Suppliers worry about the trade-exchange 'squeeze'

By Brian Milligan -- Purchasing, 3/23/2000 2:00:00 AM EST

New Web-based trade ex-changes recently formed by Ford and General Motors Corp. aim to put automaker suppliers on-line, increase communication, eliminate the need for cumbersome paperwork and provide discounts galore. But at the same time, the new ventures could squeeze suppliers, emphasize cost over quality and simply focus in the wrong place.

So say suppliers who are tempted by--but increasingly wary of--the online trade exchange concept. These existing exchanges may soon merge into one massive online venture controlled by Ford, GM and DaimlerChrysler.

While many are excited that online exchanges will open up new opportunities, they also worry that suppliers will be forced to reduce costs at a frenzied pace, while being pitted against one another in an ultra-competitive arena where price will be emphasized over quality.

Are these concerns based on a simple fear of something new, or are they based on suppliers' experience? A little bit of both, actually.

"There is a lot of uncertainty with change. Whether it is electronic commerce or whatever, sometimes these things traumatize a lot of us," theorizes Ray Campbell, vice president of global purchasing for the Michigan-based Delphi Automotive Systems. "But we are not going to be naive about this."

Representatives from Commerce One, the company that is providing software for the GM exchange, say a lot of the concerns will soon be answered. And they believe automakers and suppliers who stay out of the exchanges will have much to lose.

"If I am a seller and can communicate with five automakers, my life is suddenly a lot easier," says Michael Micucci, vice president of product marketing for California-based Commerce One. "This is a solution that will allow trading partners to differentiate themselves. The guys who embrace change will lead the world, and the guys who resist will fall behind."

Automating the spend

For a brief period of time, Ford and GM planned to use their respective marketplaces, GM's TradeXchange and Ford's AutoXchange, to automate procurement through their entire supply chains. In February, GM, Ford and DaimlerChrysler jointly announced that they will combine their efforts to form a business-to-business integrated supplier exchange through a single global portal. The three plan to have equal ownership in the new venture, which would operate as a separate business independent of the three automakers. The new venture would be powered by Oracle Corp. and Commerce One.

The agreement is subject to governmental approval. Ford, GM and DaimlerChrysler expect to reach a definitive agreement for the venture in the first quarter. Until then, the services associated with the existing exchanges will continue as they have been.

If they are successful, each link in their supply chains will be brought online, from tier-one suppliers all the way upstream. That equals about $300 billion per year in e-commerce for Ford's entire supply chain and about $350 billion for GM's, according to automotive industry research firm Dresder Kleinwort Benson.

GM's TradeXchange is part of the Commerce One Global Trading Web, a worldwide network of business-to-business e-commerce portals. It is designed to create substantial cost savings by cutting 90% of the roughly $90 to $150 in costs that GM incurs with each of hundreds of thousands of purchases annually.

Participants in the site will be able to conduct transactions in three ways: Through an online catalog, a bid-quote process or an online auction. Through this system, GM does not dictate prices; the portal simply acts as a vehicle to bring buyers and sellers together.

If the system works, buyers will reap the benefits of GM's global purchasing expertise. This includes a selection of the industry's top suppliers. Theoretically, sellers can use the site to increase their business by expanding their customer base.

GM hopes TradeXchange will cut costs by streamlining the purchasing process and allowing buyers to aggregate their purchases electronically to win bigger discounts from suppliers. In other words, GM hopes the program's automated order processing will lead to lower operational costs. The automaker envisions TradeXchange becoming the world's largest "virtual marketplace" for a wide variety of products, raw materials, parts and service. The system is designed so that participants will be able to cut their own purchase costs by eliminating the paper trail to gain access to an expanded sales channel and speed up the entire purchase process.

Ford announced the formation of AutoXchange in November. The automaker plans to link its suppliers on the Internet, as well as provide a way for suppliers to participate earlier in Ford's product development and manufacturing processes. The network not only promises to streamline Ford's procurement process and lower its costs, but it holds the potential to become a revenue generator in its own right. Like GM, Ford wants to charge a fee to companies using the system. Oracle provided the software for AutoXchange.

The AutoXchange site started live operation in February and has conducted auctions on a number of supplies that are directly involved with Ford's vehicle production, as well as those that are not, such as personal computers and pencils. Ford's nearly 7,000 dealers in the United States also are able to join the exchanges. One of the early transactions was a $78-million auction and purchase Ford conducted with a tier-one supplier for a batch of parts used in vehicle production.

Each exchange has invited other automakers to join their venture. Liron Petrushka, vice president of auction services at Commerce One, says GM will benefit from this because if other car companies begin trading on the site, the automaker will be able to charge them a percentage of their transactions. GM has said it may charge a transaction fee of somewhere around 1%. "That's generating another revenue source for them," Petrushka says.

But, from the perspective of several tier-one suppliers, with the promises come nagging concerns. The invitations are a mystery to some suppliers, who wonder if their preferred status with some automakers may be put in jeopardy during the ultra-competitive trading being fostered by the sites. They also wonder how competing car companies can protect vital data from their competition, if so much is being shared online.

"I'm not sure I understand the benefit broadly enough to comment on how the other companies should respond," admits Jeff Wincel, vice president and general manager of modular systems for Michigan-based Donnelly Corp. "AutoXchange has approached Toyota to get involved. But unless there is sanitized sharing of market data, there's not much of an advantage."

Just a browser

But representatives from Commerce One tout the exchange as a great advantage. They say it is one that even sub-tier suppliers can't resist. Micucci says sub-tier suppliers who would have once had to consider spending thousands of dollars on an EDI system now only need purchase a browser in order to become connected to the sites.

"In the old days, they didn't want to spend $50,000," Micucci says. "Now the guy doesn't have to buy anything. He just has to participate in Internet activity."

Many suppliers say they are still considering whether or not to join. But even as the automakers rev up their new Internet engines for their first trial runs, the suppliers say too much about the operations is still too vague.

"We haven't made any decisions, and we haven't been asked to," says Delphi's Campbell. "We are in the process of trying to understand what the OEMs are really expecting."

That's not to say that Delphi is going to keep its back turned to the developments. Campbell says his company is optimistic about what the exchanges could offer. He describes Delphi as waiting in the wings, watching just how much gets discounted and who wins out in the end.

"I don't want to go in with my eyes closed," Campbell says. "I want to see data. But of what I've heard so far, they [the exchanges] would be good for tier-one suppliers and all suppliers if they are properly and fairly managed."

Commerce One's Petrushka says suppliers can only benefit by joining up. He says the proof is in the pudding. The GM exchange, he adds, has been successfully tried.

During a trial run of TradeXchange, GM was able to get 118 of its suppliers online with their inventory. The company first gave the exchange a trial in December, when about seven auctions took place during a four-hour period. Petrushka says seven million dollars worth of transactions took place during this time.

Not just indirect materials

On Feb. 11, GM successfully conducted an Internet-based auction for direct material supplies on TradeXchange. The transaction was the auto industry's largest ever to be conducted entirely over the Internet.

The purchase enabled GM and its business partner Isuzu Motors Ltd. to buy a large volume of rubber sealing packages for vehicle production in both Europe and North America at a cost of $147 million. The final price represented significant savings for GM and Isuzu over traditional procurement processes, according to GM.

Eighteen qualified suppliers participated in the bid-quote process, and four suppliers were selected in the final analysis, each receiving a portion of the order from GM and Isuzu.

The company hopes to have three or four auctions per week as of this month. That means getting suppliers on board, almost whether they like it or not.

"In the past we couldn't do it this way," Petrushka says. "GM is leveraging its power. They are forcing them [suppliers] to do this."

Petrushka says exchanges like the one being offered by GM should become irresistible. One reason for this is the ease of hooking up. Any supplier would be able to use the sites easily and get their electronic catalogs on them without any trouble.

"All they need to do is go through four screens. Simplicity in use is what the Internet is all about," says Petrushka.

And what does GM get out of it? It's simple.

Of the 18 qualified suppliers who participated in the Feb. 11 reverse auction, the four winning suppliers were chosen based on four criteria. The criteria are quality, service, technology--and price.

Getting discounts

Petrushka says auto-makers will be able to easily obtain discounts through the site. This will happen once multiple, eager suppliers get a good look at what their competitors are bidding to supply a part. All that open competition will convince them to drop their prices a little, Petrushka says.

"Assume that 100 people are trying to get GM business and sell a specific part," he says. "In the past, you would fill out an RFP, send it in with quotes. It's not competitive.

"Once you put 100 bidders online and show them what each are bidding, and then give them a couple of hours to bid it down, there is no way you are going to lose," he continues. "You see how much our competitors are willing to sell it for. You go the distance."

John McElroy, a member of the Society of Automotive Analysts, says GM's discount expectations here are very real. He says suppliers today are still turning a healthy profit. In order to continue doing so, they will be willing to drop their prices a little and keep the orders rolling in.

"GM is hoping that by conducting these auctions around the world in real time, it will be able to get a buying frenzy among suppliers," McElroy says. "They [suppliers] will be able to see if their bid is matched or beaten. And if it is beaten, there is enormous pressure to say, 'Gee, we can't let this contract slip through. Let's put another bid back in.'"

It is this very attitude that has suppliers worried. Some suppliers fear that the new exchanges are ushering in another technological way of forcing them to cut costs. It's a factor that will reduce their profits, they say, and possibly force them to make sacrifices.

Doug Patton, for example, says this attitude comes in loud and clear with every press release sent out by Ford or GM.

Feeling the pressure

Patton is vice president of business development for the Michigan-based Denso International America Inc. Patton's job is to help Denso decide if it will join the exchanges. Patton says suppliers today are feeling naturally pressured to join exchanges. On one hand it is to be expected, he says. "To some extent we are being forced into doing things immediately because the customer is forcing us to bid online," Patton says.

And in many ways, Patton believes this will be good for the industry. "We do see some value from an efficiency side," he continues. "It's driving the price down."

But with all the talk about "discounts," he worries that the exchanges are placing too much emphasis on cost--and not enough on quality. And he says he is not alone in these concerns.

"I think we have to be careful that they don't simply buy on price," says Patton.

"There are many other ways to gain data and make decisions," Patton continues. "If they make them solely on price, it will wreak havoc in the supply industry and for automakers."

Patton says that, somehow, both suppliers and the automakers who run the exchanges have got to come to an agreement on price. "The automakers always hope they will drive the price down, and we always hope we'll push it back up," Patton says. "Maybe we'll meet in the middle someplace."

Being upfront

Petrushka says this reaction is to be expected. Both GM and Commerce One, after all, are being upfront about their expectations and desires. One of those expectations is an online arena that will lead to reduced costs.

"By inviting more buyers into the game they are forcing suppliers to reduce pricing," Petrushka says.

Petruska notes the impetus behind the sites: Competition. If GM can use the site to successfully buy parts for a cheaper price, it might be able to gain a competitive edge.

"They can get good parts and make [vehicles] for less," Petrushka says. "They'll save money on the buying process and generate more revenue. It's the ability to buy better parts and sell cars cheaper than the competition."

McElroy agrees that concerned suppliers are on to something. The exchanges are indeed focussing on cost reduction. But this was also an inevitable situation, he says. The only reason the cost-focussed exchanges weren't launched 10 years ago is that no one had the technology. Now that it's here, he says, the basic nature of bidding is going to change.

"This is going to get more emotion involved in the bidding process," he says. "And the only block here has been technology. There hasn't been this thing called the Internet."

Lane Kato, director of product marketing for Commerce One, says the more his company hears about cost focussing, the more it tries to convince players on both sides that there is much more at stake here.

"We are putting buyers and sellers in one room and saying, 'This is what we are doing, and price is just one factor,'" says Kato. "From a supplier's perspective, this does not replace solid engineering."

Moot concerns

Even some wary suppliers now are saying that concerns over quality are going to be moot. In the end, Wincel says, suppliers who do business over Ford's exchange site are going to be the very suppliers that Ford has approved in the past. If they don't live up to Ford's standards, he says, they won't get the work or be invited to participate.

"Those that participate are going to be suppliers that have been approved by Ford," Wincel says. "Ford is telling us that suppliers in that environment should be equally acceptable, in terms of quality systems, and conform to all their other standards."

On the chance that suppliers don't come through with quality parts, Wincel says they will be hit with the same warrantee agreements that they live with now. It would be to their disadvantage, he says, if they were to supply inferior parts.

"If they [parts] are at marginal quality, they will get hit with warrantee charge-backs for the products they offer," Wincel says. "It may be in the initial round there will be lower quality suppliers, but once they get hit with the warrantee costs, they will have to build into their prices that cost element."

Petrushka says Commerce One is keenly tuned in to the concerns some suppliers have for the sites. And not all of the concerns are centering around price cuts. Some are saying that sub-tier suppliers are not being given enough incentive to hop onto the exchanges.

"There is still skepticism out there about just how well the companies will be able to pull this off," Petrushka says. "Most of it centers on sub-tier suppliers, who may or may not have much to gain from signing on to this, and tier-one suppliers who will find themselves with a lot of pressure to provide discounts."

Forcing the issue

Still, Petrushka says GM is being anything but laid back as it attempts to rope all of its players into the exchange.

"I'm sure there are holdouts, and GM is responsible for getting them in," Petrushka says. "They are forceful and getting more than they thought. The people who are holding out are realizing they are losing out on this. They will have to come back and play."

But some suppliers say they may want to hold out for something better. They believe the existing exchanges still have a ways to go when it comes to bringing the supply chain under control. Wincel has watched Donnelly Corp. participate as one of 10 companies on Ford's AutoXchange steering committee. And he says the exchanges still have not proved that they can provide Internet-based supply chain management.

"I don't believe at this point you'll see a whole lot of supply chain coordination really being done," Wincel says. "I look at the supply chain, at the logistics aspects, the data transmissions, and I don't think they're all that prepared for that."

But Wincel also adds that it's early in the game, and the auto exchanges have got to start somewhere. And, he asks, if the exchanges are starting out by being focussed on e-procurement, is that really such a bad thing?

"For the first couple of years, this is just going to be e-procurement based," Wincel says. "I am a fan of e-procurement.

"There is an advantage from a non-production side," he continues. "You get these catalogs up in the systems. If we have 3,000 different suppliers, it becomes administratively burdensome to track and maintain. Having an e-procurement solution provides an advantage."

Rival attacks

The sites also have come under attack from rival automakers that believe they are either promising too much too early or simply not doing enough to rope in the supply chain.

DaimlerChrysler Chairman Juergen Schrempp says the automaker decided to team up with its rivals after realizing that the three had very similar goals.

"DaimlerChysler's plan for a separate exchange came together with Ford's and GM's," Schrempp says. "We bring a global presence, large volume and excellent supplier relationships to the new venture."

But prior to DaimlerChrysler's decision to join Ford and GM, some at DaimlerChrysler were not impressed by what they saw. Jeff Trimmer, director of operations strategy for DaimlerChrysler's Procurement and Supply Group, says the Ford and GM sites could be doing a whole lot more than they are. And their press announcements, he says, have been vacuous.

"If all they are doing is online auctioning, they are by far missing the opportunity that the Internet provides," says Trimmer. "What GM and Ford have done was to make public announcements about partnerships that have yet to deliver."

Trimmer says DaimlerChrysler had bigger plans. He says it was determined to move its procurement operations to the Web. At present, the company is hampered by having Internet connections only to the first line of suppliers. "Our connections are to the first tier only, and we need to extend those down the chain," he says.

"We need an overall umbrella strategy so that everyone in the organization--engineering, manufacturing, everybody involved--will understand how we fit," he continues.

Trimmer says DaimlerChrysler has been continuously disillusioned by proposed sites like those being developed by Ford and GM. Again, Trimmer says companies are focussing too much on e-procurement, which is now becoming old hat in the automotive industry. Not enough companies, he says, are thinking along the lines of Internet-based supply chain management. "You just don't have a relationship with a company if all you have is an auction relationship," he says.

"Quite honestly, what we've seen is everyone wants to talk e-procurement systems, which are fine. But they just don't cut to the heart of the supply chain."

The ideal site

Trimmer believes the ideal site would allow for complete management of the supply chain. It would allow users to hook up supply chain links, manage the elements, find wholesale reductions in cost, reduce inventory, provide for just-in-time delivery and reduce cycle time. The same site would provide supplier quality ratings and allow for online payments.

"Today we take 32 months to develop a new car," Trimmer says. "Imagine a production system that would link product development in real time and dramatically cut that time in half or by two-thirds.

"You could take a similar concept, match up the links, and take order-to-delivery times down," he continues. "And all of a sudden, dealers don't need to take inventory."

Trimmer likens DaimlerChrysler's needs to the production of a car door. He says presently, the OEM will develop the design for the door. Then the automaker will develop a stamping system. Perhaps the parts for the door are ordered through an e-procurement site. Then workers assemble the prototype.

But for the most part, the only Internet-based link in this chain is the ordering of the parts for the door. Trimmer says it's not enough.

"I imagine a Web site that contains information on product design, including cost, quality, timing, guidelines, what the prototypes will be able to do, what approval you need to get the process going and other milestones.

"Our Web site should allow individual partners to communicate with each other, find the toolmaker, design the cut, and really effectively create a virtual product development system that has never been done before," he continues.

A missing link

Petrushka balks at suggestions that GM's site focuses only on e-procurement and doesn't pay enough attention to what is happening with the supply chain.

"To say this is just e-procurement--GM is being very aggressive to create the e-supply chain, all the way from e-RFQs to fulfillment," Petrushka says. "The easiest way to do this is to start with auctions."

Micucci also argues that the site is merely the first step in getting the supply chain onto the Internet. He describes this as an evolving, complicated process.

"Most of the stuff everyone has done today is catalog-based e-procurement. Our strategic intention is to complete the supply chain [on the Web]," Micucci says. "This is a good way to prime the pump, get the suppliers onboard. We are rapidly moving in that direction."

Doug Grimm, director of global strategic sourcing for Ohio-based supplier Dana Corp., says it is true that the auto exchanges still are not focussing enough on e-supply chain management. "Everyone agrees that managing the supply chain [on the Internet] is what we have to do," he says.

But Grimm also agrees that some of the skepticism and criticism that the sites are meeting is overblown. He believes the sites will evolve to a point where they provide advanced coordination of supply chain activity.

"I think you can only be as far ahead as the technology allows you," Grimm says. "They've got a great start."

Important developments

Grimm says the naysayers are overlooking important developments about the exchanges. He says the exchanges are naturally designed to improve communication between suppliers and automakers. This can only be a good thing, he argues. "Really what General Motors and Ford's AutoXchange are trying to address is getting further communication and networking with their supply base," Grimm says. "Dana supports that."

Grimm says Dana Corp. is convinced that the exchanges are merely a step--albeit an important one--for bringing supply chain management onto the Internet. He says other companies are bound to further the process along.

"Everyone has the same agenda," Grimm says. "How do you streamline the supply chain? How can you further it with the Internet?

"There will be other products and offerings, other software companies will play a role," he continues. "Other elements will come into the Internet in order to support streamlining the supply chain."

Grimm says Dana Corp. has been exploring various exchange possibilities on the World Wide Web for three and a half years. The company was interested in increasing its buy-side activity on the Internet, but no one had anything to offer.

Then came the exchanges. It was only a matter of time before the company signed on to AutoXchange, he says.

"We were moving down this path. Now that our customer base is moving in this direction, we want to support AutoXchange," he says.

Despite all the worries, suppliers like Campbell say they are still trying to keep an open mind about the exchanges. Campbell believes the exchanges are going to understandably meet with some negative feedback in the beginning stages.

"Anytime you talk about change, a lot of people automatically get negative thoughts and begin to think like potential victims, as opposed to, 'Let's just see how this unwinds,'" Campbell says. "We've got to get involved, try to make this good for us, influence it."

Skepticism persists

But Campbell says he too can't help but be skeptical about the prospect of joining one of the exchanges. Part of the problem is simply the fact that the automakers don't seem to be sharing a lot of information.

"I've talked to tier-one suppliers about these, and with the feedback I got, I'd put this in the category of me being uncertain," says Campbell. "The OEMs have really not given us a lot of detail about how the trade exchanges work, how much it will cost, and so on and so on.

"The big problem right now is there are an awful lot of unknowns," Campbell continues.

Today, Campbell is calling on Ford and GM to present the supplier community with some models. The models, he says, would show how suppliers--not automakers--will gain from the ventures. They will also show how the exchange will be fair to both tier-one suppliers and sub-tier suppliers across the board. "There has to be a model, showing how this is good for suppliers if they are tier one or tier five," Campbell says.

Campbell further warns that if the automakers use the exchanges to place the squeeze on suppliers, the suppliers won't be the only ones who lose out in the long run. He says the suppliers willing to work with the automakers on this are only willing to go so far.

"Suppliers won't commit suicide for anybody," he says.