Ebusiness Second presentation

1
E-business Second presentation

• E-business and value chain integration
• Case
• E-business in the automotive value chain
• 11.9 2003
• Anders Hellebust
• Institutt for ledelse og organisasjon
• BI

2
Agenda

• E-commerce and e-business - relations to value
  chain integration
• Main dimensions of e-business and core areas
• Status and trends
• It is in e-business and B2B the revolution will
  come and it is the development of e-business
  driven value chains that is most important
• Transaction costs
• The functions of market places hubs (value
  chain networks)
• The development towards total e-business in value
  chains
• Case studies
• The Automotive industry
• The oil and gas industry
• Discussion

3
E-business and the value chain

• E-business is the transformation of key business
  processes through the use of Internet
  technologies
• E-business management is the planning and
  execution of front-end and back-end operations in
  a supply chain unsing the Internet
• E-business will have a significant impact on
  supply chain integration we have only scratched
  the surface

4
E-business and impact on value chain integration

• Information integration
• Planning syncronization
• Workflow coordination e-collaboration
• New business models

5
E-Business and Supply Chain Integration H. Lee
and S. Whang, Stanford University
Table 1 Supply Chain Integration Dimensions
6
Ronald Coase and transaction costs
Ronald Coase first introduced the concept of
transaction costs in the late 1930s. He tried to
determine why some industries are organized into
only a few large firms, while others are
organized very differently He tried to find out
the boundaries of the firm
7
Ronald Coase today

• Today, transaction cost economics is used largely
  to explain phenomena such as vertical
  integration, outsourcing, corporate governance
  and the boundaries of the firm
• What is my companys core area, what can other
  companies to cheaper than my firm and could be
  outsourced, and what should be merged and
  integrated?
• That means vertical integration or virtual
  integration

8
What are transaction costs?

• There is often a large amount of effort that goes
  into choosing, organizing, negotiating and
  entering contracts. The costs associated to
  these efforts are called transaction costs, and
  are generally independent of the price of the
  contracted product or service itself.
• Transaction costs are also to find the best
  companies to collaborate, outsource or merge with
• On Internet, companies may get secure information
  about suppliers and partners in minutes. Lower
  transaction costs may therefore lead to rapid
  changes in alliances, outsourcing and merging
• Transaction costs are enormous lower on internet
  and companies must evaluate what are their core
  area, what should they outsorce and what
  alliances should be preferred

9
Transaction costs in procurement and in the value
chain

• Transaction costs are also costs to search and
  find products and services to buy (market
  communication) , to negotiate on prices and
  delivery conditions
• There are also transaction costs in collaboration
  among companies in value chains on development of
  product design, product development, operation
  and maintainance

10
The Impact of the Internet on Transaction Costs

• The most significant impact of the Internet on
  the business community is the reduction of
  transaction costs both for e-commerce and
  e-business
• and it is precisely these cost reductions that
  have made the Internet such a perplexing medium
  in which to conduct business.
• Paul Sholz What are Transaction Costs?
  http//www.firstmonday.dk/issues/issue6_5/sholtz/
  author

11
Transaction costs

• Transaction costs are so firmly ingrained in the
  physical world that we largely take them for
  granted and naturally incorporate their effects
  into our business thinking when we move online.
• In the physical world, most industries are
  arranged into long and complex value chains, the
  shapes of which are largely organized by
  transaction costs.
• These value chains are populated with middlemen
  who prosper by taking a "cut" out of every
  transaction they organize within their sphere of
  influence.
• Since the process of changing key suppliers and
  distributors in the physical world is so lengthy
  and involved, most buyers and sellers simply live
  with the "cut" imposed by middlemen rather than
  attempt to economize on transaction costs

12
Transaction costs on the Internet

• On the Internet, the transaction costs associated
  with most forms of commerce largely disappear (or
  at least decrease by several orders of
  magnitude).
• This does not necessarily imply that middlemen
  have no place on the Internet - there is ample
  evidence to suggest that many new types of
  intermediaries will prove quite successful
  online.
• Online enterprises that attempt to artificially
  integrate and profit from transaction costs have
  had the most trouble staying in business
  recently. Business-to-business exchanges are
  perhaps the most visible example of this
  phenomenon.

13
Internet and market places (hubs) reduces
inefficiencies and transaction costs
14
E-business will dramatically reduce the
transaction costs

• Transaction costs stem from a wide variety of
  sources and are believed to represent over one
  third of all economic activity in the United
  States.(McKinsey)
• Can be reduced to 1/5 by
• Digitising and webitising of transaction
  processes
• Building common technological platforms hubs (VC
  networks) and applications for collaboration
• Standardisation and best practice

15
Different market places/ hubs and categories of
products

• Hubs (market places)
• Horizontal
• Vertical
• Products
• Direct (strategic)
• Indirect

16
Trends
Value Chain Network (Net Supply Chain)
S Supplyer B Buyer M Market place/ hub
Brochure-warepublicize on-line,
sell off-line Basic eCommerceone-to-one
selling from website
B2B eCommerceenabling commerce through
many-to-many commerce
S
B
B
S
S
B
B
S
M
M
S
B
M
M
B
S
EDI Networksexpensive, closed, non-scalable
S
B
S
B
B
B
S
M
S
S
B
B
S
B
S
B
S
S
B
B
S
K
S
B
B
Market efficiency
S
Real time integration among byers and sellers
systems SupplyChain Integration and
e-collaboration
S
S
Time 1996 1997 1998 1999 2000 2001
Source Morgan Stanley Internet Research
17
Trends
Value Chain Network (Net Supply Chain)
S Supplyer B Buyer M Market place/ hub
Brochure-warepublicize on-line,
sell off-line Basic eCommerceone-to-one
selling from website
B2B eCommerceenabling commerce through
many-to-many commerce
S
B
B
S
S
B
B
S
M
M
S
B
M
M
B
S
EDI Networksexpensive, closed, non-scalable
S
B
S
B
B
B
S
M
S
S
B
B
S
B
S
B
"B2B is about much more than matching buyers and
sellers... it is about connecting the shared
business and information processes of the
extended trading networks, including multi-party
product design, manufacturing planning, strategic
sourcing, shipping and logistics, inventory
management and customer management, to name a
few.
S
S
B
B
S
K
S
B
B
Market efficiency
S
Real time integration among byers and sellers
systems SupplyChain Integration and
e-collaboration
S
S
Time 1996 1997 1998 1999 2000 2001
Source Morgan Stanley Internet Research
18
Trends
Value Chain Network (Net Supply Chain)
S Supplyer B Buyer M Market place/ hub
Brochure-warepublicize on-line,
sell off-line Basic eCommerceone-to-one
selling from website
B2B eCommerceenabling commerce through
many-to-many commerce
S
B
B
S
S
B
B
S
M
M
S
B
M
M
B
S
EDI Networksexpensive, closed, non-scalable
S
B
S
B
B
B
S
M
S
S
B
B
S
B
S
B
S
S
B
B
S
K
S
The possibilty to share information with value
chain partner may give enourmous reductions of
transaction costs The problem today is
technological standards for communication and
information management. Suppliers and buyers use
different standards and have problems to see the
win win by collaboration.
B
B
Market efficiency
S
Real time integration among byers and sellers
systems SupplyChain Integration and
e-collaboration
S
S
Time 1996 1997 1998 1999 2000 2001
Source Morgan Stanley Internet Research
19
What Companies are Asking For?
The Value of E-Marketplaces (hubs)
Source AMR Research
20
Buyer Benefits

• Lower transaction costs
• Greater negotiation power
• Streamlined sourcing
• Faster time to market
• Real time access to market information
• Collaboration

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Seller Benefits

• Increased exposure to new sales opportunities
• Overcome inefficiencies in channel or
  manufacturing process
• Reduce costs of excess and obsolete inventory
• New partnership potential

22

• The barriers to procuring online are
• requires face-to-face interaction (34,6 )
• suppliers do not sell online (32,6 )
• concerns about data protection and security
  issues (30,6 )
• technology is expensive (24,2 )
• cost advantage is insignificant (20,6 )
• suppliers technical systems are not
  compatible (11,9 )
• and who benefits most from e-business?
• 11,4 SME will benefit most
• 38,4 Large enterprises will benefit most
• 43,6 Will benefit equally
• 2,1 No one will benefit

23
Three main trends for the company developments
towardstotal e-business suite

• Companies integrate their applications,
  especially
• ERP (Enterprice Resource planning)
• CRM (Customer Relationship Management)
• SCM (Supply Chain Management)
• Webifisation (Internet) of these company
  internal applications
• Webifisation and standardisation of proprietary
  product development and managing systems
• CAD (Computor Aided Design) 3D-models
• CAM (computor Aided Management)
• CAE (Computor Aided Engineering)
• Gives enormous possibilities for collaboration in
  a value chain within a common hub

24
Three main trends for the company developments
towardstotal e-business suite (cont.)

• When all processes or transactions are digitised
  and webifised, companies may collaborate with
  other companies through market places
  (e-collaboration)
• The market place develops to be an information
  hub (value chain network) for all business
  processes (transactions)
• Supply chain management (SCM) better Demand
  chain management (DCM) is what all is about
  (pull not push)
• Value Chain management

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A market place is more than buying and selling
...

• It is about e-collaboration to drastically ease
  the information process in the whole value chain
  to develop, produce and deliver products
• It is the connection of the companies internal
  digital business processes (ERP, SCM, CRM, and
  the product development systems (CAD,CAM, CAE)
  with the hub and other companies corresponding
  processes, that gives the gains and may result in
  the transformation of the value chain
• Remember e-business management is the planning
  and execution of front-end and back-end
  operations in a supply chain using the Internet

26
Problems Stem From
Need to integrate and optimize business
processes Organizations boundaries are no longer
fixed
27
Actually Want This
Sell Space
Business Processes
Customer Support Selling
Internal Space
Manufacturing Legal Finance Assembling
Online Systems
Buy Space
Integrated information and Access to that
information
Design Systems
Procuring
ERP/MRP Systems
Requirements Systems
Systems
Procurement Systems
28
But Have This
Sell Space
Business Processes
Customer Support Selling
Internal Space
Manufacturing Legal Finance Assembling
Online Systems
Buy Space
Silos of information and Limited single point
access to that information
Design Systems
Procuring
ERP/MRP Systems
Requirements Systems
Systems
Procurement Systems
29
Trends in the development of vertical hubs
experiences so far..

• One three hubs will dominate within each
  industry sector (auto industry, oil- and gas
  industry, etc.) And they will be integrated with
  horisontal marketplaces
• The hubs will be dominated and owned by heavy
  players within the industry sectors (buyers and
  main suppliers)
• The development of overall and common solutions
  (end-to end-solutions) through strategic
  alliances among system integrators
• The hubs will develop collaboration forms that
  will transform the value chains and the
  industries

30
The auto industrys Covisint

• Joint venture among
• Car producers Ford, GM, Daimler/Crysler,
  Nissan/Renault, PSA Pegeout Citroen og Mitsubishi
  Motor (in USA)
• System integrators Commerce One and Oracle
• Power battles among producers and suppliers
• Covisint is model or best practice for other
  industry sectors Forrester Research Covisint
  will transform the auto industry

31
Covisint.com
Use Internet and common standards and
applications to receive transparency in the value
chain translate a linear model to a much more
productive and effective net work
model http//www.covisint.com
32
Why Covisint?

• The main aim is through integration and
  e-collaboration to reduce costs and increased
  efficiency in the whole car industry
• Concrete business aims
• Reduce the production costs of cars with about
  Euro 3.000
• Reduce the design process of new models to 12
  months
• Develop customer relationship management (CRM)
  that makes it possible to deliver customised cars
  within few days

33
The importance of reverse bidding (RB) or
strategic sourcing

• In the beginning the main emphasis was on
  procurement of indirect products, but today
  procurement of direct products are increasing
• DaimlerCrysler with RB for 3 billion Euro om
  direct products, also complex products
• Total procurement on Covisint in the 9 first
  months of 2001 was 17 bill Euro
• RB has got enormous importance and may represent
  a shift of paradigm

34
Example of Reverse Bidding
35
A shift of paradigm?
Reverse bidding has proved that it is an
outstanding tool of procurement, also for more
complex orders. But the conditions are detailed
specifications of the products to
auction Covisint, 2001 Johannes Rudnitzy
Mercedes Benz
36
Supply Chain management before Covisint and the
Internet

• A typical car is composed of more than 200.000
  components, delivered from about 200 different
  suppliers (vendors) that must deliverjust in
  time
• Already from the seventies the car manufactorers
  used CAD, CAM og CAE tools for collaboration
  of design, management and engineering
• These tools contributed to reduce the time to
  bring a new model to the market from five to
  three years
• Business Week How the web is retooling
  Detroit 27.11 2000.

37
Supply Chain management on Covisint and the
Internet

• The next wave that takes place today is to
  connect all these internal and proprietary
  applications to the web start with design and
  end with the customer (car buyer)
• When this works, team from different locations in
  the world can look at their PC displays (or
  handheld devices) and make changes and
  corrections that may be evaluated by all
  participants (E2E)
• The supply chain develops to be a value chain
  where all, from the 3.tier- to the 2.tier to the
  main supplier (1.tier) and the car manufatorer,
  are connected directly in the development process
  - upstream
• The car buyer may also be connected in the value
  chain (design, buying (problems with
  distributors) downstream
• The competition is among value chains, using the
  same platform or hub (competition among the Ford,
  GM and DC value chain)

38
E-collaboration on design and product development

• Covisint has developed common applications for
  e-collaboration on design, 3D models and product
  development etc and has selected MatrixOne (used
  already by big car manufactorers)
• MatrixOne creates a virtual project workspace
  that supports
• workflow and routing of documents,
• strategic sourcing,
• 3D visualization and design,
• Engineering and product management
• Workflow and product description
• Possible to develop aut models 30 40 faster
  than earlier

39
The Engineering Process
Goal Quality, Time, Costs
Concept Development
Design
Quote
Industrial Engineering
Production
Quality Control and Project Management
40
E-collaboration in SCM

• Common applications for SCM (SupplySolution
  Product)
• Ford has connected its supply chain to Covisint
  with this tool (4200 suppliers)
• GM and DaimlerCrysler are now doing the same
• Delphi the worlds biggest auto main supplier
  are connecting its 5500 suppliers to Covisint -
  its cheaper to connect to the Covisint
  infrastructure, that already exists , than
  starting from scratch.
• Johnson Controls Inc, that delivers components to
  23 million cars, are connecting its 86 factories,
  plus thousands of part suppliers to Covisint

41
Supply chain management (cont.)

• The whole value chain from raw material
  suppliers, 3. 2 and 1tier (main) suppliers and
  the auto makers, are connected in a common hub
  (and later the car buyer?)
• The auto producers inform the suppliers in real
  time about status of sales and give statistics
  so that the suppliers automatically may maintain
  their stores
• Makes a platform for e-collaboration

42
Competition to make the best products from the
same platform not the best technological
solutions

• You want to win the bigger game of running the
  best car and truck company, not the technology
  game of whom has the best solutions. There are
  certain things in this industry that will make
  the industry move faster if we standardize it."
• A lack of standards could mean each auto company
  and its respective suppliers would spend millions
  of dollars on information technology to build
  separate pipelines to communicate with one
  another
• Ralph Szygenda, GM and board member of Covisint

43
Covisint has reached critical mass

• 11 global auto producers are members
• One hundret millions transactions each month
  among 2000 suppliers and car producers
• 30 of 40 main suppliers take part
• Toyota and VolksWagen have different hubs, but
  may join Covisint or develop common standards and
  applications

44
Who benefits most from Covisint?

• The auto producers Fords claims to have saved
  more money in efficiencis than they have plowed
  in the hub during the last year (2001) (for
  instance cost from 300 to 15 20 for an order)
• What about the main suppliers (1.tier)
• Earlier heavy resistance and
• The main suppliers are now members of the board
  and have influence in the development of Covisint
• What about the part suppliers?

45
What about the suppliers that do not use
Covisint?

• Covisint expects that all main suppliers takes
  their part suppliers to the hub
• 77 of the main suppliers expects that the
  number of part supplier will be reduced
  considerably next year
• Only the suppliers who can do business
  Covisint-style will survive
• AMR Research

46
Importance for Norwegian industry?

• Large parts of Norwegian industry are affected
• Raw material production Hydro Aluminium and
  Bjølvefossen
• Main suppliers
• Hydro Automotive Structure Raufoss (bumpers)
• Kongsberg Automotive (Chassis)
• And their part suppliers
• Will they do e-business Covisint-style?
• Will we have the same problems in other
  industries and for Norwegian companies in
  general?