Made-to-Order Restructuring

Back to Contents of Issue: December 2000


Dosed up on a capital infusion, AlphaBrain returns to life as an ASP and B2B exchange for machine shops.

by Daniel Scuka

Ohtaka

Photograph by Masahide Sahara

A YEAR AGO, ALPHABRAIN was on life support, and fading fast. Staff had already gone several months with no pay, and it was only a matter of time before the company's alpha waves went permanently flat. The package software maker was caught in a vicious circle, familiar to many stand-alone code vendors. Its flagship product, a database of manufacturing information and specifications assembled over many years of experience in the machine tool industry, appealed to only a narrow range of potential buyers. Machine shops and other light manufacturers used such information to estimate costs for bidding on small-lot, high-precision manufacturing jobs, but they were mostly small and medium enterprises (SMEs) who couldn't really afford AlphaBrain's package or see the value of automating a tried-and-true, paper-based process. If AlphaBrain did make a sale, there was no way to earn ongoing revenue. Convincing clients to purchase periodic database upgrades was tougher than stuffing a sumo wrestler into a phone booth. "The company was selling just a few stand-alone cost engineering systems every year," says AlphaBrain's current president Shin-ichiro Ohtaka. "Toyota and Hitachi all have their own cost-estimation systems; we were facing bankruptcy."

Today, the firm has been rebuilt as an "online engineering service provider" (read ASP) and the remaining staff are again enjoying regular paychecks. AlphaBrain owes its resuscitation to a healthy dose of risk capital and a management overhaul that included bringing in Ohtaka, a 30-year veteran of NKK Steel, who was hired away from wireless chip design and manufacturing venture firm Yozan in May '99.

Since then, the firm's prospects have brightened considerably. In June, it moved a pilot version of its revived made-to-order parts estimation application onto the Web under the name Alpha-8. The firm now enjoys the classic benefits that the ASP model provides, with customers paying a modest fee for only the service they need. What's more, the system can be continuously updated.

Alpha-8 calculates manufacturing cost estimates, allowing SMEs to more effectively bid on buyers' RFQs (requests for quotes) for made-to-order parts. "For the suppliers, setting prices is a big problem on MTO parts," says Ohtaka. "It directly affects their profitability. Alpha-8 provides detailed material, processing, and administrative cost estimates."

By itself, Alpha-8 would likely be adequate to ensure AlphaBrain's survival. The firm estimates there are several thousand potential customers for the service. "On average, only about 25 percent of all direct material costs can be attributed to MTOs, but over 75 percent of a company's business process is dedicated to their design and procurement due to the complexities involved," says Ohtaka. But not content with merely getting by, the firm has decided to branch out, and in January is scheduled to launch AlphaEXchange, a B2B marketplace that will allow AlphaBrain to post tenders to the open market and process transactions with producers based on the cost estimates produced by Alpha-8. Both Alpha-8 and AlphaEXchange should be available in English by the first quarter of 2001.

The new efficiencies are expected to bring price discipline and benefits to suppliers and producers in what is presently a highly fragmented market. "We're expecting purchase costs to go down by 20 or 30 percent, and supplier profits to go up," says Ohtaka. AlphaEXchange targets conglomerates like Tepco, NEC, Hitachi, and other large makers, who bring not only their own needs to the exchange, but also those of their associated sub-contractors. "We expect AlphaEXchange's revenues to be triple those of Alpha-8 by 2003, with Alpha-8 having some 5,000 customers," says Ohtaka.

In a report released in September, analysts at Broadview Japan found there was no one offering B2B services in the "Parts for Industrial Use" category on Japan's Web. Nonetheless, AlphaBrain may have an upward battle to convince the smaller suppliers to go electronic -- many of them still don't have computers.

But AlphaBrain already has about 60 customers who have indicated interest in the B2B marketplace, and, regardless, the Old Economy keiretsu relationships seem to be crumbling anyway: according to a June 2000 survey of Japanese manufacturers conducted by Nikkei Digital Engineering, 61.5 percent reported that they have recently started selecting suppliers from a larger pool than before (see Statistics).

The future now appears bright for AlphaBrain, but the firm couldn't have healed itself. Venture medicine was provided by Compass Partners, a Tokyo-based boutique VC that could see the latent technical and ASP value in AlphaBrain's large manufacturing information database. Compass Partners pumped in 500 million to buy a majority stake and helped the ailing software house make the switch to ASP and B2B marketplace. One key move was transferring AlphaBrain's software development to India, where a team of 27 coders has rewritten the company's core software. Around the third quarter of next year, the firm will again be looking for fresh capital. David Baran, managing partner at Compass Partners, had no comment to make on a possible IPO, but did say the firm is eyeing several strategic alliances.

Ohtaka is looking out for fresh talent as he eyes expansion and model replication in the US and Europe. "We should see even faster growth in the US," he says. "We're looking for high-quality people -- and I don't care about age, gender, or nationality." The 54-year-old shacho means it: he left his comfortable career at NKK Steel after butting heads with sclerotic senior management who couldn't take risks. "I tried to start new venture businesses in NKK," says Ohtaka, "but they couldn't understand."

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