One of the biggest industry stories of the past year has to be the automotive world’s move – make that leap – into the world of e-business.
Auto manufacturers may have been a bit slow to get on board, but now they’re making up for lost time. Every week it seems as though one or more of the car companies is announcing some new e-business project.
Like the Internet itself, the list of possibilities for automotive companies seems endless. And the manufacturers have recognized the strategic importance of reaching out to this new technology as a way to help them produce better vehicles at lower costs, transform their working and customer relationships and ultimately deliver their vehicles to customers in a more timely fashion.
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For too long, the industry’s stodgy image has hurt automakers everywhere from Wall Street, where record profits have not resulted in record stock prices; to dealer showrooms, where customers don’t understand why it takes so long to deliver the exact car or truck they want; to college campuses, where recruiters find that all too often the best and the brightest young students are shunning the industry for “more exciting” professions.
Can the world of e-business help the automakers improve the way they do business? The auto companies certainly believe so, and here are two areas they are targeting to help them reach their goals.
Supplier Purchasing
Carlos Mazzorin, Ford’s group vice president of purchasing, has said 70-80 percent of all Ford’s purchasing transactions are expected to take place on the web within the next two years. And Ford is not alone. In fact, Ford, General Motors and DaimlerChrysler are working together to form the world’s largest online purchasing company, and they are asking other automotive companies to join them.
The automotive companies are hoping to use the Internet as a way to turn many individual parts into commodities, which will then drive down costs. But at the other end of the Internet are suppliers, who are trying to use product differentiation as a way to separate them from their competitors. Product differentiation is in direct contrast to the automakers’ strategy of turning parts into commodities, where the only difference among supplier products is price.
Automakers also are struggling with the issue of supplier capability. While only “approved” suppliers will be given access to the bidding process, who will know which suppliers have the capacity to meet the demand, produce products at acceptable quality levels and make deliveries according to just-in-time schedules? Suppliers will bid on many jobs at the same time without knowing which bids will be accepted and what demands their companies may face in the future.
Another area of conflict is the issue of modularization. Not too long ago many industry experts were calling modularization the “new revolution” in automotive manufacturing. A module is a collection of different car parts that are physically integrated – with each individual part and the module requiring its own design, engineering and testing. Modules allow automakers to install many different parts and components, which are pre-assembled as a completed unit, at the same time.
Modularization will be hard to implement under any e-business bidding plan. Tier 1 suppliers will create different modules whenever they assemble different parts and components produced by many different Tier II, III and IV suppliers. How will the process be managed when auctioning filters below the Tier I supplier level? All of this will certainly complicate the process.
There also may be an adjustment period as automakers learn which parts and components can and cannot be put up for bid. For example, tires, nuts, bolts, fasteners and belts seem to be ideal bidding items, while some other products – and modular components in particular – seem less likely to move into the world of mass customization.
The most likely scenario is that OEMs will make only about 10-20 percent of their purchases at auction. But that percentage will increase as auctioning goes lower down the supply chain because the number of commodities tends to rise as supply tiers go down.
Auto companies have to be careful that the pendulum doesn’t swing too far when it comes to business-to-business trade exchange. But ready or not, automakers are going to continue increasing the use of e-business in dealings with their suppliers. And suppliers that are not prepared to work in this new environment are not likely to last long into the 21st century.
Customer Orders
While implementing a web-based program with suppliers is one strategic target, automakers also are devoting a great deal of time and resources to using the Internet to better connect with vehicle buyers.
Many industry leaders seem to believe the Internet will help them deliver customized vehicles to customers in less than 10 days. For example, as part of its order-to-delivery initiative, General Motors is counting on the Internet to help the company reduce its delivery time to eight days on custom-ordered vehicles. If successful, it will be quite an accomplishment because GM today, like the other car companies, usually needs a couple of months to deliver a custom-ordered vehicle.
Auto companies need to make changes in their order-to-delivery systems. At last check, it took less than a day to build most of today’s cars and trucks. Yet, it takes months to order parts, schedule production and deliver those vehicles to their distribution sources, the dealerships.
A great majority of customers thus make their purchases from the supply on hand at dealerships – or the supply dealers can quickly get their hands on by trading with other dealers. A very small number of cars are ordered with exact specifications because of the time it takes to get such a vehicle to the dealer. Waiting two months or more is not uncommon, and that’s a wait most customers don’t want to make.
Would more customers make special purchase orders if their vehicles would be ready for delivery within 10 days? Of course. And the auto companies need to work on providing customers with the mix and match of products that meet their customers’ specific needs. But delivering a factory-ordered vehicle within 5-10 days of order is not going to be easy, even with the Internet’s help.
For starters, automakers may have to limit the offerings and options available until they can show they are capable of producing such vehicles. What’s more, many of the vehicle options customers select are built by suppliers, which means suppliers are going to have to show they can build specific products and then deliver them almost instantaneously to the automakers.
Manufacturing operations also must have designed-in flexibility to build the different models and platforms according to customer specifications. While Honda and Toyota today may have the fastest response time to special orders, they limit customers’ options. For example, sunroofs and cruise controls may be available only on certain Honda Accord models, and customers are not given a choice of interior colors depending on their choice of exterior color.
Vehicle assembly plants will have to solve the problem of volume inflexibility. Plants today are high investments and typically are scheduled to produce 1,000 cars per day. They may have difficulties running efficiently while producing only 500 cars per day, or even 1,500 if production is based on the dictates of customer orders.
The method of delivering vehicles to customers is another area targeted for improvement. Experts say sales and distribution are responsible for up to one-third of a vehicle’s cost, and that dealerships simply add cost – and time – to the process. But there’s much more cost involved in the distribution system between the plant and the dealer.
Dealerships will always have a place with customers; however, that role may change a great deal in the future. For some, dealerships may serve much the same role they hold today – as a showcase to look at, test drive and order their new vehicles. But for e-buyers, dealerships may serve as nothing more than a distribution outlet for vehicles ordered on-line. Those customers will do their own shopping for prices and financing via the Internet, then simply arrive at the dealer to pick up their new car or truck.
Dealerships can thrive in this new environment, but only if they understand and embrace the Internet and all it offers them. After all, the web will enable dealerships to connect with car buyers in a much more comfortable environment for the customers. And in all likelihood, sales will be made without dealers having to do nearly as much work as in the past.
So is a 10-day car just an e-mail away? Not now, anyway, but it’s still right for automakers to focus on driving down the time it takes to deliver vehicles to customers. And hopefully, all of the new tools the Internet is providing will help them get there.
