Ford Motor Company: Supply Chain Strategy

Teri Takai, the director of supply chain systems, had set aside this time on her calendar to contemplate recommendations to senior executives. The question theyd asked was widely agreed to be extremely important to Fords future: ow should the company use emerging information technologies !i.e. "nternet technologies# and ideas from new high$ tech industries to change the way it interacted with suppliers% &embers of her team had different views on the sub'ect. (ome argued that the new technology made it inevitable that entirely new business models would prevail and that Ford needed to radically redesign its supply chain and other activities or risk being left behind. This group favored )virtual integration,* modeling the Ford supply chain on that of companies, such as +ell, which had aggressively used technology to reduce working capital and exposure to inventory obsolescence. ,roponents of this approach argued that although the auto business was very complex both for historical reasons and because of the inherent complexity of the automotive product, there was no reason such business models could not provide a conceptual blueprint for what Ford should attempt. -nother group was more cautious, believing that the difference between the auto business and relatively newer businesses such as computer manufacturing were important and substantive. (ome noted, for example, that relative to +ell the Ford supplier network had many more layers and many more companies and that Fords purchasing organi.ation historically had played a more prominent and independent role than had +ells. These difference and others posed complications when examined closely, and it was difficult to determine the appropriate and feasible scope for redesign of the process. -s she read through the documents provided by her team, she thought about chief executive officer !/01# 2ac 3assers recent companywide emphasis on shareholder value and customer responsiveness. "t was widely acknowledged that +ell had delivered on those dimensions, but would the same methods deliver results for Ford%

Company and Industry Background

4ased in +earborn, &ichigan, the Ford &otor /ompany was the second largest industrial corporation in the world, with revenues of more than 566 billion and about 789,999 employees. 1perations spanned :99 countries. -lthough ford obtained significant revenues and profits from its financial services subsidiaries, the companys core business had remained the design and manufacture of automobiles for sale on the consumer market. (ince enry Ford had incorporated in 5;97, the company had produced over :<9 million vehicles. The auto industry had grown much more competitive over the last two decades. (ince the 5;89s, the 4ig Three =.(. automakers>?eneral motors !?&#, Ford, and /hrysler>

had seen their home markets encroached upon by the expansion of foreign$based auto manufactures such as Toyota and onda. The industry was also facing increasing overcapacity !estimated at :9 million vehicles# as developing and industriali.ed nations, recogni.ing the wealth and 'ob$producing effects of automobile manufacturing, encouraged development and expansion of their own export$oriented auto industries. -lthough manufactures varied in their degree of market presence in different geographic regions, the battle for advantage in the industry was fast becoming global. Faced with the need to continue to improve quality and reduce cycle times while dramatically lowering the costs of developing and building cars, Ford and the other large automakers were looking for ways to take advantage of their si.e and global presence. 1ne element of the effort to achieve advantage in si.e and scale was movement toward industry consolidation. "n the summer of 5;;@, /hrysler merged with +aimler$4en. to form a more global automaker. "n early 5;;;, Ford announced that it would acquire (wedens Aolvo, and there were rumors of other deals in the works. ,reviously, in 5;;B, Ford had embarked on an ambitious restructuring plan called Ford :999, which included merging its 3orth -merican, 0uropean, and international automotive operations into a single global organi.ation. Ford :999 called for dramatic cost reductions to be obtained by reengineering and globali.ing corporate organi.ations and processes. ,roduct development activities were consolidated into five Aehicle /enters !A/s#, each responsible for the development of vehicles in a particular consumer market segment !one A/ was in 0urope#. 4y making processes and products globally common, Ford intended to eliminate organi.ational and process redundancies and reali.e huge economies of scale in manufacturing and purchasing. &a'or reengineering pro'ects were initiated around ma'or company processes such as 1rder to +elivery !1T+# and Ford ,roduction (ystem !F,(#, with goals such as reducing 1T+ time from more than <9 days to less than 5B. Fords new global approach required that technology be employed to overcome the constraints usually imposed by geography on information flow. Teams on different continents needed to be able to work together as if they were in the same building. Furthermore, in virtually every reengineering pro'ect, information technology !"T# had emerged as a critical enabler. The link between reengineering success and the companys "T groups was made explicit in the Ford :999 restructuring: "T was placed within the process reengineering organi.ation. "n the supply chain area, there was general agreement that "T also could be deployed to dramatically enhance material flows and reduce inventories, substituting information for inventory, as the expression went. -s Ford :999 unfolded, the "nternet revolution unfolded in parallel, creating new possibilities for reengineering processes within and between enterprises. Ford launched a public "nternet site in mid$5;;BC by mid$5;;8 the number of visits to the site had reached more than 5 million per day. - companywide Intranet was launched in mid$5;;<, and by 2anuary 5;;8 Ford had in place a business$to$business !4:4# capability through which the "ntranet could be extended in a secure manner beyond company boundaries into an Extranet potentially connecting Ford with its suppliers. Ford teamed with /hrysler and

?eneral &otors to work on the -utomotive 3etwork 0xchange !-3D#, which aimed to create consistency in technology standards and processes in the supplier network so that suppliers, already pressed to lower costs, would not have to manage different means of interaction with each automaker. 1n 2anuary 5, 5;;;, 2ac 3asser took over the /01 'ob from -lex Trotman. 3asser had been Trotmans second in command throughout the Ford :999 rollout and had a long$ standing reputation as tough$minded cost cutter and a capable leader. 0ven before taking the helm, he had begun to focus Ford senior management on shareholder value. "n the period 5;;B$5;;; Ford had seen companies with fewer physical assets and much lower revenues and profits achieve market capitali.ation well in excess of Fords. /orporate staff members began to study models such as /isco and +ell to try to understand whether Ford could produce shareholder value in the ways these newer companies had. -s the end of 5;;@ approached, Ford had amassed profits of <.; billion, employees en'oyed record profit sharing, and return on sales !7.; percent in 5;;8# was trending solidly upward. The company was the world leader in trucks, it had taken over the =.(. industry lead in profit per vehicle !E5,889# from /hrysler, and it was the most improved automaker on the 5;;8 2.+. ,ower "nitial Fuality (tudy !in fourth place overall behind onda, Toyota and 3issan#.

Fords Existing Supply Chain and Customer Responsiveness Initiatives

Ford had a number of initiatives under way that were aimed at positioning the company favorably for success in integrating with the extending enterprise that also included suppliers and customers. "n addition, there were historical factors that would have to be taken into account in any virtual integration strategy. Fords Existing Supply Base The existing supply base was in many respects a product of history. -s the company had grown over the years, so had the supply base, to the point where in the where in the late 5;@9s there were several thousand suppliers of production materials in a complex network of business relationships. (uppliers were picked primarily on the basis of cost, and little regard was given to overall supply chain costs, including the complexity of dealing with such a large network of suppliers. 4eginning in the early 5;;9s, Ford had begun to try actively to decrease the number of suppliers the company dealt with directly. Gather than fostering strong price competition among suppliers for individual components, there was a shift toward longer$term relationships with a subset of very capable suppliers who would provide entire vehicle subsystems. These )tier 5* suppliers would manage relationships with a larger base of suppliers of components of subsystems$tier : and below suppliers. Ford made its expertise available to assist suppliers in improving their operations through a range of techniques, including 'ust$in$time !2"T# inventory, total quality management !TF&#, and

statistical process control !(,/#. "n exchange for the closer relationships and long$term commitments, Ford expected yearly price reductions from suppliers. Hhile first tier suppliers had fairly well developed "T capabilities !many interacted with Ford via electronic data interchange links#, they were not able to invest in new technologies at the rate Ford itself could. -lso, "T maturity !understanding and modernity of technology# decreased rapidly in lower tiers of the supply chain. -s more cautious members of Takais staff had often observed, this supply base was different in its nature and complexity from +ells supply base. -nother ma'or difference between +ell and Ford was organi.ational. -t +ell, purchasing activities reported into the product development organi.ation. -t Ford, purchasing was organi.ationally independent of product development and had been>historically and up to the present>a powerful force within the company. 4ecause of the sheer volume of materials and services Ford purchased, a very slim reduction in purchasing cost could result in very significant savings. /onsequently, purchasing was involved closely in nearly every product decision. 0ngineers were counseled to avoid discussing prices in interactions with suppliers, as price negotiation was the sole province of purchasing agents. ow this might work in a more virtually integrated system was unclear. Ford roduction System The Ford :999 initiative produced five ma'or, corporationwide reengineering pro'ects. 1ne was Ford ,roduction (ystem. &odeled roughly on the Toyota ,roduction (ystem, F,( involved a multiyear pro'ect that drew on internal and external expertise worldwide. F,( was an integrated system aimed at making Ford manufacturing operations leaner, more responsive, and more efficient. "t focused on key attributes of the production process, aspiring to level production and move to a more pull$based system, with synchroni.ed production, continuous flow, and stability throughout the process. 1ne important part of F,( was (ynchronous &aterial Flow !(&F#, which Ford defined as )a process or system that produces a continuous flow of material and products driven by a fixed, sequenced, and leveled vehicle schedule, utili.ing flexibility and lean manufacturing concepts.* 1ne key to (&F was "n$Iine Aehicle (equencing !"IA(#, a system that used vehicle in$process storage devices !such as banks and -(G(s# and computer software to assure that vehicles were assembled in order sequence. 4y assuring assembly in order sequence, Ford could tell suppliers exactly when and where certain components would be needed days in advance, and buffer stocks thus could be reduced dramatically. "f such sequenced assembly could be kept level and if it was well forecasted, the benefits would be felt throughout the supply chain. The vision was of trucks constantly in motion throughout their lives, in continuous circuits between suppliers and Ford, stopping only to refuel or change drivers, feeding a process that worked like a finely tuned and smoothly running precision instrument. !rder to "elivery -nother key process Ford reengineering initiative was 1rder to +elivery. The purpose of the 1T+ pro'ect was to reduce to 5B days the time from a customers order to delivery of

the finished product>a significant reduction from the present performance of 6B to <B days. Ford took a holistic approach to the reengineering. ,ilot studies in 5;;8 and 5;;@ identified bottlenecks throughout Fords supply chain, including its marketing, material planning, vehicle production, and transportation processes. Fords approach to implementing an improved 1T+ process relied on several elements: !5# ongoing forecasting of customer demand from dealers>before 1T+ Ford had never officially involved dealers in forecasting demand, !:# a minimum of 5B days of vehicles in each assembly plants order bank to increase manufacturing stability>gaps in the order bank are filled with )suggested* dealer orders based on historical buying patterns, !7# regional )mixing centers* that optimi.e schedules and deliveries of finished vehicles via rail transportation, and !6# a robust order amendment process to allow vehicles to be amended for minor color and trim variations without the need to submit new orders. The 1T+ vision was to create a lean, flexible, and predictable process that harmoni.ed the efforts of all of Fords components to enable it to provide consumers with right product in the right place at the right time. Ford believed that success in achieving this vision would provide better quality, higher customer satisfaction, improved customer selection, better plant productivity, stability for its supply base, and lower dealer and company costs. Ford Retail #et$ork 1n 2uly 5, 5;;@, Ford launched the first of its Ford Getail 3etwork !FG3# ventures in Tulsa, 1klahoma, under the newly formed Ford "nvestment 0nterprises /ompany !F"0/o#. Ford "nvestment 0nterprises was formed to take advantage of the changing face of retail vehicle distribution system in 3orth -merica. F"0/o had two primary goals: !5# to be a test bed for best practices in retail distribution and drive those practices throughout the dealer network and !:# to create an alternative distribution channel to compete with new, publicly owned retail chains such as -uto3ation. 1wnership in the FG3 varied from market to marketC in some Ford would be the ma'ority owner, and in others Ford would be the minority owner. "n Gochester, 3ew Jork, Ford was partnering with Gepublic, another large, publicly owned corporation. 1ne of the principles of the FG3 was to buy all the Ford dealers in a local market so that the dealers were in competition with the )real* competition !i.e., ?&, Toyota, onda# rather than with each other. The overriding goal was to give consumers the highest level of treatment and create an experience they would want to come back to again and again. (howrooms would have a consistent look on the outside, with customi.ed interiors for the different Ford brands: Ford, &ercury, Iincoln, and 2aguar. The number of showrooms would be consolidated to focus resources on creating a superior selling experience, while the number of service outlets would increase to be closer to customer population centers. Ford expected personnel and advertising cost savings as well as inventory efficiencies due to economies of scale and greater use of the "nternet. Ford also believed that the FG3 would provide an opportunity to increase business not 'ust in new and used vehicles, but also in parts and services, body shop operations and Ford /redit.

"ells Integrated Supply Chain

(ee )The ,ower of Airtual "ntegration: -n "nterview with +ell /omputers &ichael +ell,* arvard 4usiness review, &arch$-pril 5;;@ pp. 8:$@6, which is included in this book.

%he "ecision
Takai perused the neatly prepared documents that had been provided by her staff. There was a broad$based comparison between +ell and Ford on many important dimensions !see 0xhibits 5#. Exhi&it ' "ell and Ford Compared %raditional Model (uppliers &anufacturer +istribution /hannel order (uppliers +ell delivery order /ustomers delivery /ustomers

"irect Model

Airtual integration would require changes in fundamental operationsC some of the changes, framed as a shift from )push* to ) pull* processes, were identified in another document !0xhibit :#. Hhatever she decided, she would have to do it soon. &eetings were already scheduled with the vice president of quality and process leadership, and from there the recommendations would move upward, eventually reaching 3asser.

Comparative Metrics (latest )iscal year*

Ford "ell +utomotive Financial Services 0mployees 5<,599 7<7,@;: -ssets !Emillions# 6,799 @B,599 5;6,99 Gevenue !Emillions# 5:,799 5::,;99 79,899 3et income !Emillions# ;66 6,8999 :,:99 Geturn on sales 8.8K 7.@K 8.:K /ash !Emillions# 7:9 56,B99 :,:99 &anufacturing facilities 7 !Texas, "reland, &alaysia# 5@9!in 3orth and (outh -merica, 0urope, -sia, -ustralia# &arket capitali.ation !Emillions# B@,6<; <<,@@< ,rice$earnings ratio <9 59L Byr average revenue growth BBK per yr <K per yr Byr average stock price growth 577K per yr 77.6K per yr

Exhi&it '

"ell and Ford Compared (concluded* Ford

"ell rocesses (uppliers own inventory until it is used in production (uppliers maintain nearby ship pointsC delivery time 5B minutes to 5 hour 0xternal logistics supplier used to manage inbound supply chain /ustomers frequently steered to ,/s with high availability to balance supply and demand +emand forecasting is critical>changes are shared immediately within +ell -nd with supply base +emand pull throughout value chain>)information for inventory* substitution Focused on strategic partnerships: suppliers down from :99 to 68 /omplexity is low: B9 components, @ M 59 key, 599 permutations

Exhi&it ' "ell and Ford Compared (continued*

Enterprise Model Comparison +ell 1perating ,rinciples /ustomer "ntimacy Ford 4reakthrough 1b'ectivesOPey "nitiatives +emand to +elivery Ford Getail 3etwork Ford ,roduction (ystem 1rder to +elivery (upply /hain &gmt. Ieadership 1rder to +elivery Ford ,roduct +evelopment (ystem Fixed to Aariable /ost (hift &odular -ssemble )0xtended 0nterprise*

+emand ,ull Aelocity

Airtual "ntegration

/ustomers /ustomers order delivery 1T + (ales GN+ -ssembly +T+ 1utbound Iogistics /ommodity (uppliers /omponent (uppliers ,lanO(ite 1perations "nbound Iogistics (uppliers (upply chain Ieadership F,+( 4ill of &aterial 1rder &gmt Ford Getail 3etwork

+ealers

F, ( F, ( /F1,

Exhi&it , Moving )rom ush to ull rocess +esign +esign strategy Aehicle combinations ,ricing strategy Aehicle purchase "ncentives /apacity planning ush ,lease everyone &ore is better 4udget$driven igher &ultiple materialO capacity constraints, +riven by program 4udget &aximi.e pro$ ductionC make whatever you can build ull &ainstream customer wants minimal &arket$driven Iower &arket$driven and !no constraints F,AO /,AL Q 59K for vehicle, Q5B for components (chedule from customer$driven order bank, build to schedule

&arketing

&anufacturing and supply

(chedule and build

+ealer network

+ealer ordering

1rders based on 1rders based on -llocations and customer demand /apacity constraints Ionger !<9 Q days# (horter !5B dys or

1rder to delivery times less# "nventory +ealership model

igh with low turnover "ndependent dealerships, negotiations with company

Iow with rapid turnover /ompany$controlled dealerships !Ford Getail 3etwork#