The Telecommunication and Information System and the Auction of AFA - Research Paper Example

Introduction: The Aalsmeer Flower Auction (AFA) is the largest flower auction and the largest commercial edifice in the world (Guinness World Records, 2001). The annual supply exceeds 4 billion flowers and 500 million plants, and the annual turnover of auctioned products amounts to 1.5 billion Euro. Daily, around 19 million flowers and 2 million plants are auctioned; resulting in around 50,000 daily transactions. AFA is located at the city of Aalsmeer, the Netherlands, close to Amsterdam and Schiphol Airport. It is also the largest trade building in the world, with a surface size of 150 football fields and an average daily number of 10,000 working individuals. AFA uses the Dutch auction mechanism, i.e., the price falls from an initial high price until a bidder stops the auction. Different roles of Aalsmeer Flower Auction (AFA) Price discovery Efficient allocation mechanism Distribution mechanism Coordination mechanism In the face of the recent problems faced by Aalsmeer Flower Auction Company this report proposes an Information System framework relating to initiating information technology for auction purposes in the flower market. Additionally the current processes are evaluated for shortcoming. The root cause of the problems faced by the company is identified and proposals are given to amply tackle them. The introduction of the new electronic market and IT based trading mechanism are discussed and illustrated. 1. Identify and analyse the business and information requirements of the board of the Aalsmeer Flower Auction, suggesting a suitable information strategy which will help them to achieve their business objectives and ensure competitive advantage in the industry. Organization Chart of Aalsmeer Flower Auction Current Situation of Aalsmeer Flower Auction (AFA) Globally-producing growers and globally active wholesalers and exports 55,000 transaction 19 million flower and 2 million plants 7,000 growers worldwide 1,375 wholesalers and exporters 44% market share 2,000 employees Annual turnover of over 1.5 billion Euros in 2002 Cut flowers around 1 billion Euro; plants 5 million Euro Competitive Forces Analysis of AFA Competitive Forces Analysis of AFA Value Chain and Industry of Aalsmeer Flower Auction (AFA) Initial suppliers : Growers Demand : exporters, importers, wholesalers, cash & carries and retailers Auction: Plays the role of a mediator and works to increase the efficiency of transactions and breaks bulk. Current Problems of Aalsmeer Flower Auction (AFA) Increasing Internationalization of the Industry – Russia & Poland; mergers and acquisitions led to a more formal way of doing business Increasing trade Outside the Auction – Africa and S. America; direct agreements with buyers by passing the auction; Dutch growers are obligated to sell via the auction with higher costs for the buyers New Technological Opportunities and the emergence of electronically driven flower market. Increase Power of Retailers: To satisfy changing consumer tastes the retailers asked for fresher products, more varieties, smaller quantities and multiple deliveries each week. Improvement Specification for Aalsmeer Flower Auction (AFA) Introduction of E-business applications Improvements in IT, marketing, and logistics arenas Development of open minded, creative, and ambitious electronic networks. Proposed Information System Solutions Hosting of Web based Auctions. Customer Relationship Management System Web based Research tool for growers and buyers Strengths and opportunities for Aalsmeer Flower Auction (AFA) 1. Netherland is the home to important genetic resources, with nearly 20,000 identified species of native plants. 2. Diverse and varying climates in different regions of Netherland allow year-round production in both open field and under shelter situations. 3. The good will of AFA is its biggest strategic asset and strength. It took the Dutch flower industry nearly 100 years to develop its pre-eminent degree of sophistication. 4. The wide market share is regarded one of its strengths. 5. The cost of labor in Netherlands is also comparatively less than hosts of many other countries. Weakness and threats for Aalsmeer Flower Auction (AFA) 1. AFA is faced with many economic, technological, social, and environmental challenges. The current production and handling efficiencies, yields, and quality has not kept up the pace as compared to those in countries such as Colombia, and Israel. 2. Growers lack ‘know-how’ with regard to modern floricultural production and handling systems. 3. Quality management throughout production, transportation, distribution and marketing has not been standardized. Moreover, producers can be more price-sensitive than quality sensitive because producing higher quality may require a greater investment which does not provide an immediate return. Thus, some operators would rather continue with low quality, cheap products for sale locally. 4. The overseas growers produce the flowers at the lower costs especially the emerging industry in China. 5. The emergence of TFA has also eroded the market share of AFA. 6. Better growing climate for varieties like the T-hybrids in countries like Ethiopia 7. The association between R&D and production practices is generally low. There is research being carried out about pre-harvest and post-harvest aspects of the industry. However, the results of this research require collaborative effort, genuine commitment, and financial investment to find their place in commercial practice. PEST Analysis Political Factors: The government is really supporative of the flower auction industry because an estimate of up to 100,000 jobs are somehow related to the flower industry. Additioanally the trade incentive are provided in the shape of reduced import duties and duty-free imports. The government also supports the infrastructure and dinance the research in this arena. The government of Netherlands is supportive of research at Agricultural University of Wageningen and other floriculture institutes. Economic Factors: The development of Netherlands national economy will also be reflected in the Flower production, auction and marketing industry. The domestic ornamentals market has great potential for further expansion. Many other internal political factors work to promote import and export opportunities with ornamentals in the international marketplace. Social Factors: The people do not have any general professional farming and managerial training. Additionally there is a lack of knowledge of international markets and its working Technology factors: The technological factors that are said to influence the Aalmeer Flower Auction is that the prevailing production and warehouse efficiencies and methodologies are not up to mark, updated and current. AFA’s Competitive Positioning Target Scope Low Cost Product Uniqueness Broad (Industry Wide) Cost Leadership Strategy Differentiation Strategy Narrow (Market Segment) Focus Strategy (low cost) Focus Strategy (Differentiation) Generic Competitive Strategies, Porter (1985) 2. From your knowledge of systems theory and systems development discuss an appropriate methodology which would help the Aalsmeer Flower Auction to identify and develop a new information system which would help them to cope with a changing environment. Market basically works to provides buyers and sellers a place to exchange or transfer goods and services in exchange for money. The earliest researches which dealt with the topic of effects of information systems and technology on the exchange and processes of the organization usually undertook the transaction costs and agency theory to predict shifts from hierarchies toward market or other intermediate forms of organization (Bakos, 1991, Jhonston and Lawrence 1988, Malone, Yates and Benjamin, 1987, Powell, 1990). A central argument of these articles was that information technology would improve communication, search, monitoring and information sorting capabilities, thereby reducing transaction cost and enabling purchasers to take advantage of production economics available in markets. Auction markets are the ones where traders transact directly through a centralized intermediary. The mechanisms of auction markets organize the trading process and related information processing activities in a unique way. Thus the impact and role of IT can vary across the auction market as compared to other market types. The Aalsmeer flower trade and auctions face new challenges. The first challenge is that the first buyers for supermarkets and large retail store chains are becoming increasingly sophisticated, purchasing larger volumes and coordinating purchases across different markets and auctions. In fact some large retailers like Marks and Spencer are bypassing the Aalsmeer auctions and their commissions to source directly from growers in Spain and other countries. Second, the sheer scale of transactions requires large amounts of space and generates substantial traffic to and from the auction houses. With current growth rates, traffic will be unmanageable within the decade and the auctions are close to their limits in terms of complexity and available space for expansion. Third the auctions confront a critical challenge of coping with the influx of foreign growers while serving the interests of Dutch grower cooperatives that own the auctions. One means of addressing these challenges is to re-engineer the auction house by using information systems and technology to enable the strategic management of the logistics, quality control and price determination processes. In this situation information technology will be used to coordinate and support the pricing and sale processes by using a data representation of the physical flower. The technology will also be applied to monitor the quality of the growers firm, and by coordinating shipping of the physical flowers directly from grower to the buyer. Information technology will then be used to register, analyze, trade and distribute flowers around the world. This would reduce space requirements and traffic problems at the auctions. It will allow growers to customize the delivery of flowers in the packaging required by different buyers and reduce damage to the product from frequent handling of the flowers. Technical Aspect of Proposed Information System Driven Network for AFA Phase 1: First Internet ordering Applications Phase 2: Flower Access Phase 3: Integrate e-selling unit with the mediation unit System Requirement of the Proposed Information System Driven Network for AFA There are a number of costs and challenges for implementing the electronic auctions system which are listed below; 1. There is a need for new quality assurance (monitoring) and influence mechanisms. The need is aroused because the growers specify the quality of their flowers which is often not 100% believed by the buyers. The lack of trust is reflected in the high prices the buyers pay for the sample lot. Additionally the product can also be damaged during the transportation. There is a need to counteract these risks with the help of influence and monitoring mechanisms. One recommendation is to inspect the flowers when they arrive at the buyer site and the quality can also be monitored before the product is shipped off. This calls for employing more inspectors. 2. The communication and hardware facilities of all the stakeholders also need to be upgraded accordingly. There would be a need to upgrade it to ISDN services. 3. The grower would also need information on logistics to make this electronic auction system a success. The logistics would work to reduce the costs involved in coordination between the buyers and the sellers. As a result of the internet operated auction system and the modern information and telecommunications facilities, the physical presence of the goods and people will no longer be required. This will have a dramatic positive impact on trade. The alternative route not only reduced time and therefore costs; it also cut out a number of merchants who had been responsible for unnecessary price increases. Wagenaar (1997, p.14) makes a few interesting conjectures on, what he calls, constants of the development of such new trade routes:  There is a feverish search for new routes to the ultimate customer to reduce transaction costs, i.e. by-passing is an ongoing process.  Once a new route has been discovered, the first movers try to monopolies it: they want to take ownership of this new access to the customer. trust (the customers ongoing confidence that what he gets is what he expected) is vital for the acceptance of any new trade route.  Payment and documentation to certify delivery of goods against their counter value (monetary or otherwise) are critical to the success of these new trade routes. So conclusively, to succeed as a new trade route, the Internet must reduce transaction costs, provide first-mover advantages, establish trust, and certify the delivery of goods. The new trade and auction mechanisms will put buyers and sellers on a global scale. Auctions are probably best known for their price transparency. Deals are affected on actual supply and actual demand at the time the auction takes place. It is a marketplace where price is dependent on the spur of the moment. Electronic auctions have the additional advantage of increasing the number of auction participants to anyone who is connected via the network and has been allowed access. Web-technology results in a swift from the traditional one-to-one negotiations using Electronic Data Interchange (EDI) to web-based auctions. The following types of web-based auctions can be distinguished as shown in Figure 1 and are further described here (Van Heck and Vervest, 1998). Secondly, electronic auctions which are driven by information systems need very flexible supply chains that can meet agreed fulfillment targets. When you buy something on the net, you also want to have it delivered: Your purchase decision invokes another transaction, i.e. the transport transaction. The web based auction system for AFA manages transaction integration as the commercial transaction (buy/sell), logistical transaction (deliver), payment transaction and administrative handling transactions are linked together across the fulfillment chain. Electronic auctions will play an important role in managing and supporting the fulfillment chain of delivery, payment and administrative handling. 4. Consider the impact and effectiveness of a new system for the organization, management and employees. The possible risks associated with our proposed Auction System are; Rise in costs of infrastructure Misleading information published to users. Feedback problems Reputation decline Kambil (1992) identified ten distinct processes that can operate in an exchange relation providing a basis for a finer grains analysis of market structure. The ten exchange related processes provide parties to an exchange relation with the information processing, coordination and influence mechanisms required to mitigate uncertainty and exchange related risks. The traditional Dutch flower auctions and alternative means of trading enabled by information technology are examined and compared in the following sections. Exchange related Processes Strengths of the Electronic Auction Vs. Traditional Auctions Weaknesses of the Electronic Vs. Traditional Auctions. 1. Search The search is more efficient compared to the sequential display of products in a traditional auction. 2. Communications Very efficient for the buyer and the growers. 3. Product Specifications Efficient Visual representation of the product using images Buyer sees an image vs. real product. Resolutions cannot communicate other details. Assessment of quality becomes more difficult. 4. Valuations Efficient for valuing sales. Growers are involved in price setting and order of transaction does not matter for the clearing price. 5. Logistics Reduce packaging and handling costs. Requires logistics support and coordination system to support direct delivery to buyers. 6. Settlements Very efficient with one day settlement period. 7. Influence Very efficient in a centralized system. Distributed and more costly. 8. Legitimization Efficient. 9. Monitoring Quality assessment outside the halls of auctions between the buyer and grower become more difficult. 10. Dispute Resolutions Arbitration mechanism of the auction reduces dispute resolution costs. Arbitration mechanism and incentives to assure quality need to be implemented. The summarized comparative strengths and weaknesses of the electronic trading system in comparison to traditional auction system highlight various advantages to this system. The first benefit of this information system driven and internet operated auction network is that it clears the market more quickly and efficiently while also sustaining ample competition among buyers. Due to this new proposed network the buyers get to bid on larger sizes and are not constraint with capacity limitation which is the case in the traditional floor based auction. So, the speed and the efficiency of the trading and auction is greatly increased as a result of this trading mechanism. The participation of growers in price setting process is greatly increased as a result of this new proposed auction network. They also get to reserve their stocks by not harvesting for a few extra days. The competitiveness of the AFA growers can be greatly increased because they can ensure overnight delivery as a result of this new proposed network. The competitive infrastructure gives the growers a critical advantage in the face of foreign competition. The overall handling and the packaging costs are greatly reduced as a result of the proposed network. The potential of uncertainty on the part of the buyers will be reduced as they will get to acquire their inventory beforehand because of the efficient networking. Finally the proposed internet operated auction system increases the transparency of the market for all the stakeholders involved. Conclusion The proposed web based and information system driven auction system is a novel way for AFA to interact with its market. It is expected to increase both the profitability and good will of the firm. The telecommunication and information system combine forces to make the marketing, purchase and auction of AFA a success. References: Bakos, J.Y. (1991), “Information Links and Electronic Marketplaces: The Role of Inter organizational Information Systems in Vertical Markets”, Journal of Management Information System Vol. 8.2 pp: 31-52 Bartholdi J.J. and Eisenstein D.D., “A self-balancing order-picking system for warehouse,” working paper, School of Industrial Engineering, Georgia Tech, USA(1996). Bloemenveiling Aalsmeer (1996a), Annual report Elshof, P. (2000), The Dutch flower sector: structure, trends and employment, Working paper, ILO, Geneva. Kambil, A. (1992), “Electronic Integration: Designing Information Technology Mediated Exchange Relations and Networks.” Doctoral Dissertation, Sloan School of Management, Massachusetts Institute of Technology Koppius, O., Electronic Auctions, Market Efficiency, and Strategic Impact, PhD Proposal, Rotterdam School of Management, Erasmus University, Rotterdam, 1999. Pine, B.J., Mass Customization: The New Frontier in Business Competition, Harvard Business School Press, Boston, 1993. Porter, Michael E.(1985), “Competitive Advantage” Ch. 1, pp: 11-15. The Free Press. New York. Van Heck, E. and P. Vervest, How should CIOs deal with web-based auctions? Commun. ACM, 41, 7 (July 1998), 99-100. Van Heck, E., E. van Damme, J. Kleijnen, P. Ribbers, New Entrants and the Role of Information Technology: The Case of the Tele Flower Auction in the Netherlands, in: J.F. Nunamaker and R.H. Sprague (eds.), Proceedings of the Thirtieth Annual Hawaii International Conference on System Sciences (HICSS), vol III, IEEE Computer Society Press, Los Alamitos, p. 228-237, January 1997. Wagenaar, R.W., De virtuele koopman, fictie of werkelijkheid, Inaugural Speech (in Dutch), Faculty of Economics, Free University Amsterdam, Amsterdam, 14 March 1997. Read More