The Internet: Redefining relationships in the supply chain

The Internet: Redefining relationships in the supply chain Executive summary: The Internet will redefine relationships in the Supply Chain in more than one way. Whilst the automotive core business becomes less and less attractive, the true asset of the vehicle manufacturers - the global customer base – needs to be exploited. The Internet will be the vehicle for achieving this. Unfortunately for the OEMs, this asset base is currently owned by the dealerships. If the Block Exemption for the automotive industry is lifted in Europe, access to the customer base is becoming even more remote. In the attempt to enhance shareholder value by exploiting the customer base, the vehicle industry is likely to undergo significant change: 1. The automotive industry will use the Internet to gain direct access to more than 250 million customers worldwide. In order to achieve this, they will seek to turn the currently infrequent purchasing patterns of cars into continuous sales streams, using products ranging from insurances to in-car and out-car entertainment and business electronics. Altogether they will have to build a largely extended B2C business with their customers. In support of this move, the vehicle manufacturers are likely to relieve themselves from the actual production process in a new wave of outsourcing activities. 2. The vehicle manufacturers will have to tackle the market by adopting distribution patterns similar to the computer industry. It is likely that three market types will emerge: a. “Cash & carry”: low cost mass production vehicles which are built to stock and pushed into the market via various types of retail outlets including free distribution channels. b. “Built to order”: traditionally built, medium to high value monocoque vehicles. Built to order with a customer order lead-time of below one month. c. “Assembled to order”: space frame technology will be the common technology for most of the increasing number of niche vehicles with production volumes below 100.000 to 150.000 units per year. Pre-manufactured modules and body panels will allow assembly to order within one week. 3. The current procurement and planning processes in the automotive industry will undergo significant change: a. The B2B platforms of the OEMs will allow feeding market data directly through to the last echelon of suppliers. This will help extending synchronised production to some extent. However, euphoric expectations should be muted. The negative impact of faults in the production chain and the individual optimisation processes of OEMs and suppliers will still exceed the positive impact of improved communication chains. b. Production to order and assembly to order will produce very short supplier lead- times. The current practice of issuing continuously updated forecasts to suppliers will become useless and is likely to be abolished. Instead of forecasts, order books or filled production slots could be fed through to those suppliers, which can be included in the production to order cycle. The other echelons would operate on capacity plans and historical data only. 4. Despite extended production to order processes, the supply chains are likely to be globalised further. Producing at the cheapest location will remain to be more important than supplying from a supplier park. Supplier parks may shrink. The Internet: Redefining relationships in the supply chain Nick Scheele, President of Ford of Europe: “Introducing the Internet is not just a change in technology. It will initiate the biggest cultural change the automotive industry has seen in a century”. Graph 1 When talking to automotive executives today, one may find that the views regarding the impact of the Internet on the automotive industry are not at all uniform The reason for this is the fact, that the Internet is only a facilitator of strategies, not a strategy in itself. These strategies are only emerging as the opportunities provided by the Internet become clearer. The scope of the Internet platforms is vast as this table of COVISINT-functions shows (Graph1). It provides means for nearly everything one can think of in the process of making a car. But there is more to it than that. Nick Scheele, President of Ford of Europe, is of the opinion, that introducing the Internet is not just a change in technology. It will initiate the biggest cultural change, the automotive industry has seen in a century. Over the last couple of years, the automotive industry has lost much of its appeal to financial investors (Graph2). Share prices have been Graph 2 decreasing constantly. Worse than that, shareholder value creation has been twenty per cent lower than the industry average. Profits are continuing to decline. In an expanding, capital hungry industry, this developing is devastating. Is the automotive industry in the typical position of any other “old economy” where manufacturing is becoming increasingly unattractive and profits can only be achieved by diversification into other businesses? The automotive industry is determined to turn its fate. It is apparent, that the obvious is done first. Reports about the success of negative price auctions, consolidation of group purchases, reduction of administrative costs and the beginning of direct sales over the Internet have filled the news. However, the historic underperformance in shareholder value creation shows that cost reduction alone will not be sufficient. The automotive industry has therefore set out to exploit their most valuable asset, the customer base. The next generation of Internet applications will therefore set out to achieve this. If the vehicle manufacturers could establish and keep direct contact with their new car buyers, the automotive industry could gain access to more than 250 Million customers globally (Graph3). If the second hand car market could be equally controlled by the OEMs, this number would increase to more than 500 Million customers worldwide. This would be the largest and highest valued customer base of any industry. Of course, keeping contact with the Graph 3 customer over the whole period of ownership is difficult, if it only concerns one new car purchase every seven years. Contacts must be refreshed more frequently. Other products and services must be found to bridge that gap. We already see a number of such related product sales increasing rapidly. Telemetric services, insurances, finance products, car rentals, lifestyle products, events and any other product range which could be associated with the brand. Another growing field of intermediate sales will be the whole range of vehicle specific consumer electronics. With a renewal rate of two years, such electronic equipment could be sold six to seven times during the full live cycle of an average car. As these products could reach a value of near 30% of the value of the car, total life cycle sales could be more than twice the value of the car. Unfortunately for the OEMs, the dealers hold access to the customer base. Lifting block exemption in Europe will enhance this problem. OEMs will therefore seek to reduce the role of the dealerships rapidly. The Internet is the given means for doing that. Prospects for selling cars via the Internet are good. A recent pan European survey showed that 25% of all car purchases are already carried out without a prior visit to a dealer’s show room.