Ford Motor Company Supply Chain Strategy Case Report

As director of Supply Chain Systems, I have decided to implement portions of the new supply chain strategy of Virtual Integration and strategies from companies like Dell. Although there are several key differences between the companies, Dell’s virtual integration strategy can be applied to Ford’s supply chain operation. A modification of the virtual integration system currently used by Dell could be applied to Ford’s dependent supplier base, distribution system, dealerships and divisions. Special care will need to be taken to address the unique dependency of our custom Tier 1 supplier.

The management of lower tier suppliers of general or generic components would be more effectively suited by the standard procedures used by Dell. If we at Ford could find a solution to the obstacles of virtual integration, it could make our supply chain run smoothly with less bottlenecking, inventory, and better overall performance. Managers could overcome the complex and error-prone manual process of forecasting and procuring parts which would result in reduced OTD lessen costs and enhance customer satisfaction.

ISSUE IDENTIFICATION Senior Executives have asked how Ford should use the emerging information technologies and ideas from new high-tech industries to change the way we interact with Suppliers. We must find ways to improve the Supply Chain management and to increase shareholder value and Supply Chain responsiveness. Specifically we are looking at how Dell manages their Supply Chain and incorporates the virtual integration strategy. A decision is required before the next meeting with the VP of Quality and Process Leadership.

ENVIRONMENTAL AND ROOT CAUSE ANALYSIS Ford’s Supply Chain is based on Vertical Integration and Outsourcing strategy, this has created a complex supply chain, increasing inventory and OTD (Order to Delivery Times). The reorganizational efforts to date; JIT, TQM, SMF; have not reduced the OTD – Order to Delivery time. This has resulted in excess inventory and error prone procurement procedures. SYSTEMIC ISSUES: Inaccurate Forecasting NATURE: Strategic • Delayed feedback from customers • Lack of Supply Chain information & communication

• Direct communication link to the customers do not exist. Independent dealerships interact with the consumer. • Overproduction – Industry overcapacity estimated to be 20 million vehicles Supplier Management Complexity NATURE: Strategic • Supply Chain based on Outsourcing (Not vertical or virtual integration) ? Large supplier network ? Requires the management of a large number of component inventories ? The purchasing division acts independently, basing decisions on cost considerations without an understanding of the overall supply chain costs.

? 3 Tiers of Suppliers – Tier 1 suppliers manage relationships with a larger base of sub-system component suppliers (Tier 2 and below) ? Tier-one suppliers – wholly-dependent – for components such as dashboards and drive trains, that are tailored to meet our specifications – flexibility of supply chain is compromised ? Tier 2 – 3 Suppliers – generic items, such as spark plugs and windshield wipers • History of poor supplier relations • Product complexity and rigid supplier networks • Production capacity for components is set in advance and cannot be changed quickly • Ineffective

Communication

? Communication channels and procurement procedures are bound within the limits of traditional phone and fax methods. This results in delayed purchasing functions, increased inventories and is error prone. ? Ford’s manual ordering and accounting procedures waste manpower, collect stock and in the end, prolong OTD. ? Tier 1 Suppliers have well developed IT systems – some interact with Ford with EDI (Electronic Data Interchange) – They are unable to invest in new technology at the Rate Ford does. ? Limited capabilities to develop IT enabled communication with Tier 2 or 3 suppliers ?

Many suppliers lack the money to invest in Internet Technology infrastructure required to fully support virtual integration Long Cycle Times Cycle time will have a direct impact on sales, inventory and profits. NATURE: Strategic • Less flexibility for ordering and limited responsiveness • Lack of communication across the Supply Chain • Direct communication link to the customers does not exist. Independent dealerships interact with the consumer. The orders are sent through the supply chain. Historical Legacies NATURE: Strategic

• Unionized labour force • Incompatible technology systems Distribution NATURE: Strategic • Dealer network structure ? Powerful independent dealership network ? Regional Ford Dealerships in competition with other Ford Dealers Loss of Market Share NATURE: Strategic • Increased Competition from Foreign Manufacturers. Ford current Supply Chain operations are based on a traditional push model. The product is designed and developed; parts sources are negotiated, the products are manufactured and sent to the dealerships for sales.

Ford has a large supplier base selected by the traditional procurement methods of transactional approach. There has typically been no consideration for how the whole Supply Chain functions. The supplier relationships are managed by purchasing department and are independent of the product development teams. DEFINATIONS: Traditional Supply Chain “Push” Model “Push” Model allows supply chain members to be separated from the end users which involves in a linear flow of commerce. The current push model is the process that occurs through time-consuming.

Suppliers and customers are served relatively by the production cycle. Since the agendas all of the members of the supply chain filter the customers’ need. Establish collaborative relationship with customers to minimize forecasting error. Push as closed to customers as possible in term of inventory. Supply Chain “Pull” Model Pull Model, a customer-driven strategy. In the “pull” model, customers can pull whatever they need out of the system by using electronic connections. The pull model is more directly focused on the individual customers and less product.

Pull model creates a more efficient supply chain that benefits both suppliers and customers. Vertical Integration – Strategy in which several steps in the production and/or distribution of a product or service are controlled by a single company or entity, in order to increase that company’s or entity’s power in the marketplace. This solves production problems related to communication, coordination, and control at the cost of increased overhead needed to set up the production organization. Virtual Integration – is the use of the Internet to replace physical components of a company with information.

This eliminates the need to physically produce ship or handle any products as they are now outsourced. This strategy gives the ability to achieve vertical integration without incurring the production overhead. DELL MODEL: Dell strategy was built around a number of core elements 1. Build-to-order manufacturing, 2. Mass customization 3. Partnerships with suppliers – Long term commitment with suppliers and sharing of production schedule, daily sales forecast and new model introduction information with suppliers. This assures timely deliveries from handful of selected suppliers. 4.

Just-in-time components inventories – the business to business (B2B) transactions are accomplished with relative ease and minimal cost 5. Direct Business Model – Sell direct to customer and eliminate retailer and distributor 6. Market segmentation 7. Customer service 8. Extensive data and information sharing with both supply partners and customers. CAPABILITIES OF DELL: 1. Customize products to exact customer requirements 2. Build-to-order approach allows the company to maintain low inventory levels and integrate emerging technologies into systems 3. Enables Highest Quality 4. Provides Excellent Customer Services

5. Real-time customer feedback and market insights 6. The ability to “sell what you have”–that is, using day-to-day pricing and sales incentives to shift demand toward products that are currently makeable 7. Extremely crisp product life cycle transitions 8. Elimination of the obsolete and excess dealer stock that plagues the non-direct competitors 9. The ability to control pricing on a real-time basis 10. Best approach is to outsource the components which others can build better and cheaper and get a competitive cost advantage 11. R & D cost is also saved due to outsourcing 12.

Generic nature of computer parts, Dell possesses the ability to negotiate and procure necessary items for plant assembly from several independent suppliers FORD DELL Supply Chain Concept Push Model – advertise product to initiate sales Pull Model –orders customized based on customers’ orders Outsourcing / JTD (Just in Time Delivery) Virtual integration Supplier Base Supplier chosen based on cost Partnership with Suppliers Number of Suppliers Complex – difficult to manage Reduced from 200 to 47 Supplier Relations Bad history, distrust, many outsourcing issues Good Components Custom / some Generic Generic

Forecasting Difficult – Little End Customer Contact Good customer contact –Short term Forecasting – Little long range forecasting Communication Methods Phone & Fax Internet and on-line communication Purchasing Independent, high level of power Integrated, part of product development – better control over supplier activities Product Development Integrated with purchasing Product Life Cycle Technology changes slow

Technology changes rapidly Manual ordering and accounting procedures Computerized information systems Sales Product sold through dealerships Online sales – ship directly to customer Product Test Drives large part of buying experience Not applicable Market Environment Very Competitive Very Competitive Order to Delivery Long (60+ days) Short ( 15 days or less)

Distribution Independent Dealerships Company controlled distribution Resale Value Resale value is important part of consumer decision No resale value expected Inventory 45 – 60 day lead time for orders 11 Days inventory / Turnover 30 times per year Unionized labour High Level None TABLE 1 – DELL FORD COMPARISION STUDY ALTERNATIVES OR OPTIONS ALTERNATIVE 1

Status Quo – Maintain current Cycle Time strategy and Operational Procedures. This option has the support of the most cautious group in the company. This strategy is the safest and most cost effective in the short term. The company would run the risk of falling behind in the industry. PROS: 1. Lowest cost 2. Least investment risk CONS: 1) Risk of falling behind other manufacturers 2) Continued OTD delays 3) Excess inventory issues not resolved 4) Communication systems remain disjointed and not fully utilized 5) Loss of Market Share continues ALTERNATIVE 2

Partially adopting Virtual Integration and modelling some of our Supply Chain procedures on Dell. Ford and Dell have some similarities and it would be possible to virtually integrate certain aspects of the Supply Chain. Areas to be considered for virtual integration that are more standardized. Also, if we expand the use of E-Business, this would provide an alternate channel to reach customers. E-Business will be the key to implementing virtual integration. PROS: BENEFITS OF VIRTUAL INTEGRATION 1) Increased control – partnerships enable Ford to have more control over suppliers actions 2) Lower Overhead 3)

Greater flexibility – real time responsiveness and inventory management 4) Project Costs a) Moderate – Ability to incorporate existing programs – JIT, TQM, SPC with new initiatives involving Virtual Integration b) Ability to incorporate existing Supply Chain initiatives already in place – reduction in project scope – JIT (Just In Time Delivery); TQM (Total Quality Management; SPC (Statistical Process Control) 5) Improved Communication & coordination a) Increased efficiency and effective coordination

b) Ability to expand and incorporate the existing IT initiatives already undertaken by Ford. i) Ford public webpage – over 1 million hits per day in in 1997 ii) Intranet – allow teams on different continents to work together in real time. iii) EDI – Electronic Data Interchange – already in place with some suppliers iv) Extranet and B2B – Business to Business system – currently system is enabled to allow instant data exchange with suppliers. v) ANX – Automotive Network Exchange – standards established to create consistency in technology standards.

Suppliers would have the same means to communicate with all automakers. 6) Better forecasting & Inventory management with new communication methods 7) Dealerships still available for consumer purchasing 8) Some Reduced exposure to inventory Obsolescence 9) Some Reduction in Working Capital CONS: 1) Initial costs involved in implementing information technologies 2) Implementing a new system will require extensive set up, training and monitoring 3) Lack of technology at Tier 2 & 3 suppliers ALTERNATIVE 3 Fully Implement Virtual Integration by modelling our Supply Chain on Dell.

For this alternative, there would need to be an almost complete restructuring of the company to mimic the Dell model. PROS: BENEFITS OF VIRTUAL INTEGRATION 1) Increased control – partnerships enable Ford to have more control over suppliers actions 2) Lower Overhead 3) Greater flexibility – real time responsiveness and inventory management 4) Improved Communication & coordination a) Increased efficiency and effective coordination b) Ability to expand and incorporate the existing IT initiatives already undertaken by Ford.

i) Ford public webpage – over 1 million hits per day in in 1997 ii) Intranet – allow teams on different continents to work together in real time. iii) EDI – Electronic Data Interchange – already in place with some suppliers iv) Extranet and B2B – Business to Business system – currently system is enabled to allow instant data exchange with suppliers. v) ANX – Automotive Network Exchange – standards established to create consistency in technology standards. Suppliers would have the same means to communicate with all automakers.

5) Better forecasting & Inventory management with new communication method 6) Reduced exposure to inventory Obsolescence 7) Reduction in Working Capital CONS: 1) Project Costs a) Highest Cost &complexity due to the size of the organization and structural changes required – complete restructuring of the company b) Implementing new system will require setup, training and monitoring 2) Dealership structure & sales strategy a) Consumers are not ready to make automobile purchases on-line at this time; therefore, dealerships are still needed.

b) Dealerships have legal franchise agreements RECOMMENDATIONS Ford 2000 has addressed the manufacturing issues related to the supply chain; the areas left to considerer are suppliers, distribution, and communication and consumer relations. Given the alternatives and analysis, I recommend we implement Alternative 2 – Partially adopting Virtual Integration and modelling some of our Supply Chain procedures on Dell. We cannot eliminate certain aspects of our business as this would require a complete organizational reorganization and automobile purchasing culture.

We cannot implement a total Direct-to-Consumer model since the consumers are not ready for this. Ford can implement some of Dell’s efficiencies such managing its supplier relationships and purchasing better, but it cannot eliminate as many of the steps in the supply chain that Dell has. Ford will not benefit from the termination of the purchasing division, but it can make huge improvements in how we manage supplier relationships. We can improve the flow of information to instant real time access with virtually no margin of error.

This would reduce inventory and related costs, increase efficiencies, provide better service. DELL MODEL AREAS FORD CAN DEVELOP: 1) Partnerships with suppliers – Long term commitment with suppliers and sharing of production schedule, daily sales forecast and new model introduction information with suppliers 2) Just-in-time components inventories – the business to business (B2B) transactions are accomplished with relative ease and minimal cost 3) Extensive data and information sharing with both supply partners and customers. IMPLEMENTATION

An implementation plan must be strategically planned and executed for each area to be addressed. As we develop the implementation plan we must take into consideration how it will affect the following areas and develop ideas to maximize the benefits for each. • Forecasting • Communication • Supplier Management Complexity ? Develop Supplier partnerships ? Reduction in number of suppliers ? Optimize critical path for parts A key initiative will be to also develop a process and functionality to connect all the separate systems with the latest IT Technology available so they function as a unit, not as separate entities.

Strategy Changes 1. Communication Improvements – Substitute information for inventory and ship only when we have real demand from customers. a. Website developments – Add additional capabilities of the website to include an online virtual showroom to encourage prospective buyers. b. Improve coordination with the suppliers by integrating their communications systems allowing for quicker information transfer. c. Provide incentive for suppliers to upgrade out-dated technology system so they can communicate electronically via B2B or the extranet. d.

Standardize B2B, EDI, intranet and extranet communications – cost savings from a direct standardized communication system would subsidize the development of an expanded extranet / B2B system. 2. Forecasting analysis – develop new forecasting methods to minimize the risk of inaccurate forecasts. 3. Cycle Time Reduction a. Supply Chain Mapping i. Identify the current Supply Chain map for parts and Supplier relationships ii. Identify bottlenecks in the flow of parts in the Supply Chain iii. Develop strategy to determine how negotiating additional partnerships can decrease the number of Supplier b.

Optimize the critical path for all parts i. Identify the best suppliers, foster closer relationships and establish long-term commitments with them. ii. Encourage more Tier 1 suppliers to act as managers for component subsystems and as the contact with the Tier 2 & 3 suppliers. iii. For Tier 2 & 3 suppliers that can’t be accommodated in the Tier 1 component substructure model – standard procurement methods can be used with the intent on having as few suppliers as possible. Negotiate more product styles for various automobile types instead of spreading between several suppliers.

iv. Reduce the number of suppliers, Ford will be able to ability to reduce the costs associated with managing multiple relationships, product variability, and timing due to capacity issues v. By becoming the supplier’s major customer, Ford will be able to control the quality, timing, and costs of the goods supplied 4. Distribution System Changes Procedural Changes: 1. Ford dealerships – Consolidate dealerships in geographic areas to reduce competition against other Ford dealerships. Give incentives to increase cooperation and increase competition against other companies 2.

Change relationship with the dealerships so that they are not so independent and treated as autonomous entities when they should be included in the whole. 3. Dealerships should be made part of the teams that help product development. They can identify the characteristics the consumers want since they are interacting directly with the consumers.

4. Provide Dealerships with extranet capabilities to enable them to locate / order already existing products that meet customer requirements. MONITOR AND CONTROL KPI – Key Performance Indicators Key Performance Indicators must be measured against a standard.

The significant benefit of tracking KPIs is that missing the standard signals the need for change. An analysis of industry averages must be consolidated and documented. These industry averages must also be reviewed on an annual basis. Some of the KPI’s that we will report on are as follows: Efficiency of SCM operations • Inventory Turns • Total costs • Supplier, Dealership & Divisions Use of Technology • Supply chain disruptions • Supply/demand imbalances

• Outsourcing and off-shoring production • Manufacturing cycle time Productivity and Competitiveness • Production equal to demand (supply vs. demand curve) • Velocity and flexibility • On-time delivery Costs • Inventory Carrying Costs • Cost per unit • Total obsolescence • Distribution costs (warehousing) Effectiveness of Business Control • Fill rate • Forecasting • Gross margin • Total operating revenue • Cost of goods sold • Just-in-Time • Radio frequency identification (RFID) Inventory Management • Inventory turns ratio

• Raw materials availability • Finished goods in hand • Total costs CONCLUSION In today’s competitive environment, it is important to focus on the customer and provide unique value in order to achieve a sustainable competitive advantage. Without virtual integration, competitive advantage will be difficult to maintain. Successful implementation of virtual integration initiatives will allow supplier companies to work together as one entity. Operations become more efficient by reducing inventory 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 competencies. Fostering cooperation through incentives is critical since compliance of suppliers is necessary to move forward. My decision to proceed with virtual integration should help redefine Ford as a competitive, cost effective company. Rather than remaining static, Ford must seek change and model their systems after successful companies such as Dell. I feel we should proceed with the integration proces