Volkswagen B2B plans

Volkswagen AG is Europe’s largest car manufacturer, producing 5 million cars, trucks, and vans each year. VW owns luxury car makers such as Audi, Lamborghini, and Bentley and family car makers such as SEAT in Spain and Skoda in the Czech Republic. The company has 300,000 employees and operates plants in Europe, Africa, the Asia/Pacific Rim, and the Americas. Vehicles produced by Volkswagen Group account for over 12 percent of the world market.

VW companies purchase annually 60 billion euros worth, or about US$73 billion, in components, automotive parts, and indirect materials, and these purchases represent more than 70 percent of VW’s annual revenue. Obviously, the procurement process and relationships with suppliers are absolutely critical for Volkswagen’s success. The VW Group was looking for ways to create more efficient relationships with its suppliers and reduce the cost of paper-based procurement processes.

However, the company did not want to automate procurement using a public exchange or an industry-sponsored Net marketplace because it would have had to adapt its own business processes to a common framework that could be used by many different organizations. It decided not to participate in Covisint, the giant industry consortium Net marketplace set up by Ford, General Motors, and DaimlerChrysler, which provides procurement and other supply chain services for these companies, other automotive manufacturers, and their suppliers. Instead, VW opted for a private platform that would enable it to integrate its suppliers more tightly with its own business processes.

Operating as a private industrial network, VWGroupSupply.com enabled the VW Group to design a system that optimized its own business processes.

During the early summer of 2002 the company began implementing a massive private B2B extranet for the Volkswagen Group and its suppliers called VWGroupSupply.com. VWGroupSupply.com handles 90 percent of all global purchasing for VW, including all automotive and parts components. It is one of the most comprehensive private exchanges in the global automotive industry.

The online Web-based platform can handle requests for quotations (RFQs), contract negotiations, catalog purchases, purchase order management, engineering change management, vehicle program management, and payments. This B2B private industrial network was developed using technology from a number of vendors, including Ariba, IBM, and i2 Technologies.

Suppliers of all sizes can access VWGroupSupply.com with standard Web browser software. The Web site is limited to suppliers that have done business with one or several companies in the Volkswagen Group and potential new suppliers that go through an authorization process. The system maintains a common data repository with details on each supplier concerning procurement, logistics, production, quality, technical design, and finance.

It also features an online catalog with 1.37 million items from 750 global suppliers. The catalog uses the [email protected] standard for classifying its contents. All suppliers who participate in the catalog ordering process classify their products using this standard. Online negotiations involve multiple bids by suppliers for various purchasing contracts. VWGroupSupply.com ensures that all participants meet its technical and commercial qualifications.

Before an online solicitation begins, the system informs vendors about the data and precise rules governing the negotiations. Shifts in market demand have a drastic impact on VW’s production activities and affect the ability of suppliers to deliver. Production bottlenecks can result if suppliers are unprepared for a sudden upsurge in demand. If suppliers stock too much inventory, they may incur excess costs from running at overcapacity. VWGroupSupply.com has an application called Electronic Capacity Management (eCAP) to alert both VW and its suppliers to changes in trends in advance.

eCAP enables suppliers to track VW’s continually updated production plans and materials requirements in real time online. This capability captures information about participating suppliers’ planned maximum and minimum capacities. If VW production requirements go beyond these limits, the system sets off an alarm so both parties can react quickly. eCAP maintains information on over 200 suppliers and 4,000 critical parts.

During its first three years of operation, the material cost reductions and productivity gains from VWGroupSupply.com produced more than 100 million euros (US$122 million) in cost reductions.

As of mid-2004, VWGroupSupply.com had handled over 500,000 transactions with more than 5,500 suppliers. More than 4,200 online contract negotiations involving 26,000 suppliers were conducted online, with a value of 42 billion euros (US$51 billion). Over 13,200 people used the online catalog and placed orders totaling 150 million euros (US$182 million).

Source: Martin Hoffman, “Best Practices: VW Revs Up Its B2B Engine,” Optimize Magazine, March 2004; www.vwgroupsupply.com, accessed August 23, 2004; and www.hoovers.com, accessed August 24, 2004. To Think About: What are the benefits to Volkswagen from using a private industrial network instead of a more open exchange? How does this system change how VW and it suppliers do business? What value does VWGroupSupply.com provide to Volkswagen and to its suppliers?