Background In 1913, Henry Ford revolutionized product manufacturing by introducing the first assembly line to the automotive industry. Ford’s hallmark of achievement proved to be a key competence for the motor company as the low cost of the Model T attracted a broader, new range of prospective car-owners. However, after many decades of success, customers have become harder to find. Due to relatively new threats to the industry, increasing numbers of cars and trucks are parked in dealer lots and showrooms creating an alarming trend of stagnation and profit erosion.
Foreign-based automakers, such as Toyota and Honda, have expanded operations onto domestic shores and, in turn, have wrestled market share from American automakers. As a direct result, unit over-capacity has steadily risen, while heightened competition and diverse product lines have led to increasing customer demands. To answer these threats, Ford has made recent attempts to transform its dated vertical integration production model into a maneuverable, efficient supply chain.
Emphasizing methods such as Just-In-Time (JIT) inventory, Total Quality Management (TQM), and Synchronous Material Flow (SMF), Ford has derived a multi-tiered system of supply. The tier system consists of numerous generic suppliers, “tier two” and below, who are managed by “tier one” vehicle sub-system suppliers.
The “tier one” suppliers, by nature, are completely dependent upon Ford’s survival since the provided sub-system component is specific solely to Ford. Dell and Virtual Integration Despite the revamping effort, Ford remains plagued with prolonged Order-To-Delivery (OTD) time periods, congested inventories and error-ridden procurement processes.
Upon investigation, these troublesome issues appear to be well addressed by the radically new direct business model of the Dell Computer Corporation. Dell differentiates itself through the utilization of virtual integration, an efficient and effective direct business model facilitated by electronic business providing Build-To-Order (BTO) products directly to customers.
The process begins with the customer specifying exactly which features are to be included in the desired computer. Dell, then, buys components from several different suppliers via Internet-based JIT ordering. By using Dell’s process of JIT ordering , misallocation of company resources is avoided and unnecessary inventory is limited resulting in a core competency of considerable cost reduction. By substituting information for inventory, Dell’s lean business structure offers mass-customized machines that are ordered, assembled and delivered with reduced lead times without sacrificing margins or maintaining inventory.
Ford’s Challenge Although the direct business model of Dell is most attractive, there are several key differences between the computer and auto industries which serve as barriers to Ford? s implementation of uniform, supply chain virtual integration. Ford must tackle many diverse obstacles that were, simply, not a factor with Dell? s implementation. These obstacles range down the delivery chain from the supplier to the manufacturer to the dealer and, ultimately, to the customer.
Overall, the intricate and historic process of manufacturing and selling automobiles contradicts the technological innovation necessary for a true virtually integrated system to exist. First, product complexity and supply channel constraints are key limiting factors of lean manufacturing that must be addressed. Due to the generic nature of computer parts, Dell possesses the ability to negotiate and procure necessary items for plant assembly from several independent purveyors.
Therefore, Business-To-Business (B2B) transactions are accomplished with relative ease and minimal cost. Although generic items, such as spark plugs and windshield wipers, are provided to Ford by lower tier suppliers, wholly-dependent, “tier one” partners supply components, such as dashboards and drive trains, that are tailored specifically for Ford, alone. Thus, the flexibility of Ford’s chain of supply is vastly compromised.
The combination of product complexity and a rigid supplier network adds complexity to the task of introducing virtual integration to Ford? s dated process. Secondly, the communication channels and procurement procedures of Ford and its tier network are bound within the limits of traditional phone and fax methods resulting in delaying procurements, clogging inventories and affording errors typical of a manual process. Unlike the fully automated online system of Dell, Ford’s manual ordering and accounting procedures waste manpower, amass stock and, in the end, prolong OTD.
Furthermore, many of Ford’s lower tier partners lack the capital to invest into an Internet Technology (IT) infrastructure that would be necessary to fully support virtual integration. Not only do these suppliers lack the technology and funding for IT initiatives, the incentive to upgrade is, also, non-existent. Lastly, historical dealer retailing and traditional consumer buying habits, both, inhibit the full-scale implementation of virtual integration. The dealer segment of Ford’s supply chain has been completely omitted in Dell’s business model.
Dell takes orders directly from the customer and delivers the product, again, directly to the customer. In the case of Ford, dealer showrooms and car lots have been the only ways of retailing a new car since the inception of the automobile. Eradication of all dealerships for the sake of advancement is, simply, impossible. First, Ford is obliged to the dealerships through legal franchise agreements, and, more importantly, consumers are accustomed to shopping for cars in first person. Car shopping appeals to the senses of the consumer, and the Internet is not yet capable of delivering such an experience.
If Ford could possibly find a solution to the obstacles of virtual integration, it could turn a new supply chain efficiency into a core competency. Managers could overcome the burdensome and error-prone manual process of forecasting and procuring parts which would result in reduced OTD, lessened cost and enhanced customer satisfaction. Recommendation Although there are several key differences between companies, Dell’s direct business approach can be applied to every facet of Ford’s operation.
As noted previously, special care should be taken to address the unique dependency of Ford’s custom “tier one” suppliers. By the very nature of Ford? s tier network, “tier one” partners have fixed relationships with Ford and cannot be chosen by cost, alone. Therefore, a variation of virtual integration could be applied to Ford’s dependent supplier base, while the management of lower tier suppliers of generic components would be, more effectively, suited by the standard procedures used by Dell.
In regard to supply channel communication and procurement, Ford can make substantial gains by standardizing all B2B transactions. By offering an incentive program throughout the tier network, Ford can encourage all partners to make the necessary technological capital improvements in order to utilize an organization-wide extranet that will aid in fault-free procurement, real-time inventory and speedy OTD. Bottle-necking between channels would be averted as synchronous information will flow up and down the supply chain via one, standard medium.
Cost savings derived from this direct working relationship should be ample enough to subsidize the development of the extranet project as well to reward the suppliers who successfully upgrade and integrate into the system. Perhaps, the most difficult obstacles for Ford to overcome are the traditional consumer buying habits coupled with the historical dealership franchises. Although relatively few consumers feel comfortable purchasing a new car over the Internet, an online virtual showroom could aid prospective buyers to find the right model and features to fit their budgets and needs.
Dealerships could use the corporate extranet to locate and ship already manufactured automobiles from existing lots that would meet consumers’ specifications. By doing so, dealers could lessen normally stagnated inventory stocks, while enhancing customer satisfaction with reduced OTD. Although, Ford may never be able to achieve the efficiency of the Dell computer Company, it can achieve a low cost position in the industry by integrating a direct supply network. Ford’s goal of TQM could be easily met by implementing a variation of Dell’s already successful virtual integration business model.
Fostering cooperation through incentives is key since compliance of supply chain partners is necessary to gain first-mover advantage. Conclusion In today’s competitive environment, it is important for any business to focus on the customer and to provide unique value in order to achieve a sustainable competitive advantage. Without virtual integration, competitive advantage is lost. Successful implementation of virtual integration initiatives allows supplier companies, which are performing only certain processes, to work together as one entity.
Therefore, operations become more efficient by reducing inventory, assuring quality, and reducing delivery time. More importantly, the organization maintains the ability to thrive in a competitive marketplace by achieving increased customer satisfaction through unique and strategic core competences. Virtual integration will redefine corporations and , eventually, entire industries as supply chains evolve into a new business model of cooperation and sharing.