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:
- Real-time value chain transparency
- Automatic reporting and price compliance capabilities