Ford and GM drive to build e-procurement systems
By Mark A. Brunelli and Brian Milligan -- Purchasing, 2/10/2000
Representatives from Ford Motor Co. and General Motors report that the two auto industry giants are making great strides in building the much-hyped online marketplaces where the companies plan to integrate their entire supply chains.Plans for GM's TradeXchange and Ford's AutoXchange are massive in scope. Both companies plan to use their respective marketplaces to automate their entire procurement spend. For Ford that will equal an annual spend of roughly $76.5 billion and about $63 billion for GM, according to Purchasing Magazine's annual ranking of the nation's top 250 spenders (PUR: Nov. 4, '99; p. 52).
But that is just the beginning. Each link in the OEMs' supply chains will be brought online, from tier one all the way down the line. All said, that equals about $300 billion per year in e-commerce for each supply chain, and that number could grow as new suppliers are brought on board.
Both companies are in the beginning stages of building these rival e-bazaars, working out details and giving suppliers from tier one and beyond the information they need to bring their dealings onto the Internet.
"At this point we're really going through an education process," says Harold Kutner, GM's group vice president of worldwide purchasing and Northern American production control and Logistics. "Generally we're receiving very positive responses to this."
While the GM site is partially operational now, Kutner and GM expect to have the entire supply chain automated by the end of 2000. On December 17, GM and its partner in the effort, CommerceOne, announced that they conducted their first ever Internet-based business-to-business auction on the TradeXchange.
That same week, GM buyers began using the site to process $500,000 worth of MRO purchase orders from the first five companies to place electronic catalogs on the TradeXchange. Suppliers that are already active on the TradeXchange include W.W. Grainger, Boise Cascade, Corporate Express, Direct Sourcing Solutions and Graybar.
In order to shore up even more purchasing power, GM recently invited Toyota and Honda to join the e-marketplace. Both companies reportedly are weighing the proposal. "At this point there's just preliminary discussions," says Kutner.
Asked how much money GM hopes to save with its new venture, Kutner says, "We haven't really quantified the cost savings. There will be a significant savings in administrative costs and a tremendous savings in the time it takes for buyers and sellers to get together."
Ford and its partner, Oracle, had tentative plans for the first release of its AutoXchange in January, says Mark Duhaime, acting CTO of Ford's business-to-business group. "The first release is going to involve integration of Oracle products that already exist," Duhaime said in early January. "We also are looking at increasing the functionality...we're doing some customization."
Duhaime says that eventually, the site's functionality will include a great deal of value-added services, including early warrantee detection, automated logistics management, collaborative design and more. Before those services can be offered efficiently though, the majority of suppliers need to get their electronic catalogs posted on the Web.
"What we're really pushing for is to build the virtual network," says Duhaime.
Suppliers willing to take part
When GM and Ford announced their decisions to build massive online marketplaces, the question immediately arose as to how all the suppliers would be brought online. Building and maintaining an electronic catalog is an expensive undertaking, especially if you're a smaller tier-three or tier-four supplier.
Both giant automakers are seeking to play down those concerns and say that the amount of money and time saved make the prospect of coming online a no-brainer for any supplier. As Kutner puts it, the virtual bazaar is "going to give [suppliers] the ability to aggregate and centralize their supply chains," a very profitable proposition.
What's more, the automakers say that smaller suppliers will be able to take part in the marketplace by using a simple $50 Web browser. Those smaller companies, however, will most likely not be able to take part in the full procure-to-pay functionality and ERP/EDI integration provided by companies like Oracle and CommerceOne.
"At this point there is very little responsibility for the suppliers," says Duhaime. And "even at the browser level, I think they're going to be more than willing" to participate.
Suppliers to the automotive industry that were interviewed for this story seem to share the OEM's contention that the increased efficiency of the Internet is the wave of the future and it need not be resisted.
"Ford is our largest customer, and general motors is our third largest customer. So we're working on them constantly with what they're doing," says Gary Corrigan, vice president of corporate communications for Dana Corp. "The Internet is the equivalent of what the telephone was to our grandfathers and what television was to our fathers."
Corrigan adds, "We do believe that strategic sourcing is going to be a key to us reducing cost."
Bill Berry, vice president of information technology and CIO of automotive systems groups at Johnson Controls, says his company is equally willing and eager to take part in the e-marketplaces. "Our plan is to participate in the requirements that they place into the marketplace on suppliers," says Berry. "We view it as an opportunity for Johnson Controls."
Berry says these online exchanges are about more than just saving money. He says the ease of communication provided by the Internet presents real opportunities for companies to improve their end products by leaps and bounds.
"The way we're viewing this is that the OEMs are not just creating online marketplaces to achieve the lowest cost purchases," says Berry. "We have to be competitive from a cost perspective, but we also have to be the leader in service, deliveries and quality, as well as provide innovative solutions to the OEMs."
Berry pointed out that many of the products produced by Johnson Controls are the result of extensive collaboration on the part of cross-functional teams. Such items cannot simply be slapped into an electronic catalog. "The products that we develop that can be placed in a catalog, we are going to do that.
"We support the concept that Ford and GM are going through because it makes sense to leverage your total volume of business across the entire company...to look for the best value out there," says Berry. "What this technology does is open up the marketplace worldwide."
Consumer-driven initiative
Analysts and consultants interviewed about Ford and GM's online ventures agree that once operational, these bazaars will drop huge amounts of money to the OEMs' bottom lines. But that alone is not enough to vault Ford and GM way ahead of other automakers.
In the burgeoning world of business-to-business e-commerce, competing auto manufacturers are likely to follow suit and take their procurement practices online. In the end the most successful company will be the one that can translate those immense savings into better cars for the consumers.
"Frankly, in the showroom the customer doesn't care how something was purchased," says Maryann Keller, chairperson of the Society of Automotive Analysts. "They care about what they are being offered to buy. If it's at a price they can afford, they buy it."
And if Ford and GM's main goal is to increase shareholder value, analysts say the online markets--if successful--should do the trick. Success, however, depends on many factors other than simply saving money and time. For one thing, the companies must strive to change their images from that of old-world manufacturers to something more contemporary.
"They want to sell themselves to Wall Street as reinvented car companies, not Midwest automotive manufacturing companies, but brand-new e-based companies that provide automotive products and services," says John McElroy, board member of the Society of Automotive Analysts. "They have to sell themselves as something other than highly cyclical manufacturing operations."
McElroy says the money and time that Ford and GM are poised to save will contribute to a "staggering increase in profitability." But that won't necessarily secure their places at the top of auto industry. McElroy says other automakers are being patient, calmly looking for an edge over the two industry giants.
"I don't know if the other [auto companies] will lose," says McElroy. "What they're doing is seeking an advantage to GM and Ford. They're not dummies, they're watching this stuff like hawks, but have not announced anything near the order of magnitude of what GM and Ford have announced."
"Undoubtedly [the other auto companies] have internal programs," McElroy adds. "Toyota is doing interesting stuff in Japan, and DaimlerChrysler is here in the U.S., but Americans in Detroit are leading the world in this regard."
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