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The Internet & Supplier Management

The majority of a manufacturer’s cost is in purchased materials.

The majority of a manufacturer’s cost is in purchased materials. Consequently, the question of how to manage suppliers is enormously im-portant to both OEMs and suppliers, alike.

The Internet has unleashed a host of options. Several parties are now engaged in a fierce battle for defining and running Internet-based supplier-management systems. Who controls this arena has major implications not only for which technical solutions prevail. The manufacturers best able to promote their own vision will restructure the industry to serve their competitive interests and weaken their rivals in the process.

A brief review of a number of options shows the hard choices that must be made. An OEM could create and operate its own supplier network. It could piggyback on the infrastructure of external service provider; there the OEM would run its supplier applications on a seemingly private exchange. The OEM could tap Covisint a public exchange. Yet another option would be to rely on multiple, third-party service providers.

Most likely, OEMs will spread supplier applications across all these platforms. It will assign supplier applications to various “homes” depending on two factors: competitive-advantage issues and cost.

Before delving into the technical choices, it is important to recognize that OEMs pursue different corporate strategies and have much different strengths and weaknesses. Their goals in developing new supplier-management systems, therefore, will differ as well. For example, one OEM may enjoy a cost advantage in purchased parts over a rival. Last year, for instance, Chrysler Group bitterly accused its suppliers of overcharging it for parts compared to its cross-town rivals. Another competitive basis is quality. Current J.D. Power surveys, for instance, find Ford last in quality among the top six automakers. Faster-time-to-market is yet a third, corporate strategy.

Each OEM’s supplier community and practices give it different strengths and weaknesses. In crafting supplier-management systems, each OEM would like to acquire the strengths of its competitors while simultaneously shedding its own weaknesses. For instance, Ford would love to have the quality parts now enjoyed by Toyota.

The principle supplier applications to run over the Internet cluster into four categories:

  • Supply-chain management execution
  • Settlement and payment
  • Direct-parts procurement
  • Product development.

Among other apps are advanced planning and scheduling systems, indirect parts procurement, quality, and warranty. On one site, for example, DaimlerChrysler supports over 160 supplier applications on its own dedicated network.

Pursuing this collection of hundreds of applications connecting thousands of suppliers are several organizations hoping to define and control supplier networks. Potential bases for the various supplier applications include:

  • The OEMs
  • Covisint
  • Third-party Internet commerce service providers.

Added to the fray are neutral non-profit organizations. The Automotive Industry Action Group (AIAG) and Original Equipment Suppliers Association (OESA), for instance, both hope to promote industry standards for the benefit of their members.

The decisive word for where to place strategic applications is control. No OEM will share a business practice, supplier community or system with a rival if it believes it enjoys a competitive advantage there. For instance, Ford believes its logistics planning capability offers it a competitive advantage over its rivals.

Critical is understanding the full array of technical options that are possible if the manufacturer decides to retain control. These will be described in order of increasing cost and expense to the manufacturer. The cheapest to operate would be a browser-based system. This could be used for simple transactions, such as downloading technical documentation and general “terms and conditions” type contracts. More costly would be to operate a Web site that taps into back-office systems, such as the manufacturer’s enterprise resource planning (ERP) system. Yet even more costly would be to rely on an outside, commerce service provider to supply a full-blown infrastructure-and-applications suite. For instance, Siemens AG is now using CommerceOne (Pleasanton, CA) in this fashion. Delphi Automotive Systems is starting to operate such a semi-private exchange on Covisint’s infrastructure.

The most costly alternative is for a manufacturer to entirely run its own private exchange. Trent Rock, Director of ebusiness at Federal-Mogul (Southfield, MI), believes that only manufacturers with sales greater than about $6 billion a year can afford this approach. A full-blown private exchange (with auctions and so forth) costs at least $5 million to implement. Several vendors, including i2 Technologies, offer such private-exchanges.

In sum, the Internet is most emphatically changing how companies manage their suppliers. Often lost in the technical debates over the best “home” for such applications is the competitive-advantage issue. Acknowledging this factor is paramount when exploring any sharing of resources with erstwhile competitors. Only by evaluating costs and competitor issues together can a manufacturer determine the best option to base a supplier application. Furthermore, this determination should be made on a case-by-case basis for each application. Proceeding in this fashion will truly let a manufacturer sleep well at night.