The Price is Wrong

On Feb. 25 DaimlerChrysler AG, Ford Motor Co. and General Motors Corp. announced the formation of the world's largest on-line purchasing company. Since then, everyone - OEM and supplier alike - is offering an opinion about this new joint venture.

Savings of $1,000 per vehicle and forecasts of an IPO valuation in excess of any of the venture's founders are among the many expectations of the new firm. As with any new Internet-related venture today, the early expectations tend to be enthusiastic exaggeration.

Exaggeration or not, there is no question that the use of the Internet will profoundly impact how OEMs and their suppliers work together.

The capabilities of the Internet can multiply a hundredfold the ability of a firm to share large amounts of information with other businesses quickly, inexpensively and virtually effortlessly. The Internet will enable detailed information on an upcoming bidding opportunity to be provided to any potential supplier, anywhere in the world, in a matter of minutes for virtually no cost.

But if a bidding opportunity is opened to any qualified potential supplier beyond the OEM's current supply base, what impact will that have on the OEM's supply base reduction and supply chain initiatives?

And what impact will qualifying the new potential suppliers have on purchasing personnel? Will their workload be so great that more, not less, personnel will be needed? What if non-automotive suppliers want to bid? What criteria should be used to evaluate and qualify these 'new' suppliers?

More important, will an OEM's engineers and supplier quality people end up spending more time with suppliers during design verification, pilot and launch?

Hopefully, each OEM is taking the time to carefully consider strategic implications of business-to-business (B2B) e-commerce. This is particularly true of online reverse auctions where the OEM posts goods it wants to buy on the Internet and suppliers compete to provide the goods to them by bidding the lowest purchase price.

Because of its ease of implementation, it is the one aspect of B2B whose value can be most easily misunderstood and has the potential of being the most misused.

There is only one purpose for using reverse auctions: to obtain goods at the lowest possible price. Since price is the ultimate determining factor in awarding the business, the use of a reverse auction implies that the buyer considers all bidders to be equal in every other respect.

For those goods, non-production and production, when the supplier provides no, or very little, differentiation through some contributed value, a reverse auction is the way to go, as with most industrial materials and pure commodities.

If, however, the supplier provides some value beyond the goods themselves, e.g., on-site engineering support, product and process innovation sharing, help beyond contractual requirements, etc., then the difference among competing suppliers is more than price. In that case, the use of a reverse auction is, at best, inappropriate, and, at worst, wrong.

If an OEM rushes to use reverse auctions without apparent concern for their application, it will most certainly be interpreted by suppliers that the OEM is interested primarily in the lowest price, has little regard for the unique capabilities and contribution of each supplier, and, most importantly, cares little for the relationship between itself and its suppliers.

Under these conditions, how many suppliers will rush to the aid of an OEM whose key supplier suffers a devastating fire (as occurred at Toyota when Aisin had a plant fire), when they have all cut their margins to the bone and helping won't increase the probability for future business from the OEM?

How much post-purchase price creep will take place as suppliers are subjected to an increasing frequency of reverse auctions? What will the impersonal nature of B2B e-commerce do to the OEM's and supplier's ability to achieve a detailed understanding of each other's business? Also, where will the monies come from for suppliers to undertake the design and development of new products for the OEMs?

Any manufacturer that does not take the time to first, carefully determine and clearly delineate the conditions under which they will be using reverse auctions, and second, communicate these conditions to the affected suppliers, most assuredly does not appreciate the benefits it can realize from good supplier relations.