Ford Motor Company is facing a major decision with regards to its supply chain strategy moving forward. The underlying question is, “how should the company use emerging information technologies and ideas from new high-tech industries to change the way it interacted with suppliers? ”. Within Ford, there are 2 major, and opposing views.
First, there are those that feel strongly that Ford should follow Dell’s model of “virtual integration” (reaping the benefits of vertical integration without vertically integrating) – using the model to communicate effectively with its suppliers, achieve and focus on inventory velocity, and allow its component suppliers to specialize. The other group believed that the Dell model would not work at Ford, mainly because the two industries were too different, particularly, the automobile industry was too complex.
The following are the major issues which must be addressed if the Dell model were ever to be feasible for Ford. Ford’s Supply Base The traditionalist group above was correct, Ford’s supply chain is very complex. Ford had “several thousand” suppliers, which was extremely difficult to manage. Ford tried to simplify its supply chain by reducing the number of suppliers, and create relationships with a group of capable Tier 1 suppliers. One key issue is the fact that Ford now has no actual connection to its Tier 2 suppliers and beyond (Exhibit 1).
Ford deals directly with its Tier 1 components suppliers, and those Tier 1 suppliers are the ones that deal with the Tier 2 and even Tier 3 suppliers. If for some reason, something were to happen to one of Ford’s Tier 1 suppliers, Ford would in turn lose the Tier 2 suppliers that are associated. To have a structure like this can be very risky, and something Ford must attempt to address in the future. Purchasing at Ford Purchasing at Ford is completely independent of Product Development, very different to Dell, where these two departments are very closely connected.
This can make it very difficult for Purchasing to maintain low inventories if they are not fully aware of what components new vehicles will be using in the future. A key to any manufacturing company is to standardize as many components as possible without compromising customer appeal. If purchasing knows which components will be common in the future, they can use economies of scale to reduce costs – and as mentioned in the case, any cost reduction that Purchasing is able to achieve can translate into very significant savings. Ford will never reach the level of Dell in this particular area.
In the computer industry, there are many common components from one workstation to the next, which makes it very easy on Purchasing to achieve its goals. In the automobile industry, Ford is dealing with thousands of components that may differ from one vehicle to the next. Ford Dealer Forecasting Ford has taken some positive steps in its implementation of the Ford 2000 initiative, a sequence of 5 corporation-wide reengineering projects. Ford Production System (FPS) gears Ford’s manufacturing operations toward leaner, more responsive and more efficient results.
This involves Synchronous Material Flow (SMF), a process focusing on continuous flow of material driven by a fixed vehicle schedule. Order to Delivery (OTD) was also an important process, as it aimed to reduce delivery of a customer’s order from 45-65 days to a mere 15 days. The implementation of OTD is where the issue lies. Ford is relying on dealers to do something they have never done, to forecast customer demand. With SMF, 15 days worth of vehicles had to be in each plant’s order bank to increase manufacturing stability.
The accuracy of Ford’s forecasting is an integral step in being able to maintain the continuous flow of materials, and very important to Ford’s overall supply chain strategy. Can dealers really be trusted to do this, or might there be another alternative? Qualitative Analysis Since Henry Ford founded the company in 1903, it grew to be the second largest industrial corporation in the world and has produced over 260 million vehicles. With this type of history, it can often be difficult for a company to make radical changes that will provide the competitive edge in the future.
Ford is on the right track with its implementation of the Ford 2000 restructuring plan. Ford needed to implement a globalization strategy, and needed to decide whether they wanted to adopt Dell’s supply chain strategy. My decision is to follow Dell’s model where it makes sense for Ford, not blindly in all possible areas. Advantages of following Dell’s model are as follows: * Implementation of better technology will not only setup Ford for the future, but also its supplier base. Long-lasting partnerships can be built.
* Efficient and effective communication and coordination will be created. * Improved control over suppliers, ability to monitor performance. * Lower inventories through better forecasting. * Inventory velocity – concept to be introduced and followed by Ford. Some potential disadvantages of the implementation of Dell’s model: * New costs will be incurred in development of new web-based systems, also time spent in training Ford’s supplier base. * Difficulties of implementing a true “build to order” model in the automotive industry.
* Implication for information sharing between Ford and its suppliers – trust issues? * Will the new supply chain be able to overcome the lack of technology within its supplier base? Quantitative Analysis There are some key comparative metrics that should be analyzed when comparing Ford to Dell (from Ford Case, Exhibit 1). Dell’s revenue to assets ratio is 2. 9, while Ford’s is 1. 4 Dell’s return on sales is 7. 7% while Ford’s is 3. 8%. These two metrics represent the manufacturing agility Michael Dell was talking about.
The way operations currently are, it is impossible for Ford to achieve the 55% 5-year average revenue growth Dell has achieved. Dell is a more agile business, but they are operating in a more agile industry. Ford could do everything right and implement all of Dell’s processes, but they would still not be able to match these impressive metrics. Alternatives and Recommendation Does Ford want to take a risk and adopt Dell’s Supply Chain Strategy or does it want to remain with its traditional approach. Both can be advantageous, but which has the most potential?
Ford should indeed implement Dell’s approach, as it’s going to address many of the issues already discussed and give it the opportunity to be an industry leader in the future. Creating a web-based communication system (Ford-Comm) for Ford and its suppliers is an important step. This will allow Ford to segment, manage, rank and even cut out its technologically challenged suppliers if needed. Ford should include its Tier 2 and Tier 3 suppliers within this system so as to create a link between those suppliers and Ford, also allowing Ford to monitor their performance.
Although there will be a cost to Ford in implementing this system, it helps the suppliers that do not have the financial means to create something similar, as all they would need is the time and dedication. Ford could post access to its vehicle schedule and its bills of material – limited by what each supplier’s production capabilities are. This way, suppliers can plan ahead by already knowing what will be required in the future and allow Ford to “build to order”. From there, many options would be available to suppliers, such as maintain pricing, submitting pricing on new components, etc.
See Ford-Comm information flow (Exhibit 2). Ford should restructure its Purchasing department to work closely together with the Product Development team. It’s important to increase efficiencies by ordering in larger batch sizes, standardizing components, and reducing product costs along the way. It is imperative for Ford to standardize as many components as possible as it will contribute to significant savings along the way. The new IT infrastructure may also aid on having different suppliers “bid” on contracts for these standard components.
Forecasting is a large potential problem that Ford could be facing as it has never had to take on this type of task before. Ford should look at the alternative of outsourcing this task to a large company with experience in automotive. This company would work closely with the network of dealers to provide accurate forecasts which Ford can use to maintain the continuous flow of materials it so desires. Ford’s new Ford-Comm system would also be taken advantage of here, as all forecasts would be linked to future demand and would be used in Purchasing. Implementation
The first step to commence the improvement of Ford’s supply chain operations is to properly implement the new Ford-Comm system that facilitates communication between Ford and its suppliers – see Implementation Schedule (Exhibit 3). The second step is to correct the purchasing infrastructure – the department needs to work hand in hand with the product development team. A new position will need to be created to be the primary liaison between the two departments (Timing – 1 month after Ford-Comm implementation). Thirdly, Ford will need to seek out and hire a third party, forecasting firm.
A new internal forecasting team will need to be hired to work very closely with this firm to guide and monitor results (Timing – 2 months after Ford-Comm implementation). After 2-3 years, this team may even be able to take on this task on its own, and the third party firm will no longer be required. Monitor and Control The following Key Performance Indicators will be used to evaluate each of the three issues that Ford attempts to address: Ford Supplier Evaluation: The new system will involve tracking tools to track supplier performance, to segment supplier groups, and to pinpoint non-conforming suppliers.
This will allow Ford to have great control over its supplier-base. Purchasing Team: Tracking the number of standardized products across all product lines. Measure the number of components used in 5+ vehicles as a percentage of all components. Segment into different component types. This allows Ford to track increases in the number of standard components, as this translates into savings for the company. Forecasting Accuracy: Measure forecasted demand versus actual demand. Goals to be adjusted on a yearly basis. This is done by Ford and not the forecasting company so that Ford can see how well this company is performing.