Covisint: Help or Hindrance? By Charles Stunson

Transcription

1 Covisint: Help or Hindrance? By Charles Stunson Introduction Since the press release on February 25, 2000, four of the largest automotive manufacturers in the world have been successful in assisting the development and launch of an automotive business-to-business (B2B) exchange that will facilitate the procurement of automobile parts. Ford, General Motors (GM) and DaimlerChrysler, initiated the project. Later Renault-Nissan and Delphi were added as equity partners. Together the five partners have the combined purchasing power of over $300 billion annually. The web-base company, Covisint (CO-vis-int), which is a play on the words: communication, cooperation, collaboration, vision, visibility, international and integration, promises to: Strengthen existing and developing relationships Bring together global trading partners Streamline new and emerging business processes Provide Internet based business solutions for the automotive product lifecycle Maintain customer driven focus However, suppliers have a different view of the project. Suppliers believe that Covisint will do nothing more than further squeeze margins and strain the relationships between automakers and suppliers. Moreover, there are concerns of ownership, who will run the company and neutrality. Finally, there has been a question of exactly what services will be offered through Covisint. Other stakeholders believe that Covisint will be the answer to inventory reduction, at all levels of the supply chain, and have the ability to respond quickly to market changes. Initially, automakers and suppliers to the automakers will be a part of the exchange, with plans to include dealers in the near future. Covisint has 1

2 been struggling with the conflict between suppliers and automakers since May With all the uncertainty surrounding the exchange many wonder if the exchange will be a help or hindrance. From EDI to B2B In the 60 s Electronic Data Interchanges were the cutting edge of business. However, since 1997, EDI has been overshadowed by B2B exchanges. While there are some similar benefits in the two, the B2B exchange is superior to an EDI. EDI is defined as the transfer of structure data by agreed message standards from computer to computer by electronic means. The term structure data is different than s or printed documents, because both forms of data can be acted on by humans. In an EDI system, computer systems are relied upon to generate and process messages; thus, the structure data is in a format that only computers can read. Like an exchange, EDI encourages the flow of information in an open environment. However, unlike an exchange, there must be a message standard in order for the exchange of information to occur; otherwise every company would have a different language and the benefit of EDI would be worthless. Finally, the term electronic means has changed over the years. In the 70 s EDI data was put on magnetic tape and then delivered by a courier or posted, which was then uploaded and read into the system. This system was not without its problems, though. Some of the problems that reoccurred were: 2

3 Physically mailing the tape took too much time Volume of tapes was growing, which lead to a scheduling problem. Tapes were vulnerable to being destroyed Often two identical tapes were produced in case one of them could not be processed by the recipient's computer system, thus creating a serious handling problem. In the 80 s the solution to these problems was to send the data via telecommunications; however, new problems arose: Bilateral computer links required organizations to schedule links at the same time. Each link costs money Any the number of trading partners grows the number of one-to-one links eventually becomes unmanageable Incompatible computer systems Although the above problems were reoccurring the benefits of EDI were: Reduction in the delays caused by postal paper chains Avoids the need to re-key data and therefore saves time and reduces errors Avoids the cost of the creation, recording and storage of paper documents Facilitates shorter lead times and reduced stock holdings, which allow reductions in working capital requirements (i.e. just-in-time policies) Provides the opportunity to improve customer service Provides the opportunity to reduce administrative costs On the other hand, B2B exchanges can reap the benefits of EDI by using the Internet as the infrastructure to conduct business. This eliminates the need to physically add links to new trading partners and broadens potential partners to anyone in the world. Moreover, EDI is confined to sharing information whereas a B2B exchange can offer products, services or information among business entities. It is argued that B2B exchanges generally provide more perfect information, which is always available, aggregates fragmented groups of buyers and/or sellers and helps to provide deeper price discounts. Along with buyers and sellers, the B2B exchange also requires a 3

4 facilitator of the exchange or market host. Thus, the stakeholders of a B2B exchange can be categorized as: suppliers, buyers and market host(s). Each entity has several general benefits of participating in an exchange. Benefits for Suppliers: For suppliers, an exchange will add a new marketing and distribution channel to customers. Since this channel is virtual, much of the initial outlay of cash that is typically needed to establish a new channel can be minimized. With the proper staffing, an exchange can provide better customer service through online interaction. Such a benefit could decrease transaction costs, which could allow for more volume. Supplier operational costs associated with sales and process costs of order management can be reduced, as well. Benefits for Buyers: Like the suppliers, buyers benefit by a reducing waste and operating leaner. Since the Internet is the infrastructure that is used to conduct business both supplier and buyers benefit from eliminating the cost of on-going software upgrades and maintenance. The buyer can also reduce procurement process and inventory costs. As the exchange grows, the buyer can capitalize on the supplier base and take advantage of more comprehensive solutions to day-to-day problems. Benefits for Market Host(s): The market host benefits by establishing a high value-add in the digital economy. Since the exchange is made up of companies all over the world, the market host can increase service levels to existing customers. Market hosts also benefit by increasing revenues based on the design of their revenue model. At present, the most 4

5 popular revenue models are transaction fees and/or a percent of the sales. Covisint will generate revenue by charging suppliers fees to be a member. Covisint Characteristics Some common questions that all exchanges have to address are: Who will own the exchange? Who will participate? What goods and services are sold? How will they be sold? Who will own the exchange? Typically, there are three types of B2B market hosts. Sell-side hosts are industry suppliers that own the exchange and join together to sell products and services. Buyside exchanges are unrelated industry buyers that own the exchange and join together to aggregate their purchasing power. Neutral exchanges are unbiased third parties that bring buyers and sellers together. Covisint began as a buy-side exchange because GM Ford and DaimlerChrysler initiated the project. However, Covisint has recently become a company and intends to offer an IPO. Moreover, in order to promote an atmosphere of equality between automakers and suppliers, it will necessary for Covisint to operate neutrally. Suppliers have asked for an equity stake in the company in order to ensure that the concerns of the suppliers will be addressed adequately. At present, there is no plans to issue more equity, but there may be profit sharing. The profit sharing will be in the form of a discount on fees Covisint will charge suppliers for transactions and discounts will not be offered until Covisint reaches minimum profitability. 5

6 Who will participate? Participants of the exchange can be segmented in two categories, open and closed. Open exchanges allow any entity to register to participate on the site. Open exchanges generally are more buyer-centric because they provide the buyer with greater product and pricing knowledge. Closed exchanges are limited to members. The seller s position is protected by preserving pre-existing relationships, limiting competition for the buyers business. Presently, Covisint has taken the form of a closed model. A list of qualifications must be met in order to become a member. Tier 1 suppliers typically have no problem adhering to these qualifications. However, there is a fear that some of the Tier 2 and many of the Tier 3 suppliers will be forced out of business because of the stringent qualifications. What goods and services will be offered? Goods and services can be classified as direct goods and services and back office goods and services. Direct goods and services include specific products that may be related to an industry, whereas back office goods and services are non-specific products, such as office supplies. Accounting is an example of a service that may be classified as a non-specific, as well. Covisint has committed to auto parts, which range from tiny rubber seals to passenger and driver seats. How will they be sold? These goods and services can be grouped into two methods of purchasing. The first method is systematic purchasing, where buyers establish long-term relationships through negotiated purchasing contracts from qualified suppliers. For example, Ford may purchase leather wrapped steering wheels from a supplier over the next year at a 6

7 fixed price. The second method is spot purchasing, where buyers search for short-term one-time transactions that fulfill an immediate need at the lowest possible cost. With spot purchasing there is an opportunity to get rid of an overstock of inventory that may be of use to automakers and/or suppliers. Both methods support the capabilities of Covisint. However, an exchange that supports systematic purchasing has a greater chance of driving the necessary liquidity. Relationship Between Suppliers and Automakers In the past the relationship between suppliers and automakers has been strained. Since the automotive industry is a specific asset intensive business and also requires significant amounts of inventory, large sums of money are needed for daily operation. Due to the nature of the business, carmakers have used their size and influence to minimize their expenses to suppliers. For example one assembly center can contract as many as 300 suppliers. The types of products that the suppliers design and manufacture range from airbag units to tires. Additionally, in the last five years the automotive business has become one of the most competitive industries in the world. In the 60 s and 70 s the North American market was consisted of 50% GM, with Ford, Chrysler and American Motors Corporation dividing the other 50%. Today, GM and Ford s market share is less than 30%, DaimlerChrysler is just under 20% and Toyota has captured close to 10%. Typically, the automaker will draft a contract with a supplier for a set amount of years, with the understanding that the cost decreases over the course of the contract. Suppliers are in a dilemma because although these contracts were extremely lucrative, they are responsible for incurring the cost of design, manufacturing and delivery of the part. In the event that their part does not arrive to the assembly plant on time or the 7

8 part is of poor quality and causes the plant to stop production, the supplier will have to incur the cost of downtime. Many times the daily cost of downtime of an assembly center can be close to USD 200,000 per hour. It is easy to see how the relationship between the supplier and the carmaker can become an us versus them mentality. Conclusion It is difficult to see how Covisint will live up to the hype it has created. There is much distrust between the automakers and the suppliers, and rightly so. Covisint was initiated by the automakers, which also happens to be the equity holders. Thus, the automakers have attempted to become the market hosts and buyers, at the same time. Additionally, refusing to issue equity to some suppliers exhibits bad faith and makes the automakers appear to attempt to reap the benefits of a B2B exchange at the expense of the suppliers. In reality, the exchange will not function unless there is cooperation between these two constituents. The disagreements among suppliers and the automakers will further distance the stakeholders and make it even more difficult to achieve liquidity. Moreover, many suppliers are wary because of the issues of confidentially. Becoming a member of Covisint will require that all designs and proprietary information be submitted to Covisint. Here again, the suppliers are put in another compromising position. This chain of events has prompted many suppliers to wait and see what becomes of Covisint in the coming months. B2B exchanges have incredible power to create high value add services for all involved constituents, but as with most initiatives the keys to success are: execution, communication, cooperation, collaboration, vision and integration. Unfortunately, Covisint has yet to heed their name. 8

9 Bibliography Forrester Research, Inc., B2B Integration Road Map What is Means, June Havard Business Review, E-Hubs: The new B2B Marketplaces, May-June Covisint News 9