Lade Inhalt...

Analysis of the divergence between theory and practice

How Covisint’s course of strategy can improve the performance of the automotive industry

©2004 Masterarbeit 66 Seiten


This management report identifies and analyses the major inefficiencies in the altering strategies of Covisint® – the former proclaimed biggest electronic B2B-marketplace in the world – from its inauguration until the present day.
Covisint® was founded by a consortium of automotive OEMs, i.e. General Motors, Ford Motor Company, and DaimlerChrysler in the beginning of 2000. This electronic B2B-platform represented the intention to establish an industry-wide standard that every automotive company should be forced to use if it wants to generate business in future. Moreover, Covisint® represented the ambitious vision of the „Big Three” to put their automotive supply chains on the Internet in order to improve their process efficiency in various ways. At that point of time many writers already called Covisint® „the third revolution in the automotive industry” (Industrial-IT 2000, p. 13). As this chosen prominent example will show, many managerial failures have been made causing the marketplace’s continuous low performance.
The management report mainly is based on 34 interviews conducted with automotive industry managers and experts from spring until autumn 2003. The extensive empirical research should allow obtaining an up-to-date and profound view of the interrelated inefficiencies in Covisint®’s strategies. The crucial issues on every of the detected three major strategies as standardised electronic B2B-marketplace for the global automotive industry (1. strategy), as application service provider/ASP (2. strategy) and as messaging- and communication-hub (3. strategy) will be revealed, differentiated and critically discussed. The manifold and interrelated reasons for failures of each strategy will be analysed.
Finally, in order to avoid the repetition of mistakes made in the past and to improve Covisint®’s future performance, recommendations derived from the analysis are given.
Der vorliegende Management Report identifiziert und analysiert die bedeutendsten Ineffizienzen in den wechselnden Strategien von Covisint® – dem ehemals proklamierten größten elektronischen B2B-Markplatz der Welt – von dessen Gründung an bis zum Jahr 2004.
Covisint® wurde Anfang des Jahres 2000 von einem Konsortium der größten weltweiten Automobilhersteller (OEM) – General Motors, Ford Motor Company und DaimlerChrysler – gegründet. Covisint® als elektronische B2B-Plattform repräsentierte die Absicht einen industrieweiten Standard für […]


Table of content

1. Introduction

2. The challenge
2.1 Structure and characteristics of the automotive industry
2.2 Contemporary issues
2.3 Inefficiencies in the automotive supply chain
2.4 Buyer-supplier-relationships as competitive weapon
2.5 Impact of B2B e-Commerce on the automotive industry

3. The inauguration of Covisint® 13
3.1 The vision
3.2 The formation
3.3 The first steps
3.4 Problems arising

4. Analysis of the problems
4.1 Issues of the OEM’s diverging business strategies
4.2 Issues of the business model
4.3 Trust and technological security
4.4 Market power and participation 27
4.5 Issues of procurement and bundling
4.6 The competitive environment of Covisint®

5. The re-formation
5.1 Application service provider as new strategy
5.2 Caveats to the standardisation of processes and applications
5.3 Problems and issues

6. The present situation
6.1 Covisint® as messaging- and communication platform
6.2 Problems regarding the current strategy
6.3 The new competitive environment

7. Conclusion and recommendations

8. References

9. Annex
9.1 Annex 1: List of interviewees
9.2 Annex 2: Abbreviations and definitions
9.3 Annex 3: Background information

1. Introduction

This management report will identify and analyse the major inefficiencies in Covisint’s®[1] varying strategies from its inauguration until the present day.

The proclaimed largest electronic B2B-marketplace[2] in the world, Covisint, was founded by a consortium of automotive OEMs[3], i.e. General Motors, Ford Motor Company, and Daimler­Chrysler in the beginning of the year 2000. This marketplace-initiative was the intention to establish an industry-wide standard that every automotive company should be forced to use if it wants to generate business in future. Moreover Covisint represented the ambitious vision of the Big Three[4] to put their automotive supply chains[5] on the Internet[6] in order to improve their process efficiency in various ways. At that point of time many writers already called Covisint “the third revolution in the automotive industry[7] ” (Industrial-IT 2000, p. 13). As this chosen prominent example will show, many managerial failures have been made causing the market­places continuous low performance.

This management report is mainly based on 34 interviews with automotive industry managers and experts conducted in summer 2003 (pls. see annex 1). The extensive empirical research should allow obtaining an up-to-date and profound view of the interrelated inefficiencies in Covisint’s strategies. The crucial issues on every of the detected three major strategies will be revealed, differentiated and discussed critically.

After introducing Covisint, chapter 2 gives an insight in the structure and contemporary issues in the automotive industry. In chapter 3 the inauguration of Covisint and major ideas accord­ing to its potential were reflected. Following, chapter 4 provides an analysis of the major rea­sons why Covisint’s first strategy to standardise the automotive industry failed. Chapter 5 discusses the re-formation of the marketplace to an ASP[8] and the arising issues on the second strategy. In chapter 6 the current and third strategy from November 2003 on as messaging and communication hub is critically reviewed and probable future problems are revealed. Finally, in chapter 7 conclusions are drawn from the analysis of the various strategies and recommen­dations are derived and given as to how Covisint could improve its future performance.

2. The challenge

2.1 Structure and characteristics of the automotive industry

The automotive industry[9] is considered as the mother of all industries (Lapidus 2000). No other industry comes close to the level of technology, regulatory volume and retail found in the automotive industry (Lapidus 2000). As characteristics we find a combination of mass production, high degree of customisation[10] and technological and logistical complexity. Dia­gram 1 depicts a simplified automotive supply chain with its several tiers.

Abbildung in dieser Leseprobe nicht enthalten

Diagram 1: Simplified automotive supply chain with several tiers

Source: Revised version based on Diebold presentation

The shape of this branch of industry is a tightly connected network of several thousands of companies. According to the multitude of business on the various logistical levels (i.e. tiers) of the supply chain, the automotive industry is shaped like a pyramid. On top of this pyramid we find a monopoly consisting of only a few OEMs.

In contrary on the bottom we find a high fragmented[11] market consisting of several thousands, mostly SMEs[12]. As an example the Big Three in sum have about 30,000 direct (tier-1) and indirect (tier-2 and following) suppliers and generate a transaction volume of about US-$ 240 billion (Sako 2000).

The industry is fiercely competitive on a global level in terms of design, technology, price, and time-to-market (Aberdeen 2002). The supplied products are quite heterogeneous, ranging from simple parts like screws and springs – which nevertheless are frequently customer spe­cific and hence no commodities – at one end of the supply chain up to complex systems like dashboards at the other end.

The current general distinction between system suppliers (tier-1), components (tier-2) and part manufacturers (tier-3 and following) is being enlarged by a fourth category, the “system inte­grator” or 0.5-tier enterprise (Mühge et al. 2003). This category contains the market leaders, i.e. those multinational enterprises which posses key competences in the production and development of highly complex components, like complete front ends (Mühge et al. 2003). System integrators thus are mainly large businesses that work in research and development alliances with OEMs and realise most of their business value with OEMs. So it is obvious that on top of the supplier hierarchy mostly large companies are positioned while the SMEs are frequently located within the component and parts supplier categories (Mühge et al. 2003).

With regard to the competitive environment and the high dependency on business cycles, automotive companies with the most efficient supply chain win in the market (Aberdeen 2002).

2.2 Contemporary issues in the automotive industry

To comply with the existing hyper-competition[13] automotive companies on the one hand have to focus on their core competencies[14] by reducing their depth[15] of production and on the other hand they have to reduce their logistical complexity by minimising their number of direct suppliers[16] (tier-1)[17]. As a convergence of these two efforts, the automotive industry is charac­terised by a high level of modularisation. Modularisation[18] describes the process in which pre-assembled subassemblies are delivered as they are needed (Just-in-time) to an OEM’s or sup­plier’s assembly line, where these modules are put together to the finished car.

By reducing the depth of production, OEM’s and supplier’s have to outsource[19] value-adding processes and hence determine the degree of the vertical integration of the company. Main drivers for outsourcing in the automotive industry are the progress in technology and the in­creasing product and process complexity as well as rising expenditures for R&D[20]. This devel­opment results in an increasing degree of specialisation what causes even large OEMs to fall back to the knowledge and capabilities of suppliers. Nevertheless, according to Markus Schoettle, Automobil Produktion, outsourcing processes can encompass the loss of knowledge and an enhanced dependency on suppliers because OEMs lost out of sight which parts are best for them to purchase.

As a further prevalent contemporary issue in the automotive industry, OEMs are utilising plat­form strategies where various models and bodies can be combined with just one platform in order to achieve economies of scope[21]. This strategy as well as the development of similar parts over various lines of models can reduce expenditures for R&D and create synergies like economies of scale. In order to distinguish one vehicle from similar vehicles with a large amount of equal parts and platforms – like models of Ford, Mazda and Volvo – features the consumer can see from the outside have to be different in order to differentiate the brands and not to harm their image.

SCM[22] still is a very important topic in the industry in order to improve production processes. Each year the automotive industry executes thousands of process efforts and spends hundreds of billions of dollars on goods and services to support their business initiatives (Aberdeen 2002). Even a small percentage of process efficiency represents a major difference on these companies’ revenues (Aberdeen 2002). For the past five years the Internet has been increas­ingly leveraged as an enabler of process efficiencies and competitive advantage for the larger players in the automotive industry (pls. see chapter 2.5).

The launch of Covisint has been considered as one of the major milestones in supply chain optimisation (Aberdeen 2002).

2.3 Inefficiencies in the automotive supply chain

A crucial issue in the automotive industry is how companies work with each other and their supply chain. Technology alone is not going to solve this problem of collaboration across many different businesses. Basically, inefficiencies within the supply chain can be differenti­ated in inefficiencies in procurement processes, SCM-processes like logistics and quality issues, collaborative engineering and issues according to the communication process.

Diagram 1 depicts the main inefficiencies encountered in today’s automotive supply chain.

Abbildung in dieser Leseprobe nicht enthalten

Diagram 2: Inefficiencies in the automotive supply chain

Source: Covisint Presentation

Abbildung in dieser Leseprobe nicht enthalten

Procuring a part or material in this industry is complex because any change in specification, part quality or delivery time has exponential impact as it moves up the supply chain. Often, a RFQ[23] for a single part is so information-loaded that it is stored in a large three-ring binder sent to various suppliers (Aberdeen 2002). These suppliers respond in a number of ways, requiring an extensive evaluation effort by OEMs. The purchasing process can take more than four months depending on the degree of complexity of parts (Aberdeen 2002). The adminis­trative costs alone of procuring materials for a car amount to about US-$ 95 (Baer et al. 2001).

High inefficiencies can also be detected in logistics. As an example, in the year 2000 in the US it took an average of 53 days to get a car built and delivered to its customer, while only one or two of those days were actually spent on the assembly. According to a report by Roland Berger from June 2000 full 36 days go by for creating a schedule for production, processing orders for materials and purchasing supplies (Baer et al. 2001). The more inven­tory will be created that is not to a customer's liking the more money an OEM will lose. These losses mainly derive from dropped prices and marketing efforts (Baer et al. 2001). Today the majority of suppliers still have to wait for an OEM like General Motors to analyse its needs and send out a release asking for a shipment what takes a large amount of time (Baer et al. 2001).

With regard to SCM, the various processes are highly dependent on the interaction of depart­ments, suppliers and partners to build and deliver vehicles. Designers and engineers must agree on specifications[24] affecting the type of material or product that is sourced. Tier-1 suppli­ers need up-to-date information on specifications in order to build the right components. Tier-2 suppliers may need data on specifications and demand plans in order to source raw materials (Aberdeen 2002). Though the automotive industry probably has the highest adop­tion of EDI[25], it is still facing a significant communication problem especially on the tier-2 up to tier-n[26] level within the supply chain.

High amounts of costs associated with quality issues represent a further problem within the scope of SCM[27]. Current design and engineering in the supply chain are vital to the competitive­ness of the automotive industry. However, these innovative design and develop­ment processes are hampered if product data cannot be exchanged smoothly across the supply chain. Brunnermeier et al. (2002) estimated that imperfect interoperability in the US-automotive industry costs an amount of up to US-$ 1 billion per year and causes delays in the introduction of new models by at least two months which can amount to US-$ 1 million for each day (Brunnermeier et al. 2002). Generally, the later downstream quality problems and scrap are detected, the more costly they are in terms of scrapped models, model rework and project delays. Hence, quality problems have to be detected at the earliest stage of production to minimise rework expenses.

According to Marina Pedler, Ford, recent data shows that most quality problems derive from tier-2 and tier-3 suppliers. Hence, quality processes comparable to those existing between OEM and tier-1s have to be introduced what would be associated with warranty savings (Marina Pedler).

Since several decades it has been a further very crucial issue for automotive businesses to minimise high inventories. As an example, the average value of General Motors’ inventory is estimated on US-$ 40 billion, involving high inventory costs and opportunity costs due to bounded capital (Laudon et al. 2002). The dealers hold most of this inventory due to the prevalent make-to-stock strategy in the US[28]. Build-to-order strategies would reduce finished vehicle inventory costs to a great extent as well as they generate other production cost sav­ings. Potential savings for General Motors are estimated at US-$ 20 billion a year (Laudon et al. 2002). Nevertheless, though the automotive industry is doing a lot of efforts, build-to-order has not yet become reality (Laudon et al. 2002). Further literature source states that high inventories due to imprecise demand forecasts generated costs in the US-automotive supply chain of US-$ 49 billion in 1999 (Gibbsons 2000). These inefficiencies resulted in extra costs for the consumer of US-$ 310 per vehicle (Gibbsons 2000).

According to collaborative engineering, in the year 2001 the product development of a vehicle took two to four years (Baer et al. 2001). A single design change still takes about five weeks to filter through layers of engineers and managers (Baer et al. 2001). The inefficiency of information sharing throughout the automotive development process forces engineers to spend enormous amounts of time tracking down information and managing communications with internal and external partners (Garretson 2001). If a specification is changed, the proce­dure has to be redone every time, each time introducing the possibility of errors in collation, and losing lots of time (Jankowski 2001). As a result, connectivity is a major issue in the auto industry, because it must support the critical supply chain functions that drive the industry.

In the past EDI as communication technology was quite expensive. In the mid-1990s, a small supplier had to ascribe US-$ 45,000 per year in EDI related expenses. Because of the expense, only 30-40 per cent of automotive suppliers use EDI, according to Peter Weiss, Covisint (Konicki 2001). As a result, even in the late 1990s, large suppliers typically received sched­uling information directly from OEMs via EDI, and then transmitted the schedules to tier-2 and tier-3 suppliers via fax, meetings, e-mail and phone, since these lower-tier firms in the supply chain did not have the capital to invest in EDI (Konicki 2001). Moreover each OEM is using its own CAD-system (Garretson 2000). As a result, 25 per cent of platform develop­ment time is wasted on duplication of work and waiting for responses (Baer et al. 2001). Moreover US-$ 3-4 billion of excess inventories become obsolete due to inability to commu­nicate design changes.

As we can see, there is little doubt that the automotive industry supply chain is disconnected and the flow of information is constricted. These information gaps existing between points in the supply chain result in expensive inefficiencies.

2.4 Buyer-supplier-relationships as competitive weapon

In context with outsourcing processes and modularisation, the importance of buyer-supplier-relationships within the automotive industry is increasing and has become a competitive weapon[29] (Krajewski et al. 2002). Due to the higher amount of parts procured by external suppli­ers, savings in procurement represent one of the major sources to improve an automo­tive businesses performance. In the US-automotive industry purchasing costs represent the largest cost factor with about 50 per cent (Lapidus 2000). The average US-vehicle hence gen­erates procurement costs of US-$ 11,300 (Lapidus 2000). According to Uwe vander Stichelen, Delphi, purchasing costs in the European automotive industry are even higher due to the lower depth of production. Purchasing costs are estimated at 60 per cent of the value of the finished vehicle in Europe (Uwe vander Stichelen). These figures consist of costs for direct material – which is directly used for the production process of a car – and indirect material, called MROs[30]. Because of the fact that the purchasing costs represent the highest costs fac­tor for the production of vehicles, purchasing prices historically have been subject to continu­ous pressure on and squeezing of suppliers’ margins. As a result, Goldman Sachs (Lapidus 2000) estimate margins within the automotive supplier industry just at 2–5 per cent, depend­ing on the uniqueness of the product a supplier produces, its market power and its logistical position within the supply chain.

Due to the continuing process of outsourcing, especially OEMs transfer a rising portion of R&D as well as production activities to tier-0.5 and tier-1 suppliers what forces them to change from formerly competitive forms to more collaborative forms of cooperation. This is especially true for simultaneous engineering, where a high degree of collaboration is needed in order to shorten time-to-market and to handle critical information.

A rather competitive orientation within buyer-supplier-relationships is characterised by some kind of zero-sum game: Whatever one side loses, the other side will gain. Short-term cost advantages are priced over long-term commitments (Krajewski et al. 2002). These forms of cooperation can be detected especially in the lower-tiers of the supply chain, where parts are rather commodities and suppliers can be switched more easily. Though price is an important criterion in every buyer-supplier-relationship in order to stay competitive, within these forms of cooperation the price is the predominant driver for purchasing decisions (Doran 2001). In contrary, on top of the supplier pyramid we can detect a rather collaborative orientation within buyer-supplier-relationships. Here, OEMs and suppliers consider each other rather as partners and support their mutual activities to a higher degree (Krajewski et al. 2002). Nevertheless, according to Dr. Ralf Koester, Benteler, it has to be pointed out that there always is competi­tion within collaborative forms of buyer-supplier-relationships and cost efficiency still has a high priority. Rick Stephenson confirmed: “You will always have to have what you call co-opetition, that is gonna have to be there, because you cannot get better without or less compe­tition but I think it will vary among the OEMs”.

A close look at current buyer-supplier-relationships in the US-automotive industry reveals many adaptations. For example, Ford Motor Company adopts some but not all forms of col­laborative practices. It enters long-term contracts and provides modest support for supplier development. In return it demands – and due to its market power gets – information on sup­pliers’ production processes, but not necessarily on their cost structure (Krajewski et al. 2002).

It is quite interesting that there are plentiful evidences that the rather collaborative forms of cooperation can be considered as the main reason for Japanese superiority in price and quality in comparison to US-American and European vehicles (Helper 2002). In compliance, Piore et al. (2001) pointed out that adversarial buyer-supplier-relationships were a crucial factor that hindered the US-automotive industry’s competitiveness. As a result, there is no doubt in lit­erature that the right mix of buyer-supplier-relationships directly influences the competitive­ness of an OEM and supplier.

Market power of buyer and supplier is a crucial factor within that kind of relationships. In the automotive industry the OEM “historically” has been able to exercise continuous bargaining power on its suppliers in order to force down prices due to a bundle of factors. Wheelen et al. (2002) criteria to determine market power applied on the automotive industry showed the following results: Automotive OEMs are powerful because they purchase a large proportion of a suppliers’ sales. Moreover the few OEMs are shaping a monopoly in contrast to a frag­mented supplier market, depending on the level within the supply pyramid. Hence, the degree of market power which an OEM is able to exert on a supplier highly dependents on the market structure. On top of the supplier hierarchy where we find a oligopolistic structure consisting of a very limited number of top suppliers, OEMs are losing market power. Moreover this loss is strengthened by the OEM’s diminishing potential to re-integrate the production of formerly purchased products. The risk of backward integration by OEMs for suppliers become less probable than in the past due to the prevalent focus on core competencies. Nevertheless, nowadays there still is a limited number of examples (like Volkswagen) where formerly out­sourced production activities were taken back in-house (Weißgerber 2001).

2.5 Impact of B2B e-Commerce on the automotive industry

As it was pointed out in chapter 2.3, EDI is prevalent in the automotive industry since the 1970s but has a lot of disadvantages ranging from high costs of implementation up to ineffi­ciencies in standardisation and resulting disconnections (Laudon et al. 2002). B2B e-Com­merce[31] based on Internet-protocol represented the hope of the automotive industry to miti­gate these major problems.

There is little doubt among experts that B2B e-Commerce via electronic B2B marketplaces can affect buyer-supplier-relationships in various ways depending on the use of the provided applications[32]. The selection of the right strategy and an efficient use of applications can have significant influence on the competitiveness of an automotive business. Rick Stephenson expressed it in the following way:

The ability to strategically take advantage of that [applications], is in a long-term gonna be, which ones the OEMs prefer or the suppliers. If the value is information in real-time – and I think it is – than those who are smartest about using it to their strategic advantage. So I think it all concerns the use of the tools. If someone decides to use marketplaces strictly to source parts and not gonna do collaboration, there switching speed may increase. But the direction of the industry is to push things down and log them in. So that dynamic is occuring as well, the dynamic of strategies how to handle business. There are so many variables popping around that it is not possible to make exact forecasts or to describe it in a simple way (Rick Stephenson).

Hence, if an OEM is focused rather on competitive forms of cooperation like General Motors was at least until the mid-1980s, he will prefer auctions[33] and may switch suppliers fre­quently. If an OEM wants to support a collaborative form of cooperation like Japanese OEMs preferred in the past, he will rather focus on SCM-tools and applications facilitating collaborative engineering.

Broad consent among experts existed on the fact that marketplaces will not trigger any shift in the distribution of market power. According to Markus Brandau, NewtronAutomotive, these tools can rather be considered as catalyst that consolidate market positions. Moreover market­places are accelerating major developments in the industry like the consolidation of the sup­plier market (Markus Brandau).

Though according to Kyle Gillmann, Forge Finder, Internet applications like marketplaces enable a high market transparency that can foster competition, also the medium has its limita­tions. Due to the high variety of product specifications, comparability of parts and products is limited also via the Internet. The uniqueness of customised parts can cloud the transparency that the Internet facilitates to some degree (Rick Stephenson).

The frequently proclaimed vision of the virtual supply chain in the automotive industry is far from being reached. Basically this is due to the immense complexity of this branch of industry that cannot be compared to Michael Dell’s popular and often cited example of a virtual supply chain. While a computer comprises just about 30 components, a car or light truck is made up of about 5,000 parts and components delivered from thousands of direct and indirect suppliers (Baer et al. 2001). This logistical complexity is one of the main issues why breakthroughs in truly universal connectivity have been few.

Nevertheless, these facts could not hinder Harold Kuttner, Covisint, to be quite ambitious to follow Dell’s example of radically streamlining communication from the customer to the sup­pliers. From today’s perspective, this was a quite naive view.

Nevertheless, BPR[34] is an ongoing task in the automotive industry with changing tools to exe­cute this task. BPR and all the connected questions remain the same, only the tools change in the automotive industry, as Marina Pedler confirmed:

The question still is: how do I take costs down, how do I improve quality, how do I improve the cycle time of the various processes that I have to undertake. All those questions were the same questions ten or twenty or thirty years ago though, of course, the answers are changing (Marina Pedler).

Hence, electronic B2B-marketplaces and especially Covisint represent platforms that provide a set of newly developed tools for BPR enabled by the Internet. The main task for automotive OEMs and suppliers was and still is to seek for applications that can generate true and sus­tainable benefits (Marina Pedler). In the following we will have a closer look at Covisint’s inauguration as a promising Internet-application for the automotive industry.

3. The inauguration of Covisint

3.1 The vision

As we already know, Covisint was the attempt of the Big Three to transfer the global automo­tive industry’s processes on the Internet. At this point of time in the year 2000, probably only a few people could imagine what tremendous challenge this endeavour would represent.

In the beginning one saw advantages like shared investments in one common industry mar­ketplace instead of bearing the costs for setting up an own proprietary portal[35]. In addition, bundled efforts should allow the Big Three to implement this marketplace faster than com­petitors and enable them to establish an industry-wide standard that would significantly in­crease their market power within the whole industry. A further aspect at that time was that a number of suppliers asked OEMs to establish one common platform so that suppliers do not have to bear the costs to participate on several proprietary portals.

Participation and critical mass[36] –crucial issues for many marketplaces at that time – should be guarantied by the bundled market power and liquidity[37] of the Big Three. They intended to force their suppliers to participate in Covisint in order to generate sufficient transaction vol­ume on the marketplace (Helper 2002). Additionally suppliers should be enticed to participate by using Covisint as sales channel which should enable them to acquire new (large) customers and, therefore, improve their profit margins.

The potential of this new exchange was heralded as enormous: The exchange would handle US-$ 240 billion in purchasing – representing the bundled purchasing volume of the Big Three – for 90,000 companies worldwide[38] and generate transaction fees of US-$ 3 billion per year[39] (Baer et al. 2001).

Estimations on saving potentials varied significantly, culminating in a cut of costs of US-$ 3,000 from the price of an average medium sized car (Baer et al. 2001). Especially investment banks and consulting companies made plentiful calculations on saving potentials. If a company spends about US-$ 80 billion each year on purchasing like Ford Motor Company[40] and General Motors do, the Roland Berger report from the year 2000 calculated savings of US-$ 150 million simply by streamlining slow and costly processing (Baer et al. 2001).

In more concrete, gross savings included reduced transaction costs due to simpler and faster purchasing procedures (Schau 2001). Especially savings in the purchasing process were of high importance. This was due to the fact that a business earning for example 20 per cent gross margin, a reduction in purchasing costs by US-$ 1 equals an increase in sales by US-$ 5 (Schau 2001). But even 2 per cent cost savings can be significant if the expenditure is large enough like it is the case for the automotive industry (Schau 2001).

Procurement savings basically were differentiated into two types: First product prices could be reduced by the higher degree of competition fostered by the transparency that the Internet enabled. Finding the best sources of a material, pushing down its price and arriving at amounts and conditions that result in the cheapest deals are facilitated. This was one part of the proclaimed benefits that Covisint offered to the buyers who used its site. The second potential savings from purchasing came from the basic costs of processing transactions (Baer et al. 2001). As a result, costs for an average procurement process at the Adam Opel AG should be reduced from DM 200 to DM 20 predominantly by high process cost savings of the new streamlined purchasing processes (Calik, 2001). Also the Ford Motor Company supposed to reduce its purchasing costs by up to 20 per cent by the use of Covisint (Dudenhöffer 2000).

According to SCM-potentials, Covisint claimed that it is able to make all orders and forecasts immediately and securely available to all participants in the chain, so that OEMs and suppliers can respond to a need simultaneously (Baer et al. 2001). By making the same information on demands available to every supplier, automakers expected to achieve savings in time and costs (Baer et al. 2001). Harold Kuttner expressed it like this: “We’ve got to get our supply base sensing what our needs are, not waiting for a release saying on October 1, we need 1,200 parts” (Baer et al. 2001, p. 83). In today’s supply chain, suppliers use inventory buffers to compensate inaccurate, out-of-date manufacturing information[41] and forecasts. Covisint was intended to help suppliers to reduce inventories by providing access to more accurate produc­tion information which should enable them to better align internal schedules with OEMs’ de­mands (Garretson 2000).

Summarised, Covisint’s primary objective was to deliver an online trading environment that would provide the following benefits to the automotive industry (Aberdeen 2002):

- A 12- to 18-months vehicle development cycle
- Compressed order-to-delivery cycles
- Increased shareholder valuations within the automotive industry
- Greater asset efficiency and utilisation
- Higher profitability
- More integrated supply chain planning

Plagued with so many costly inefficiencies in its supply structure, Covisint was proclaimed as the big opportunity for mitigation. It should provide a vast electronic framework under which thousands of automotive companies could change compatible information and do business together. By creating an open Internet-based standard, Covisint was intended to be an easy to access platform were information regarding forecasts, inventory, billing, shipment, and prod­uct design could be exchanged in real time (Baer et al. 2001). It was proclaimed that the mar­ketplace “will take the automotive industry upside-down” (Baer et al. 2001, p. 84). Other sources even called Covisint the “third revolution in the automotive industry” (Industrial-IT 2000, p. 13).

3.2 The formation

How fast concepts could change in the frenetic digital economy during the Internet hype was delivered on February 25, 2000, when General Motors, Ford Motor Company and Daimler­Chrysler announced their latest plans (Poirier et al. 2001). Oracle[42] and CommerceOne[43], which had previous relationships with General Motors and Ford Motor Company, were to remain as technology providers in the new venture. As above mentioned, now the even more appealing possibility of reducing the higher costs to suppliers for participating in multiple portals[44] is changed to only having to enter one all-encompassing marketplace. The reluctance some suppliers showed to dealing in separate platforms for each OEM was eliminated by this initiative. This move should be especially beneficial to smaller, resource-constrained lower-tier suppliers, affording them direct access to a large volume of potential orders through the Internet. It was supposed that it could last a year until all the details had been worked out on standards, changing entrenched EDI systems and agreement on strategy and execution procedures (Poirier et al. 2001).


[1] Covisint represents an abbreviation for: Co llaboration, vis ibility, int egration. Covisint is a registered trade mark. In the further course of this management report the trade mark sign will not be used anymore in order to improve visual clearness.

[2] pls. see chapter 9.2 / The following the term “marketplace” will be used for “electronic B2B-marketplace” in order to improve legibility

[3] pls. see chapter 9.2

[4] Big Three: General Motors, Ford Motor Company and DaimlerChrysler

[5] pls. see chapter 9.2

[6] pls. see chapter 9.2

[7] Henry Ford’s introduction of the assembly line in 1912 for the production of Ford’s model “T” (“Tin Lizzy”) can be considered as first revolution. The second revolution within the automotive industry is the introduction of lean management and lean production, what can be considered as a paradigm shift away from mass production and Fordism to flexible production and management techniques

[8] pls. see chapter 9.2

[9] pls. see chapter 9.2

[10] One of the major objectives in the global automotive industry is to come close to the vision of “mass customisation” as the combination of
mass production and customisation

[11] Other authors describe the structure of the automotive supply market as atomistic

[12] pls. see chapter 9.2

[13] pls. see chapter 9.2

[14] pls. see chapter 9.2

[15] Example of 100 per cent production depth: The Ford Motor Company had the highest degree of vertical integration when it was managed by its founder, Henry Ford I. During the 1920s and 1930s, the company owned its own iron mines, ore-carrying ships, and a small rail line to bring ore to its mile-long River Rouge plant in Detroit. The Ford Motor Company at that time was completely 100 per cent) vertically integrated, i.e. it controlled (usually by ownership) every stage of the supply chain from the iron mines to the retailers (Wheelen et al. 2002). Today Ford is rebuilding and modernizing its famous River Rouge plant using flexible equipment and new processes. Employees are working in teams and use internet-connected PCs on the shop floor to share their concerns instantly with suppliers (externally) or product engineers (internally) (Wheelen et al. 2002). Still in the 1980s General Motors was a highly vertically integrated corporation that at one time manufactured up to 70 per cent of its own parts (Laudon et al. 2002). Today the average OEM has a depth of production of approximately 30 per cent (Uwe vander Stichelen).

[16] In the year 2000 Ford Motor Company purchased 90 per cent of their procurement volume from 200 suppliers, the 100 top-suppliers are responsible for approximately 70 per cent of the purchasing volume (AMI 2000). Ford suggests that though the number of tier-1 suppliers will decrease and turnover with these suppliers will raise, Ford will keep its bargaining power (AMI 2000).

[17] As an example, in the year 2002 Ford Motor Company had a supply base of 800-900 direct suppliers (Trombly 2002).

[18] Often called “modular production”

[19] Allotting work to suppliers and distributors to provide needed services and materials and to perform those processes that the organisation does not perform itself (Krajewski et al. 2002).

[20] pls. see chapter 9.2

[21] pls. see chapter 9.2

[22] pls. see chapter 9.2

[23] pls. see chapter 9.2

[24] The OEMs initiate about 90,000 specifications and engineering change orders in one year (Rick Stephenson). The suppliers initiate even more changes in specifications and have to wait about 3 months until a change in specifications is approved by an OEM like Ford-Werke Köln (Dr. Ralf Koester)

[25] pls. see chapter 9.2

[26] Tier-n: Different systems and modules of a vehicle have different supply chains. The supply chain of a leather seat can have up to 7 tiers until its completed. Tier-n describes an undefined number of tiers within the supply chain.

[27] Automotive companies have hundreds or thousands of suppliers, some of which supply the same types of parts. The quality of these input can affect the quality of the company’s work and product, and purchased parts of poor quality can have a devastating effect. For example, Ford Motor Company was forced to halt Tempo and Topaz production, when a faulty engine part purchased from an outside supplier caused some gears in the engine to lose a few teeth during a test run. Approximately 5,500 hourly workers were temporarily laid off (Krajewski et al. 2002). In addition, Ford lost about 2,000 cars each day of production stop (Krajewski et al. 2002).

[28] And to a lower degree in Europe

[29] pls. see chapter 9.2

[30] pls. see chapter 9.2

[31] pls. see chapter 9.2

[32] Provided applications like auctions, RFQs, quality tools, tools for logistics, collaborative engineering etc.

[33] pls. see chapter 9.2

[34] pls. see chapter 9.2

[35] i.e. General Motor’s SupplyPower, Ford TradeXchange, DaimlerChrysler DCX-Net

[36] pls. see chapter 9.2

[37] pls. see chapter 9.2

[38] Some sources even estimated a transaction volume as high as US-$ 750 billion, depending on assumptions about how much lower-tier suppliers will use the marketplace for their own purchasing (Baer et al. 2001).

[39] Required that suppliers were mandated to use the marketplace, and were charged standard marketplace fees of 0.5 to 1.5 per cent of transaction value (Baer et al. 2001).

[40] Jacques Nasser proclaimed that to survive in a competitive market, OEM must hear from the consumer. One way to listen is to make direct contact with consumers. Rather than relying on its car dealers to handle all consumer contacts, Ford has set up a Web site that lets consumers select and price cars of their choice (Poirier et al. 2001).

[41] Inefficiencies in the supply chain of Ford Motor Company: How could it take so long? First, the updating process at each firm can take a day. When TRW receives its customers’ requirements, it must translate the whole document received from Ford in order to understand what has changed. Second, it is often not possible for a firm to skip a link in the chain. For example, suppose Ford plans to increase its production of the Focus by one unit compared to the week before. This information by itself is not useful to the seat belt buckle provider, because he does not know how many seat belt buckles TRW has in inventory, how many seat belt buckles TRW will need next week, whether the seat belt buckle might be the same for a Nissan seat belt, what Nissan’s production levels are, etc. Two developments, bothbased on open standards, promise easier communication among many users. The Internet offers a significantly cheaper way of communicating with other firms compared to VAN’s. Second, the Internet’s open standards mean that document translation is less complicated (Aberdeen 2002).

[42] Specialised on back-end ERP experience

[43] Specialised on Internet-based procurement processes

[44] Example: In 2003 the tier-1 supplier Zahnrad Fabrik Friedrichshafen had to be connected to 32 portals of their customers (John Sobeck).


ISBN (eBook)
ISBN (Paperback)
966 KB
Institution / Hochschule
University of East London – East London Business School (ELBS)
2004 (April)
elektronische marktplätze automobilindustrie covisint internet

Titel: Analysis of the divergence between theory and practice