The Automotive OEMs Might Soon Contract “BRAIN” Damage Part 2: The Future and User Recommendations

The Automotive OEMs Might Soon Contract 'BRAIN' Damage

Part 2: The Future and User Recommendations

P.J. Jakovljevic - August 13, 2002

Event Summary

While all eyes and ears have recently been on WorldCom's bankruptcy, another insolvency under way is sending shockwaves throughout middle and lower tiers of automotive suppliers despite its insignificant financial magnitude in comparison to the WordCom's.

On July 5, the board of BRAIN International AG, a German provider automotive and industrial business solutions, filed for provisional insolvency proceedings with the Local Court of Freiburg, Germany. Included in the application are BRAIN International AG itself and both its subsidiaries BRAIN Automotive Solutions GmbH and BRAIN Industries Solutions GmbH. After carefully reviewing the business and financial situation, the board cited insolvency was looming as a result of the difficult market situation in Germany.

A substantial drop in sales especially in Germany reportedly exacerbated the situation in the second quarter. Intensive discussions with potential financial investors and strategic investors still continue with the aim of continuing the company as a going concern and of launching further restructuring measures. Business trends, particularly in the USA, nonetheless, continue to be positive for BRAIN North America, a wholly owned subsidiary of BRAIN AG.

The best example thereof would be the August 1 announcement of the release of SupplyWEB 6.0, marking the second upgrade for the product this year, with enhancements including advanced global capabilities and expanded functionality in key areas such as demand management and releases, purchasing, advanced shipping notice (ASN)/supplier shipping, and invoicing. SupplyWEB is a comprehensive, ERP independent, web-based Supply Chain Management (SCM) procurement and supplier rating solution, designed specifically to improve relationships and efficiencies between automotive manufacturers and their suppliers. It should allow automotive suppliers to deploy e-commerce strategies to reduce inventory, speed the flow of supply chain information, and increase operational efficiencies, as by deploying it manufacturers should be able to achieve 100% electronic communications with all their suppliers, even if some of their suppliers do not have EDI capability. To that end, SupplyWEB includes fully integrated machine-to-machine EDI transactions as well as web-based methods. Futhermore, since just accessing the supply chain is not enough, through the use of 5 procurement methodologies, including SMI (Supplier Managed Inventory), and Kanban, users should be able to manage their suppliers according to their needs. For instance, SupplyWEB allows suppliers to respond quickly to the exceptions that occur, such as defective material, delivery issues, excess inventory, critical Kanban, etc. It also allows manufacturers to rate the performance of each supplier and focus on resolving and preventing the exceptions.

This is Part Two of a two-part analysis of the impact of a recent announcement concerning BRAIN. Part One covered the announcement and Market Impact.

BRAIN NA Future

Owing to the functional attractiveness of the SupplyWEB product, there are indications that some automotive suppliers have recently committed to using BRAIN (e.g., Volkswagen (VW), both in European and US plants), despite the current diminished spending pattern, and even after the insolvency announcement. As usual in these situations, there might be several possible scenarios for BRAIN's fate.

One of the more favorable scenarios would be that someone, possibly a direct competitor, steps into the picture and acquires at least the more attractive parts of BRAIN offering. The likelihood of that happening might not be high (30%), given that many competitors, even the most powerful one, have been licking their own wounds. There is however a 20% chance that private investors/venture capitalists may step in and keep BRAIN alive.

Another, also favorable option and more likely option (40%), would be that the profitable wholly owned subsidiary BRAIN NA spins off and sustains as a separate entity, supporting the most viable products, i.e., TRANS4M and SupplyWEB. Fortunately, the most unlikely scenario would the most unfavorable one -- that the company's assets get liquidated completely (10%). In any scenario, it is quite implausible that BRAIN will sell many major deals until its products' future is more certain.

The events will therefore likely hamper BRAIN NA in its quest to fend off QAD (see QAD Seemingly Nearing The Corner) in their battle for dominance in midsize automotive market. Also, MAPICS, IFS, Glovia, Geac/JBA, SoftBrands, SSA GT, ROI Systems and Lilly Software are some of the Tier2/Tier3 vendors that have viable solutions for mid-sized automotive manufacturers in their quest to eliminate complexity and streamline operations and contain costs, which will jump at the ensuing opportunity. One should never forget about the large players like SAP, Oracle, J.D. Edwards, Baan and PeopleSoft that are entrenched within the automotive original equipment manufacturers' (OEMs) and Tier 1 suppliers' corporate offices, and have recently started addressing the required product lifecycle management (PLM) and engineering change management (ECM) functionality. While they may still lag the above smaller brethren in their support for a day-to-day plant-level execution functionality, it is very likely that they will not sit idle in that regard either.

User Recommendations

While we cannot advise BRAIN's customers to take the events in stride, we do not recommend abandoning ship in a knee-jerk reaction, as we believe that their endeavors will not necessarily be seriously jeopardized. Due diligence and development of case scenarios for either a system change or remaining with the status quo states goes without saying, although different users might end up with different action plans, subject to their particular state of affairs. For instance, users that are only using BRAIN products in certain remote plants are in the least quandary and should cautiously go with the flow and contemplate contingency plans for the time when upgrades become necessary. These products will more likely survive than not, either within another company or as a part of a restructured BRAIN. A dicer situation, however, awaits the users that are in the middle of large rollouts and BRAIN is the pillar of their IT strategy. These users will have to wait and see whether BRAIN will sustain, either through new funding or acquisition.

An unsuccessfully implemented system and unhappy and/or demoralized users would be one of the additional crucial arguments for the case of switching to another system. On the other hand, in the case of a successful implementation, smooth business processes flow and users being fond of a system, one would have to reckon with the tremendous issues of managing change and user resistance. Unless there is a crying need for and apparent (preferably quantifiable) benefits from abandoning the BRAIN product currently in use, you may be better off by hanging on for a while. Nevertheless, be on high alert and develop medium- to long-term alternative plans for moving to a new technology. Ensure that you have the prerogative to change the source code and a team of skilled resources available. Self-sufficiency' should be the name of the game.

If you are interested, perhaps the existing calamitous situation could even be leveraged to your benefit. Consider negotiating a pilot or trial period at no cost to you. Moreover, leverage the BRAIN opportunity to negotiate a lower price with its competitors. If BRAIN is willing to provide its solution at a low cost, use that information with other vendors. Savvy CIOs may end up with a sound business case that enables them to reap the upside benefits of these sweet deals, while protecting the downside with a sound risk management plan that includes backup and a fallback strategy.

Until BRAIN can present a solid reorganization plan and new product strategies become clear, we do not advise potential users to deploy its products, although learning about new features would not hurt. We suggest evaluating the bells-and-whistles, price, and corporate viability of other vendors instead, before making a selection. As with all new releases, users should employ a critical approach in their evaluation of the products, and require the company representative to demonstrate specific technological and functional capabilities. At least, BRAIN should be evaluated to raise the bar for other vendors in the contest in terms of demonstrating their EDI, ANX (Automotive Network Exchange, supported within BRAIN-eX, a TCP/IP Message Broker), release accounting, Just-in-sequence (JIS), repetitive purchasing, integrated barcode printing, lean manufacturing, and other e-Business processes pertinent to the automotive industry.

Also, the products' compliance with the most common industry standards such as Ford MS-9000, AIAG M.A.P., or QS-9000 should be probed. The lower tiers automotive suppliers in need of a plant-focused ERP system and of getting quickly and affordably on their e-Business feet would be the most likely beneficiaries from evaluating BRAIN and like products. Sharp industry focus and domain expertise, product interconnectivity, and quick and inexpensive e-commerce enablement have been BRAIN's bargaining chips in the game against the peers.

The pressures of the '90s on automotive suppliers to streamline manufacturing operations in order to reduce inventory and costs in general, and to increase the overall speed of production, have only been increased recently with the recent economic slump. Many ERP systems have consequently added new functionality to meet these needs, such as bar-code labels printing for both parts and containers, and advanced shipping notices (ASNs). Therefore, make sure that the system supports the practices and dictated standards by your likely big-brother trading partners (e.g., General Motors, Ford, Honda, etc.).

On a more general note, given that over the last few years, the enterprise market has become obviously stratified into stable vendors on one side, and stagnating, non-profitable and cash-depleted vendors on the other side, and since this will become even more accentuated in current economic milieu, customers are advised to conduct due diligence regarding vendor viabilities. Pay detailed attention to the balance sheet, a recent investment in R&D pattern, and to any fine print footnotes/remarks in financial statements.