Buy by wire

The purchasing function at a leading European car parts manufacturer has evolved as it has grown and as the automotive industry has changed. Professor Allal-Chérif (BEM Bordeaux Management School) looks at how the purchasing division is installing advanced information technology tools

This case (see reference below) focuses on the French group CarFab (the name has been transformed for purposes of the case) which has, through acquisitions, become one of the world’s leading manufacturers of automotive parts. Its 50,000 employees working in some 100 factories generate annual revenues of nearly $10 billion. Purchases amount to 60% of total turnover, hence the importance of the purchasing function. CarFab buyers cover eight major categories:

As the company has grown, the complexity of purchasing has increased and the criterion for supplier selection has evolved. Whereas fifty years ago, price was the dominant criterion, today the innovative and partnering capacities of the supplier are much more important.

Given the importance of purchasing to the company’s health, the group has decided to apply advanced information technology to the purchasing function and baptized the project E@SI (E-business at Supplier Integration). Because no single package or electronic marketplace covered all the needs, the project has been broken down into five sub-projects:

Online bidding
To help reduce costs CarFab has decided to implement a reverse auction bidding platform. In a reverse auction, sellers compete for business and the price drops over time, as opposed to what happens in forward auction where buyers compete leading the price to rise. In CarFab’s case, suppliers would be pre-selected for the auction and price would not be the sole decision criterion. While the case does not go into the details of pros and cons of reverse auction systems, it opens that discussion avenue.

The implementation of such a platform is an opportunity to achieve one of CarFab’s primary goals: the rationalization and reduction of the number of suppliers. After testing several reverse auction platforms, CarFab signed an agreement in 2006 with Freemarkets, a historical leader in this sector (founded in 1995), to cover $300 million of deals over two years. After approximately five years, the online bidding process was expected to cover 20% of purchases or more than €1 billion. The overall cost reduction goal has been set at 9-12%.

Web catalog
Web catalogs homogenize formats and offer comparisons of similar products offered by different suppliers. In this instance, CarFab partnered with IBM Business Consulting to implement the Commerce One electronic catalog solution. Because of Commerce One’s financial difficulties, CarFab was able to arrive at an agreement giving it ownership of the Java source code. This in turn allowed it to customize the package to fits its data analysis needs. Professor Allal-Chérif brings up the problem of user expectations and technical shortcomings that can create problems for IT projects. In CarFab’s case, the buyers had high initial expectations for this application and the disappointments caused by technical limitations of the initial version led to the installation of a new version in 2009. In the end though, the time needed to process a tender bid has been divided by three.

Supplier monitoring
Tracking supplier performance meant for CarFab the ability to assess their suppliers’ financial solidity, their industrial capacities (equipment and staff) and their technological innovativeness. All supplier events would be archived in the system and accessible to purchasing personnel. This application would allow the group to perform financial, industrial and technological audits of their suppliers.

Here CarFab worked with a small software consultant before passing on the specifications to European software giant, CapGemini. The customized package, built on a module-by-module, functionality-by-functionality basis, allowed for progressive installation and a spreading of high investment costs. Such new applications must fit in with older existing ones: in CarFab’s case, the package needed to mesh with the group’s existing SAP packages; at the tail end of the new application, a SAP module, Business Data Warehouse, was added to provide additional data analysis and decisional assistance.

Professor Allal-Chérif notes two issues that must be tackled in the implementation of such monitoring applications and which caused problems for CarFab: the reliability of the information which can be incomplete, redundant or even obsolete; user thoroughness in updating the system with new information.

Supplier extranet portal
Here CarFab set itself two objectives: manage supplier quality incidents and share performance indicators. One important function of the incident system was to propose different alert levels so as to make suppliers more aware of the impact of potential errors on CarFab’s operations. The Incident Management System (IMS) included a quick response system (QCRC –Quick Response Quality Control). Three responses to supplier quality incidents were expected: within 24 hours, the plan to ensure that no new defects arrived at carFab facilities; within five days, a detailed analysis of the cause of the defect and of its non-detection at the supplier; within ten days, an action plan to prevent further defect occurrences of the same type.

By sharing test results with their suppliers, CarFab’s sought to enable them to improve their performance quickly and to reinforce the idea of a supplier as a value creator. The application was to provide suppliers with charts and other visuals, offering them a vision of their performance at the group and at the plant level.

After testing an electronic marketplace, Covisint, developed by the big three American car manufacturers, CarFab opted for a simpler and more flexible customized solution. The initial functionalities were brough online in 2008 and the tool enjoys a good reputation among buyers and suppliers.

Purchasing intranet portal
This portal falls within the company’s larger knowledge management efforts. The primary goal is to achieve internal benchmarking so that the company’s best practices can be disseminated as widely and quickly as possible. The purchasing function was chosen as the pilot for the group’s global knowledge management solution.  The portal would offer discussion forums with FAQ functions, and access to documents, mostly in Word or Excel format.

The Information System department developed a solution around Lotus Notes with help from IBM. Allal-Chérif notes that the application had laborious beginnings (the case does not provide details but that leaves room for hypothetical discussion) but that thanks in part to an internal marketing campaign, it is now accessed 20,000 times per month (equivalent to each buyer accessing it once a day).

In summary, this case provides a useful overview of the various IT modules that a state-of-the-art purchasing function might have at its disposal. Unfortunately, length limitations do not allow Allal-Chérif to go into the details of options and tribulations surrounding each module. Of course, this leaves for readers or users of the case a space which they can begin filling using their experience or imagination.

Reference:
ECCH 609-018-1
“CarFab Case Study: Choosing an e-Business Solution. The Role of Information Systems in the Purchasing Function”
Professor Oihab Allal-Chérif
BEM Bordeaux Management School

Published March 2010