Patching the supply chain together

Crafting an application platform that can handle up to US$300 billion in automaker business each year is a daunting idea. For Covisint LLC, the start-up tasked with mastering that challenge, so is the reality. DaimlerChrysler AG, Ford Motor Co. and General Motors Corp. anted up a total of US$200 million to found Covisint in February last year. The unprecedented joint effort aims to weave together back-end systems from the automakers and suppliers to create a Web-based exchange to automate the time-consuming and costly chore of acquiring direct materials, parts and sourcing contracts from suppliers.

The ambitious industry exchange looks great on paper. But going into its second year of operation, Covisint’s progress is getting mixed reviews. The Southfield, Mich.-based start-up adeptly auctions service contracts, materials and parts today. It snared almost US$100 billion in auctions from GM alone in 2001, but only a small percentage of that amount counts as revenue. And looking beyond online auctions and procurements, Covisint’s role and progress get harder to measure.

To tackle other critical parts of the supply procurement process, such as inventory management, collaborative design and quality assurance, Covisint relies on several third-party vendors, such as SupplySolution Inc., MatrixOne Inc. and Powerway Inc.

That’s a problem, say automotive analysts, because those stopgap technologies are key to Covisint’s long-term viability and amount to a clear stumbling block to Covisint’s long-stated aim to serve as a one-stop shop for the industry.

“Looking at their vision, there is a huge amount of potential. But other than potential, they are not having a huge impact on the industry yet,” says Kevin Prouty, an analyst at Boston-based AMR Research Inc. “Covisint is still trying to build up its infrastructure and personnel, so how much opportunity can they grab?”

For starters, Covisint appears to be grabbing partners to offer technologies that it can’t build on its own. For Web-enabled direct material fulfilment, which should reduce waste by communicating changes to supply and production schedules, Covisint tapped SupplySolution last March. Southfield-based SupplySolution had 1,000 automotive customers that predated its exclusive deal with Covisint. Under the terms of the deal, SupplySolution will continue to sell its I-Supply product to companies in other industries. But for automotive customers, those sales get channelled through Covisint, which has renamed the product Fulfillment.

To better manage advanced product quality planning, a process that addresses parts changes during the design and manufacturing process, Covisint struck a deal with Indianapolis-based Powerway last April at the urging of DaimlerChrysler. The automaker had already begun standardizing on Powerway’s Web-based tool and document management services. It also holds an undisclosed equity stake in Powerway.

And in the area of collaborative product design and project management, Covisint brought in Westford, Mass.-based MatrixOne. That agreement essentially ends Covisint’s partnership with NexPrise Inc., which was acquired by Mountain View, Calif.-based Ventro Corp. in August. After Covisint implements MatrixOne’s set of Value Chain Portfolio products next year, support for NexPrise will be phased out.

But even though Covisint provides three vital parts of automotive supply chain management through three outsourcing arrangements, the exchange projects that 75 per cent of its revenue will come from these types of technology products and accompanying services by 2005, compared with virtually no revenue in those areas this year, says Harold R. Kutner, group vice-president of worldwide purchasing at GM and a member of Covisint’s board of directors.

Kutner acknowledges that selecting technology from these three partners was Covisint’s third choice. Its first choice would have been to go with its vested technology partners, Commerce One Inc. and Oracle Corp. It’s second would have been to build the applications in-house.

“If I had my way, we would develop everything in-house, and we wouldn’t share any revenue. But you have to be realistic,” says Kutner. “It’s an embryonic company of a couple hundred people. We don’t have those [development] resources yet. But since we don’t and want to offer more products, we have the ability to partner.”

Saved by the Auction Bell

Analysts agree that Covisint has struck strong revenue-sharing deals with its partners, but some still question how much value the exchange can provide while it’s integrating those products into its platform.

“They identified partners that were willing to sell a piece of their souls to get onto this portal,” says Steve Gregerson, an analyst at Automotive Consulting Group Inc., an automotive research firm in Ann Arbor, Mich. “It’s difficult to see any level of value-add, considering the [automakers are] spending tens of millions dollars per quarter on Covisint, which is very expensive for the automotive industry.”

Kutner disagrees emphatically with that analysis. He projects that these deals will propel Covisint to an initial public offering by 2003. And while Covisint gets up to speed with its new partners, it’s also approaching break-even revenue, he says.

“The revenue projections are not where they should be, but they are not horrible,” says Kutner. He expects Covisint to be profitable by the end of next year as a result of its strong auction revenue.

Covisint appears to have established an online auctions foothold. GM, for one, says it has conducted about US$98 billion in procurement transactions via the online exchange this year. Procurements of direct materials, such as steel and plastics, made up about US$96 billion of that total. For those purchases, GM used Covisint’s quote-and-auction services and technology. It also spent US$200 million for indirect goods through Covisint’s catalogue system.

Although GM spends roughly US$86 billion each year on procurements, the US$96 billion tab includes multiyear sourcing contracts and materials purchases for vehicles through the 2006 model year. GM also sold US$2 billion worth of materials and machinery through Covisint’s online auctions.

Kutner says last year’s Covisint auction tab was unusual because it included one large, multiyear deal. He expects Covisint to typically handle US$50 billion to US$60 billion in auctions from its automotive founders. Still, GM cut its per-transaction costs by 3 per cent, to 17 per cent, Kutner says, and was able to process more orders by using Covisint’s technology platform.

Covisint officials also hope the exchange’s auction services will lure smaller suppliers that want to aggregate their purchases and reap cost savings. But one of Covisint’s biggest challenges remains wooing and winning suppliers.

Several supplier giants, such as Troy, Mich.-based Delphi Automotive Systems Corp. and Dearborn, Mich.-based Visteon Corp., have pledged to work with Covisint. But it will also need to draw the support of smaller players, too, like Guide Corp., a Pendleton, Ind.-based maker of headlights. Guide posted US$600 million in revenue last year, while Delphi and Visteon posted revenues of US$29 billion and US$19 billion, respectively.

Jim Johnson, Guide’s CIO, says he’s exploring what role Covisint will play for his company. “The real challenge in automotive is driving cost out of process and reducing the cycle time to design a car and its components,” says Johnson. “Covisint could play a role in areas that don’t have strong systems on the front end and the back end, such as collaborative engineering and product design.”

To win small players like Guide with limited in-house staff to customize systems, Covisint must beef up its consulting services and spell out its growing application service provider offerings, according to analysts.

“Covisint is the massive [automaker] initiative that everyone loves to hate,” warns AMR’s Prouty. “But if you don’t have solid vision for suppliers, then every day that goes by, suppliers will make decisions that make it more difficult to include them.”

Covisint: The Road Travelled

2000

February: DaimlerChrysler, Ford and GM jointly announce plans to combine efforts and ante up US$200 million to form a single global business-to-business supplier exchange. Ford’s Kevin Vasconi is named chief technology officer.

April: French automaker Renault SA and Tokyo-based Nissan Motor Co. join the exchange. The Federal Trade Commission (FTC) begins an antitrust investigation.

May: The exchange is named Covisint.

July: Several Tier 1 automotive supply companies announce their support and intent to sign on.

September: Covisint receives clearance from the FTC and Germany’s antitrust agency and officially launches the exchange, with an initial suite of tools for auctions, catalogues, quote management and product development.

October: NexPrise and Engineering Automation Inc. are selected for collaboration and quote management.

November: The integration of Ford’s AutoXchange and GM’s TradeXchange begins.

December: Covisint LLC becomes a legal entity and signs agreements with Commerce One and Oracle. The exchange selects Documentum Inc. for content management.

2001

February: Covisint taps Mercator Software Inc. to integrate data applications.

March: The exchange chooses SupplySolution for supply chain execution software.

April: Kevin English is named chairman, president and CEO of the exchange.

May: French automaker PSA Peugeot Citroen SA joins the exchange.

June: Covisint selects webMethods Inc. for software integration.

September: The exchange selects MatrixOne software for collaboration and sourcing, and announces plans to phase out NexPrise.