Supply Chain in the Fast Lane

[From iSource Business, April 2001] Nothing epitomizes the Great American Car as well as muscle cars. Look at late 1960s and early 1970s fire-breathers like the Mustang, Camaro, Chevelle and Charger and it's easy to see what the American approach to improving cars was more power. Forget evolution of manufacturing techniques. Just drop a big-block in the engine bay, slap on a four-barrel carburetor and highrise intake manifold and shoe the beast with some wide American rubber. There's your improvement.


A little unrefined, perhaps, but the funny thing was, it worked. The cars were fast (and let's face it, cool), the public bought them by the trainload, and Detroit bathed in the profits. Then reality, in the form of emissions requirements, higher gas prices and gas shortages, hit as only reality can, and the Big Three were forced to refine their offerings, first in the form of lighter, more fuel-efficient cars. From then on, refinements in the automotive industry were ratcheted up in a manner more precise than adding cubic inches.


Keep it in First Gear


The trend of slowly refining processes seems to be continuing, even when it comes to something as hyperkinetic as e-business. While enabling the myriad suppliers involved in torquing together every urban assault vehicle pushed out the factory doors might seem like something Detroit would jump at, given the potential savings, things are proceeding slowly in that area. Covisint, the online marketplace that promises to be the 800-pound steel-and-safety glass gorilla, doesn't even have a home yet. It's hard to slash expenses when you don't have a home from which to to slash.


Dennis Virag, president and managing director of the Automotive Consulting Group of Ann Arbor, Mich., says that right now the auto companies are electronically transacting Maintenance, Repair and Operations (MRO)-type items. He says, You're beginning to see e-procurement used fairly widely, especially on commodity-type products. Virag believes that online procurement will increase in the future. We think that you will see a significant amount of procurement, again of non-engineered, commodity-type products.


On the exchange front, Virag also points out that, while Covisint, and to a lesser extent FreeMarkets, are getting most of the press, there are a lot of other online supply chain enablers, and they can expect to gain traction as e-procurement in general does. Today, there is significant electronic content on the vehicle. And, although there's a lot of focus on Covisint and FreeMarkets' automotive sector, there's a lot of electronics procurement, standard electronic components, through the electronic exchange. So, it's not only the automotive exchanges that are going to experience significant volume increases. It's going to be any type of product that goes into the automobile.


Jon Ekoniak, senior research analyst at U.S. Bancorp Piper Jaffray, concurs with Virag that the auto industry is taking some supply chain baby steps, with the potential for giant steps in the future. Ekoniak says, We're already seeing implementations coming on the auction side. For example, GM has run [a small number of ] auctions using Commerce One software, and has been able to procure everything from small parts to fairly large, expensive orders.


What About the Options?


So the auto makers are seeing cost reductions, but what about the secondary benefits, like less inventory, faster cycle times and reduced stockouts? Virag says it's too soon to tell. I think the jury's still out on that. The auto industry went to lean manufacturing initiatives, like just-in-time delivery, a number of years ago. So, in terms of inventory stocking and so forth, that's been pretty well minimized. The real benefits of e-procurement are on the commodity side.


Ekoniak, however, believes that the most impressive results might come from this area of secondary benefits. The auto industry has been hammering down its parts suppliers for years, trying to get the costs as low as possible. So it's not that they're necessarily going to be able to buy a part more cheaply through increased competition, because they've already been very competitive and they've had these shakeouts within their suppliers. The benefits really come from being able to reduce the time it takes to make a car, to actually procure the products, so there's less inventory in the system.


Made-to-order Cars


Elaborating, Ekoniak says, It used to take about four years to actually design a car. Now they're down to around two years, and they're looking to get that down to around six months. So, they could change to [suit] consumers' demands much more quickly, and they don't get stuck with an outdated product line where they have to put incentives into place, such as no interest rate on your financing, or dealer rebates. If they can target their customers better and know exactly what their customers need, then there's less of a price reduction to get stuff out the door.


Rakesh Batra, an analyst with the e-business consulting firm Syncata, which has done extensive work with Honda, believes that the future of the enabled supply chain will indeed include more consumer involvement. He says, Most of the auto industry typically works on a push basis. You just produce the cars and you send them out to the dealers and hopefully they'll sell.


But enablement will change that, according to Batra. We're seeing a shift from production-driven environments, which have been based more on asset utilization, capacity utilization, to what's more of a supply chain environment. Which doesn't ignore capacity and asset utilization, but says, Hey, there's a bigger piece over here. There are efficiencies in inventory, there are efficiencies by collaboration, so let's take this whole manufacturing setup or manufacturing process to the next level of capability.'


Dancing Gorillas


And now to Covisint. When an exchange has the backing of Ford, GM and Chrysler, it's going to get a lot more press than one bankrolled by a garden variety billionaire venture capitalist. There is obviously a lot of economic weight to be thrown around here, but it remains to be seen if it can be thrown around gracefully. The Big Three haven't exactly been fishing buddies, historically, and an e-link between them isn't likely to change things drastically.


Virag puts the necessity of cooperation this way: There are not only three big gorillas GM, Ford and DaimlerChrysler but you have several others who are joining the parade. So how do you get five gorillas to dance together, when each has preferred internal systems? GM works very closely with Commerce One, Ford works with Oracle, DaimlerChrysler is in bed with SAP. How do you resolve whose engines you're going to use to drive Covisint? Those are some serious issues.


There is historical precedence for this pessimism. Virag points out the previous e-procurement initiatives have died on the automotive vine. If you look at some of the collaborative initiatives the auto industry attempted in the past, one of them that comes to mind is ANX. That's the auto industry Web-based initiative that was centered in AIAG, the Automotive Industry Action Group. That never really materialized like the auto companies had anticipated and hoped, and actually it was sold to SAIC. Could Covisint be an inter-manufacturer Edsel-in-the-making? Virag says that's not an unrealistic assumption.


The Key's in the Ignition


Ekoniak says Covisint does have its problems, but the behemoth is not totally clueless. They need to put all their management team in place, and then start moving forward. But at least they know who they're going to be working with, and they're starting to evaluate them more closely.


To be fair, not all this dithering can be laid at the feet of the Big Three. Virag explains that suppliers from the tall to the small have to be involved to make Covisint viable, and actually accomplishing that hook-up is no mean feat. In order for an enabled supply chain to function properly, you need buy-in from suppliers at all levels of the supply chain. That means the very smallest, the very biggest, from the materials suppliers through the component suppliers, through the system suppliers and integrators, on up to the vehicle manufacturers. And a lot of small to midsize companies are really hesitant to join the bandwagon because, on one side, they're waiting for the auto companies to tell them what to do. On the other side, they're fearful that the companies are going to tell them what they have to do, and they won't have the capital resources to put these systems and processes in place.


Will this idling cause Covisint to play technological catch-up for quite some time, possibly forever? In the Internet world, aren't there two classes of enterprises, the quick and the re-org'ed? Ekoniak says that's an issue that bears inspection. It will be interesting to see, because once they got approval from both the U.S. and German authorities, their plan was to move full speed ahead, and it's taken longer than they anticipated. It's a challenge getting Ford, DaimlerChrysler and GM to all agree on one thing. If they do get that agreement, if they do get a CEO who everyone's happy with and everyone can trust, then I think they can move along pretty quickly. If there continues to be bickering and infighting, it could be a different story.


Just as it's pretty impossible to say that anybody has an American car, given the multinational nature of car manufacturing, it's hard to say for sure where supply chain enablement efforts will lead in the automotive world. It seems safe to say that the automotive supply chain will become more enabled, and that enablement will have an effect on consumers and suppliers, but the extent of that enablement, and the speed at which it is reached, is still unknown. It's not quite the start of a race, but the checkered flag isn't quite in sight.

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