No area of the automotive industry is more tempting of a target for an overhaul than procurement. U.S. OEMs spend at least $200-billion/year on direct, production parts. This "spend" is larger than the gross domestic product of entire countries.
At the same time, current procurement practices are rife with inefficiencies, complexities, and costly procedures. The end result is to drive up the final cost of a vehicle by at least several hundred dollars per unit. Furthermore, each sourcing decision (what to buy and from whom) locks up the cost structure of an OEM and supplier for years to come.
Procurement isn't going to change overnight. A lack of standardization and its extraordinary complexity preclude any simple fix. Information technology (I.T.) vendors of all stripes, nevertheless, hope to "fix" the procurement area by supplying new systems, services and technologies. I.T. vendors almost universally underestimate the difficulty in comprehensively tackling this area.
All users and I.T. vendors touching procurement need to know the forces and problems in this transition to Internet-based procurement, commonly referred to as "eProcurement." This oversight includes monitoring the competing solutions and closely watching for a particular vendor or practice to break out from the pack and dominate.
A comprehensive look at current procurement processes reveals why it is such a tough nut to crack. The practice:
An OEM sourcing decision today may begin far before any formal, purchase contracts are drawn. It could begin with a supplier sales engineer and an OEM product engineer exploring a concept in informal, face-to-face discussions. A rough set of specifications may be floated about. The product engineer may even informally commit to a supplier before the work is formally put out for bid. An initial request for quote (RFQ) can be just a trial balloon to seek out information or to validate that new specifications and target costs are, indeed, realistic.
The RFQ itself is often a thick stack of paper documents. Once printed it almost immediately becomes obsolete. Even after a sales contract is signed, the OEM and supplier may continually modify the initial agreement for weeks or months to come. This includes making engineering changes to the part and renegotiating piece prices.
Adding to the complexity is that every OEM has its own procurement processes. Even within one OEM, procurement takes multiple flavors depending on:
Furthermore, information exchanges between OEM and supplier go over every conceivable media including phone, fax, email, U.S. mail, electronic data interchange (EDI), intranets, and extranets. It touches multiple databases and systems including computer-aided design (CAD) systems, engineering bill of materials (BOM), past sales contracts and other legal documents, and knowledge-management repositories. At the same time, OEMs are constantly modifying their procurement processes. The net result is that procurement today is a many-headed beast.
In addition, the largest suppliers, especially Delphi and Visteon, superbly know how to win OEM contracts using current procurement practices. These very large suppliers will agree to changing the rules of the game only if they believe they will come out on top in any new regime.
Intro this morass, I.T. vendors are aggressively moving in, hoping to capture a large piece of the action. Many of these vendors come from outside of the automotive industry. They enter believing procurement in the automotive industry is far simpler than it actually is. Depending on what they sell, they see it essentially as
In truth, few vendors even come close to understanding the breadth of requirements that any procurement system must satisfy. All are scrambling, nevertheless, to identify what parts of today's procurement processes are tractable and therefore amenable to their specific I.T. capabilities.
Making matters worse for the I.T. camp is that any eProcurement solution itself introduces new complications. For instance, few in the auto industry are familiar with new e-business concepts such as virtual project workspaces, electronic blackboards, and the like. New intellectual-property issues also loom in any shift to eProcurement. A move to all-digital formats can wreck havoc over a company's ability to control its intellectual property, as Napster has painfully taught the music industry.
Despite these additional ebusiness complexities, several groups of I.T. vendors are vying for leadership roles. These include:
Among them, Covisint is certainly one to watch. Backed by OEMs, it is targeting procurement, specially quote management, as an area it expects to dominate. A key Covisint technology partner is NexPrise. This Santa Clara, CA-based firm is now supporting the pilot where General Motors is connecting with Delphi and Magna for procuring new interior modules. In addition to NexPrise, other e-commerce vendors include Commerce One and e-Room.
Taking a different approach, i2 Technologies sees a major role for itself by offering its supplier relationship management (SRM) software. Large infrastructure and enterprise application vendors like Oracle and SAP also believe they can be big eProcurement solution providers.
CAD vendors, such as Dassault, SDRC, and UGS (formerly Unigraphics), see eProcurement as heavily engineering-centric. Consequently, they are pushing their collaborative product commerce (CPC) concepts. Likewise competing are internal OEM efforts such as Ford's C3P and Chrysler's Fastcar programs.
No vendor or single solution has yet to break away from the pack and declare itself the eProcurement winner. Instead, all parties are fighting for market share. This competition is essentially reduced to a fight for "seats," that is, the number of active users. Those totals are quite small.
Yet another indicator for convergence to an industry-wide, common, eProcurement practice will be the prevalence of critical I.T. standards. These include CAD data standards and business-process standards similar to RosettaNet's PIPs now used in the high-tech industry. Even here the situation is murky at the moment with no emerging winners.
In sum, keeping track of the competing flavors of eProcurement is no simple task. To ignore it, however, could be extremely costly. A "head-in-the-sand" approach could leave a company hopelessly out of sync with the industry and at a significant disadvantage in a most critical area.