During the past 15 months, Volkswagen AG has spent $US5.2 billion buying parts, PCs and raw materials by means of an online auction service that has helped it slash procurement costs by 40 per cent to 50 per cent and cut contract negotiations from as long as three months to one day.
But because of nagging security concerns, the German automaker plans to run eBreviate's auction software on its own servers behind its corporate firewall, said Meike-Uta Hansen, director of business-to-business online negotiations at Volkswagen.
"We're doing this mainly for security reasons," said Hansen. "It's very sensitive data that gets exchanged, and we want to be the owner of this data us and our suppliers, and no one else."
Volkswagen's strategic move isn't a surprise, given the sensitivity to privacy within the fiercely competitive automotive industry, said Thilo Koslowski, an analyst at Gartner. "Volkswagen wants to make sure that they can close the windows and pull down the shades so that no one can see what they are doing," he said.
Johnson Controls in Milwaukee is tackling similar security concerns. The $17 billion maker of car interiors launched its own online exchange in March to handle online auctions, bidding negotiations and supply chain issues.
Mike Suman, group vice president for e-business at Johnson Controls, said he wasn't content to conduct the supplier's electronic business over a third-party infrastructure. "If a company ever gets a reputation of cross-pollinating data, it would be their death," Suman said. "In the end, how secure you are is everything."
While Volkswagen officials claimed that they didn't experience any security breaches with eBreviate, the automaker also wanted more control over the applications that run a significant part of its business. Hansen said Volkswagen has needed to tweak the auction software it used with four different service providers, including that of eBreviate.
For example, Volkswagen used online auctions to negotiate pricing on its long-term parts contracts, but the service providers weren't able to electronically handle other parameters, such as prototyping costs, production scheduling and retooling costs.
"We'd have to do a lot over the phone, and you aren't really saving time or money then," said Hansen. Now Volkswagen can make adjustments whenever it sees fit, she said, and "we can set up our own auctions without asking a third party."
Customising auction services and software and then trying to link suppliers with internal systems is a challenge for many companies, said Dan Garretson, an analyst at Forrester Research.
"Some large companies use [hosted applications] as a pilot," he said. "That way, they can try it out without making a huge commitment to hardware and maintenance."
Volkswagen's migration to a server-based auction platform will take at least another nine months to complete, Hansen said. During that time, eBreviate, a unit of Electronic Data Systems, plans to develop a custom XML-based messaging system and single sign-on capabilities and to beef up security for Volkswagen, eBreviate officials said.
Still, most companies aren't interested in running an online auction service. Owens Corning, a $5 billion maker of composite materials, conducted more than $400 million in auctions last year using hosted services.
J.P. Blanchard, the global e-commerce sourcing leader at Owens Corning, acknowledged that he has some concerns about costs and security but said that the company has no plans to bring those applications in-house.
"We're not in the online bidding-software business," he said. "We have a strong sourcing organisation, but that's not our expertise."