection. This enables Dell to use repairable parts system? to compress time and reduce costs, enabling a team of Chapter Eleven: Electronic Commerce Payment Systems, Order Fulfillment, and Other Support Services 5 REFERENCES FOR ONLINE FILE W11.4 CIO Magazine. Advertising supplement, October 1, 1999. Xelus Inc. “Case Study: Dell,” 1999. xelus.com/ Dell. dell.com (accessed March 2008). industries/cs_dell.html (no longer available online).

ONLINE FILE W11.5 EC Application GROCERY SUPERMARKET KEEPS IT FRESH: WOOLWORTHS OF AUSTRALIA

Dealing with early movers of pure e-tailing is a major supermarkets, rather than from every local store. There is problem for established retailing. How is a well-established an AU$50 minimum order, and a 7.5 percent surcharge for major supermarket to respond? With huge investments in home delivery, as well as an AU$6 delivery charge. This brick-and-mortar stores, Woolworths of Australia found helps in recovering the additional costs, but an average itself dealing with just this question. Three major players order, around AU$200, still returns little profit. dominate the grocery market in Australia: Coles Myers, New users can register only if deliveries are possible Woolworths, and Franklins. These three companies control to their postal address. On first use of the system, the some 80 percent of the marketplace. Franklins, which is customer is guided to find the products that they want with owned by a company in Hong Kong, takes a low-cost, suggestions from the list of best-selling items. Alternatively, minimum-service approach. The others, both Australian- the customer can browse for items by category or search by based, provide a full range of products, including fresh keyword. Items are accumulated in the “shopping trolley” foods and prepared meals. (cart). The first order is entered into a master list for future Woolworths’s initial approach was to set up a orders, as are subsequent orders. standard Web site offering a limited range of goods, but When the customer has selected the required items, excluding perishable items. The delivery service was they select “checkout”; at that point the total value is initially available only in areas near the company’s major computed and the customer confirms the shopping list. supermarkets. Woolworths felt it had to respond to the Payment is made only at time of delivery using a mobile newly emerging approaches from online entrepreneurs. (cellular) electronic funds transfer (EFTPOS) terminal, and If those organizations were allowed to take over a either a credit card or a debit card. In this way, precise sizable segment of the market, it could be difficult to charges can be made based on weight of meat or fish, as recover it. well as allowing for out-of-stock items. It was not long before management realized that this The customer has to set the delivery time and day. was not an effective approach. Woolworths’s staff had to If the customer is not home to accept the delivery, walk the aisles, fill the baskets, pack the goods, and deliver additional charges will be applied. them. For an organization that had optimized its supply Additional services that are available include dietary chain in order to cut costs, here was a sudden explosion in advice, recipes, and recording of preferred food items. costs. When gross margins are only 10 percent, and net margins around 4 percent, it is very easy to become Source: Written by Professor Ernest Jordan, Macquarie Graduate unprofitable. School of Management, Australia, August 2000. Used with author’s Furthermore, Woolworths has established its place in permission. public perception as “the fresh food people,” with fruits and vegetables, freshly baked breads, meats, and prepared meals being promoted heavily. If home shopping ignores Questions these, Woolworths is avoiding its strengths. 1. Describe the driver of the online initiative. Woolworths’s Homeshop, the second-generation home shopping site (woolworths.com.au), was designed with 2. Describe the difficulties of moving online. freshness in mind, and all the fresh foods are available for 3. Find the status of online service today at delivery. Deliveries are arranged from major regional woolworths.com.au.