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B2B's evolution: Auto industry lessons

Business-to-business exchanges were expected to completely alter conventional buyer-supplier relationships as Old Economy firms would be displaced their by New Economy rivals.

Only a few years ago, business-to-business exchanges were expected to completely alter conventional buyer-supplier relationships.

Some e-business proponents foresaw a sweeping away of industry and national differences in purchasing patterns as Old Economy firms were displaced by the business models of their New Economy rivals. The reality, however, has proven to be otherwise, as evidenced by the number of independent public B2B exchanges that are no longer in operation.

Yet even as public exchanges have run into trouble, large industrywide exchanges are continuing to crop up, and smaller, private exchanges are flourishing. "There has been a distinct shift away from the specialized public exchanges, such as Ventro or VerticalNet, and towards large industrywide exchanges run by consortia of incumbent firms, such as Covisint in the automotive industry and Transora in the consumer products sectors," according to Wharton management professors John Paul MacDuffie and Susan Helper, a professor of economics at Case Western Reserve University, in a new report, ?B2B and Modes of Exchange: Evolutionary and Transformative Effects.?

"Firms are also drawn to private exchanges, even though these offer fewer potential benefits than the industry-level exchanges that promote standardization throughout a larger network," the report said.

In their report, part of a forthcoming book called ?The Global Internet Economy,? edited by Wharton management professor Bruce Kogut under the support of Wharton's Reginald H. Jones Center, the two researchers argue that B2B will be "evolutionary" rather than "revolutionary," that it will continue to be used, but in a way that enhances, not replaces, individual companies' business strategies. Companies and nations, MacDuffie and Helper predict, will develop e-business tools that reinforce old paradigms for purchaser and supplier relations.

"There are patterns of social interaction that are deeply imbedded in systems of procurement," MacDuffie said. "The patterns differ by company history, country, laws, institutions, geography and resources. They aren't easily overturned in some wonderful convergent vision, and their role in influencing the adoption of a new technology is often underestimated. They influence the way any given firm would want to use the Internet."

There are patterns of social interaction that are deeply imbedded in 
systems of procurement. Increasingly, the authors said, firms will choose among different forms of B2B, depending on their strategy for managing the value chain. Rarely will one form of B2B address all aspects of that strategy, so companies are likely to use a mix of different exchanges. What's more, says MacDuffie, "a lot of what the Internet and B2B do is reduce information and coordination costs. That's a benefit that can absorb whatever kind of past approach to procurement and supplier relations you've had. So B2B doesn't give you a strong incentive to move away from your traditional capability; in fact, it lets you realize some gains right away from sticking to your knitting."

Focusing on the auto industry as a window into the potential impact of B2B on global industries and national economies, Helper and MacDuffie describe ways in which B2B can facilitate a wide range of business interactions. They say that the savings involved--some delivering onetime gains and some facilitating continuing improvement--should powerfully fuel the diffusion of B2B in the coming years. Current estimates of the savings from automotive B2B is estimated by Goldman Sachs to be more than $2,000 per vehicle, although the authors view this as too high because it overestimates how many purchases can be carried out via B2B auctions.

The authors cite five potential sources of performance improvement: • Automating the procurement process: The reduction in paperwork may bring costs per purchase order from $75 to $150 down to $10 to $30.

• Interoperability: Easy communication between many users has been facilitated by the Internet. XML, a computer language still being refined, promises to make e-market communication even more standardized.

• Auctions: Online auctions have a tremendous potential to reduce prices, as large numbers of suppliers compete for contracts.

• Collaborative planning: Major savings can be achieved if plants in the supply chain can quickly view each others' inventory levels and production schedule and plan accordingly.

• Collaborative design: Designers in the same firm or different firms would be able to work in parallel. Various forms of proprietary software already exist, but the difficulties of linking them, and data security issues, still present obstacles.

Helper and MacDuffie show how these benefits tie in with the auto industry's existing behaviors toward suppliers. Since the 1930s, the U.S. auto industry has been largely characterized--with some exceptions--by "exit" relationships, and the Japanese industry by "voice" relationships. It may well be the code writers at Oracle and Commerce One that have 
the most influence over how much Covisint affects the mode of exchange 
of these different companies.

In the exit mode, automakers resolve problems with a supplier by getting a new supplier. With the voice mode, automakers work with longtime existing suppliers to resolve problems. The authors assert that B2B can facilitate either approach. "If you want to be free to choose any supplier you want, and switch suppliers at a moment's notice, then B2B helps you do that, through auctions. If you want to develop close relations with suppliers and exchange proprietary data, B2B makes that more efficient too," says Helper.

Given what many would characterize as "cutthroat" such auction markets, will the Internet weaken the close ties which some automakers?Toyota, for example--have for decades nurtured with their suppliers? The authors predict that B2B exchanges will not push Japanese automakers toward exit mode; rather, it will help them strengthen their existing voice approach.

Certain B2B advantages will accrue to either exit or voice modes of exchange. On the inventory side, all links in the supply chain can have quick access to information about inventory levels and delivery schedules.