A Challenging Proposition

Automotive Industries, July, 2001 by Klaus Vollrath

European suppliers find e-commerce rife with advantages and pitfalls as they learn the rules of the game.

Some utopias are simply too beautiful to be realistic: An outbreak of joy from Japanese managers guided by the Internet to a small company in the Black Forest, Germany, that can produce apart at half price (as suggested lately in a beautifully colored TV spot) will remain the very rare exception. It is much more likely that in such worldwide Internet comparisons, the European or U.S. manufacturer will find themselves out-paced by producers from countries with significantly lower wages.

"Electronic commerce by Internet will lead to drastic changes in the boundary conditions for the supply industry within a very short time," says Dr. Klaus Urbat, spokesman for the Syndicate of the Supply Industries in Germany and managing director of the German Foundry Industry Association. The message is clear: Despite fears surrounding worldwide cost comparisons, there is a full-scale e-business euphoria within the purchasing industries. Spearheaded by the automakers, big purchasers are engaged in a race to build up e-commerce structures that will -- boosted by high profitability expectations -- impact the supply industry like a hurricane. Future demand will be bundled through these channels, and suppliers will have to readjust to new market rules.

Volkswagen Leads

A look at the introduction of e-business in the German automotive industry quickly reveals that the Volkswagen Group is leading the way. "Up to now, we have concluded 144 supply contracts based on Internet auctions," says Francisco Javier Garcia Sanz, member of the board of the VW Division with responsibility for purchasing, during a meeting with suppliers in March 2001. At first glance, this figure does not look very impressive, but VW focused primarily on the minimization of process costs rather than the sheer number of auctions.

In the course of these e-business projects, VW was able to cut purchasing costs by 13 percent, while process costs were, in some cases, reduced by as much as 50 percent and more. Other activities reoriented to online handling are catalogue purchases. In February 2001 alone, 2,000 users with access to online catalogues placed 11,000 orders. By mid-April, VW and Audi employees were offered a choice of 140,000 items from the online catalogues of some 50 suppliers. The opportunity to order office supplies directly online has led to total cancellation of warehouse expenses, with an 88 percent improvement in delivery times and a 30 percent reduction in process costs. Reductions in material costs were achieved as an "agreeable side effect." Consequently, the total volume of purchases conducted through e-business channels will increase from about $720 million in 2000 to about $1.9 billion -- some 4 percent of the total purchasing volume of the Group -- in the current year, and will continue to rise quickly. Other br ands produced by the Group such as SEAT, Skoda, Bentley and Rolls-Royce will follow. Within weeks, the Group intends to start e-business projects in North and South America. The suppliers of VW have been urged to actively adapt their operations to e-business requirements. If a company fails to take adequate steps to keep pace with these developments, it will no longer be regarded as a minor oversight; it will rather be an unforgivable error.

Covisint Progresses

Compared with VW, the apparent volume of e-business activities conducted by DaimlerChrysler, which has been operating the Internet platform Cov-isint jointly with General Motors Corp., Ford Motor Co., Renault and Nissan since November 2000, is significantly lower. "At the end of the year 2000, we had processed 33 online bidding events with Covisint on both sides of the Atlantic," explains Tom Sidlik, member of the board of DaimlerChrysler, responsible for the purchasing activities of Chrysler. "This represents the purchase of more than 500 items and services with a total volume of more than $200 million."

In the course of these transactions, material cost reductions of 17 percent were achieved on average. Additionally, catalogue purchases through Covisint started in November 2000 and are expected to reach a volume of some 100,000 transactions in the current year. Despite this undeniable progress, Covisint insiders suggest the project is lagging behind schedule, mainly due to rivalries between the companies involved.

Another important automaker jumping on the e-business train is BMW AG, which went online with its e-commerce platform Ariba B2B in mid-March after a test run of several months. The Ariba solution is used by the technical purchasing department, which is responsible for the procurement of capital goods, services and overhead cost material, among others things. This measure mainly focuses on internal process time reductions. Up to this point, BMW employees have had to spend a total of approximately 60 minutes per order; the company expects that the use of Ariba will help reduce this time to less than 20 minutes. The project is part of an ambitious overall e-business strategy aimed at the implementation of four platforms -- B2B, B2C (business to customer), B2D (business to dealer) and B2E (business to employee) -- by 2003.