Sept. 11, 2000

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Industry Optimizes Supply Chains

Carmakers aim to reduce costs and speed production of build-to-order vehicles

By Bob Wallace

More on automotive industry:

Industry Charts:Automotive (PDF File) sidebar:Supplier Looks Overseas To Avoid Labor Pains Covisint's Rough Road (8/7/00) VARBusiness Model E Cars (8/21/00) EETimes Hypersystems' control car rides (7/31/00) EETimes Dependable auto systems emerge (7/31/00) EETimes Car electronic systems accelerate (7/31/00)

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ighting for survival in a fiercely competitive, ever-consolidating core business, vehicle makers and their suppliers are escalating their use of IT to squeeze costs out of their production processes and supply chains. The intensifying battle also fuels the industry's transition to a customer-driven business that harnesses technology to generate new revenue.

How much waste can be cut from the cost of production? "I'd estimate somewhere between $1,700 to $3,000 per car, if you optimize your supply chain," says Pete Janak, CIO at auto-parts giant Delphi Automotive Systems Corp. "Think of a supply chain as a long train where the engine--a top supplier--gets an automaker's data first and starts moving, with each railcar waiting for the information before it follows forward. It takes a long time to get to the caboose. To improve this, we need all railcars moving at the same time--which means getting everyone in the chain the data they need at the same time."

If implemented industrywide, supply-chain optimization could save huge amounts of money. "There's about $700 billion of inventory in the auto supply chain today, which hurts everyone, pricewise," says AMR Research analyst Kevin Prouty. "Technology such as the Web exists to cut that figure by a third by providing a view into supply chains."

Prouty says supply-chain optimization holds much greater cost-cutting potential than the well-publicized trend to move procurement to the Web. "Companies should be focusing on improving supply chains," he says, "because when you optimize one, you save billions. Focusing on online procurement only saves you millions."

That's why supply-chain optimization is the overriding priority for Delphi. The parts maker is considering creating a portal to broadcast data to its suppliers. It's also considering joining Covisint, the fledgling auto marketplace founded this year by General Motors, Ford, and DaimlerChrysler. Covisint is promising initially to provide online procurement, to be followed eventually by the technology needed for supply-chain optimization--but Delphi's Janak says it's too early to know exactly what will be delivered.

"In an ideal world, we'd like to be part of the exchange if they offer supply-chain optimization capabilities. But there's a lot of uncertainty surrounding it," he says. "As a result, we have to explore all our options and be willing to change." Delphi considers sup-ply-chain optimization so critical that it's likely to launch an optimization project for its suppliers within six months, regardless of what Covisint offers. Delphi could modify its project to accommodate the exchange's plans if needed, Janak adds.

Whatever the outcome, Delphi is laying a foundation for its future supply-chain applications by expanding its networking infrastructure. Last November, the company disclosed a five-year, $160 million outsourcing deal with AT&T, under which AT&T will build a global IP network to link Delphi's international operations with 2,800 suppliers and customers. Janak says the global net will cost 30% less to run annually than the mishmash of networks it replaces. The network will also provide the foundation for future E-commerce initiatives and the company's planned global engineering system, Janak says, and will accelerate product development by supporting around-the-clock engineering using technicians in different countries.

The big automakers are also pushing aggressively into Internet initiatives to cut costs and to help them make the transition from their traditional business model--mass production based on uncertain demand forecasts--and respond more quickly to customer requests and trends.

No automaker has harnessed the Web for business gain as aggressively as General Motors. GM is the catalyst in the creation of Covisint, which will merge the early online marketplace efforts of GM and Ford. Covisint is the latest in a series of online initiatives at GM that began in 1996, when the company built up its own IT management structure, after spinning off services giant EDS. GM then hired CIOs for its business units from telecommunications companies, retail chains, and home-appliance makers and charged them with finding ways to put the Web to work.

The results have been impressive: GM became the first of the Big Three U.S. automakers to launch an online shopping and dealer referral Web site, called GM BuyPower; the first to launch a robust online marketplace with TradeXchange; and the first to move vehicle financing to the Net.

In just eight months, BuyPower's visitors swelled to 1.2 million a month. In TradeXchange's first two months, GMAC auctioned 6,000 off-lease vehicles--saving $1,400 per vehicle by eliminating the need to transport them to auctions, says Ralph Szygenda, GM's group VP and CIO. "This is going to be a monstrously large benefit for us." TradeXchange auctions have brought in $473 million so far this year, he says.

Covisint founding member DaimlerChrysler's efforts include an attempt to provide a coordinated Web storefront for its U.S. dealerships. The automaker has tapped the Cobalt Group Inc., an E-business services firm, to create Web sites for more than 2,100 Chrysler, Jeep, and Dodge dealers that will be integrated with the automaker's site and central database. The integration will provide shoppers with information on pricing, incentives, and new and used-car inventories.

Gary Dilts, E-Connect Platform VP for Daimler-Chrysler, says the rapid proliferation of dot-com car shopping sites is creating confusion and inaccuracy. DaimlerChrysler wants to integrate its dealer Web to provide all site visitors with the same information and make sure that information is up-to-date and correct, he says.

Ford says it has a better idea. It's trying to be the first to move to build-to-order vehicle production--and, ultimately, it hopes to build those vehicles quickly enough to achieve a much-discussed industry goal, the "five-day car.'' The automaker was the first to detail plans to link Web sites to its back-end, order-entry, and materials-management systems.

Under an agreement with Microsoft's CarPoint car-shopping site, Ford also has access to a huge database of customer-preference information, which will help it build the cars that consumers want.

In August, Ford and GM and their dealers detailed plans to work together via proposed Web sites that would closely tie the manufacturer with its distribution channel. GM and its key dealers are gathering support for a Web site that would provide pricing, competitive information, and links to other automakers' dealers. Ford dealers are planning to launch FordDirect.com, in cooperation with the investing automaker, to let customers shop, finance, and begin the purchase of vehicles online. Both GM's and Ford's original Web sites only refer customers to dealers.

The Big Three are also looking at new ways to generate revenue with technology add-ons such as vehicle navigation and communications services, including some based on wireless Internet service. GM's OnStar unit is the furthest ahead, followed by Ford--which recently announced a joint venture with Qualcomm Inc.--and DaimlerChrysler.

Other vehicle manufacturers are thinking the same way. Paccar Inc., an $8.5 billion truckmaker, hopes to boost sales of its rigs with vehicle navigation systems, which let drivers use wireless Internet links to access Web sites that provide services such as warning drivers of traffic snarls, or even helping them make extra money by picking up freight along their routes. "Real-time navigation systems can save truckers hours by steering them clear of traffic and other tie-ups, alerting them to these events, and suggesting routes around them," Paccar CIO Patrick Flynn says.

Diesel engine maker Cummins Engine Co. is harnessing the Web to add value to the engines it sells into the mining industry. A special control module continually checks engine operation at a mining site and transmits the information to a Cummins Web site. Cummins monitors the incoming data and alerts its customers to problems that could lead to a catastrophic failure, so a truck with a failing engine can be pulled off the site for preventative maintenance, says Rod Nehring, director of IT organizational effectiveness at Cummins. "Without this information," he adds, "nobody knows there's a serious problem until the engine breaks down, and it takes two to three weeks to have the diesel system rebuilt."

Cummins is also undertaking a massive internal standardization effort to slash costs and streamline operations. The company plans to replace nearly 50 manufacturing and financial systems with one integrated worldwide system based on Oracle's enterprise resource planning apps. That's expected to pay off across the company. "Benefits will include a 30% improvement in productivity manufacturing, planning, purchase administration, order entry, scheduling, and pricing," Nehring says.

Concurrently, Oracle's Business Process 2000 applications are being deployed in all Cummins distributorships. The engine maker's 31 North American distributors have already implemented the suite; the company is finalizing plans for international distributors. "We've been using Oracle and they've been using homegrown systems, so we're having them switch to complete worldwide standardization by the end of next year," Nehring says. "This eliminates the interfacing and translation that has to be done, as well as problems with application interoperability."

Cooper Tire & Rubber Co. has also taken on a major system standardization. When Cooper took over distribution of Pirelli tires in the United States, it found that it needed to standardize business systems to facilitate transfer of key financial and business information between Pirelli's and Cooper's U.S. facilities.

"We spent 15,000 man hours internally developing a Cooper ERP system, which happened to have additional functionality, and also have our own warehouse-management system," says John Mitchell, VP of MIS at Cooper. "Our ERP system is so tightly integrated that we decided to replace Pirelli's SAP system with our own and are installing our warehouse systems in their facilities."

The systems standardization has allowed Cooper to integrate Pirelli's tires into its product line, which helped to persuade a 400-store tire chain that sold Pirelli tires to carry a line of Cooper tires, too. "This would help us sell an additional 1 million tires a year, on top of the commissions and fees we earn for selling Pirelli," Mitchell says.

The company will team with five other top worldwide tire makers to launch Rubbernet .com, an online industry marketplace, in the second quarter of next year. "We expect it to help us cut procurement costs, but since we do business with others, like automakers, we'll need to tie into multiple marketplaces, which could be a problem," Mitchell says.

Daron Gifford, global automotive director at Deloitte Consulting, says exchanges such as Covisint could result in dramatic industry changes through supply-chain optimization. However, until the exchanges prove themselves, companies should focus on enhancing and integrating their existing business systems, he adds. "There's a huge potential for Covisint to go beyond procurement and drive the industry to work together and share data it's never shared before," Gifford says. "But it's still only potential."

Illustration by Jeffrey Fisher
Photograph by Larry G. Linkous

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