Autos' new driving range

a Proposed online auto exchange widens distributors' options

By -- Industrial Distribution, 10/1/2000

Almost 100 years after Henry Ford's Model Ts rolled off the newly introduced assembly line, another revolution is about to take place in the nation's automotive market.

The change is less about what will be sold-MRO items and automotive components-and more about how these industrial goods will be sold to the Big Three automakers. The linear supply chain model now used by General Motors, DaimlerChrysler and Ford Motor Co. will be shifted to a jointly hosted online platform, soon to launch following its September approval by the Federal Trade Commission. Automakers Renaud and Nissan are on board, as well.

That new e-commerce tool, recently named Covisint, may level the playing field for distributors, auto component manufacturers and others whose sales categories include the automotive market. Covisint will handle the purchasing processes for production and non-production materials. More parts suppliers and repair parts suppliers will have their respective product lines posted on the Internet site in hopes of selling to the auto industry. The automakers' goal: to source materials faster than ever to trim procurement costs and get the finished vehicle to the consumer market quicker. Streamlining the supply chain may also result in lower sticker prices in auto showrooms. For OEMs, consistency of parts and a centralization of purchasing will become the norm now that Covisint has gotten the green light from the FTC. For distributors and other suppliers, the proposed e-catalog format means their companies get 24/7 exposure before numerous players.

"For suppliers, that's a new tool to actually conduct business," says Mike Kight, president of Grainger's strategic marketing unit.

Gearing for a test drive

Will all distributors' ability to do business with America's automakers be based on price, if their product lines and prices can be viewed on the Covisint Web site? As such, if price were the sole factor in determining which suppliers can tap into the automotive supply chain, will their profit margins be squeezed for every last penny?

That scenario is unlikely, says GM spokesman David Barnas, because there's no way you can run a business solely on price.

"Quality, technology, service and price are the four factors we look at in making any sourcing decision," Barnas says. "If you just go after price, you're doing a detriment to your business and to your customers."

Nuts and bolts

That in itself may comfort distributors. The Covisint platform will allow buyers to solicit and study bids from multiple sources online. Suppliers, according to the Covisint Web site, will be able to see their customers' current product requirements along with new items. Online bidding and online price quoting will be supported by the Covisint platform. Suppliers can list overstocked items or highlight services they can offer.

They also can post pricing applicable to all who venture to Covisint.com. Plus, pricing specific to particular buyers can be posted. Suppliers can maintain and audit their e-catalog data, a point that sits well with group vice president Mark Sheehan of Birmingham, Ala.-based Motion Industries.

Buyers can submit bids to purchase the excess materials posted on Covisint by suppliers. Buyers can also search for products and suppliers with whom they want to do business. Further, buyers will be able to see their suppliers' products, services and prices.

Will price posting on the site leave suppliers feeling too exposed and vulnerable to a buyer slashing its profit margins? No, according to Covisint's Web site. The "importance of confidentiality to all participants" will be taken care of by security measures built into the site.

Also, participants should consider that all auto components cannot be treated as commodities, explains Sheehan. A distributor's specialized knowledge of technical, mechanical and electrical items always will complement a boiled-down supply chain, says Sheehan. The need for the human touch and a face behind a product will not vanish. Technology is only as good as the people who use it.

Approximately six percent of MI's total $2.2 billion in annual sales are to the transportation industry, according to Sheehan. Contracts with GM, Ford and DaimlerChrysler are part of that mix. Demystifying Covisint will be the next step for the Big Three and other auto OEMs coming on board, Sheehan says.

"It will be extremely cost-effective for both buyer and seller as essentially, the buyer is serving themselves," he says.

Still, Sheehan understands that many suppliers are "fearful of the auction scenario."

Fara Warner, communications manager for Ford Motor Co., compares Covisint to a "community at your fingertips." She says online exchanges will break down the barriers that small companies may have felt when trying to get a foot in the door of an auto OEM. Suppliers cannot ignore online transactions backed by a clear e-commerce strategy.

"This is where you've got to get to," Warner says. "It's where you'll do transactions and build good strong relationships."

Jay Mullick, corporate operations officer for Ann Arbor, Mich.-based Ewie Co., knows that embracing a technological application for a traditional hands-on industry is the way to go. He credits Ewie's move to a business Web solution portal as a factor in a projected $90 million in sales. The company has contracts with Ford and GM. Mullick expects the company's sales to the automotive market to top $60 million and hopes to take part in Covisint.

A new frontier

The future of automarket selling will lie in a blend of technology and knowledge, says Dave Gawthrop, business development manager for Novi, Mich.-based J.H. Bennett and Co. Bennett does about $38 million annually with about 40 percent of revenues from the automotive market. He anticipates that one day, distributors will earn profit margins on product knowledge and on field support and less on price if this proposed business model becomes the norm.

Not every auto part or function, such as a fluid power mechanism specific to an application, can be considered generic. Automaker spokespeople say price alone-the hallmark of a commodity item-will not determine which suppliers will become Covisint participants.

The fees for participation on Covisint.com that will be collected from online participants is where Covisint will profit, confirms Barnas.

"Covisint will generate revenue through minor transaction fees conducted on the site," he says, adding that those fees are "significantly less than the cost savings that will be realized by companies using the site."

For example, Barnas explains, "the average cost of processing a purchase order today costs about $100. By using the Internet, that cost can be cut by more than half, to less than $50. Transaction fees would be a small, small percentage. Covisint will also generate revenue by providing software tools and applications as well."

The cost for this transaction fee has not yet been made public. As for volume discounts-the more purchases made by a company of a supplier's product line, the less the supplier would have to pay in online fees-that "hasn't yet been determined," says Barnas.

The concern has been raised in some circles, including the federal government, of price-fixing and antitrust violations. Meanwhile, distributors and several of the automakers themselves have each established their own e-commerce site. Until Covisint is underway, Ford will continue to operate its Auto-Xchange and GM will host its TradeXchange site. Since 1993, DaimlerChrysler has worked with its Tier One suppliers on an e-commerce platform, according to a company source.

The door has been left open, however, for other industries' supply chains to be integrated. According to Covisint.com, other "business opportunities" will be assessed once Covisint's "initial objectives" are met. What remains to be seen is which other business markets will establish a similar procurement model.

Meanwhile, Don Robertson, president of Hubbard Industrial Supply Co. in Flint, Mich., along with other distributors, is left wondering just how Covisint will work. A week before the July 4 holiday, Robertson was in his office, writing a sales proposal to one of the automakers. He spoke about the proposed Internet sourcing model after completing the proffer.

"It really has thrown a real sense of confusion into the supply base," he says. But with a touch of cautious optimism, Robertson adds that Covisint, as proposed, "is pretty visionary."

Hubbard Industrial has contracts with GM and Delphi, an automotive component maker. The Delphi contract, held since 1989, is the longest continuous automotive sales-related contract the Michigan distributorship has. Seventy percent, or about $35 million annually, of Hubbard's sales are auto-related.

"There's a lot of confusion and very little understanding at this point of what the long-term game plan will do. We don't view it as a demise, just another evolution of commerce," says Robertson. "This is one step further into the paperless society."

Speaking further about e-commerce, Robertson says, "[There have been] contracts at one stage followed by commodity-managed contracts, then integrated supply. But now we have e-commerce superseding that. But they're all around in some form."

It remains to be seen, he notes, what the future will hold for any of these business models

Covisint's name fits its goals