How blockchain can unlock value for automotive buying organizations

Blockchain continues to gain momentum in many industries and applications.

When it comes to manufacturing and the automotive industry supply chain, most people think about how blockchain can help drive part traceability.

Another interesting application is price transparency across the supply chain, which could create tremendous value for participants.

This is especially true of its use to help automakers enforce directed buy agreement (DBA) price compliance with suppliers.

Doing so could help automakers capture the 1 percent to 3 percent of directed buy spend that's left on the table due to supplier non-compliance.

This could equate to $100 million to $300 million in potential savings for a typical organization that spends $10 billion through a DBA. And that lost value isn't necessarily confined to automakers.

Tier 1 suppliers can also lose out if the DBA price saving is reflected in the Tier 1 part price but not enforced with the relevant Tier 2 supplier.

DBAs and the visibility challenge

A DBA is an agreement in which an automaker requires its direct supplier to purchase from a specific sub-supplier certain raw materials, parts or components for integration into a finished product.

DBAs enable automakers to control multiple levels of the upstream supply chain by requiring Tier 1 suppliers to purchase sub-component parts typically at a competitively negotiated price.

Automakers prefer DBAs because they lower upfront costs for sub-component parts and create greater opportunities for volume-based savings. These savings are typically passed from the Tier 2 supplier's material price into the Tier 1 supplier's price.

While extremely beneficial, DBAs require data visibility to enforce contract prices.

In an ideal world, a buyer can construct a complete "supply tree" that provides price and part data visibility across every part supplier's ecosystem, traditional contracts, and DBAs to identify the non-price-compliant DBA suppliers in real-time.

This kind of visibility requires an unprecedented amount of collaboration and trust between automakers and their suppliers, which in turn requires a system that allows data to be securely stored and shared, manages peer-to-peer privacy, and eliminates the need for time-consuming, inefficient manual reconciliation of price variance discrepancies.
 
Blockchain can help

This is where blockchain comes in. A blockchain-based multi-party system (MPS) can help organizations overcome their current technology and process limitations, so they can capture the 1 percent to 3 percent in DBA spend value they are currently forgoing.

With automakers' and suppliers' enterprise resource planning (ERP) and purchasing platforms acting as inputs into a secure and shared blockchain, participating sales, purchasing, and accounting organizations can partner in ways they never could before.

A blockchain-based solution also provides opportunities to identify discounts and potential supply risks. Such a solution could also reallocate 10 percent to 15 percent of the work effort saved in non-value-added work.

Hence, category managers can shift their efforts to strategic initiatives such as defining category strategies and fostering supplier relationships.

There are two key areas in which a blockchain-based multi-party system can help automotive companies solve their DBA challenges and capture lost value:

1. Real-time value chain transparency
2. Automatic reporting and price compliance capabilities

Value chain transparency

The blockchain spans the supply tree structure and securely stores contracts and DBA terms.

To provide a supply tree visualization, each organization's sales, purchasing transactions, and contracting data are fed into the blockchain using API calls, which stores contract and DBA pricing terms as a reference point.

The blockchain then establishes DBA price baselines among all contracting parties to detect DBA price inconsistencies.

Automatic reporting, price compliance

By enabling automated reporting and price compliance alerts, the blockchain supports DBA price compliance enforcement.

Once the data pipelines for feed into the blockchain, DBA price variance reports and alerts can set up to be automatically triggered to support the price compliance enforcement process.

Reporting capabilities include price variance identification, volume discount and supply risk identification to support mitigation and diversification.

This example can help an automaker avoid significant profit erosion by automatically detecting and reporting price variances across suppliers that are involved in DBAs, or even eliminate these variances altogether when purchase order issuance, invoicing and payment are all based on the DBA price recorded in the system.

In a world of growing supply chain complexity and pricing pressures, DBAs can offer significant benefits for automakers by enabling them to exert greater control over their bill of materials (BOM), and optimize their parts expenditures.

However, in their current form, DBAs can be difficult to administer due to confidentiality concerns, manual and inconsistent applications within organizations, and administration inefficiencies.

Combined, these factors cause participating organizations to lose potentially millions to billions of dollars in value.

While not typically thought of in terms of price compliance use cases, blockchain can help automakers address these challenges as the foundation of a solution that protects the involved parties' confidentiality, streamlines administration through automation, and ensures compliance with the DBA's terms -- thereby boosting efficiency and profit.