GM buying into online auctions
Auto giant may look online for MRO supplies in the future
By Ken Brack -- Industrial Distribution, 11/1/1998
Pittsburgh, Pa.--General Motors' tryout of Internet auctions to buy production materials at lower costs is another resounding volley across the shifting supply channel.GM recently began testing online auctions by inviting suppliers to bid on contracts for components such as molded rubber vibration control equipment -- believed to be a first in the automotive industry.
In September, GM signed a contract with FreeMarkets OnLine, Inc., a company that qualifies suppliers and conducts Internet auctions for firms like Caterpillar and United Technologies. The deal involves direct material components for assembly and may include some commodity items like spark plugs, according to an announcement.
Some distributors and industry analysts expect so-called reverse auctions conducted for large end users will soon include MRO supplies. Requesting online bids, one of a growing number of Internet sourcing options available to industry, will likely bring lower prices in open competition. That prospect may be troubling for some MRO distributors.
"When it comes to the big end user, the idea of reverse auctions (for MRO and OEM goods) will take a percentage of the products, but it's not going to be as big as some people may think," says distribution consultant Bruce Merrifield. "I'm not saying that's not important, though.
"When you see a new Web application like FreeMarkets is offering, you have to assume that every new solution or opportunity will capture a little market share, but it won't replace existing things. The question is how many different ways will the traditional distribution business be niched away?" Merrifield estimates other companies will begin soliciting online bids for MRO supplies within the next 18 months.
Not everyone sees Internet auctions reaching MRO distribution so soon. Ray Blashill, executive vice president of J. H. Bennett and Co., Inc., says it may take longer for automakers to implement the initiative with their MRO suppliers.
Obstacles include the firewalls, or security measures, built into existing electronic data interchange systems, data bases with parts ordering number systems and technical, contractual details, he says. J.H Bennett serves as a procurement arm for 127 GM plants and supplies industrial controls, fluid power components and other products.
"I'm convinced we will be dealing through the Internet service in the future, but right now I just don't see it as a practical method," he says. "In the distribution world, programs on the production side we often see two or three years later."
Blashill does not anticipate the automakers will "just go out and shop the world. They are continuing to consolidate their supplier base but they have criteria for the selections ... I think over time they will go to e-commerce on the Internet using those defined suppliers they already work with."
GM would not disclose financial or other terms of the deal with FreeMarkets OnLine. Spokesman Dan Jankowski said discussions were ongoing about exactly what products direct material components include. With 1997 revenues of $178 billion, GM is the world's largest buyer of parts and materials for assembly into automobiles.
Officials at Motion Industries Inc., which services 119 GM plants, say they are not surprised by the announcement and welcome GM's approach. Mark Sheehan, vice president and general manager of MI's North Division, says he believes commodity parts listed in a vendor's catalog will not be included in online requests for quotes -- at least for now.
"FreeMarkets is clearly for direct materials and sellers are defined as 'fabricators who manufacture or supply customer components and materials to buyer specifications,' " he says. "While we do not fall within that scope, there are implications for our market in that it furthers the role of the Internet in the supply chain process.
"The FreeMarkets concept is really about matching buyers and sellers on a global basis, and this may prove to be a very efficient way to find lower-cost suppliers for car parts," Sheehan adds. "I think we should simply applaud GM's effort to lower manufacturing costs and reaffirm our commitment to support and customer efforts to take cost out of the process."
Ellen Holladay, vice president of information systems at MI, says distributorships that invested early in supporting customer initiatives such as electronic catalogs and Internet purchasing will benefit. "We realize that many customers have unique requirements and that 'one size does not fit all,' " she says.
FreeMarkets' president and CEO Glen Meakem hailed the agreement as the beginning of an important trend for American industry.
"A major automobile manufacturer is replacing the traditional negotiations between its purchasing department and automotive suppliers with our online markets," he said in a prepared statement. "GM's size and importance to the economy validate the role of online markets for direct material components and commodities."
Merrifield, who is president of Merrifield Consulting Group, Inc., suggests distributors should "start becoming students of Internet auction models and solutions, because there will be segments of their traditional product channel flow that will be diverted into new auction-based channels. There will become floating prices for lots of stuff for which distributors traditionally charged list or fixed contract prices -- just like how we buy gas, airline tickets and produce at the store."
Meanwhile, the other major automakers continue to find ways to reduce their procurement costs as they reduce the number of suppliers.
Ford Motor Co. was expected to award management of its MRO transactions to Intelisys Electronic Commerce, LLC., for example. Under a reported pilot of the system, Intelisys helps bring Ford suppliers online with its own technical assistance and arranging for third-party vendors. Ford spokesman Ron Iori said it was premature to disclose details. I
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