12/1/2001 | 8 MINUTE READ

Where's The Money In E-bu$ine$$?

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Yes, you can make and save money through eBusiness. “Where?” is the $64,000 question that individual companies and on-line marketplaces are struggling with. Here are some clues about that location.


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We know that eBusiness’ easy access to customers worldwide helps both buyers and sellers easily identify new business opportunities, availability, and pricing. This, according to researchers, typically increases revenues 5% to 10%, while reducing sales and marketing expenses 2% to 10%.

We also know that eBusiness’ automated approval processes greatly limit unauthorized purchasing (“rogue buying”). This is significant because rogue buying can constitute as much as 45% of indirect corporate spending; limiting such buying can increase revenues by 20% to 35% for approved suppliers. For component and commodity suppliers, on-line automated purchasing systems can slash the cost to process purchase orders (PO) by 90% or more, as well as halve average order cycle times.

Shortening the order-to-delivery process in and of itself can lead to reduced inventory in support of customer demand. Considering that about $50 billion worth of new cars—60 days of inventory—are sitting on lots in North America alone, says Ernest Miller, head of the Adaptive Manufacturing/Operations Solution of Cap Gemini Ernst & Young U.S. (Cleveland, OH), reducing that inventory by 25% would free up significant money throughout the supply chain.

However, the real money to be made in eBusiness might be as much from “soft” return on investment (ROI) measures as the hard, quantitative measures, admits John Moore, vice president and general manager of Automation Research Corp. (Dedham, MA). And one of those soft measures is better quality automotive designs—“something that connects better with the public and that is cheaper to build,” says Moore. “Remember, a lot of costs are determined in the design phase.”

The following are some other business-to-business (B2B) areas providing monetary savings. Warning: Not all of these areas are necessarily good for all automotive participants.

The money in auctions eBay brought on-line, real-time auctions to the masses. Many people who follow this activity estimate that B2B auction sales will be a sizable chunk of overall B2B eCommerce. Why? On-line auctions generally reduce the time spent in purchasing negotiations, and they open the market for both buyers and sellers. Also, the real-time pricing in B2B auctions nicely replaces conventional buying/selling at fixed, pre-determined prices. This one capability—dynamically pricing goods based on the market’s immediate supply and demand—lets both buyers and sellers increase profits and improve margins; sellers, in particular, can liquidate obsolete and excess inventory.

Two types of on-line auctions predominate: forward auctions, where suppliers auction excess inventory and receive market price for surplus goods; and reverse auctions, where buyers post electronic requests for quotation (eRFQ) for goods and services, and suppliers bid for this business on-line.

On-line auctions and their benefits are enticing. In actuality, key suppliers with established relationships are not about to go away because of them, though. Nor will the Internet and on-line auctions stop new business relationships from developing. In fact, auction or not, Moore points out that the amount of “strategic” goods bought over the Internet is “surprisingly pretty small.” That’s not true when buying indirect, commodity-type items

Reverse auctions can become a vicious exercise in diminishing returns. Reverse auctions can capture some savings not available during conventional negotiations and bidding, “but you quickly get to where you’ve auctioned away any excess ‘profit,’” admits Miller.

The money in collaboration
The Internet’s ability to exchange information and documents will yield—and has yielded—large dollar savings through collaborative product design (CPD). CPD thrives on the monetary savings that come from reducing the number of engineering hours required to create a new product. This involves sharing data more effectively to eliminate the rework associated with re-entering data, redrawing drawings, and doing work multiple times when it crosses boundaries (whether between internal departments or entire companies). The ideal result: A reduction in the overall cost of a project, especially one that comprises several suppliers.

Time is the obvious savings here, but two other variables factor into the measure of productivity, explains Miller. “One is directly reducing the quantity of whatever is going into the processes. Second is reducing the skill level required to do those processes—going from professionals to craftsman to workers.” Collaboration, he notes, affects both of those variables. (Proof: As CAD/CAM systems improved with such features as embedded intelligence, companies are able to do some of their work with less-expert engineers.)

CPD over the Internet can in fact pay for itself in one fell swoop, thereby justifying an entire eBusiness operation. It can help minimize tooling mistakes resulting from awarding a tooling contract based on an old version of a product design. “A mistake like that can cost millions of dollars,” points out Randy Barba, partner at the Automotive Industry Group for Accenture.

The money in synchronizing IT
Despite the promises fueling the march of acronym-laden technologies for the past 20 years—MRP, MRP II, MES, ERP, APS, SCM, and more—manufacturing’s problem still is the big disconnect in the information that resides in enterprise resource planning (ERP) and the schedules that it produces versus what the plant is executing and actually producing. “Very often, gathering shop data is less than perfect. Moreover, it doesn’t improve with time,” says Miller, extremely tactfully.

Now along comes eBusiness. “eBusiness could provide a tremendous benefit [by building] the bridge that we need” between the islands of information these systems created, Miller continues. Connecting these islands together would let OEMs and their suppliers operate off the actual data that describe the real physical processes on the plant floor. “We wouldn’t have to always be half out-of-phase and half out-of-sync; we could be up-to-date and accurate. Imagine how much better manufacturing would be if it were fed real-time data, or some reasonable facsimile of real time, about process yield rates.” That’s the information necessary for, Ford for instance, to say to a customer, “Oh, you want the red Taurus with the moon roof and leather seat in two weeks”—and deliver on that. Without such information, notes Miller, automakers will always need to rely on inventory to cover up the out of sync data.

The money in labor
What is often not said where other people could hear it: automation replaces people. (Mitigating that fact is—and the ultimate spin has been—the ability of an enterprise to find new jobs for those people.) Now, along comes eBusiness, which adds an entirely new level of automation, cost, management, and ROI considerations. “There’s been some wishful thinking out there that somehow eBusiness would create value other than decreasing the workforce. But that’s the real source of productivity improvement,” says Miller. “The only way you get real productivity improvement is by replacing work effort of real people with automation and information flow.” By “real people,” Miller means both the white- and blue-collar jobs that support manufacturing.

Others are coming clean on this topic. In a recent article in The New York Times (October 15, 2001, “Using Humans as a Computer Model”), Paul M. Horn, a senior vice president who oversees the research labs at IBM, is quoted: “The only way to get efficiency gains in information technology is to take some of the people out.”

Monetary e-savings
Examples do exist where eBusiness can and does save money. SupplySolution, Inc. (Southfield, MI), is gaining lots of attention because it has a comparatively simple solution for inventory management and a clear ROI message when it comes to B2B processes applied to that backwater called “logistics.” “We have a service that will not require you to change anything you’re doing,” says Al Salerno, SupplySolution’s senior director of Business Alliances. “You won’t have to change your ERP system. You won’t have to buy any new computers or any software. There are no fees for maintenance or training. Everything you get is included in a monthly subscription fee.”

Called “i-Supply Service,” SupplySolution’s Web-based system provides full electronic data interchange (EDI) functionality and lets buyers provide their suppliers with real-time information about their inventory. The service connects to existing inventory management systems. Suppliers can monitor their customers’ inventories, usage histories and patterns, forecasts, and receipts to see what’s needed and when—through their Web browser, any time.

SupplySolution practically guarantees significant cost savings within six to eight weeks after you’ve gone “live.” Most of those savings come from reducing inventory and reducing the typical 30% premium on freight cost for next-day arrival parts.

Another example of eBusiness savings involves an annual $264,904 cost reduction at the cast Components and Brakes Business Units of Hayes-Lemmerz International (Ferndale, MI). This is a result of Hayes-Lemmerz using SupplyWEB software from BRAIN North America (Grand Rapids, MI). SupplyWEB is a Web-based system for communicating business information, such as procurement data, purchase orders and material releases, shipment receipts and in-transit information, supplier performance ratings, payments, pull (kanban) signals, and part capacity data. Approximately 100 suppliers log onto the Web to access Hayes-Lemmerz data by facility. To date, one SupplyWEB server services five Hayes-Lemmerz plants, with three more plants soon to come on line. Hayes-Lemmerz is using TRANS4M ERP from BRAIN as well as ERP systems from J.D. Edwards and Oracle.

The $264,904 annual cost savings come from 10 areas, including reducing manual data entry, phone calls, inventory, paper costs, and premium freight costs; and automating planning and sending vendor release schedules, the calculation of vendor ratings, and the release process in general.

Who Has Found It?
One may wonder whether companies are truly making money by using the Internet—or just avoiding costs. “I think that depends on where you are in the food chain,” says Moore. He suspects that several OEMs are saving money. If you’re one of the lower-tier suppliers delivering to these OEMs, then you’re “potentially” making money.

It’s a two-edge sword, and suppliers are getting squeezed, muses Moore. First, there’s the pricing pressure to bring costs down. Yet suppliers have to play in the Internet game to participate, to gain more credibility with their large customers, and to facilitate customer retention and bigger contracts. However, the Internet creates much more pricing transparency.

“Speed, agility, flexibility. These are the three main ad-vantages the Internet enables,” says Moore. “These three things allow you to save money and make money: Save money on improved processes between you and your partners; make money on better response to market, the ability to win and retain customers, and to actually serve the customer better.”

Hand holding a crystal ball

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