Ford Motor Company Supply Chain Strategy

Group 2 IT Stalwarts Balaji Kannan Carlos Salvador Gary Kwong Kathleen Ojo Kurtis Franklin

INFO 609 Fall 2011 California State University, San Bernardino

Table of Contents
TABLE OF CONTENTS..............................................................................2 GENERAL ISSUES....................................................................................3 BACKGROUND........................................................................................4 MAIN STAKEHOLDERS.............................................................................5 THEORY AND CONCEPTS.........................................................................6 SYMPTOMS AND PROBLEMS....................................................................7 CAPABILITIES AND OPPORTUNITIES.........................................................7 ALTERNATIVES.......................................................................................8 EVALUATION CRITERIA:...........................................................................9 EVALUATION AND REVIEW......................................................................9 SOLUTION 1: MAINTAINING STATUS QUO........................................................................9 SOLUTION 2: DIRECT ORDER FROM CUSTOMERS AND DELIVERY THROUGH DEALERSHIPS..........10 BEST SOLUTION & IMPLEMENTATION PLAN............................................11 SOLUTION 3: INTEGRATED SUPPLY CHAIN:......................................................................11 CURRENT STATUS UPDATE....................................................................14 REFERENCES........................................................................................16

General Issues
The business strategy for Ford for a couple of decades was to compete in the market with its own supply chain -- multi-tiered suppliers and dealer networks. With globalization and much more nimble competition from Asian manufacturers, this approach of managing vertical silos was no longer an option. Ford needed a strategy centered on a newer concept that aims to take complexity out of the supply chain, and enhance information progression in multitude of ways. Business could not be viewed as a sequential process similar to an assembly line anymore. Ford's former business model centered on coming up with ideas, studying those ideas, obtaining full approval for the ideas, and understanding how to staff and evaluate the business results. With the paradigm shift to consumer-centric from production-centric, this old model was no longer relevant. The speed to market and responsiveness to consumer needs became the critical factor and success enabler. Ford looked at companies like Dell, with its innovative supply chain model based on "Order to Delivery. How much of Dell's process Ford could mimic successfully and deliver results was unknown. The objectives for Ford were: 1. Drive costs out of supply chain 2. Improve product quality and reduce cycle time 3. Integrate more closely with Tier-1 Suppliers and reduce the complexity of the sourcing organization 4. Make information available to the whole supply chain simultaneously unlike the cascade process that may take days, weeks or even months. 5. Eliminate organizational and procedural redundancies 6. Realize economies of scale in manufacturing and purchasing Ford looked at Information Technology as an enabler of the reengineering and business transformation projects. IT became the main tool that helped Ford Motor Company drive their transformation throughout the enterprise. The transformation was necessary as Ford faced a major challenge in its existing supply network. Suppliers were picked on cost to Ford with little or no concern for total supply chain cost. Complexity of interactions was very high, and the number of tiers and partners was staggering. The time to market for the products was very high because of complexity in communication and decision-making. Ford Motor Company had a 100-year inertia to overcome. As Ford Motor Company grew in size, the "why change a working model" attitude lead to a buildup of mediocre practices and inefficiency. This inertia led to:

Decreasing market share with increased competition from European and Asian car manufacturers Transforming from a linear, top down organization to nimble, net-ready organization Mounting cost pressures as margins were becoming lower More demanding customers as Ford moved away from customers with its heavy organizational structure Fractured or fragmented automotive market place with myriad of suppliers Multi-tiered supplier base leading to inefficiencies in procurement Focus on company profitability and not supply chain profitability Lack of accurate demand forecasting Competing dealerships within a local region Fractured vision in the organization and conflicting objectives

Background
If Ford had to live up to its founder's vision of providing the customer with the right product at the right time and at the right price then it had to radically change its strategy and revive its legacy as a great company. The turnaround was tough and the senior executives of Ford Motor Company realized that. In 1995, a new vision "Ford 2000" was created. Its goal was to dramatically reduce costs by reengineering and globalizing the corporate organizations and processes. Consolidation of myriad product development centers into five Vehicle Centers was a means of achieving this goal. As a part of this initiative Ford realized that in order to gain benefits from its suppliers, it should share its knowledge with its suppliers, provide suppliers with tools and technology to enable them improve supply quality at a lower price. The fragmented automotive supply market needed to be unified to achieve this goal. In 1997, Ford initiated the Automotive Exchange along with its competitors General Motors and Chrysler. Unlike Ford of the past, the new Ford shared information to enhance the overall supply chain profitability by providing those key supply chain levers of 'aggregation' and 'economies of scale' to its suppliers. The Automotive Exchange was possible with the growing Internet capabilities and Ford embraced the technology successfully. It used the web to improve its communication with suppliers in real time, increase healthy competition among suppliers and directly having an impact in the lead time for vehicles to reach the market.

In 1999, when Jac Nasser took over as CEO, Ford progressed beyond cost reduction into a consumer centric organization. The focus shifted to increasing shareholder value and increase customer responsiveness. It is then Ford looked at best practices in the supply chain world and the Dell strategy seemed promising. It was a completely different industry with noncomparable products and service. It was not an easy path for Ford but there were forerunners in the automotive industry who have achieved the flexibility and responsiveness without compromising on containing costs. Toyota and Honda were successful contemporaries with streamlined processes, reduced inventories and a highly focused consumer orientation. The second major issue that Ford had was managing the cultural shift. The "One Ford" vision within the company and with its suppliers was the target. Downsizing the workforce, reducing facilities without compromising on responsiveness, retraining employees, suppliers and dealers to the new system was critical to the mission's success. Ford achieved most of this by leveraging on the IT infrastructure, the Ford Production System and sharing knowledge with its suppliers. At one point, in 1997, Ford had close to 350,000 employees worldwide. In 2010, Ford has been able to achieve the financial targets with 164,000 employees worldwide or close to 50% reduction in workforce. 200 plants were reduced to 70. The number of brands was cut down and newer models reached the market sooner than before.

Main Stakeholders
The key stakeholders in the Ford 2000 initiative were the Ford stockholders, Ford Executives, Ford Suppliers, Ford Customers, Ford Employees, Dealers and their employees, and Competitors.

Theory and Concepts

Old Business Model: Maintain multiple but disconnected suppliers, sequential decision-making process [come up with ideas, study those ideas, get full approval of ideas, make staffing decisions based on results expected]. Production centric. It was a push system. New Business Model: Customer centric. Pull System. Speed to market, responsiveness to customer Ford had several key trends that they wanted to follow such as: 1. Global Market 2. Ford 2000 3. The need to improve quality and reduce cycle times while also lowering the cost of developing and building cars. 4. Reducing OTD from 60 days to less than 15 5. Fords Existing Supply Chain and customer responsiveness initiatives Values: 1. Improve quality 2. Maintain a hold on to the global market

3. Reduce Cost 4. Increase Shareholder Value 5. Provide expertise to supply base

Symptoms and Problems

An automobile consists of some 20,000 parts. In order to source all of these parts, Ford had developed relationships with thousands of suppliers since its beginnings. Ford had too many suppliers that were picked primarily on cost, rather than overall cost within the supply chain. This created a large complex network of relationships that Ford had to constantly deal with. The tier-one suppliers were supplied with IT-enabled cost savings techniques such as just-in-time inventory, total quality management, and statistical process control. However, these suppliers were not able to bolster these capabilities and invest in more IT like Ford because of costs. These IT capabilities were not adoptable by some of the lower tier suppliers because they lacked IT sophistication. Since an automobile is a lot more expensive than a computer, implementing Dells model of virtual integration will be a challenge. It is doubtful that Ford customers would order a car online without driving it first. Also, since the automobile has much more parts than a computer, reducing the number of suppliers will be difficult and the building of the vehicles will require more business systems. In adopting Dells virtual integration, Ford wanted to become closer to the consumer by eliminating the middlemen. However, Ford had bottlenecks within its supply chain that caused the order to delivery date of a vehicle to be anywhere from 45 to 65 days.

Capabilities and Opportunities

To overcome this challenge, Ford reduced the number of suppliers it dealt with directly. It provided expertise to its tier 1 suppliers to improve their operations using Just In-Time, Total Quality Management, and Statistical Process Control. As Ford moved to a more IT-capable buyer, the IT capability of suppliers became a major limitation with their reduced ability to move quickly with costly IT investments. This dichotomy between Ford as a buyer and their top suppliers being unable to keep up technologically was a fundamental difference over that of Dell. The supply base was more complex than Dell's. Additionally, purchasing happened at Ford was central and almost an organization unto itself, where Dells purchasing worked very closely with product development.

The Ford production system was based on a multiyear project that drew on internal and external expertise. The key transformation was moving from a push system to a pull system with synchronized production, continuous flow and process stability. Ford defined a "Synchronous Material Flow (SMF)" that focused on streamlined material flow and lean manufacturing concepts aimed at improving flexibility. Another goal was reducing order to delivery (OTD) time from 60 days to 15 days. Improvements in the areas of demand forecasting, safety inventory of 15 days of vehicles in each assembly plant, regional mixing centers to fasttrack transportation and delivery and order amendment process. The vision was to create a lean, flexible and predictable process.

Alternatives
Alternatives Status Quo Keep its existing supply chain Pro Least disruption to the business No cost of reorganization Cons Unsustainable Business will cease to exist

Direct order from customers and delivery through dealerships

More responsive to customer Vertical integration of layers between customer and Ford Dealer network Centralized control Potential for increased revenue

Integrated Supply Chain

Bring suppliers in earlier in the product development cycle Increased supply chain profitability Improved time to market

Expensive Discretionary product purchase without physical product Large integration efforts Company will grow larger, more layers Potential for decreased revenue Restructuring Plant closures and Layoffs Divesting of noncore areas Increased investment in technology infrastructure

Evaluation Criteria:
In order to compare the alternative solutions, a set of decision criteria that covers the entire supply chain operation is necessary. The decision criteria that we used to evaluate the solutions are: 1. 2. 3. 4. 5. 6. 7. Meet a high service level Improve capacity of suppliers Decrease lead-time Handle a variety of products Respond to wide ranges of quantities demanded Respond to changes in order made Price

Evaluation and Review

Solution 1: Maintaining Status Quo
Maintaining the current system was not a viable solution for Ford Motor Company. With the organizations inefficiencies and the business model not tuned to address the changed market landscape, it was not possible for Ford to address the challenges adequately. 9

Criteria High Service level

Result Unattainable

Improve capacity of suppliers

Unattainable

Decrease lead time

Unattainable

Handle a variety of products

Unattainable

Respond to quantity demanded Respond to changes in order made Price

Unattainable

Unattainable

Unattainable

Reason The organization structure and the current practices does not allow Ford to maintain high service level. The focus of Ford was to improve its bottom line. Low cost was the primary driver for the suppliers and volumes were dwindling with decreased market share Goal of 15 days to delivery was not attainable mainly due to processes and communication methods followed. Product development was fragmented and handling variety was prohibitive due to costs. Visibility of customer requirement was not complete. Push system with inventory based order fulfillment. Customer requirement visibility was not complete Push system with inventory based order fulfillment. Customer requirement visibility was not complete. Margins were already low and with unstructured production and order fulfillment system it is was possible.

Solution 2: Direct order from customers and delivery through dealerships

A solution with a high customer focus would have addressed responsiveness but with dealer organizations not buying-in to the Ford vision and motto would be detrimental to the overall plan and hence the solution will not be viable. Supplier or upstream components of the supply chain was also not streamlined and hence Ford could not achieve the momentum it needed if this solution was implemented.

Criteria

Result 10

Reason

High Service level

Maybe

Improve capacity of suppliers Decrease lead time Handle a variety of products Respond to quantity demanded

Unattainable Unattainable Unattainable

Yes

Respond to changes in order made Price

Yes Unattainable

Direct customer order provides high visibility to Ford. But dealer involvement is minimal and they hold no stake in the solution. Supplier processes and volume constraints restrict Ford from achieving this. Supplier processes and volume constraints restrict Ford from achieving this. The product development function and the facilities were still fragmented and not tuned to address variety. Ford's production would follow customer order. Due to inefficiencies in the upstream and downstream side in the supply chain, this response will not lead to increased revenues This would have been at an increased cost to the customer Ford's responsiveness can only be met with increased costs in this model as cost reduction is not possible with inefficient supplier and dealer organizations. Therefore increase in price would have lead to decreased customer orders

Best Solution & Implementation Plan

Solution 3: Integrated Supply Chain:
The best solution for Ford Motor Company is to implement an integrated supply chain that allows it to take advantage of new technologies while reducing costs. By better planning their use of raw materials, they can avoid over stocks and under stocking of vehicles. Also, but simplifying the supply chain and integrating the purchasing process with the development of new vehicles, better decisions can be made regarding parts sourcing. A fully integrated supply chain met Ford's strategic goals. Ford's vision of 'One Ford' with the board approved "Four Point Plan" was achievable with this solution.

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Four point plan balance cost structure with revenue and market share; reduced time to market on cars that customers want and value; financing the plan and rebuilding balance sheet; working together to leverage resources around the world

Ford's new competitive strategy of high responsiveness to customer and highly efficient internal system aimed at cost containment will address the four point plan adequately as outlined below Criteria High Service level Result Yes Reason High order visibility between dealer and Ford. The lead time reduction from 60 to 14 days allows Ford to maintain a high service level. Ford One Network practices streamlined dealer processes and curtailed competition among Ford Dealers and focused competition with dealers of other car manufacturers

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Improve capacity of suppliers

Yes

A centralized logistical network through Automotive Exchange and specific initiatives with key suppliers such as Penske. Streamlined supplier and carrier operation with improved transportation network. Penske trained more than 1500 tier-2 and tier-3 suppliers in streamlining. Penske became Ford's strategic partner in supply chain implementation Real time accountability procedures combined with advanced logistics management technologies provide visibility to Ford
Ford Production System (FPS) Consolidation of production facilities to 5 vehicle centers Process reengineering initiatives with Ford and with suppliers and dealer network Decreased lead times with streamlined supplier network Reduced inefficiencies with FPS Flexibility introduced in the system with FPS High order visibility across the entire supply chain network Reduced lead times from 60 to 15 days allowed lower inventory

Decrease lead time

Yes

Handle a variety of products

Yes

Respond to quantity demanded

Yes

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Respond to changes in order made

Yes

Price

Yes

Synchronized production capability due to FPS allowed Ford to quickly revise production schedules or switch from inventory to address dealer and customer needs. Reduced lead time strategy and supplier alignment. Lower inventory costs Improved process efficiencies leading to lower cost Customer satisfaction leading to higher margins

The various elements of the integrated supply chain: Network Design Optimization, Carrier and Premium Freight Management, Information System and Technology Integration, better Finance Management benefits, helped Ford achieve the goals of the four-point plan.

Current Status Update

Ford Motor Company delivered solid results for third quarter of 2011 despite uncertain business environment and weakening global economy. According to Alan Mulally, the President and CEO of Ford, they achieved this by focusing on developing outstanding products with quality, fuel efficiency, safety, smart design and value. Sales were up 14% from a year ago and the market share increased in United States and Europe. The year 2010 ended with $1.66 billion in net earnings and $128 Billion in total revenue. Much of the turnaround since 2007 has come about due to the change in business strategy and transformation that was seeded more than a decade ago. Jim Yost, the then Chief Information Officer for Ford said that the transformation from the old view of a manufacturing company to a consumer-oriented company was essential. Fords goal was to provide products and services that consumers want, when they want them, the way they want them, and at an affordable price. Ford was not far off from Henry Ford's initial goals when he began Ford Motor Company and started assembling Model-Ts. In his days, Ford wanted to deliver affordable, personalized means of transport to consumers. As Ford Motor Company grew to about 164,000 employees over 70 plants and across 200 countries, it became harder and more complex to keep to those ideals.

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Since the Ford 2000 initiative, Ford has had a second restructuring plan called The Way Forward that was announced in 2006. The company reduced its size, which included the elimination of 30,000 factory jobs, as well as the sale and discontinuation of many of their brands. The consolidation of brands began in 2007 with the sale of Aston Martin, continued in 2008 with the sales of Jaguar and Land Rover, and completed with the 2010 announcement that the Mercury brand would be discontinued after over 70 years of production. The divestment of these properties brought additional resources to Ford that allowed them to expand with new products such as hybrid vehicles, new compact cars based on global platforms, and a revitalization of the Lincoln brand.

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References
Penske. Ford Motor Company: Six Sigma Initiatives. Retrieved November 4, 2011. Article Stable URL: http://www.penskelogistics.com/casestudies/ford2.html Ford Motors. (2010). Form 10-K (Annual Report). Retrieved November 4, 2011 from http://www.ford.com. Ford Motors (1997). Ford Manufacturing Supply Chain - Video. You Tube. Article Stable URL: http://www.youtube.com/watch?v=qyO9QSo0FjU

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