08 January 2001
B2B exchanges: Blessing or curse?
by Bob Felton
Great potential, real dangers.
If automakers have their way, just-in-time (JIT) manufacturing will soon take a giant step forward. "GM," related an executive with one of the company's big suppliers, "says that when somebody in a dealership orders a car with leather seats, the cow should wince."
The vehicle that's supposed to make that possible is Covisint, an online marketplace organized last February by Ford and General Motors, joined soon afterward by DaimlerChrysler, Renault, and Nissan. Conceived as a colossal electronic bazaar for the auto industry, member firms will be able to solicit and submit bids, make purchases, locate sources, conduct auctions, browse parts catalogs, forecast demand and plan production, issue invoices and make payments, schedule deliveries on the basis of up-to-the-minute data, and even collaborate on design drawings in real time. Eventually, the exchange might trim $3,000 off the cost of manufacturing an automobile and shorten design times by up to 18 months. When mature, auto executives conjectured, Covisint should make it possible for automobile companies to emulate Dell Computer's e-feat: allow customers to specify a complete, customized automobile online, and drive it away from a dealership a few days later. Firms that rely on auto company purchases should expect to feel a lot of heat to get on board and might eventually have to make substantial changes in the way they do business in order to keep their business.
No time soon
But Elsie needn't fret just yet: Covisint is having a hard time getting itself organized and running. Further, recalling other auto company initiatives that never quite jelled, suppliers are wary of adapting their procedures and bringing on personnel to accommodate the automakers' idea of e-business. With companies increasingly looking toward advances in electronic communications to gain a competitive edge, though, and reluctant to maintain large stores of capital-intensive inventory, it's a safe bet that engineers throughout the manufacturing sector will soon be looking for ways to synchronize their operations with arrivals at the loading dock and departures at the shipping platform.
Developed by Japanese industry during the '70s under the guidance of Taiichi Ohno, a Toyota engineer, JIT manufacturing aims to eliminate waste from industry by making labor and supplies available at just the time, in just the amount, needed. Paint should arrive at the loading dock, for instance, just before the paint gun runs dry. For the plant engineer, JIT demands endless, real-time choreography: Somebody else is waiting for that just-painted part—and is going to howl if it doesn't arrive on time.
Making JIT work requires close cooperation among parties—a marriagelike level of commitment. Ideally, an OEM regards suppliers as an extension of the firm and eschews heavy-handed, deliver-or-else ultimatums, directing the focus instead toward continually improving the relationship between the firms. Electronic communications contribute to that goal by opening portholes into the other company's operations and enabling rapid transfer of huge amounts of information. It keeps a supplier informed about the customer's production needs in real time, for example, and permits it to tweak its own operations accordingly. But a supplier won't bother with that without assurances of a continuing relationship.
The suppliers that Covisint needs are wary, though, worrying that the exchange might have the effect of undermining the strong, one-to-one relationships necessary for JIT manufacturing to work—and not without good reason. The first transaction executed on Covisint, in October, was a reverse auction, a bidding war whose winner is ordinarily the one with the lowest price. The exchange won't reveal the details, but it's reasonable to assume that the lowest or near-lowest bidder won the contract, reinforcing the suspicion that the real purpose of Covisint is to drive suppliers to a rock-bottom price. Partners Renault and Nissan bought in, though the automakers won't allow suppliers an equity position in the exchange. The result is that the automakers win two ways: They collect a brokerage fee for each transaction via their ownership of the exchange, and they get prices squeezed to starvation levels.
Engineers confronted with the prospect of JIT manufacturing via an exchange need to anticipate and prepare for both technical and political obstacles. First, firms in the industry own the exchanges and are sometimes fierce competitors; committees of those firms' appointees manage the exchanges. Paris Peace Talks-like disputes over everything that comes to the table are possible and, in the case of Covisint, delayed the opening several months. The exchange's directors fought for three months, for example, before agreeing on a name for the exchange. Similarly, more than five months after the originally announced start-up date, the exchange's owners hadn't settled on a software platform. Engineers will need to develop a keen ear for nuance to avoid being drawn into pointless squabbles and to negotiate the integration of their manufacturing data with the exchange by the firms' IT group.
Successfully linking to an exchange in order to transact business, opening a portal into a portion of the company's affairs while maintaining the security of the rest, is going to be difficult for some firms. For starters, all exchange members have to come to grips with the security problem; the company's private electronic files must reside behind reliable firewalls. In late October, though, hackers managed to break into Microsoft's files and view application source code—source code hidden behind the very technology Microsoft builds into its operating systems. Additionally, the engineering and information technology departments have to collaborate to parse out the data that's needed for customers and suppliers and convert it into a usable format. Similarly, they'll need to cooperate to interpret arriving data and ensure it gets to the people who need it.
But that's not all. JIT manufacturers won't just plug in the modem, turn on the production line, and let it rip. No. Continuous improvement of the entire production system, tinkering endlessly to eliminate every little nit, is fundamental to the JIT approach. It is a management philosophy rather than a set of discrete techniques, and it aims at nothing less than eliminating every step or procedure that does not add value. Implemented rightly, JIT strips production costs to the bare minimum and rewards its practitioners with substantial improvements in quality.
Each step critical
There's a dark side to JIT, however, and it can be devastating. Because it relies on maintaining a delicate balance among all of a production line's components, the whole mechanism can spiral out of control if just one element goes haywire. When United Auto Workers members at two of GM's Flint, Mich., parts plants struck in July 1998, the company idled 26 of the company's 29 U.S. manufacturing plants, and 140,000 workers were laid off almost immediately. The analogy to business-to-business (B2B) exchanges is the collapse of a single server or, worse, the rapid spread of a computer virus. The "ILOVEYOU" virus, for instance, spread from the Philippines to computers worldwide in just one day and, according to Lloyd's of London, caused more than $15 billion in damages. For a JIT production line to work, everything connected to it must work.
The bottom line is that it's too soon to say whether B2B exchanges will be a blessing or a curse. If employed by the big manufacturers as a device to strong-arm suppliers, JIT will join the long list of transient, business-school enthusiasms (and suppliers, no doubt) that flourished briefly and vanished. If used to promote a greater degree of cooperation between firms that rely on each other, JIT could benefit.
Bob Felton is technical editor for InTech.