To e, or not to e? Not quite, but automakers trying to save princely sums via Internet

October 25, 2001
By: Bernard Swiecki

The idea was to have e-commerce solve everything. Then the thud of a million dot-coms hitting bottom gave people a new perspective. Are automakers still hip on e-commerce? You'd better believe it.

To e, or not to e? And the answer is complex. Electronic commerce was heavily hyped in the past half decade. The auto industry, it was proclaimed, was headed for a transformation. Everything from procurement to vehicle and component design was going online. OEMs were aglow at the prospect of tremendous cost savings.

But suppliers were not so sure.

The bursting of the dot-com bubble has brought reality to the e-hype that swept the stock market. Former CEOs have moved back into their parents' houses, pondering past stock options and future careers. The question that begs to be asked is, "Has the thud of the dot-coms tempered the e-commerce ambitions of OEMs?" The answer appears to be, "Not much."

The Center for Automotive Research (CAR) recently performed a study funded by SupplySolution. The objective was to ascertain the importance of e-commerce in the current automotive supply chain and to get a feel for its importance in the near future.

The study's centerpiece was a survey of 16 system integrator-level automotive suppliers. System integrators are contracted by OEMs to provide not just parts or components but entire vehicle systems, such as suspension modules and steering systems. Because of the complexity of the systems they supply, system integrators have deep supply chains and an acute need for collaboration with their suppliers. These respondents were polled not on their use of e-commerce with OEMs, but on e-commerce activities with lower-tier businesses in their supply chains. Respondents accounted for a total of $70 billion in automotive sales, and the average respondent manages a supply chain of about 1,300 firms.

Seventy-seven percent of the respondents indicated that they plan to reduce the number of suppliers they purchase from over the next 12 months, with the average reduction being 21 percent. The capability to do e-business, then, is a key factor in deciding which suppliers will get the jobs. Fifteen percent of the survey respondents indicated that they currently choose suppliers based on their ability to do e-business with them. They also indicated that e-commerce will grow in significance - 77 percent plan to select suppliers based on their ability to do e-business in two to three years.

That last statistic highlights another key characteristic of e-commerce: Its benefits can be fully realized only when it is applied throughout all the tiers of a supply chain. The firms in the top tiers almost certainly will permeate their supply chains with e-commerce - a drastic change from the status quo. During the focus group interviews that led up to the survey, the suppliers that were interviewed indicated almost no e-commerce activity in the lower tiers of their supply chains.

In addition, the study's respondents indicated that, on average, 3 percent of their current capital expenditures are directed toward e-commerce initiatives. That number was forecast to grow to 13 percent in the next two to three years. The remarkable growth in this figure alone reveals that Tier 1 firms are indeed very serious about e-commerce.

What Will This Mean?

So just what activities will constitute supply chain e-commerce? Three categories emerge.

The respondents indicated that online procurement currently is the most important online activity, with a score of 2.9 out of 4, where 4 equals "required for success." Trailing procurement were engineering design and demand planning and management, with scores of 2.5 and 2.4, respectively. In two to three years, procurement is expected to remain the most important activity, with a score of 3.5 out of 4. Demand planning and management is expected to rise to 3.4 and engineering design to 3.2.

Demand Planning and Management. Several suppliers in the study already use the demand planning and management facet of e-commerce.

This facet involves forecasting and managing shipments, ordering, and production, using the latest available data, which is provided online. Some suppliers give their suppliers access to extremely accurate data on their own operations. The application of this data throughout the supply chain can result in significant cost savings, because it can cut down on premium freight, reduce inventories, and eliminate waste.

Engineering Design. One of the greatest promises of e-commerce is its ability to change the way parts are designed. It can allow engineers from OEMs to cooperate on design with those from each supplier involved in a vehicle system. This cooperation pays dividends in the form of instant information sharing throughout the entire supply chain, thus ensuring that everyone is working on the latest design. In the past changes in part specifications tended to take a long time to reach engineers at firms farther down the chain, resulting in delays and waste of valuable engineering resources.

Procurement. The emphasis on online procurement may be confirmation of what suppliers have feared all along-that e-commerce will lead to further cost pressures from OEMs (and for lower-tier suppliers from their respective customers). Purchasing portals use online auctions, which put considerable pressure on bidders and have generated not a few complaints from them. Just how online procurement will affect suppliers remains to be seen, but their concern is clear. The study's respondents expressed a great deal of concern about online portals.

Covisint, the portal created by Ford, GM, and DaimlerChrysler, rapidly is expanding its abilities. It already has begun holding reverse auctions online.

The respondents' greatest concern regarding portals is the security of confidential information (scoring a 2.7 out of 3). There are two dimensions to security risk when using reverse auctions on a portal. First is the concern that proprietary information could be leaked either by a flaw in programming or because of hacking. The second concern is much more subtle: Over time it is possible that bidders, though technically anonymous, would come to know exactly which firms they are bidding against. If they know these firms' bids for various components, they will know the lowest price that makes sense for each firm on a given component, thus getting a glimpse into their competitors' cost structures.

One line of thinking about reverse auctions is that eventually they will have to evolve to display voluntarily the identity of each bidder. This will allow purchasers to consider less tangible factors, such as each bidder's reliability and engineering capability, in their decisions instead of relying on price alone.

Although security was the respondents' most significant concern regarding online portals, three other factors were nearly as important (each scoring 2.5 out of 3): assurance of site longevity, cost, and technical issues in maintaining interfaces. It is clear that suppliers are not comfortable with the use of portals and that Covisint will face a significant challenge in selling its business case to a skeptical audience.

Overall, the study indicates a sober view of e-commerce among today's automotive suppliers. They are willing to use it, but they are taking a cautious approach. It is not enough to use e-commerce simply because it's the latest trend permeating the industry. Suppliers see it as a tool from which they expect to see significant benefits.

Bernard Swiecki

Bernard Swiecki

Contributing Writer
Center for Automotive Research
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Suite 200
Ann Arbor, MI 48108
Phone: 734-929-0484
The Center for Automotive Research focuses on the future of the international automotive industry. Its overall objectives are to provide industry research and analysis, communication forums, and informational resources that respond to the changing needs of the international automotive and automotive-related industries.