Virtual Reality

Virtual supplier networks could be the wave of the future

Detroit  July 17, 2001 The bad news: The world's leading carmakers find themselves capacity-fat and profit-thin. In a world of complex products, intricate supply chains, and long design cycles, suppliers struggle to reduce costs and respond to unstable demand. The good news: virtual supplier networks (VSNs) could help to alleviate some of these points of pain.

A VSN can help to optimize the productivity and profitability of three critical functions: procurement, supply chain management, and product development.

In Andersen's June 2001 Automotive Best Practices Forum, the firm surveyed over 35 automotive suppliers on the subject of VSN, revealed many of the industry's fears and misconceptions, and discovered how the industry is preparing to proceed and hopefully succeed.

Who benefits from a VSN?

A VSN works for sellers, as well as buyers. How? "In an exchange, buyers aggregate demand and ask for a discounted price based on the higher volume," says Randy Miller, Andersen's global automotive partner, "The greater the number of buyers, the greater their clout." This may sound bad for sellers, but suppliers benefit in several ways. Transaction costs are lower; demand is more reliable; and the odds of selling slow-moving inventory are better. As Miller notes, "Everyone gains from the smoother and faster movement of products, services, and information in the supply chain."

Auctions, an element of a VSN, have focused on indirect material. Russell Hensley, senior manager of Andersen's automotive competency center, suggests that, "To move beyond these commodity products/services, auctions will have to take into account such value-added variables as delivery options, payment terms, differentiated product features, warranty clauses, and quality."

So, even if auctions seem price-driven now, they won't be in the future. As one supplier participating in the Andersen survey said, "If the OEMs want to beat us up on price, they don't need an auction to do it. They do it well enough right now just by picking up the telephone. But at least in an auction, they have to do it with 'real' competitive bids. And we all get to see the other prices."

Preparing for success: what should a supplier do right now?

A little due diligence is in order. Suppliers should begin with an understanding of their risks. "The security of proprietary data within an exchange is one concern, as is ownership of data-mining capabilities," says Hensley. "Trust is obviously important; some suppliers may feel that an industry exchange led by large and powerful players might be suspect, while others are confident that the real benefits will significantly outweigh imagined inequities."

The erosion of any competitive advantage based on technology is also a risk; the pace of innovation can quickly level the playing field. Hensley suggests, "Perhaps the greatest risk to any supplier evaluating its options within a new industry model is complacency. Some executives, who think that technology is the whole story, fail to provide the necessary leadership to change the company's business processes and culture." VSN's need to be leveraged to not only increase operational effectiveness but also to drive cultural transformation.

Miller summarizes: "To create a winning business model, a supplier should: 1) find ways to create new value (perhaps through a product/service offering or a strategic partnership); 2) decide which exchanges and participants have a value proposition that matches the supplier's goals; and 3) avoid partnering with an exchange or other company that lacks vision or the technology to take away the real pain in the industry."