VW's e-marketplace: how it should be done

"Customer to business to employee to business to customer.” That’s automotive colossus Volkswagen’s straightforward process flow formula. It’s the key to e-business, according to VW main board director Dr Jens Neumann. His argument is that web technologies, properly applied, make integrating the whole design, supply chain, manufacture, sales, distribution and service cycle feasible – and they bring serious hard business benefits. His proof is VW’s own considerable recent successes with its world-wide collaborative e-marketplace, covering all of on-line material auctions, catalogue purchasing and supply chain capacity management in three key projects. It’s been under construction since VW announced its intentions in April 2000, being built on procurement software from Ariba, an auctioning suite from eBreviate, supply chain planning and optimisation software from i2 Technologies and middleware, integration services and project management from IBM, with AT Kearney as management consultant. And the results have already been impressive. It’s clear that it’s been quite an undertaking, only helped by the fact that VW is no stranger to IT, or to business process re-engineering. Neumann says the firm had been reinventing itself for years, notably with its seven year transformation project taking VW from product-push to customer-pull – achieved, he says, by focusing on managing process flows rather than functions. And consequently, he says, the e-revolution didn’t mean VW had to start from scratch. “We [already had] our own IT company, ‘gedas’ in Berlin, which takes care of world-wide systems integration. We have product creation tools for development, production planning and simulation. We have advanced and integrated CAx systems. We have ESL, our electronic supplier link, established in 1998 with more than 6,000 suppliers connected on-line. We have a build-to-order-system that enables us to customise more than 70% of our 20,000 cars we build daily around the globe.” Integration and collaboration But what the web brings to the party, he says, is wider scale integration, speed and collaboration. The problem before the ‘e’ implementations was, “too much patchwork as a consequence of … departmental approaches … too many legacy systems … too much complexity … not enough transparency. Web-based IT … will just blow away old-fashioned hierarchical information management, foster team spirit, speed up decision-making and increase transparency for our customers and stakeholders.” Just so. And following several pilots with its web-based marketplace, since September 2000 VW has been implementing and using it’s multi-faceted e-hub and driving hard and very purposefully towards this vision. Looking at the on-line auctions project first, Dr Martin Hofmann, head of B2B in VW’s procurement department, says: “Auctions have been a great success. Every 10th negotiation is based on auction technology today; all our buyers use that technology. And all product groups are continuously monitored for potential auctions.” So far, product types valued at eur660 million per year have been identified, but this will clearly grow, particularly as suppliers themselves don’t have to invest in software to participate. Neumann says: “We will have completed the full rollout, including training of all purchasing people involved, by the middle of next year. We will then have in place a simplified and accelerated process for supplier selection, quoting and bidding, order execution, documentation and analysis.” As for the e-procurement project, Neumann says, “The idea is that the end user of a certain material orders directly from the supplier and the supplier has the material delivered directly.” Initially, VW worked with so-called indirect materials, establishing catalogues for office equipment, stationery, desks and so forth, but Hofmann says this has now been extended to all kinds of MRO (maintenance, repair and operations) materials, with some 100,000 now available from on-line catalogues. Massive benefits Why? It’s not because average cost reductions per order are 13%: that’s just the tip of the iceberg. Time savings sound extravagant at 10 days work compressed into two hours in some cases, but VW stands by its figure. The firm insists that it means total process costs are being cut by a staggering 50% – and delivery times shortened by no less than 70%! And finally, the capacity management project, eCAP in VW terminology. This, says Neumann, has been, “the most difficult, but at the same time most promising.” The goal is to make capacity information transparent and to resolve conflicts jointly with VW’s suppliers via the web exchange. Total transparency “This is the basis for any effective supply chain management,” observes Neumann. “Punctual car production and delivery time is often hampered or distorted by the non-availability of parts or components. This is often due to the lack of synchronicity in the allocation of these parts or components at the manufacturers. If Tier One, Two and Three suppliers [could] receive broken down information on their respective parts of the ordered vehicles, they could allocate and utilise their capacities more efficiently and the logistics would run more smoothly,” he concludes. And that’s what’s happening. Hofmann explains: “[The system] matches the latest demand information with a 24 month horizon from Volkswagen’s ERP systems real time with the minimum, planned and maximum capacity of our suppliers. Our suppliers can access the respective demand information and can adapt capacity data on-line. Flags indicate potential shortfalls and allow early countermeasures.” Neumann says the pilot started with 550 power train parts from 25 suppliers, and was originally being ramped up to 70 or so. But it’s well beyond that already: says Hofmann, “We are targeting 200 of our most important suppliers in 2001, extending the reach to all important suppliers of direct material in the [near] future.” Altogether, Hofmann says the e-marketplace has been a “breakthrough”. He claims: “Lead time reductions of up to 95%, process cost reduction of up to 70% and – in some cases – we could eliminate entire warehouses. Improvements have been realised for Volkswagen and our suppliers. Our procurement and supply chain processes with our suppliers have been improved significantly. “We [have] reduced the operational workload of our procurement units and linked the suppliers closer to the end user and gained efficiency in the operational processes. We [have also] speeded up our strategic procurement processes: we involve suppliers earlier in supply chain planning [and] thus smooth the entire chain,” he says. Marketplace hub He concedes there is still some way to go: “Our aim is to merge the information flow beginning at the customer order and ending at delivery and after-sales service. The VW marketplace is the focal point where applications such as ERP and capacity management [will] come together.” But he says benefits are already mounting: “Our exchange applies … identical processes throughout the entire [VW] Group: a breakthrough in itself. Furthermore, we integrate our exchange with all brands’ respective IT systems and thus create exiting transparency – for us and for our suppliers.” As I said, it’s impressive. But Neumann warns would-be followers that it’s not easy. “We deal with a very complex product made of about 10,000 parts. More than 60% of them come from external suppliers and their respective suppliers. We talk about thousands of cars per day, deal with more than 320,000 direct employees world-wide, handle the procurement for 70 different models, for eight different brands, in 44 production facilities all over the world.” Do it properly And he insists: “In this complex environment, quick and dirty solutions won’t work. So, don’t believe anyone who says the task is easy. [But] we are convinced that our B2B marketplace, once it is fully established and integrated, will make everyone’s task easier, simplify structures, speed up workflow and – as a result – reduce process costs and increase value considerably.” But for Neumann there’s still more on the horizon. “I can assure you there are many more projects to come. We will build [a] seamless IT infrastructure step by step.” And Hofmann echoes the view. He says, for example, “VW has been using collaborative tools in engineering on its extranet infrastructure for quite some time. Our vision is the completely virtually developed car – no more real mockups or prototypes. It’s a long way. Internet-based collaborative engineering tools will complement our extranet tools. First pilots have proven to be successful.”