Integrated SCM: Fuelling Success in the New Economy

Prepared & Compiled by: Vaibhav DK Gupta; 63; SCM

Automotive companies will derive the most competitive advantage from integrating their supply chains. The returns are proven and are up to ten-fold larger than those from downsizing, reengineering, realigning human resources or rationalizing production. As the experience of Dell Computers shows, industry laggards can become leaders by effectively integrating their supply chain. The automotive supply chain is the most complex in the world. It includes variety of suppliers, service providers, outsourcers, distributors and dealers. Pushed by consumer demand and technological advance, automotive companies are being pushed into factorydirect, build-to-order and just-in-time models of manufacturing. However, the automotive supply chain is not yet integrated enough to fully respond to or reap the benefits from these production models. This is because most automotive companies do not yet have IT systems that can utilize the Internet. As a result, even in industrialized countries, car companies can take three months to deliver a fully paid for order to a customer.

All players in the automotive supply chain, by and large, still have disintegrated stand-alone legacy systems. Even within companies, functional divisions are often walled off from each other. For instance, inventory systems do not connect into business systems. This is particularly so in Asia. Further, complexity is added by the array of legacy systems in use. Different vendors use differing systems, most of which do not fit into that of OEM. As a result, business processes take more time than they need to. Data entry must still be done manually. When one database is updated, so must all the others. As a result, automotive companies have not been able to take full advantage of the Internet and E-Commerce. More importantly, the absence of point-to-point integration has prevented companies from reaching their full potential. Integrating the Supply Chain brings revenue benefits, through increased customer satisfaction and reduced costs, through more efficient collaboration with suppliers & distributors. Time-to-customer is dramatically reduced, since ordering and manufacturing systems are connected. Companies can produce to order and handle mixed-mode scenarios. Design and prototyping have also been dramatically speeded up.

For instance, Toyota has completely integrated and internet enabled its supply chain. It now takes the Company just 12 months to take a product from design to mass production. Three

years ago, it took Toyota 22 months. It takes all other automakers 36 months to get from design to production. Similarly, Mitsubishi has saved itself a lot of time and energy by integrating its global production network. SAPs integration system enables the firm to track each kit from the point of departure in Japan, through shipping, arrival, assembly, distribution, dealership and buyer. An integrated system enables the OEM to immediately manage events and react to changes in the supply chain as they happen.

For example, as soon as order is received, it is configured, the vehicle manufactured and sent to the dealer. The system automatically triggers an alert if supply chain parameters are violated. Private portals are now becoming a popular feature of supply chain integration. They are different from public, B-to-B exchanges in the sense that they only connect one type of player in an OEMs supply chain. In suppliers portal for example, all vendors are able to interact with each other via this private exchange. Integrating the value chain is enabling companies to work together in a way never seen before. Some term it as collaborative commerce and see it as the future wave. Global companies no longer compete individually against each other. Now clusters or groups of functionally integrated companies are the ones competing. As illustration, General Motors and a select group of its top suppliers and distributors have integrated inventory, sales and delivery processes. This cluster competes with that of Ford, which has replicated the same model with its vendors.

Ford India Limited has integrated its supply chain by using the most up-to-date version of Fords in-house Common Materials Management System. Materials Planning & Logistics is now completely integrated, ensuring uninterrupted production at optimum inventory and lease cost. The Supply Division supervises the supply chain. It comprises of a Materials Planning & Logistics Department that runs the production chain from raw materials to the delivery of finished cars to the dealer. The Purchase Department executes all commercial functions. The Supply and Technical Assistance Department handles the quality aspects of each car part, right from development to approval. In making the Ikon, Ford India uses close to 460 parts coming from 141 suppliers in the US, Europe, Brazil, South Africa and India. 95 of its suppliers are Indian, and Ford has achieved local content of 75%. Ford India has pursued very aggressive strategy in ensuring that local suppliers meet its quality standards. With the help from an international expert team, it audited 370 of the best Indian suppliers on the basis of commercial track record and quality of these. 80 were selected. These were assisted in tying

up with Fords top global suppliers, who assist them on quality design and manufacturing. There is also close co-operation with Fords global design and quality offices. Ford India helps manage these relationships and provides ongoing training to Indian suppliers. At present, fourfifths of Ford Indias supplies by value come from a tie-up between its Indian and Global suppliers. One-fifth comes from independent local suppliers. Additionally, Ford India has put in a Quality Control System across the supply base, which reports on a monthly basis. It also continues to improve supplier quality through a no. of in-house and external certification initiatives. 80% of suppliers are QS 9000 certified. Ford is now encouraging them to attain ISO 14000 standard so that both its plant and suppliers operations are environmentally responsible. Ford India is also devoting considerable thought and investment to devising durable, re-usable packaging for the shipment of supplies and finished products. At the moment, there is considerable wastage, particularly in overseas shipments.

The Material Planning and Logistics Department releases two schedules to each of its suppliers all over the world. The first is a six-month planning schedule. The other contains confirmed orders for the next 14 days, which must be shipped so that they reach the plant in time. Ford India has simplified the shipment process by outsourcing it. Imports are handled by trading partners who consolidate its parts orders at specified locations in Europe & Brazil and ships them in full container loads according to schedule. By dealing only with trading partner, for consolidated shipments, Ford India has minimized its cross-border documentary and payment procedures. Within India, Chennai based suppliers provide 70% of parts. 13% come from Delhi, 12% from Western India and the rest from Bangalore & Tirupati. Non-Chennai supplies are handled by five lead logistics partners who collect parts from suppliers twice a week, store and consolidate them at specified hubs and ship them to the plant as per production schedules. Ford India also has a computerized track and trace system that follows each supply shipment through transit. Ford picks up parts from some Chennai-based suppliers, but most deliver to the plant themselves at a fixed time everyday. Supply-park suppliers operate just-in-time and move the material on to the line site themselves. What is unique about Ford Indias supply system is that the company picks up parts from outstation suppliers. By doing so, it removes uncertainties in the supply transport process and eliminates production stoppages due to non-arrival of parts.

The automated Plant Vehicle Scheduling or PVS System runs the production process. As each stage of production approaches completion, a trigger is sent to the next stage. There is thus a direct and sequential delivery of parts to the production line. The system also releases a consolidated invoice for each day. Fords lead logistics partners also handle outgoing shipments of ready vehicles, spare parts and knocked-down kits for export. Ford has 34 dealers and 66 sales points across India.

Ford has a global system by which its subsidiaries benchmark the efficiency of their supply and production chains. The system also allows subsidiaries to benchmark themselves against each other. Ford India also evaluates its logistics partners against these parameters. Since 1996, Ford India has moved up considerably in the Ford global ranking. It has, for instance, only two schedule changes for want of parts since April 2000 and no line stoppage since November 2000. It is well below the benchmark on delays in the delivery of finished cars o dealers and on damage in transit. It has controlled premium freight costs fairly successfully by using only trucks for Indian supplies. It is also slowly reducing inventory. Since Ford clocks inventory from the time a part leaves the supplier until the Quality Department approves the finished car, inventory days are still higher than desired. They include the one to two months shipment time for imported parts. Ford India will soon localize power train supplies. This will bring inventory down considerably. Ford India would like to integrate its materials planning and logistics database with those of its suppliers and dealers. In this way, orders and releases will be automated, allowing the production and supply chain to function more seamlessly. Ford India would also like to introduce greater modularity in its vehicles so that the production line can respond more rapidly to its shifts in demand.

QUESTIONS:
1) 3) 4) How do Ford Indias inventory days compare against the industry benchmark? Is the system of lead logistics expensive? Are Ford Indias lead logistics partners essentially suppliers or transporters? Justify your

answer.