Survival of the e-Fittest

e-Business driving supply base consolidation in auto industry, study finds

Traverse City, MI  August 6, 2001  Three-quarters of tier-one automotive suppliers expect consolidation in their supplier base over the next year, with e-business capability being a key factor in which suppliers remain, according to the results of a new study by the Center for Automotive Research at the Environmental Research Institute of Michigan.

The study, "E-readiness of the Automotive Supply Chain  Just How Wired is the Supplier Sector?", addressed the overall e-business readiness of the North American automotive supplier sector, with a focus on tier-two and -three suppliers.

The preliminary results of the research project were announced today at a workshop held at the 2001 Automotive Management Briefing Seminars in Traverse City, Mich. The final results will be released the week of August 27.

The authors of the study, which was sponsored by technology provider SupplySolution, report that tier-one suppliers are confident that e-business will reduce costs across the supply chain and expect their suppliers to expand their e-business capabilities in several specific areas.

The tier-ones are conscious of the obstacles to e-business implementation, the report found, but the authors conclude that suppliers that are proficient in e-business stand to gain as tier-ones trim their supplier lists. The study found that 77 percent of tier-ones expect consolidation in their supplier base in the next year and that a supplier's e-business capability will be a driving factor in whether it remains in the automotive supply chain.

"To succeed in the emerging business climate, e-business must permeate automotive supply chains," said Jonathon Morelli, Ph.D., member of Environmental Research Institute of Michigan's (ERIM) Center for Electronic Commerce, and one of the authors of the research project. "Tier-one suppliers believe this is true but are well aware of the problems that may thwart implementation. Success will depend on e-business models that work for all participants and a supplier community that can provide the supporting technology and assistance."

Additional initial findings in the study include:

  • Today, 15 percent of tier-one suppliers are looking for two-way e-business capability in their suppliers. This figure will rise to 77 percent within two to three years.

  • The importance of e-business will increase broadly across diverse business activities. The ability to conduct e-procurement with production-parts suppliers currently is a priority for auto-industry tier-ones and is likely to remain so over the next two to three years. But the ability to conduct e-business for purposes of demand planning and management, as well as engineering design, will become increasingly important in the next couple years, too, the study found.

  • e-Business expenditures by tier-one companies will increase from approximately 3 percent of capital expenditures today to 13 percent in the next two to three years.

Study participants also estimated the cost-reduction impact of e-business in their organizations today against the future, when programs will be fully implemented. In the category of engineering and product design, respondents indicated a 4 percent cost reduction today and 18 percent when fully implemented; for procurement, 7 percent today versus 16 percent in the future; and with quality assurance, 3 percent cost reduction today and a 19 percent reduction when e-business plans are fully implemented.

Tier-one respondents, in assessing their suppliers' capability to manage e-business in specific manufacturing areas, ranked "computer-to-computer communication, automated on both ends" the highest at 49 percent; logistics and order tracking at 18 percent; and finished-goods inventory the lowest at 14 percent. The respondents projected that these percentages would rise to 78 percent, 66 percent and 63 percent, respectively, over the next two to three years.

Don Woerner, senior vice president of sales and business development for SupplySolution, explaining why his company sponsored the study, said, "While there have been a number of studies that have identified the market potential surrounding e-business implementation, we felt there was a lack of concrete information about two areas: the extent to which tier-two, tier-three and tier-four automotive suppliers are equipped to adopt e-business initiatives, and the extent to which the tier-one supplier base was considering e-readiness as a factor in qualifying current and potential suppliers.

"These findings are extremely important in communicating to the tier-two, tier-three and tier-four suppliers the strides they must make to adopt e-business in their operations," Woerner continued. "And for technology companies, it is important that we provide this supplier base with some fundamental, but equally critical deliverables: education, scalable technologies, and general understanding of how supply chain technologies can work for their organizations."

The Center for Automotive Research (CAR) initiated the study in January 2001, and the research comprised two steps. In the first, three automotive systems integrators were queried in focus groups; in the second, 16 tier-one suppliers with North American sales of $70.2 billion (average sales of $4.4 billion) responded to a comprehensive mail survey.