Technology

Can Covisint Shift into Gear?

Will new technology deals help parts suppliers overcome their reluctance to join the auto industry's online exchange?
Joseph RadiganMay 29, 2001

Covisint, the online auto parts B2B exchange created by Detroit’s Big Three automakers, recently put the finishing touches on two related technology sourcing deals.

Earlier this month, in separate announcements, Sun Microsystems and Exodus Communications said the E-marketplace will host its applications and Web site on Sun servers in Exodus’s data centers.

Kevin Vasconi, Covisint’s chief technology officer, says the deals actually extend and formalize existing relationships that originated last year, when the online marketplace was formed, and conform to the technology strategy the company has employed since day one.

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“Early on, we made the financial decision that we are going to outsource our hosting,” Vasconi told CFO.com. “We don’t want to sink tens of millions of dollars into building our own global data centers.”

Covisint began using Exodus’ Chicago data center in December, and then added backup and disaster recovery services from an Austin, Texas, center in January. With the latest announcement, the online exchange will make use of a third site in Amsterdam for the automakers’ European factories.

Vasconi would not disclose the financial terms of either deal, but he explained that Covisint views the hardware end of its operations as largely a commodity function that can best be farmed out. In fact, the B2B exchange intends to make its mark is on the applications it develops that integrate the automakers’ supply chains with those of their parts makers. That’s where the biggest chunk of its technology spending will go.

The company also won’t disclose what portion of its tech budget is devoted to infrastructure and how much is being spent on application development.

If the contracts fulfill their promise, they could prove to be the stepping stone the company has sought for extending its reach throughout the entire auto industry supply chain. But it won’t be easy.

With the tech infrastructure issues settled, Vasconi says his next priority is the development of applications that push Covisint toward a so-called collaborative commerce model, essentially merging the product design and procurement functions. Most of the new applications will be developed in Java and run on the Sun hardware. What’s more, they will also be integrated with some of Covisint’s existing applications from Commerce One that run on Windows.

The applications Covisint is developing internally essentially take functions developed 20 years ago in an electronic data interchange (EDI) format and rewrite them for the Web. EDI has been used in the auto, banking, and insurance industries for years, but given its reliance on older technology, such as IBM mainframes, second and third- tier suppliers have found it too expensive to adapt their systems to the format.

The Web is supposed to address the cost issue, but Covisint has some built-in hurdles of its own.

The online exchange’s biggest problem remains the reluctance of many parts suppliers to join it. Many have feared that the online marketplace is just another excuse for slashing their margins to an even finer, razor-thin slice.

Vasconi acknowledges that there’s been some resistance to adopting Covisint’s technology. But he feels that resistance can be overcome once the exchange can demonstrate some positive impact on its members’ bottom lines. The problem there is that most of the companies that exemplify the few success stories to date feel that their own experience is something of a trade secret.

Whether the deals with Sun and Exodus actually address this concern among the parts suppliers remains to be seen. But as entrenched as that resistance may be, John Wojtkiewicz an analyst with the Boston-based market research firm, Yankee Group, says ultimately the automakers will get their way with Covisint, if for no other reason than their combined purchasing power is too strong for them to not win out.

If Covisint can overcome the resistance, Vasconi says the benefits will materialize as the car makers and their suppliers expand beyond simple procurement in E-commerce and move into a process that fully integrates their product design with their procurement.

“Covisint is not a procurement exchange, and it was never designed to be a procurement exchange,” Vasconi says. “The underlying message is that collaboration is going to emerge as the killer app.”

To a certain extent, product design already overlaps with the procurement phase, but the integration is far from ideal. Vasconi notes, “Today, there’s a ton of manual intervention. As an engineer, I can’t tell you the number of times I’ve seen a blueprint with 1500 pencil annotations on it.”

But that kind of manual intervention creates too much inefficiency.

Even if Covisint persuades the parts suppliers that it’s to their benefit to adopt an electronic, collaborative commerce model, it will have other challenges to deal with.

Rick Villars, vice president for Internet and E-commerce research at International Data Corp. in Framingham, Mass., says Covisint will need to successfully integrate procurement and inventory systems with the purchasing contracts between manufacturers and their suppliers. Often called the exception process, this involves matching individual parts orders to a contract’s terms and determining where the two vary.

Villars says automakers typically renew their parts contracts for two to three years at a time, and the procurement process is built upon filling individual orders tied to those pacts. But it’s not unusual for individual shipments to vary from the terms specified in the contracts, either on price, the part specifications, or the date of delivery.

EDI’s ability to address the exception and reconciliation functions is minimal at best, Villars notes, partly because EDI it hasn’t been universally adopted throughout the auto supplier business.

The Web technology underlying a B2B exchange like Covisint, because it is relatively inexpensive, could prove to be a better fit for this link in the supply chain. But until the parts makers’ involvement in Covisint becomes widespread, the exception process will remain less than perfect.

In the meantime, Covisint has to persuade its target audience, and Vasconi says he understands it’s going to be a challenge to produce a convincing argument that there’s a return to be gained on the investment in Covisint’s technology.

“We are not a typical software company that makes claims without having the data to back it up,” Vasconi explains. “It’s part of our culture, that when we publish data, it will be rock solid.”

If Vasconi’s data is solid enough, then Covisint may finally kick its gear out of neutral and into drive.

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