Global Exchange Announced for Aerospace, Defense

SAN MATEO (03/29/2000) - One by one, competing companies in major industry segments are coming together to form buying coalitions that the participants claim will reduce supply chain costs, speed time to market, and cut waste.

On Tuesday, a global trading exchange was announced by key members of the aerospace and defense industry, a market segment that annually racks up $400 billion in sales. Founding members include Boeing Co., Lockheed Martin Corp., BAE, and Raytheon Systems Co.

The founding members will create and spin off the exchange, which is based on Microsoft Corp. and Commerce One Inc.'s MarketSite Portal, as an independent company. Currently, the aerospace industry includes approximately 37,000 suppliers according to a Commerce One spokesperson.

At its simplest level, the creation of an exchange is a pronouncement by the aerospace and defense industry that they want to participate in the new economy.

"This is a large step in the direction of bringing us from old economy to dot-com," said Hollis Bostick, a multi-discipline specialist at Boeing, in Canoga Park, California. "It will help us to change our business practices to take advantage of the new dot economy in a major way."

According to Bostick, members of the exchange will see a major increase in their supplier and customer base.

"Currently the way the supply chain is built, we are doing business with people we have been doing business with for 50 years. Now suddenly a little mom and pop shop that may be excellent at making a particular component can come in and bid against our traditional suppliers," said Bostick. "It opens up a whole new world."

However, one aerospace industry player not invited to participate as a founding member of the exchange is GE Aircraft Engines, based in Cincinnati.

"The way GE sees it, these exchanges are heavily focused on the buy side. GE is well on its way to doing its own exchange, and we are already involved in executing auctions. GE, as one of a group of companies on the buy side, bought $50 million in components last month," said Rick Kennedy, a GE spokesperson.

"On the front end -- the sell side -- we haven't really decided whether we will join [the exchange] or not," said Kennedy.

Kennedy also pointed out that it is not yet clear that the commercial airline industry is interested in conducting its business over an exchange.

"This particular deal is heavily focused on military," added Kennedy.

One of the key benefits will be lower transaction costs and increased productivity, according to most members of the exchange.

"In the aerospace industry companies can spend as little as 20 percent of their time on procurement and 80 percent on bookkeeping and other paper issues. We will be able to work quicker and smarter using the exchange," said Hugh Burns, a Lockheed Martin spokesperson, in Bethesda, Maryland.

It is expected that the exchange in some cases will be operated as a reverse auction where the buyers quote a price they are willing to pay for a component and suppliers bid to meet that price.

"The government has already said reverse auctions are possible to use on their contracts," said Bostick, addressing the question of whether exchanges lead to reduced competition and possible restraint of trade. "We can't force people to bid on these things. You won't get anybody to bid on it if it is priced too low," added Bostick.

However, there is a short term downside to an open bidding environment according to Bostick.

"Anytime you go into an open or reverse bidding environment, both sides are learning a lot. You are going to have a lot harder time hiding the costs that aren't usually visible to everybody -- like your overhead costs," Bostick said.

The four founding companies have signed a memorandum of understanding and expect the new company to launch the site by the third quarter. Each of the members will have an equal stake in the new company with adjustments made based on the level of transactions over the first three years of its operation.

Commerce One will gain a 5 percent equity position.

Boeing reported revenues for 1999 of $58 billion; Lockheed Martin reported revenues of about $25 billion; BAE $19 billion; and Raytheon $20 billion.

Commerce One Inc., in Pleasanton, Calif., is at www.commerceone.com.

InfoWorld Editor at Large Ephraim Schwartz is based in San Francisco.

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