PA Consulting Group recently published the results of a survey of 135 leading European vehicle manufacturers that brings into question the widely held view that the industry is at the forefront of e-business maturity. Alex MacDonald and Dirk Pfitzer, two of the company’s senior consultants, shed more light on the findings
Intense price competition in the automotive sector should make adoption of e-business very attractive
The automotive industry sector is not alone in experiencing increased globalisation and customers demanding greater product variety and refresh rates. However, more uniquely, the response to global over-capacity and greater transparency between markets has been the reduction in prices for the final product. As a result, OEMs have looked to reduce their overall supply chain costs.
The initial e-business hype promised to be the ‘silver bullet’ solution to just this challenge. Indeed, research has been carried out in an attempt to quantify the potential savings available, with estimates varying dramatically from €1,000 to €5,000 per car.
The PA Group’s recent in-depth study, carried out in collaboration with the University of Frankfurt, reveals that Internet technologies typically account for savings of less than €100 per vehicle produced and sold. This figure is derived from collating responses across the value chain, from OEMs through to third tier suppliers, throughout Europe and Scandinavia.
Of greater concern, perhaps, is that procurement of non-production materials by OEMs makes up the largest proportion of this €100 saving. The potential benefits arising from improved utilisation of capacity, reduction in inventories, collaborative design and providing customer choice hardly feature in the survey findings. Yet, it is primarily in these areas of optimising the integrated supply chain that some commentators have estimated potential savings from e-business of up to €5,000 per car can be made. The focus on non-production materials, rather than optimising the integrated supply chain goes a long way to explaining the lacklustre performance to date.
The barriers to e-business are financial and relational, as well as technological
Financial
The response to the business imperative of addressing global OEM over-capacity and reducing prices for the final product has been demonstrated by increasingly frenetic industry consolidation, accompanying closure/lay-offs and across-the-board price reductions demanded from suppliers. Investment in longer-term strategic solutions appears to have disappeared from the agenda. The business case for adopting Internet technologies is also unclear – what are the savings per car along the supply chain, and how should the benefit be distributed between OEMs or the suppliers?
The lack of a clear business imperative is quite clearly an inhibitor to further expansion of e-business technologies, and the survey reports that:
- 55 percent of companies using advanced planning systems state that the most common reason for not extending its use to third parties is that the payback is difficult to quantify
- 45 percent of all companies see the lack of a clear cost/benefit relationship as one of the main barriers to using web-based procurement.
Relational
The survey finds that greater availability of demand information is required along the length of the supply chain; this conclusion is derived from evidence such as 21 percent of respondents identified the disclosure of internal information as a major barrier.
The survey findings also indicate that OEM companies are taking 73 percent of current e-business benefit. The remaining 27 percent are shared between all tiers of the supporting supply chain, as illustrated in Figure 1. This inequitable distribution is partly explained by OEMs greater participation in e-business initiatives. However, the OEM focus on short-term supplier price reductions discourages the development of the collaborative relationships required to drive out benefits along the entire supply chain.
Figure 1: Estimated savings per car in euro as a result of e-business solutions
Technological
Internet technology can improve demand management processes by making customer order information available, in real time, along the whole supply chain. However, even with access to this improved demand information, many automotive supply companies do not have adequate internal processes and systems to use it to improve business performance.
EDI continues to dominate the supply chain and collaborative management information exchange (76 percent of the respondents are using EDI, against 28 percent using Internet-based applications). This reluctance can be partially explained by the lack of common e-business ‘industry standards’, such as those developed through ODETTE for EDI.
The hype that initially surrounded e-business and the poor technology available during that time has seen the adoption of a cautious ‘wait-and-see’ mentality, particularly from supplier companies. However, while the robustness of the technology has improved considerably and the hype has been demystified, the cautious reluctance remains.
What is clear from this cocktail of barriers is that the progress towards fully exploiting the benefits of e-business technology is likely to be painfully slow. Technology alone is not the answer; it is a much more an issue of leadership. So where is this leadership going to come from and what is likely to inspire it?
Vehicle manufacturers must take the lead
Automotive OEMs have in the past demonstrated that they can take an effective leadership role. An example is the response by US and European OEMs to the Japanese OEMs who were gaining volume and market share because of the higher quality and reliability of their products. Against this threat, US and European manufacturers took a leadership role to improve quality and reliability all the way along the value chain, such that any remaining differences are now no longer a significant factor in consumer buying decision-making. Closer to the e-business technology question, the OEMs have successfully introduced EDI links with all their major suppliers.
Exercising this leadership needs to achieve the following:
- The ‘compelling business imperative‘ must be identified and signed off by both OEMs and suppliers
- OEMs need to share high quality information and equitable benefits with their supply chain partners to realise the full e-business potential
- OEMs need to agree and implement 'information plans' with their suppliers, who in parallel need to repeat the exercise along the whole supply chain.
The ‘compelling business imperative’ must be identified and signed off by both OEMs and suppliers
The survey finds that almost two thirds of automotive companies do not currently have in place a company-wide, consistent e-business strategy. The main reason cited by respondents is that e-business is still not perceived as being a strategic issue (58 percent), as illustrated in Figure 2.
Figure 2: Reasons cited for not having an e-business strategy in place
Unsurprisingly, there is a clear correlation between the adoption of e-business strategy and realisation of e-business benefits, where those achieving the greatest savings had their e-business strategy linked to the overall business strategy. The survey finds that for those companies that have in place a company-wide e-business strategy:
- Two-thirds purchase productive goods or services via web-based procurement systems
- Nearly 80 percent actively use marketplaces to procure productive goods or services.
The survey reports that in evaluating the benefits of implementing e-business solutions, one of the most important automotive measures has been the ‘savings per car’ manufactured. The divergence of 400 percent, between the €1000 to €5000 estimated potential savings per car, is obviously very unhelpful and no well-run business is likely to want to use figures with this level of accuracy in their business planning. This is supported by the survey findings where a third of companies have had difficulties formulating a strategy.
Consequently, PA Consulting Group recommends that an independent assessment be made to evaluate the savings potential - this is possibly a role for the industry trade associations such as the European Automobile Manufacturers Association. Whatever figure is arrived at, it must be sufficiently credible and robust to enable incorporation in the business planning processes of the automotive industry companies.
OEMs need to share high quality information and equitable benefits with their supply chain partners to realise the full e-business potential
PA’s survey recommends that: "A transparent form of presenting the relevant planning and scheduling information needs to be defined, including establishing a clear controlling and reporting of information and figures".
The greatest impact of e-business is reported to be in the improvement of internal and external processes. This is illustrated in Figure 3, extracted from the report.
Figure 3: The greatest impact of e-business is the improvement of internal and external processes
However, interview responses with Tier 1 suppliers indicated that there was considerable scope for the adoption of best practice fixed/variable forecasting rules by OEMs, and that Tier 2 suppliers and below did not have sufficient access to OEM demand information.
Interestingly, the survey clearly shows that only in very few cases have existing business partners been substituted as a direct result of the application of Internet technologies. This may be partly due to long-term contracts that are common in the automotive industry, but also points to the fact that established customer and supplier relationships are not likely to be replaced by on-line transactions.
While supply chains have become more integrated through the deployment of Internet technologies, progress is slow. Further integration requires greater collaboration. Unfortunately, as discussed earlier, the OEMs are currently taking nearly three-quarters of the e-business benefit, a situation unlikely to encourage greater collaboration.
Initiatives in other sectors to improve supply chain integration, such as in the food and drink industry with ’Efficient Consumer Response‘, have failed through the more powerful players taking an inequitable share of the benefits. To avoid this arising in the automotive sector and to realise the full e-business potential, PA recommends that that there is agreement from the outset between OEMs and their suppliers on the division of benefits through the previously described independent assessment.
OEMs need to agree and implement 'information plans' with their suppliers, who in parallel should repeat the exercise along the whole supply chain
Enterprise Resource Planning (ERP) systems are the IT backbone of the vast majority of the automotive companies surveyed, and are therefore a key starting point for leveraging new Internet technologies. In the context of optimising business processes and standardisation of exchanged information, these systems are critical, since e-business links the various ERP systems of suppliers and OEMs alike across the value chain. While SAP is the most dominant ERP systems supplier, and other well established players are used, more than half the respondents use ‘other’ back-office systems, typically from smaller ERP vendors or in-house developments.
The range of web-based applications is even broader than that of ERP. Interestingly, over 58 percent of all applications in use are either developed or sold by little known vendors or have been developed in-house, as illustrated in Figure 4.
Figure 4: The range of web-based applications by type of vendor
While the high number of SAP installations helps in defining standards, the wide variety of ‘self-made’ systems causes business partners problems in trying to integrate industry-wide processes in a cost-efficient manner.
In response to this situation, PA recommends that the OEMs demonstrate leadership and agree ‘information plans’ with their suppliers to enable the benefits of Internet technology to be realised. They have done this successfully in the past in the drive for quality improvement. To achieve rapid and parallel Internet technology development throughout the automotive sector, the initiative should not be limited to the OEMs alone, and each ‘customer’ in the supply chain should develop ‘information plans’ with its own suppliers.
Conclusion
The automotive industry across Europe is in reality not as mature in terms of adoption of e-business as might be thought, and indeed, it is lagging behind the expectations raised 18 months ago. Nevertheless exceptions within the observed companies do prove that there is potential that can be leveraged if the right approach is taken.
Consequently, OEMs and suppliers need to take action in the adoption of Internet technologies, and specifically this includes:
- An independent assessment to evaluate and agree the total savings potential and the division of benefits
- The parallel agreement and implementation of ‘information plans’ between each supply chain ‘customer’ with its own suppliers.
Given the imperative to address global automotive sector over-capacity and reducing prices for the final product, PA believes that the adoption of e-business should definitely move higher up the corporate agenda.
