Supply-chain management needs to go beyond the cookie-cutter approach
In our latest book, “One to One B2B” (hitting the shelves in May), we thoroughly dissect the evolving strategies that leading business-to-business sellers use to improve relationships with their customers. We spend less time, however, examining the ways leading B-to-B customers are rationalizing their supply-chain relationships with sellers. Here we’d like to reflect on that, and on what we believe are the key one-to-one implications.
Most exchanges are not going to survive. Too many are cropping up. More important, most haven’t thought about their missions carefully enough. It’s probably not enough to create a pricing discovery system – all that does is commoditize basic products. This is an era of mass customization, and the way things are evolving, we’ll soon be building products and services one customer at a time. To succeed long-term, an exchange needs to go beyond a cost-focused, cookie-cutter approach. The successful exchange of the future will need to provide leverage for maximizing the creative, cooperative vitality of the entire supply chain.
So, for an exchange, what’s vital is learning the needs of both buyers and sellers, and providing tools that enable customized, learning-oriented, interactive relationships. In short, successful exchanges need to ooze one-to-one.
We’re not saying B-to-B buyers are wrong to reduce costs. Far from it. What we are saying is that cost reduction by itself isn’t enough. Facilitating buyer-seller collaboration and one-to-one relationships will be required for long-term success.
Collaboration is essential. The goals of supply chain management today are broader and more complex than most exchanges appear to realize. The altruistic messages of their press releases aside, the principal thrust of the typical exchange is to clean up the dirty, imperfect flow of information that formerly benefited sellers. The common philosophy seems to be: “Round up the buyers, the sellers will come.” The focus is on cost. Collaboration usually seems to be an afterthought, and that is shortsighted. While some exchanges do recognize they must meet the needs of both buyers and sellers, most simply don’t “get it.”
One-to-one is essential. If, as a seller, you’re truly afraid of the commoditization an exchange may represent, it must be that you aren’t really providing any customer-specific value. You’re not one-to-one. Sellers who are truly focused on the needs of their customers, individually, don’t have to fear an exchange – even a poorly organized one – because the relationship with each customer takes simple price competition out of the picture. At the very least, the arrival of an exchange in your industry should serve as a wake-up call: “Wake up! It’s time to create some added value for your customers, and this added value must be specific to each customer, one customer at a time.”
Let’s go back to the problems inherent in pure cost-cutting. When thumbscrews are applied, sellers cut corners, quality suffers and an entire industry can experience more long-term harm than short-term good. The need for cooperation is a lesson learned the hard way by the auto industry. In the 1980s, major automakers used their considerable leverage to pursue an objective that might charitably be characterized as “cut supplier costs, no matter what.” Suppliers recall all manner of horror stories from an era of heavy-handed negotiation on pricing. For example, the automakers did their all to shift such costs as engineering and inventory onto their suppliers. Determined to maintain their relationships yet hard-pressed to remain profitable, struggling suppliers made up for their shrinking margins in other ways, frequently resulting in less-than-stellar quality and little in the way of true innovation. The overall result for the industry? Recalls. Assembly line shutdowns. Brand erosion. Sales declines. New automakers rising to the fore. (Can anyone spell “Lexus”?) The sledgehammer approach to cost reduction hurt the industry.
Take Two: Covisint, an auto industry-sponsored electronic exchange, is proposed. At first glance, the feeling of suppliers was “Here we go again” – another round of merciless pressure on margins. Certainly a key thrust of Covisint is cost reduction – for commodity-like components. But what is different about this exchange is that it appears to recognize the importance of coordination, customization, symbiosis and interdependency. That is, Covisint executives seem to understand that the success or failure of the whole hinges on maximizing the interactive capabilities of individual entities.
CREATE COOPERATION Reducing procurement costs is important, says Covisint spokesperson Dan Jankowski. But “that pales in comparison to the value we can create by enabling collaborative activities.” Today, the industry is so highly competitive, the smart thing, says Jankowski, is to create cooperation, looking “at the cost structure of the entire industry to see where savings can be found.” The greatest potential? “It’s in streamlined processes,” fueled by “better information flows.” Ultimately, the real thrust of Covisint, says Jankowski, is a recognition by the industry that design, inventory and related processes need to coalesce. Moreover, “Sellers need to differentiate themselves and show their value to a buyer.” In other words, these are customers who are begging their suppliers: Interact and customize with buyers across a set of common processes!
Overall, Jankowski insists that Covisint will address the needs of both buyers and sellers. Its creation itself, says Jankowski, is in part a response to seller concerns. Think back to 1999 when both Ford and GM announced plans to create their own proprietary e-commerce platforms, the GM exchange and the Ford exchange. Suppliers to these automakers, such as Borg-Warner and Lear, recognized that their businesses were about to become more, not less, complicated. Imagine if each automaker created its own set of standards – and beyond the emerging portals of Ford and GM, more were sure to come – then each supplier would have to finance and operate corresponding and largely redundant process capabilities. “Suppliers were realizing they were about to be put in a position of trying to supply multiple entities, automaker by automaker, with the costs and complications inherent in that,” explains Jankowski. “They said to the industry, `Can’t you guys get your act together? Provide one structure? One protocol to support?'”
ENVIRONMENT FOR COLLABORATION Covisint purports to introduce a consolidation and standardization of processes, but with a stated goal to provide a flexible and efficient environment for collaboration between suppliers and OEMs. “We’re not here to dictate standards: `Do it this way or else,'” Jankowski explains. “Instead, we’re creating open systems.” Jankowski calls it an “agnostic” approach. “Use whatever software you like [CAD, CAM, SCM, procurement] and we take on all the responsibilities for connectivity.” In other words, suppliers can approach the exchange with just about any level of sophistication or software and yet begin participating in supply-chain-wide collaboration. “All you need is a browser and a mouse and you can have access to design, production, inventory, procurement,” and other XML-based tools across a rapidly expanding menu.
Such as? One key set of tools enables the automakers’ design teams to interact with suppliers’ engineers more rapidly and efficiently. Instead of passing design change information to one supplier at a time, an automaker can host a live, virtual design session. Suppliers buy “seats” to these design forums, but then become a partner in the process, says Jankowski. “The automaker’s engineers say, `Here’s what we are doing, here’s what we need, now you can ask questions, review the CAD diagrams as much as you like,’ and it’s all in one place and can be reviewed over and over.” In turn, suppliers can use their own CAD programs to create components meeting the needed specifications. Moreover, their submissions are blocked from view from potential competitors in the supply chain. Such sessions and tools are efficient for automaker and supplier as well. “Instead of getting on and off planes, people on different floors, in different companies or countries – they can all sit at a PC and collaborate in real time.” In terms of cycle time, says Jankowski, “If we can shave even 5% or 10% from a 36-month project, that’s a lot of money, representing savings for both the supplier and the buyer.”
Other tools – up-and-running, evolving or planned – address other needs. For example, while collaborative engineering promises to cut costs and cycle times, shared planning and production knowledge tools hope to pare inventory levels, thus lowering financing costs. “If the buyers can work with the suppliers to help the industry get rid of excess inventories, speed up information flows, and generally improve processes, every dollar saved goes right to the bottom line,” Jankowski says. “The suppliers are healthier, margins are better for everyone, consumers see more car for the money – everybody wins.”
Both the U.S. Federal Trade Commission and its German counterpart, the Bundeskartellamt, have given Covisint a green flag. And apparently suppliers are now coming around to the belief that Covisint could be a good thing as well. For example, Kevin Kirby, the director of e-commerce at $1.9 billion flooring, acoustics and convertible top supplier Collins & Aikman, notes: “Covisint is revolutionizing the industry. They’re providing tools that will improve planning, design and procurement.” Kirby’s firm is “delighted” at having an opportunity “to get in on the ground floor. This is a chance to shape Covisint’s functionality and operation.” Moreover, Collins & Aikman is encouraging its own suppliers to join as well. “We see this as an open, collaborative and even friendly environment,” Kirby says. “It’s good for the industry.”
Two more early participants are $4.4 billion axle and exhaust maker Arvin Meritor Inc., and $2.5 billion powertrain maker Borg-Warner Inc. Executives from Arvin Meritor estimate the streamlined processes available from Covisint will slice 10% to 25% off their company’s costs. Speaking at the recent Speciality Equipment Market Association conference in Las Vegas, vice chairman and president Bill Hunt said, “Covisint [is] something the supplier community doesn’t have to fear.” And Borg-Warner’s chief information officer Jack Kalina told the PR Newswire, “Joining Covisint is one of several steps we are taking to leverage potentially valuable forms of information technology across our organization for the benefit of our customers, suppliers and employees.”
FACILITATE ONE-TO-ONE RELATIONSHIPS Will Covisint or other industry-sponsored exchanges succeed? Can an exchange dominate an industry and yet be perceived as fair to all participants – even benevolent? We believe it can, so long as it subscribes to a philosophy designed to promote collaboration and facilitate better one-to-one relationships between buyers and sellers. As we see the world evolving, the only way an exchange will ever have any chance of becoming a permanent feature on the commerce landscape is by addressing the needs of both sellers and buyers. Yes, in the auto industry, the buyers have the capital and the knowledge, the best perspective on the “whole” of the supply chain and arguably the strongest motivation for rationalizing processes. But without the sellers, the buyers have created nothing. The only way forward is to build volume. And the only way to build volume is to meet the needs and earn the trust of both buyers and sellers.
To succeed, Covisint must follow through on its pledge to collaboratively devise a set of open and optimizing processes. Call it interdependency, call it “benevolent monopoly” (as we refer to this phenomenon in our upcoming book), but whatever you call it, for any exchange to really propel its industry, it’s got to treat sellers like, well, customers. As for suppliers to any industry featuring a successful exchange? Bottom line: The more “exchange-oriented” any industry becomes, the more important it becomes for sellers to provide genuine, customer-specific value. The way to do that? We call it “one-to-one.”
