After reviewing Ford Motor supply chain, we became aware of its very complex nature. Due to this complexity we are forced to search for alternatives to overcome the costly supply chain challenges faced by our industry both now and in the future. The present system has an inefficient control of a large database and a vast and complex network of suppliers. We need to change our supply chain in order to make it more cost effective and profitable. After careful analysis we recommend the implementation of a partial virtual integration system, similar to the system used by Dell Computers.
With this system, Ford will use information technology and the internet to interact and transact with both their suppliers and their customers. Ford can increase their sales by providing better customer service and faster communication from the supply end through to the manufacturing division and right on to their end user, the customer. This system will be implemented with their existing supply chain so Ford will cover both markets at the same time. If Ford concentrated only on the virtual system their competition would put them out of business, so by running both systems simultaneously will give them an edge over their competition.
Introduction Ford Motor Company is the second largest industrial corporation in the world with revenues of more than $144 billion and about 370,000 employees. Their operations span more than 200 countries worldwide. The company has both the design and manufacturing of cars division and they have a financial services division. Significant revenues and profits are realized in both divisions. The automobile industry has grown very competitive over the last two decades with not only competition being felt from the other two US automakers, General Motors and Chrysler, but also from foreign manufacturers like Toyota, Honda and Nissan.
The industry is also facing an increasing over-capacity as developing nations realize the wealth and job-producing effects of automobile manufacturing, and are encouraged to develop and expand their own export auto industries. Issue Identification The main issue with Ford is the management of their large data base of business partners, in particular their first tier suppliers and their second tier suppliers. When we compare Ford to Dell (See Exhibit 1) we realize that Dell only has about 50 suppliers, but Ford has thousands of suppliers that operate in a very complex network of business relationships.
Each Dell computer system is made up of less than a hundred parts, whereas an automobile requires several thousand parts. In addition, where Dell sells directly to the consumer, Ford has a large number of dealerships who are spread through a large geographical area throughout the world. To manage both the suppliers and consumers in a single supply chain is a challenge for Ford. Ford is constantly looking for new ways to better control and to manage its supply chain in a more productive and cost effective way.
Another issue faced by Ford is the lack of technology in their first tier business partners. This lack of technology makes it difficult for these suppliers to keep up with Ford’s demands. It results in a bottle neck situation for the supply chain. This lack of IT technology results in miscommunication and poor coordination between the suppliers which may result in longer lead times, higher costs and other problems. Because Ford has used independent dealers to sell their vehicles, they don’t have control on their end users, the customers.
This lack of control, plus the dealer’s markups, has negatively impacted their ability to control the consumer’s service experience. Root Cause Analysis Ford’s main business is the production and distribution of vehicles. Ford also earns substantial revenues and profits from their financial division. These two divisions have resulted in net incomes of over $7 billion and a return on sales of 4% which is trending upward. These results show that Ford has a strong market and financial position.
In order to increase their global share, Ford teamed with Chrysler and General Motors to work on the Automotive Network Exchange which aimed to create consistency in technology standards and processes in the supplier network, so that suppliers would not have to manage different means of interaction with each automobile manufacturer. These actions have enabled these American manufacturers to produce better quality vehicles at a reduced cycle time and lower costs due to economies of scale. Ford merged with Daimler-Benz in 1998 and in 1999 Ford also acquired Volvo.
These mergers have increased Ford’s database of suppliers substantially. This has also made their supply chain even more complex and expensive to run and even more difficult to manage. In order to manage these supply chain issues, Ford implemented their Ford 2000 plan, which worked to restructure many of Ford’s key processes like Order to Delivery and Ford Production System. Their goal was to reduce OTD from 60 or more days, down to less than 15 days. They wanted to convert their supply chain from a push type to a pull type (See Exhibit 2).
Ford’s goal was also to reduce the number of their suppliers and in turn create a more cost effective supply chain. Ford worked with their suppliers to help them better manage their own operations. Another initiative started by Ford was the Ford Retail Network which aims to reduce competition among its own dealerships in the same areas, by having one unified dealer who provides the best possible service to their customers. Our decision now is to either implement Dell’s supply chain model or not! Alternatives and Options There are a number of approaches we can take to improve our supply chain.
We could design a system that is a mixture of both an online system and our tradition dealership system. We would have to form procedures to enable customization and ordering by customers over the internet, but we would also have to maintain our traditional dealerships as well. The advantages of this two type system would be the customers’ would have the ability to customize their own vehicles. This would be basically building a vertically integration business model. This would open new markets and attract clients who prefer to shop online.
The disadvantages of this system would be the cost. It would be time consuming and require both internal and external changes with would be difficult to handle and integrate with existing systems. Also the independent dealerships would most likely complain that their own supplier is now a competitor for their customers. Also if Ford’s own suppliers do not have the abilities to keep up with the speed of Ford’s IT system, there would be cause for more problems. Another option would be to create a virtually integrated system based on Dell’s model.
Ford and all their suppliers would share information between their systems and the internet to coordinate the flow of materials and production. The orders would be taken either by phone or on the internet. Basically Ford would be creating a complete pull system. The advantages of this option would be the same as the first option, the customers’ would have the ability to customize their own vehicles. The customer’s requirements are met faster with higher profits being realized due to the elimination of the dealer’s mark up. Also Ford would be able to directly control the customer service.
They would have minimal inventory carrying costs and higher order lead times. They would also improve their ability to forecast demand. There would also be an improved relationship with both the customer and the supplier. The disadvantages would be that Ford would have to change their traditional processes and production methods in order to take advantage of this new form of supply chain management. This would definitely be a more risky option due to the costly and time consuming processes. Another problem would be the loss of dealerships, which may also result in this traditional shopping customer going to the competition.
Recommendations Our recommendation would be to implement the first option outlined in the Alternatives and Options, which is to extend its virtual business strategy by implementing a partial version of the Dell model of supply chain management. The dealers would still play a role in the distribution since the experience of buying a car from a dealership cannot be replaced by something virtual like an online system like Dells. Combining the virtual integration model to their existing supply chain will ensure that Ford has a more efficient and profitable future.
Their overhead and inventory costs will decrease, and Ford will be in a better position to interact with their customers. Most importantly the success of this recommendation will mainly depend on the performance of the shareholder value. Implementation Plan In order for Ford to implement this new system, their IT systems should be centralized and shared with their suppliers. Since its tier two and tier three suppliers may not be able to update their IT systems, Ford’s sharing of their system will aid the suppliers to implement this new virtual system.
Suppliers would have access to central design database while Ford controls the access and functionality as per their operational requirements. The IT system would ensure a smooth flow of supplies and reduce any congestion and improve the efficiency of the supply chain and more importantly, give Ford a competitive edge. The dealerships can play a more involved role by forecasting customer demand and Ford should involve an outside company to help them with the forecasting demand and work with each dealer.
Monitor and Control In order for the new system to function properly Ford must have an IT specialist to coordinate all IT activities with the suppliers in order to ensure a smooth flow of information between the supply chain partners. This IT specialist should resolve any issues as soon as they arise. Lead times on all online orders should be monitored regularly to ensure that the time from the customer order to delivery is being met at the predetermined optimum time.
Another way to monitor the performance of the system is to start an online customer satisfaction program where the customers can evaluate and rate their experience with Ford. The new system should be review semi-annually to ensure the ideal performance is being met, and if not, make recommendations on improvements to senior management. It is also important to ensure the shareholder value is increasing. This could be done through annual meetings with all executives to review the progress of the new system.